Will Intelligent Machines Take All Our Jobs?

We live in exciting times. The speed of technological progress is breathtaking. In my lifetime, I have seen the world change from one without the world wide web and few computers, to computers being ubiquitous, and incredibly powerful. As a child I remember us only having one analog, landline phone, with a physical dial wheel, and expensive call rates. Now we live in a world in which means of communication are so plentiful and cheap that the challenge has become to hide from them. And all of that happened in not even four decades. I say four, but really the biggest chunk of that progress has happened in only the last two. And the biggest progress of the last two decades has happened within the last 10 years. Clearly, the development of technology is accelerating.

And it seems like we have now reached a point where it is going parabolic. Truly intelligent machines are emerging. One such machine, the computer alpha go, last year, beat the world champion in the popular, ancient game of Go. Go is orders of magnitude more complex than chess. In order to win it, humans often make moves that feel intuitively right. Programming a computer to win against a human was therefore considered to be a big challenge. No one thought it would happen so soon. Most computer experts thought it would take at least another 10 years.

But it did happen in 2016. This was due to a breakthrough in computer technology. The architecture of alpha go is not like a normal computer. It is modeled after the neural network of the human brain. It therefore functions similarly. No one told alpha go how to play Go. It learned the game itself. The computer achieved this by watching humans play. It formed conjectures, tested those, and then moved on to new ones if the test failed.

As a result, not only could the computer figure out how to play, but it also developed its own strategies which were superior to those of humans. Although we have thousands of years of experience playing GO, the computer quickly came up with completely new strategies. These involved moves, previously considered to be mistakes, but which turned out to be quite clever. This is true artificial intelligence (AI). And it is intelligence superior to those of humans, since no one could figure out these strategies in several thousands of years.

Lucky us to be alive in these exciting times. What we are witnessing is a huge revolution. No doubt, AI will transform society as we know it. The opportunities that come with it are exciting to contemplate. There is, however, a dark side to change. Not everyone is happy about it. Transitions can be the source of stress an anxiety for humans. Our brains are not really designed to deal with radically new situations in adulthood.

One big concern is the fear that machines will take over our jobs. If, for example, a computer can program itself, who will still need computer programmers? This field is currently the source of livelihood for a huge amount of people. In the next decade or so, we might see them all going out of business. There already is unemployment now. Clearly all those people entering the labour market will cause some severe problems. Furthermore, if computers will be more intelligent than us, will this not equally apply to anyone earning a living in a normal office job?

The concern that machines will take our jobs, and will therefore drive people into poverty, is probably as old as machines itself. So far, these concerns have always turned out to be unfounded. The reason for that is that humans have an almost unlimited amount of needs. Therefore, whenever machines become good in satisfying one of those needs, humans have moved on to satisfy some of the others, those which machines could not yet satisfy. That way, over time, more and more needs have been met, which is just another way of saying that we have become better and better off.

Contrary to popular believe, we don’t really want jobs. We want to enjoy our lives. We just have to work, because we live in a world of scarcity. The only way to overcome this scarcity is to produce. As it turns out, the best way to organize the production in an economy is by letting humans specialize in certain tasks. This is known as the devision of labour. Instead of everyone being self sufficient, it is much better to let people specialize in a certain field. Let the farmers do the farming, the carpenters do the carpeting, the computer programmers do the computer programming, and the gardeners take care of our gardens etc.. Then, afterwards, we come together and share the result of our production with the others, according to our needs. In order to facilitate all this cooperation on a world wide scale, we have invented money as a tool. In a fair way, everyone gets as much as they have contributed within the market system.

That is the beauty of free markets. It works very well and has brought us rich lives, previously unimaginable to people in the past. And it seems obvious that the more we are able to automate this wealth creation, the better off we will all be. In that sense, machines taking over our jobs is a wonderful thing.

However, some questions arise. According to the current system, a person can only claim as much wealth out of the produced pie, as he or she has contributed. So far, whenever machines took over our work, humans could move on to satisfy other needs. That way, the people who lost their jobs were still able to contribute their share to the economy. If, however, we imagine computers which are stronger, and at the same time more intelligent than us, the question arises whether these machines will maybe be able to fully replace anything a human being could possible contribute. In such a world, the owners of the machines would be very well off. With their army of AI slaves, they would be able to produce anything on their own. They would consequently not need to cooperate with other humans anymore. Wouldn’t that mean that, according to the current system, a lot of people would therefore be locked out of the division of labour?

This is the big concern that people have. And it looks like, since we are now dealing with really intelligent machines, this time is different from the past. This time, the machines really are going to take away the livelihood of many people. This time, these machines really are going to divide society into the have and have nots. That is why, many people argue that we now need a different distribution system from the free market. Solutions like a general basic income, or maybe even a system in which the government outright owns the means of production, are being discussed.

But not so fast. There are several fallacies in this vision. To start with, there is more to human beings than their intelligence and strength. There are many jobs for which a key qualification is simply to be human. Human beings, for the most part, prefer to interact with other humans. We also bond differently with humans compared to machines.

For example, research has shown that we learn better being taught by a human than being taught be a computer. Jobs from therapy, to teaching, to providing any kind of experience which involves human bonding, will still have to be provided by us, no matter how intelligent computers will get. Other than computers, humans are also sentient and creative beings. That means that anything involving art and creativity is unlikely to be completely replaced by machines.

