Interventionism: Recent Episodes
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Interventionism includes all forms of government interference with the market, wage and price controls, tariffs,and prohibition of drugs, fascism, unions.
Some principles for understanding environmental issues. Can government steer energy use decisions to improve outcomes?
Download the slides from this lecture at Mises.org/MU22_PPT_37.
Recorded at the Mises Institute in Auburn, Alabama, on 29 July 2022.
Inequality is a good thing in the free market. Economic equality is a disastrous government policy that leads to economic ruin for all—including the poor and workers.
Download the slides from this lecture at Mises.org/MU22_PPT_36.
Recorded at the Mises Institute in Auburn, Alabama, on 29 July 2022.
Is it all bad news? There is still entrepreneurship. There is still innovation.
Download the slides from this lecture at Mises.org/MU22_PPT_27.
Recorded at the Mises Institute in Auburn, Alabama, on 28 July 2022.
US medical provision is far from a free market, and is a mixed bag of government and markets—as are most developed countries. Flagship programs have serious fiscal problems ahead.
Download the slides from this lecture at Mises.org/MU22_PPT_29.
Recorded at the Mises Institute in Auburn, Alabama, on July 28, 2022.
Free trade allows for maximizing total number of mutually beneficial exchangers and promotes economic progress.
Download the slides from this lecture at Mises.org/MU22_PPT_22.
Recorded at the Mises Institute in Auburn, Alabama, on 27 July 2022.
Less and less and less?
Download the slides from this lecture at Mises.org/MU22_PPT_17.
Recorded at the Mises Institute in Auburn, Alabama, on 26 July 2022.
Bloomberg suggests that individuals should not be permitted to make their own stock selections because they are not "qualified" to make such decisions. Instead, governments should help direct their investment choices.
Original Article: "Should Government Be Your Stockbroker? Maybe So, Says Bloomberg"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Washington politicos want to keep the debt going up at breakneck speed forever. But the responsible thing to do is refuse another increase to the debt ceiling and force a partial default. Politicians hate that idea because default would make it harder to spend trillions in deficit spending.
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
This special virtual seminar for donors to our fall campaign was livestreamed on October 8th, 2021.
Jeff Deist and Bob Murphy discuss Mises's views on interventionism and their continued relevance today, particularly after the last year and a half of economic intervention resulting from covid tyranny.
"[Interventionism] preserves some of the labels and the outward appearance of capitalism. It maintains, seemingly and nominally, private ownership of the means of production, prices, wages, interest rates, and profits. In fact, however, nothing counts but the government’s unrestricted autocracy... This is socialism in the outward guise of capitalism. It is the Zwangswirtschaft of Hitler’s German Reich" —Ludwig von Mises, The Middle of the Road Leads to Socialism
Read the full text from Mises here.
For the foreign-policy non-interventionist, some schools of thought in international relations are much better than others. "Liberal hegemony" (the favored school of neoconservatives) has long supported endless war and intervention by the US regime worldwide. We discuss how we can use "realist" research to move the foreign policy needle away from liberal hegemony and toward a more sane foreign policy.
Guest: Zachary Yost (Mises.org/Yost) is a Marcellus Policy Fellow with the John Quincy Adams Society.
Be sure to follow Radio Rothbard at Mises.org/RadioRothbard.
Abstract: This article compares the Keynesian, neoclassical and Austrian explanations for low interest rates and sluggish growth. From a Keynesian and neoclassical perspective, low interest rates are attributed to aging societies, which save more for the future (global savings glut). Low growth is linked to slowing population growth and a declining marginal efficiency of investment as well as to declining fixed capital investment due to digitalization (secular stagnation). In contrast, from the perspective of Austrian business cycle theory, interest rates were decreased step by step by central banks to stimulate growth. This paralyzed investment and lowered growth in the long term. This study shows that the ability of banks to extend credit ex nihilo and the requirement of time to produce capital goods invalidates the permanent IS identity assumed in the Keynesian theory. Furthermore, it is found that there is no empirical evidence for the hypotheses of a global savings glut and secular stagnation. Instead, low growth can be explained by the emergence of quasi “soft budget constraints” as a result of low interest rates, which reduce the incentive for banks and enterprises to strive for efficiency.