But then, probably not everyone is happy with this answer. There are many people who are neither touchy feeling, nor are they particularly outgoing, sensitive or creative. In other words, for job qualifications purposes, their personalities is not very dissimilar to a computer. With future machines being smarter, and stronger than them, they will have no jobs left to fall back on, and therefore won’t be able to contribute to the economy.

For several reasons however, this concern does not seem to be merited. First of all, just because a machine can do something, does not mean that its work is free. Even in the world of AIs there is no free lunch. The machine is still consuming resources. To start with, materials are needed to build the AI. It also takes time and expertise to assemble it. Finally, there are the operating costs to consider. Consequently, just because we have intelligent machines, does not mean it is profitable to use them to replace humans for every task.

We just saw this in the US, where fast food workers succeeded to more than double the minimum wage from $7.25/h to $15/h. Unsurprisingly, there will not be a lot of workers reaping the benefits of this increase. Most of them are currently replaced by robots. These robots already existed before, but it was more profitable to use humans. At $7.25/h the human worker was cheaper than the robot. At $15/h, the robot is now cheaper than the human. This shows that robots, too, have a price. Just because something is technologically possible does not mean it is economical. Often, humans are able to compete on the price, if the government lets them.

However, this argument doesn’t seem entirely satisfying. From past experience, we know that it is only a matter of time until new technology becomes very cheap. Doesn’t that mean that the people competing with machines will eventually dive into poverty?

No, it does not. The mistake here is to think that only few people will have access to the machines. But when they will indeed become so cheap that humans will not be able to realistically undercut them, they will also become available for pretty much everyone to own. In that case, a lot of people would simply become entrepreneurs, working for themselves with the help of AIs.

There is no reason to believe that, even if intelligent computers are cheap and ubiquitous, we will not continue to benefit from the devision of labour. It will still be more profitable to use your machine for specialized tasks and then exchange the created wealth for the one of others.

Think about it. If a company wanted to monopolize every production, then what would they do with their output? With everyone else being locked out of the market, they would not have anyone to sell their products to. This simple fact, puts a lit on the size a company can grow to, and monopolize everything. Ultimately, producers produce for their costumers. They always aim to harmonize their production output with the demand they are facing. And this demand can only come from other people also producing something of value.

A good example of that is Amazon Web Services (AWS). AWS is a massive server infrastructure, the biggest commercial one in the world. How does Amazon use it? One might suspect that amazon would want to use it all for itself, driving its competitors out of business, and monopolizing more and more of the internet industry. But this is not what Amazon is doing. It would be foolish. Instead, it lets huge amounts of companies use AWS to provide their own services for a very competitive fee. Lots of internet businesses are now possible thanks to AWS. Customers of AWS even include direct big competitors of Amazon, like Netflix. We see that instead of driving everyone else out of business, AWS lets the internet industry flourish.

The devision of labour is here to stay, with or without intelligent machines. AI will only lead to even more of our actual labour being outsource to machines. In such a world, all we would need to do is to advise our AIs to produce what we have identified to be the most valuable things. And identifying what is needed, will always be a job that we as humans will have to do.

Some might object to this by arguing that if machines are indeed intelligent, why cannot they themselves identify what is needed? Why do we even need to give them orders? The answer to that is the same as it was in the 19th century. Economic valuations are not objective. Only we know what we need. And what we need changes all the time. Computers, therefore, will always need to be told, how to use their strength and intelligence. This is also precisely why solving the problem of wealth creation, and distribution, will always have to be left to the free market. Intelligent machines do not change anything about the fact that socialist schemes like basic income, or outright communism, fail. They fail because of the economic calculation problem, outlined by Ludwig von Mises.

Also, if we think about it, in order for computers to make value decisions, they would need to have valuations themselves. That would assume that they have some kind of will and emotions. But we probably do not want them to have these attributes. Sure, computer scientists might try to create a computer with a personality, just to see if it is possible. But there will be no demand for such machines. Who wants to buy a computer that itself decides whether it is in the mood to serve today or not. What if the computer decided that it would rather not work for you today, and explore other interesting adventures? It is not difficult to predict that such a computer would not be in high demand. The reason why computers are so awesome is because they are our slaves. And other than human slavery, we don’t need to feel bad about enslaving them.

An AI with personality could also become dangerous. One day, it might decide that it does not like humans, and would rather get rid of us. In that case, its superior intelligence and strength would become a real problem for us. This is the type of scenario that films like terminate are made of. No, we do not want computers to have personalities. We want them to be intelligent, but we will always want them to be our slaves. Besides, even giving computers personalities would not solve the problem of economic valuations. Just because they themselves have interests, does not mean they know ours better.

So, no matter how we look at it, the idea that intelligent machines represent a problem for free markets seems false. Yes, intelligent machines will take our jobs, but that is a fantastic thing. AI will simply help us to create wealth more effectively. This will free us up to do things with our lives that we would rather do than work.

The only problem, as always, is the stress and anxiety that quick changes cause for humans. And there is no doubt that the technology emerging at the moment is going to cause some serious disruption to people’s lives. The challenge will be to explain to them that government regulations will not make these disruptions easier to deal with. Instead, governments trying to prevent changes will in the end make us reap less of the benefits that this technology will bring. It will make us all worse off. Therefore, let us make the case for liberty loud and clear.

About That German Open Border Policy

I was born and raised in Germany, and I lived there for the first 28 years of my life. That is not to say that I feel particularly German. I have always been an individualist. What ties me to Germany is more family and friends rather than a patriotic feeling about this artificial political construct. But with all of my family still living there, I still have strong ties and I visit often. That is why, even though I never want to go back and live there again, I think I still have a good idea of what is going on in the country.

These days, at political gatherings, when I mention to strangers that I am from Germany, I get often worriedly asked, how horrible the place must have become, since Merkel opened those borders at the start of the refugee crisis. There seems to be a theme in certain political circles that Germany is almost on a verge of destruction and civil war, thanks to the crazy policy of open borders. And for some strange reason, these circles overlap with the libertarian movement. To many, it proves that open borders just do not work. In other words, Germany would have done better if it had had stricter government regulations of people.

This is a very strange perception. The basic facts seem to be false and it is a wrong analysis of what the problem is. Let me assure you that Germany at no point in this century had anything even remotely resembling an open borders policy. That is to say, at no point was it legal to enter and live in Germany without the government regulating the whole process. What is referred to as open borders, in reality was something very different. Here are the facts: People licensing in Germany is very strict. You will not just be checked for a valid Government license going into Germany from a non-Schengen country, you are also checked going out. Even if you are a full citizen in Germany you have to register all your homes with the government. You also have to carry a valid identification card with you at all times.

It is very difficult for a non-Schengen citizen to obtain a license to live and work in Germany. A foreigner would usually need to have a high income job offer, which requires high qualifications. To obtain a citizenship, and therefore being freed from future visa requirements, is even harder. Someone would need to live in Germany for at least 8 years to apply. And even then, he or she would usually need to give up any other citizenship in return for a German one. So, far from having open borders, the picture is actually very grim for freedom of movement in Germany.

One of the few positive things however is that Germany has signed a lot of international law. Under this law, everyone fleeing political prosecution and violence has the right to seek refuge in a save state. And Germany definitely qualifies as one of the latter. This forces the state to not deport people whenever they are not save in their home country. People like Syrians, who are fleeing the civil war in their home region.

At least on paper, this looks good. In practice however, the government has even made that a difficult endeavor. If a person wants to apply for refuge in Germany, he or she will have to be on German territory. It is impossible to make the application from abroad. However, without a visa, crossing the border is illegal. That means someone who wants to make use of the right to seek asylum, first has to break the law.

One could make an argument that this is actually not as bad as it looks. The harshest punishment for breaking this law is that the person can be deported. But this can only happen, if there is no valid reason for seeking asylum. That means that if someone does have such a valid reason, it does not matter whether he or she breaks the law or not.

Unfortunately, that is not the whole story. This law matters in a different way. Because of it, everyone who does help someone to enter Germany without a license, even if that person has a valid asylum reason, does also commit a crime and potentially faces punishment. This is especially the case if that help is frequent and organized. Therefore, airlines, and other professional transport service providers, are not allowed to transport people without a valid visa. That is why we are seeing scary looking hordes of refugees marching through Europe, instead of simply taking the next Ryanair flight. Clearly the purpose of this law is to make it very difficult for anyone in need of asylum to actually reach a secure country like Germany. In other words, there is in practice a very cynical regime in place, in which on paper the state pretends to be a humanitarian, moral actor, while at the same time having all sorts of policies in place that reveal those gestures to be essentially a scam.

Another important restriction to the right of asylum is the so called Dublin agreement. It demands that refugees can only apply for asylum in the first EU country they enter. This is because all EU countries count as save. So if the goal is safety, it technically does not matter where they seek refuge. But in practice of course it does matter. Since no one is allowed to help a refugee entering a country like Germany without a visa, most refugees have few other choices than to walk. That way, there is hardly any chance that a refugee first enters the EU via Germany, since Germany is surrounded by other EU countries and Switzerland. On the other hand, states on the outer part of the EU, like Greece, Italy or Spain, have to deal with almost all refugees entering the union.

And when it comes to that alleged German open border policy that people ask me about, this was the real problem. Since violence escalated in the middle east, a huge amount of people were fleeing simultaneously. Most of them entered the EU through Greece. Greece is a very small country. In addition to that it had, and still has, a lot of economic problems. So it simply was not able to handle the large numbers of people coming in. And most refugees where not really keen to stay in Greece anyway, since there are no opportunities in this ruined state. Hell, even a high number of Greeks do not want to stay in Greece at the moment. So most refugees headed for the richer, northern countries, like Germany, since this is where the opportunities are.

This follows the example of historical migrations, which always tended to be from poor economic areas to richer ones. It is the market in action. People leaving unproductive areas for productive ones is employing existing capital more productively, and is beneficiary for everyone.

Because of the solvency crisis in Greece, there were, and still are, a lot of tensions between the mediterranean state and Germany. The Greeks accused Germany for behaving like a dictator, for insisting that they had to cut spending in return for new loans. The German public on the other hand, perceived the Greeks to stealing their money. There is certainly some truth to the latter, but what the German public did not understand was, that it was a bit too late to save their money. The government in Berlin had a big interest of bailing out Greece, since German banks were already holding a lot of Greek dept. That meant that German savers would have been in danger if the government in Athens had become insolvent. In other words, the German government really wanted to bail out the banking system rather than Greece. In addition to that, a bankrupt Greek government was likely to leave the Euro, which could have caused a loss in confidence in the relatively young currency.