JEL Classification: E12, E14, E32, E43
Thomas Mayer (Thomas.mayer@fvsag.com) is the founding director of the Flossbach von Storch Research Institute, Cologne, Germany. Gunther Schnabl (schabl@wifa.uni-leipzig.de) is a professor of international economics and economic policy in the department of economics at Leipzig University, Germany.
INTRODUCTION Since the 1980s, slower economic growth in the industrial countries has been accompanied by lower interest rates, with real interest rates turning negative more recently (figure 1). The fight against the economic consequences of the severe corona crisis has triggered an even stronger monetary expansion, with even more government bond yields falling into negative territory. At the same time, investment, productivity growth, and economic growth have continued to slow. Although to some observers the pivotal role of central banks in ever-lower levels of interest is evident, representatives of central banks have stressed structural factors as the reasons for low interest rates (Lane 2019, Schnabel 2020).
Figure 1. Nominal and Real Short-Term Interest Rates in the US, Japan, and Germany
Source: IMF. Arithmetic mean. Real interest rates calculated based on official consumer price inflation statistics with hedonic price measurement. Different schools of thought have provided different theoretical and empirical explanations. Based on Keynes (1936) and Hansen (1939), Bernanke (2005) and Summers (2014) have attributed secularly declining real interest rates to a global savings glut driven by aging societies, a declining demand for fixed capital investment, and a declining marginal efficiency of fixed capital investment (Gordon 2012). Łukasz and Summers (2019) argue that “the neutral real rate for the industrial world has trended downward for the last generation and this is best understood in terms of changes in private sector saving and investment propensities.” According to their view, central banks are simply adjusting to the exogenous forces of secular stagnation when they set the interest rate at or below zero.
In contrast, from the point of view of Austrian economic theory in the tradition of Mises (1912) and Hayek (1931), human beings strive to achieve their goals earlier rather than later and thus have a “positive time preference.” This makes negative interest rates under free market conditions impossible (Mises [1949] 1998). This view is in line with the finding of Homer and Sylla (2005) that through most of economic history real interest rates were positive. In this spirit, based on the monetary overinvestment theories of Mises (1912) and Hayek (1931) and in line with Borio and White (2004) and White (2006), Schnabl (2019) has argued that the gradual decline of interest rates in the industrialized countries has been due to asymmetric monetary policies: strong interest rate cuts during crises were not followed by respective increases during the postcrisis recovery.
The question of whether the gradual decline of real and nominal interest rates in the industrialized countries (and the rest of the world) is due to structural change, as suggested inter alia by Summers (2014) or due to policy decisions made by central banks is crucial for the economic policy agenda. The Keynesian interpretation can be used to justify further interest rate cuts, even below zero,Agarwal and Kimball (2019) of the International Monetary Fund (IMF) have compiled a guide for central banks on how to enable deep negative interest rates in order to fight recessions. as well as fiscal expansion. In contrast, from the Austrian point of view only renouncing policies that have led to low and even negative interest rates can reanimate economic activity. This article compares the two approaches and derives policy implications.
THE KEYNESIAN AND NEOCLASSICAL INTERPRETATION OF LOW INTEREST RATES AND GROWTH The close relationship between declining nominal and real interest rates and declining (productivity) growth is in the Keynesian and neoclassical view due to exogenous factors. Structural change leads to changes in supply and demand conditions in the capital markets, with the result that the real interest rate declines. In the spirit of Hansen (1939), Bernanke (2005) attributes a savings glut to the aging of societies. As people approach retirement age they are seen to save more for old age. When the cohort of aging people is large, in the Keynesian and neoclassical approach the aggregate supply of loanable funds and equity capital rises. At the same time, profitable investment opportunities are seen to decline, reducing the demand for loanable funds and equity capital (Summers 2014).