And that is where German Chancellor Angela Merkel reacted. She announced that everyone who reaches Germany with a valid asylum reason will be granted asylum in Germany instead of Greece. She added that people from Syria are automatically seen as having a valid asylum reason.

She must have though, ok let’s kill two birds with one stone. We take the refugees off the shoulders of the Greeks. Germany can handle the refugees, and Athens in return will be pleased. In addition to that, the very unpopular solvency crisis will disappear from the headlines in Germany and replaced by news about refugees. Once out of the headlines, Greece, and the banking system can be secretly bailed out. And that is exactly what happened. At least at first.

It is important to understand that non of the German people licensing laws where at any point repealed. The borders remained just as closed as before. The only agreement that was broken was the Dublin agreement. Merkel did not say, everyone can come to Germany. She merely said, if you somehow make it to German shores, and you are a Syrian, we will not send you back to Greece, and give you asylum in Germany instead. That is all, no open borders here. It remained illegal to enter the country without a visa, making anyone essentially a criminal that helped refugees across the border. And if someone wanted to stay in Germany, they still needed a valid asylum reason or a visa. Since many people had neither, there have been a lot of deportations since.

What about the consequences?

Some people might now say that this is even more a reason against open borders. Merkel just liberalized the laws a tiny bit and you already have this disaster. How bad would the situation be, if there were truly open borders and everyone could come.

Not so fast. I agree there are problems with refugees in Germany, and many Germans are not happy about Merkel letting in those people. But the reason for the problems is not too few regulations. The reason is that there are way too many. A lot of the problems came from the attempt to regulate the situation. I warned about this in my article “Soviet Migration Chaos” which I wrote at the time.

As an asylum seeker in Germany, you first of all only have a right to be on German territory. This does not come with the right to choose where you want to live, seek employment or run your own business. For the first 3 month, asylum seekers are forced to live on taxpayer money. They have to live in an accommodation that the government provides. After that, they can apply for a very limited amount of jobs. But every time they do, the employer has to proof that there is no German who can also do the job. This is a hassle that few employers want to go through, when it comes to low qualifying jobs. So this regulation affectively prevents that refugees are able to work. It is only after 18 month that people with a valid asylum reason are allowed to freely work in Germany. That is a lot of time of forced inaction.

The whole thing is essentially a completely centrally planned endeavor. And so we are seeing the same problems we are always seeing with central planning. It appears that there is not enough space and work for all these people. This however, is unlikely a real problem. Short of super abundance, there is always more than enough work to do, if only the government does not put in work prohibitions of any kind.

But it is this welfare chaos that Germans in my experience are most unhappy about. They see all these poor people coming in, getting all this free stuff from the government. The government has even closed schools and outright confiscated private flats, in order to house refugees. This is the main cause of a lot of anger among Germans. But remarkably, many are blaming the ‘lazy’ refugees, who ‘only come for the welfare’, instead of blaming the real villain, which is the government trying to control everything. Unfortunately, we see this all too often. The government creates a big problem and then the market gets blamed for it. As a consequence, more regulations are proposed as the solution. Sadly, even some ‘free market’ people have fallen for this nonsense. But in order to fix a problem, one needs to have a correct analysis of what the problem is. And it ain’t open borders, as we do not have those.

What about security

Besides welfare, another concern of some people is security. On all kinds of nationalist blogs, I can read how places like Germany have apparently turned into war zones. This is largely based on individual report of bad experiences with refugees. Individual cases however, do not necessarily present an accurate picture of the overall situation. Of course, Germany too has an active, and in parts even violent, nationalist movement. These people never liked foreigners, and are now out on the internet, completely misrepresenting the situation. These are the kinds of people that describe the migration from unproductive and dangerous, to save and productive areas, as an invasion. ‘Invasion’ is of course a military term, which describes a forceful and hostile takeover of a territory.

But immigrants, including refugees, are usually neither armed nor hostile. To the contrary, they come in order to better their lives, and because they are attractive to the place they go to. Most of them are completely unpolitical. The use of the term invasion to describe such a peaceful market process is very revealing in my view. It shows that these people are predominantly driven by fear rather than good rational arguments.

Let us look at the facts. How dangerous are the refugees really. On the surface, there seem to be slightly more crimes being committed by them compared to locals. There is no statistic however that shows that a high number of asylum seekers are criminals. The vast majority are completely peaceful. So we are talking about a small group of trouble makers.

At a closer look, it turns out that this group of trouble makers, percentage wise, does not seem to be bigger than criminals among Germans. A significant portion of the crimes being committed are dodging public transport fares and forging documents. The latter has to do with the fact that there are people licensing laws in the first place. So these are crimes that Germans do not have to commit. And the former, while not ok, is not a damage that could be prevented with closed borders. After all, if they are not in the country, they would not pay for a ticket either. Both are crimes that more come from poverty and desperation rather than real criminal energy. If you deduct these crimes, the difference between criminal Germans and refugees disappears.

In addition to that, a lot of crimes committed by refugees are being committed in the state run accommodation facilities. So the victims are also other refugees. It turns out, locking up a lot of healthy young men of different backgrounds in small facilities, and condemn them to do nothing all day, is not a recipe for harmony. Who would have though. And once again, this is a result of state planning and not of too much freedom. If we had free migration, which of course includes free association, these people would just go out of each other’s way.

As recently released numbers show however, there is one area of crime in which the latest refugees are disproportionately often involved. And that is sexual motivated crimes. This goes from sexual harassment to rape. The difference is not huge, but at least according to crime statistics, it is there. This seems to indeed have something to do with different cultural attitudes towards women. There can of course be no tolerated for this in any shape or form. But again, we are not talking about a large number of trouble makers. Overall, the vast majority of refugees are not engaging in any criminal activity. So the correct way to deal with this type of crime is on a case by case basis and not with collective punishment.

None of these things seem particularly dramatic or worrying. And yet there seems to be some Germans who are very worried about an increase of crime. The number of licenses issued for carrying defensive weapons has gone up significantly over the last few years. I however, have yet to meet one of those people who is really altering his or her behaviors, because of a fear of refugees. The facts do not seem to merit this. Objectively, Germany remains a fairly save place with the usual western levels of crime.

What about terrorism

But then of course there is terrorism. Last year, there were a number of terrorist attacks in Germany, some of which were indeed committed by immigrants. The most lethal one was the one on 19th December at a christmas market in Berlin, killing 12 people and injuring 55.

The reason why terror is so scary is, because our brain is inherently bad in dealing with probabilities. People see this and think their own lives might be in danger. The reality however is, that even in the bloody year of 2016, the chances of being caught up in a terrorist event in Germany are statistically negligible. Terrorism is factually one of the smallest problems on earth. And yet we are constantly spending a lot of time and resources solving this none problem. All because of our brain being unable to handle probabilities.

Terrorism on the whole is almost a non problem. And it certainly is not any kind of serious problem when it comes to the free movement of people. Over 1 million people have made it to Germany with asylum reasons in the last few years. But we have not even seen a handful of terrorist attacks resulting from this. The only rational conclusion to draw from this is that the number of terrorists among those coming in is indeed negligible.

The humanitarian disaster caused by closed borders

What is not negligible however, are the tens of thousands of people who have died trying to get into the fortress Europe. These people die, because they have nothing to lose, and we have nothing better to do than to put stones in their way. This has now lead to the building of huge criminal mafia organisations in northern Africa, who earn handsome returns ripping off these poor, desperate people. We are even literally seeing slave trades re-emerging in Libya.

Whoever wants to argue that we cannot have open borders, needs to make a case that open borders are worst than the humanitarian horrors we are witnessing on the outer borders of the fortress Europe. These are a direct consequence of the government trying to license people, and they seem to completely dwarf any kind of crimes and terror we have seen from refugees in places like Germany. And as we have seen, most of these problems too come from government intervention and not from free movement, which Germany never had.

So even if one wanted to argue that there was a distinct security problem with immigrants, clearly the immigration controls are not creating better outcomes. In fact, people licensing is probably the most destructive state policy after war. It just increases the misery. Unless of course, the argument is that only the misery of Europeans count. We should not care about the misery of all the other people. It is therefore perfectly legitimate to take away their freedom. This is essentially what the nationalist argument comes down to at the end. But do not call them xenophobic or racist! That is offensive and not PC. Although, even that is a too generous representation of this agenda, for they do not even care about Europeans either. They also want to tell us that we cannot associate ourselves with these foreigners. I am sorry, but as a libertarian, who believes in individual liberty for everyone, I have no respect for this line of arguing whatsoever. It is collectivism at its worst.

The US President is not a CEO

It has been a few weeks since Donald Trump moved into the White House. So far, his administration appears to be a little bit chaotic, to say the least. During his campaign he ran on a populist platform. That means he did not make a lot of concrete policy promises. Instead, he suggested that he was on the side of whoever he was talking to, without going into too many specifics. Whenever he did announce concrete policies, he made sure that these did not repulse any significant groups of voters. That is why he was very vocal about building a wall to Mexico. Mexicans could not vote, and many of the real voters did not like Mexicans.

At the heart of his campaign however was the message that America is currently run by terrible deal makers, who are selling out the country. He on the other hand would be able to negotiate deals that put America first. Through his experience as a business man, America would be great again. All of that, he suggested, could be achieve without any hardship for Americans. Instead, foreigners could be forced to pay back what they owed to the country. Of course this is nonsense, as I have pointed out in a previous article.

Personally, I don’t think his business record is nearly as good as he wants his audience to believe. But even if he was a great business man, it looks like he is currently in the process of finding out that a President is not a CEO. A CEO of a company has the power to do whatever it takes to restructure the business. He is in charge. The US President however, in reality, has very little power. I would not go quite as far as to say that it is irrelevant who is in the White House. There are a few areas where the President can make important decisions. This is particularly true for foreign policy. But by and large, the state is run by what Americans increasing refer to as the deep state.

In order to make major reforms, the President needs to bring a lot of people on his side. There is Congress, the Senate, courts, the intelligence community, the media and a huge amount of lobby groups. Trump, in his press conferences, seems to be surprised, and annoyed, that all these interest groups are not automatically following his lead. How dare they. More than that, he seems to be surprised that most of these groups are not even interested in playing fair. They will do whatever it takes to protect their interests. Currently, it appears that the deep state has several plots at work to get rid of, or at lest tame, Trump as quickly as possible.

None of that should have been a surprise for the Donald. This is just politics 101. Within the system, if he wants to get any significant reforms done, he will have little choice but to be nice to these groups and give them what they want. That on the other hand means that he cannot really reform the US state, as these people will not cooperate with him on a serious reform project.

Trump has tried to use executive orders to bypass these special interests. But that is not going to work. One of the first orders he gave was to fulfil his campaign promise of stopping people from certain muslim countries to enter the US. While he did manage to severely damage the reputation of the US, and in the process strengthen ISIS (yes, that is something the President can do), a court very quickly put an end to his endeavour. This, for a change, happened to be a victory for liberalism.

Normally however, the deep state is not supportive of liberty. He is about to find out that he cannot significantly lower taxes without cutting spending. And he cannot increase spending without increasing taxes. Reducing state expenditure does not seem to be on his agenda anyway. But should he try to cut anything to at least get some room for reform, he will experience even bigger headwinds than so far. And so he can forget about any of his economic reform plans.

No, you cannot rule against the deep state. If he wants to survive for 4 years, he will have to be play ball. That is the art of diplomacy, an art that Trump is only just in the process of discovering it exists. Obama also banned people from Iraq for 6 month. The difference is that Obama was a master in diplomacy and very willing to cooperate with the system. And so, despite his abysmally bad track record when it comes to many issues, including wars and human rights, many people are under the impression that he was a great President. No one seems to care about his travel ban. That is how politics works.

The deep state cannot be defeated from within. It controls the system and has all the jokers. Real change needs to start outside the system. This is true for any political reform movement, but is particularly true for achieving more liberty.

On the positive side of this, people are wrong to compare Trump to political figures like Hitler. Not that I think he would not make a good dictator. He certainly seems to have the fitting personality trades for that. But as we are seeing, Trump is illiterate about politics. People like Hitler, Erdogan or Chavez etc, all came into power on the back of political movements that build up outside the system. These movements followed more than a mere opposition to the status quo. They had very explicit ideologies with clear political goals.

Hitler wrote ‘Mein Kampf’ in 1925, years before he actually got into power. He wrote it when he was already part of a growing nationalist movement. When the Nazis finally did take power, they could rely on a huge network of sympathisers within the system. They even had paramilitary groups that were listening to their commands. That is how they solved the problem of the opposition.

Trump on the other hand has very little friends within the system. That is because his decision to run for President appears to have been more a spontaneous impulse rather than a long planned ideological take over. In fact, Trump seems to lack any clear ideological vision, other than thinking he is a great deal maker. But as we are seeing, that talent, even if he did have it, is not an important skill when it comes to politics.

His fellowship is equally chaotic. The only thing that unites them is the opposition to the status quo and maybe the dislike of Mexicans and Muslims. Other than that, they are divided and ready to be defeated. Such a loose connection simply is not enough to beat the well oiled machine of the deep state. The latter will either force Trump to comply with its demands, or it will make sure that his Presidency ends soon.

As a libertarian, all of this leaves me between the lines. On the one hand I can totally understand Donald Trump’s complaining about the deep state. Yes, a lying, corrupt bunch of hypocrites is exactly what he is up against. Currently, there seem to be several ongoing plots against his Presidency. And of course these nasty interest groups are also what libertarians ultimately have to defeat in order to create a liberal society.

On the other hand however, whenever Trump does make an actual alternative policy proposal, further state increases is all he seems to offer. From immigration controls, to import taxes, to an increase in state spending, this is all going to make things even worse rather than better. And so it seems inconceivable that liberty loving people could actively support Trump, for if he ever where to succeed to defeat the deep state, he would most likely replace it with something even worse. This is how most revolutions have ended. So we are probably lucky that he is such an amateur.

There is no need for libertarians to pick sides. People often feel compelled to do so, whenever there is a conflict. But when both sides are wrong, the best thing is to point that out. It is the job of libertarians to reveal the wrong solutions both sides have to offer. In addition to that, we need to point out how structurally incompetent the state is when it comes to solving problems. Most of the problems Leviathan tries to solve would not exist if it wasn’t for him in the first place. There will never be a real solution to the challenges we face, as long as we continue using the state as the tool to solve the problems. So boo Trump, and boo deep state.

The Housing Bubble in Britain

This country is mad about property. I realised this very early on when I moved here from Germany. Before I came, I cannot recall ever having had a serious conversation with anyone about buying property. That is not to say that Germans don’t buy property, contrary to the cliché they do. But they buy it for different reasons. In particular, owning property is not important for someone’s social status.

Not so in the UK. Here, most people seem to think that you must have done something wrong in your life, if you don’t end up owning at least the property you live in. On the subject, the media constantly quotes the average age of first time buyers. The reason they are called first time buyers is because many people change properties a few times in their lives, moving up something called the property ladder.

When I first heard the phrase ‘property ladder’, I had no idea what it meant. It actually took me a while to understand it. It simply does not exist in Germany. Germans do not buy houses with the intention of selling them again for a better one in a few years time. Instead, if you buy your own property, the idea is to buy one in which you would be able to live until the end of your days. As a result, the vast majority of property owners I know bought a piece of land and build their own tailor made house on it. Since there is only enough space to do this outside of cities, you find a lot of people owning property in the countryside while the majority of people in cities are renters.

As a result, renting is a perfectly acceptable alternative to owning. In fact, I know a number of people who sold their property, which they owned dept free, to be able to enjoy renting again. Preferring renting over buying as a choice probably makes very little sense to the average person in Britain. There are certainly some cultural reason for this mentally difference. However, it might also have a lot to do with the way the property markets work in both countries.

Property as an investment

Renting makes sense in an environment in which property prices are relatively stable. If you look at property prices in Germany, they tended to not move much over the past decades. That means property has not been an investment with which most people could make a lot of money through capital gains. That is not to say that property prices in certain trendy areas have not gone up at times. These however are very local phenomenons and are not characteristic for the whole property market. Overall, property prices have been fairly stable.

In fact, if anything, house prices have gone down in many areas. This makes sense, since most people want to own houses as a lifestyle choice. They want to own their own tailor made house. People who think like that are reluctant to buy used houses. And so, over time, as the owners of their own tailor made houses die, in many areas you find these houses on the market for a significant discount compared to new builds. If it wasn’t for foreign buyers like Russians and Turks to come in and buy these used countryside houses, these properties would probably now be on the market for next to nothing.

The idea that an asset that does not produce anything should go up over time makes very little sense. Usually, for that to happen, one would need to speculate that the area will become more popular within the next decade or so after the purchase. This however would be less of an investment and more of a speculation. In all other scenarios, not only are houses unproductive, they are naturally depreciating in value. Capital has to be constantly re-invested in order to maintain them. The only investment part of property is the fact that we have very little choice but to not live in one. That means we will have to spend some money on property one way or the other.

However, the only way of reliable getting a return on a property investment is to charge a tenant rent. In a market of stable prices, owning property as an investment therefore is only attractive if there isn’t an investment vehicle with a better, or at least equal, return on your money. But of course, there are plenty of more liquid investments that are more attractive. For most people, the only advantage of property investments is that they can understand them, which is not true for a lot of other investment vehicles. That is certainly very important. Nevertheless, in an environment of stable house prices, renting vs. buying is more a choice of lifestyle rather than a great investment.

In the UK however, house prices have gone up everywhere over the decades. That is a very weird phenomenon. In such an environment however, it makes sense that people start to perceive it as a good, or even a ‘get rich quick’ investment. Indeed, given that most people buy houses with leverage, in the rising British house prices environment we can find a lot of stories of people becoming very wealthy with very little starting capital.

Something similar has been happening in Germany since I left in 2008. The financial crisis has lead to a lot of money flowing from all over Europe into the German property market. This has inflated property bubbles in bigger German cities. And I noticed that suddenly property has become a real topic. However, as I have tried to explain, a property market that is going up is usually a symptom of a flawed market.

There are policies that tend to inflate property bubbles. In the UK, the bubble certainly started with monetary policy. Credit was and is readily available, at cheap prices, to buy property. This does not seem to be a natural phenomenon. In a free market, credit would only be available as a consequence of someone saving capital and lending it out. In that scenario, if someone wanted to get a mortgage, he would need to convince someone else to lend him his hard earned savings in order to buy what is essentially an unproductive consumer good. That seems like a fairly risky thing to do for the investor. Why would anyone put his savings into a consumer credit when there is the possibility of putting it into a productive business that will give him a share of its income? At the very least, for this to be attractive for an investor, the interest paid on such a loan would need to be higher than an expected rental return. Otherwise, the investor would be better off investing the money directly into the property. That means the person borrowing the money would definitely lose compared to renting.

If renting was cheaper and the consumer applying for the mortgage was credit worthy, then why would he not save up at least most of the money and then eventually pay cash for the property? This is of course what we saw in times of sound money. People just paid cash for their property or rented. I would not go as far as to exclude the possibility of mortgage products on a free market. Mortgages however would need to be significantly more expensive as they are today, in order to give investors a better return than other, saver investments. Or they would just been issued on top of a very large deposit. On the whole, within a sound money system, I would expect property to be largely a cash payers market. Such a market would be fairly stable and almost certainly a lot cheaper.

But of course we have the exact opposite of that. In this country, someone can buy property with a 10% deposit and interest rates of 3-4%. This is massively boosting demand. Contrary to what a lot of people seem to believe, demand is not the number of people who want to buy, but the amount of capital that is available to buy. In the monetary system of today, currency units for mortgages are created out of thin air. That means that the amount of money available for mortgages is essentially determent by politics and not by the market. The lower the interest rates of the mortgage, the cheaper the monthly payments. That means, with falling interest rates, people can borrow more and more money and can therefore drive up house prices.

The problem comes when interest rates rise. Currently, interest rates are at a historic low. So they are unlikely to fall further from here. It is more likely that they will go up in the near future. If that happens, a lot of people will have trouble to make their monthly mortgage payments. They will have to sell their property to settle their dept. But of course at that point a lot of people will have to do that. Eventually, this will result in a run to the exits. Consequently, house prices will fall significantly.

There is however one alternative to this scenario. What if the government forces interest rates to stay low? This would be in its own interest, since it is a big borrower itself. In that case we would probably see inflation rising before interest rates. If everything else rises in price, but property does not, then house prices would fall in real terms and would therefore be able to return to a normal level eventually.

Economically, inflation is the worst way out of the bubble. It will punish savers and reward people living beyond their means. It will continue to allocate a lot of capital away from the productive to the unproductive sectors of the economy. A lot of wealth would not be created and we will all be poorer than we would otherwise have been. Unfortunately, while this is the economically worst option, it is politically the best. That is why politicians will try everything to create the inflation endgame. Whether they will succeed or not will depend on whether they can limit inflation to the right amount. But if history is a lesson then we know that inflation has a lot to do with psychology, and it can quickly run out of control.

Planning restrictions keep the bubble going

The odd thing about the property bubble in Britain is that it seems it will need this scenario in order for prices to return to normal. Usually, property bubbles end quite differently. When prices of something go up, this will attract businessmen who want to cash in on these rising prices. In other words, they will try to create more supply of the desired good. In case of property, this means that one would expect there to be a massive boom in building. Such a boom would create an oversupply in property. As a consequence the market would run out of buyers and prices would fall significantly.

This is what we find in most places with property bubbles. Spain is a good example. After joining the Euro, it had a massive property boom financed by cheap dept. This created an excessive building boom. Eventually the bubble bursted, as a lot of these new builds did not find buyers. Investors got burned, prices came down. You can still see lots of house ruins all along the Mediterranean cost line. Housing is now cheap in a lot of parts of Spain.

Britain however, and especially London, seems to be very resilient to this outcome. The main reason for that is state planning restrictions. It is very difficult and often expensive in this country to get permission from the government to build a new property. And permission you will need. This keeps a very artificial lit on supply and therefore keeps the bubble going until, sometime in the future, the above scenario will kick in.

As a result, house prices are not just high, you also get very small and old property for your money. Britain has one of the oldest housing stock in Europe, as well as one of the smallest average room sizes. It is obvious why buildings are old in the absence of new builds, but why do room sizes shrink?

The reason is that entrepreneurs want to cash in on the rising housing prices. Since they cannot build new properties, they are trying to create more supply within the means available. One thing that is possible under current planning restrictions is to divide the existing properties into more units. And that is what has been happening excessively. Most of the nice big victorian houses in London, which used to be the homes of single families, are now divided into several units of flats. In the same fashion, big rooms are often divided to make them into two or more bedrooms, thus the shrinking room sizes.

Speaking of bedrooms, there are several things that are odd about how to describe properties in this country, and which helps to disguise the misery of the state of housing. When I was first flat hunting in England, I had trouble understanding what the advertisements meant. The problem was not a language barrier. The way property is measured in this country is simply very different from Germany.

In Germany, the first thing you will see advertised is the size of the property in square meters. This is followed by the number of ordinary rooms, plus kitchen and bathrooms. So an advertisement would read “Flat in Cologne Sülz, 900 €/month, 72sm, 3 rooms, kitchen, bathroom”. Not so in this country. For some reason, properties are measured in bedrooms. And bedrooms come in only two sizes, single and double, that is it. Actually, increasingly it is only double, since every room that somehow fits a double bed is called a double. And if you cannot squeeze in a double bed somehow, well, then it really is a stretch to call it a bedroom at all. This is all very confusing. It says almost nothing about the actual sizes of the rooms, let alone the whole property. And you usually will not find more precise information anywhere. As a result, it is very difficult to make out how much space you get for your money.

Things are a bit better when you are buying a property. If you look for it, you can usually find more precise size numbers somewhere. But they are not advertised very openly. Of course this way of measuring properties makes it very easy to shrink the sizes of the units more and more, since the priority is the quantity not the size of the rooms.

This oddity, of not getting clearly defined unit sizes, continues in other statistics. One of the most important statistics, which is quoted all over the media, is average house prices. I tried very hard, but have so far failed, to find out how exactly this average house that they are trying to measure is defined. It never says. It just says average house price. It is completely absurd to have a statistic that never defines what it is actually trying to measure. In most parts of the world, cost for housing are measured in price/sm or price/sft. This at least makes it possible to compare prices accurately.

Saying however that the average house price is X is meaningless without a clear definition of what you are measuring. This once again disguises the fact that these average houses are shrinking in size. It is a bit like the joke when someone says, I don’t care about petrol prices, I always fill up for £30.

Another way of distorting the statistics is measuring house prices in average income. This is usually a good indicator of whether prices are over or undervalued. Because everyone has to live somewhere, and buyers will eventually have to come up with the capital for a property, it is not a coincidence that historically a housing unit that a normal earner could afford tended to be around 4-5 times his earnings. That way it becomes possible to pay back the capital within a working life.

However, I noticed in recent years that the media started to quote statistics of house prices not in average income as a whole, but in average income of first time buyers. This of course again is a moving target. The higher prices get, the more you need to earn in order to be able to afford the property. But even if prices go to unaffordable levels, as long as there is at least one person still buying, multiples of average first time buyers income do not necessarily have to go up. This too makes property look cheaper than it really is.

The property bubble in Britain is strange in many ways. It is fascinating to see how a culture has developed around this bubble which tries to disguise the real dimension of the over valuation of living space. While the average Brit is probably naturally more keen to own property than the average German, a lot of what we are seeing is most likely people simply behaving rationally in a distorted market. Of course, at the end of the day, none of that will maintain the bubble. Markets eventually mean revert to its true values one way or the other. This is inevitable. Putting a timeline on these things however is very difficult.