Savings Glut, Secular Stagnation, and the Keynesian Natural Interest Rate
Following the sharp interest rate cuts of the US Federal Reserve in response to the burst of the dot-com bubble at the beginning of the new millennium, Bernanke (2005) attributed an increase in the US current account deficit (i.e., growing net capital inflows to the US) and the decline of world interest rates to factors outside the US: “A global saving glut … helps to explain both the increase in the US current account deficit and the relatively low level of long-term real interest rates in the world today.“ Bernanke (2005) argued that aging populations in a number of industrial countries and several emerging market economies, notably China, had transformed these countries from net borrowing to being net lenders on international capital markets, with the result of increased net capital flows to the US.
According to Bernanke (2005), East Asian countries prevented their exchange rates from appreciating and accumulated foreign reserves to boost the competitiveness of their exports and create war chests against balance of payments crises.In 1997–98, the Asian crisis, which had been caused by large net capital inflows, overinvestment, and current account deficits, put an abrupt end to the economic miracle in a number of Southeast Asian countries (Corsetti et al. 1999). Bernanke (2005) also observed higher US dollar earnings for oil- and raw materials–exporting countries due to rising oil prices, which were to a large extent recycled into US dollar investments. Before the subprime crisis, capital flows to the US were attracted by fast productivity growth, strong property rights, and a robust regulatory environment.
After the outbreak of the subprime crisis, which culminated in the global financial crisis of 2007–08 and prompted the Federal Reserve (and other large central banks) to cut interest rates toward zero, Summers (2014) developed a comprehensive explanation for the global decline of nominal and real interest rates from a capital market perspective. On the supply side of the capital market, Summers (2014) linked low birth rates in industrialized countries to growing savings in the tradition of Hansen (1939)In the 1930s, Hansen (1939) had argued that low growth was caused by slowing population growth and limited scope for technological innovation. He had dubbed this phenomenon “secular stagnation.” and Bernanke (2005), who had argued that people in aging societies would save more for retirement.Keynes (1936) distinguishes eight savings motives from an individual perspective: preference for private profit (i.e., interest), intertemporal substitution motive, life-cycle motive due to decreasing income after retirement, precautionary motive, independence motive, enterprise motive, bequest motive, and avarice motive. The theory of a savings glut in an aging society randomly picks out the life-cycle motive and applies it to the entire society. Weizsäcker (2014) transferred Summers’s (2014) concept to Germany and demanded an expansionary fiscal policy to lift interest rates. Meanwhile, the pressure on German fiscal policy to become more expansionary to increase the inflation rate (and thereby to allow the European Central Bank [ECB] to lift the interest rate) is growing. Summers associated growing income inequality with a declining marginal propensity to consume (an increasing propensity to save) in a large part of the population.Keynes (1936) argued that the growth of income over time had increased the savings rate of the society, leading to a structural rise of savings over investment. Following Bernanke (2005), he identified accumulation of reserves in emerging market economies as a reason for the increased demand for safe assets available in the US.As the Fed strongly cut interest rates in response to the burst of the dot-com bubble after the year 2000, capital flows to East Asia accelerated. With the East Asian countries stabilizing their exchange rates against the dollar, the accumulation of dollar reserves and thereby the purchases of US government bonds strongly increased (see McKinnon and Schnabl 2012).
On the demand side of global capital markets, Summers (2014) linked a lower demand for fixed capital investment to changes in technology. He assumed that companies in the information and communication technology sector would have a lower demand for fixed capital. Like Bernanke (2005) and Gordon (2012), Summers (2014) argued that the potential of innovations to increase productivity had structurally declined. The resulting drop in the demand for capital goods was supposed to have been accompanied by lower prices for capital goods, leading to a further decline in investment spending in nominal terms. In Summers’s (2014) view, rising household savings drag down expected aggregate demand, including corporate investment. Thus, corporate savings rise as well.Which can also take the form of hoarding cash. When savings and investments are assumed to behave in line with these “stylized facts,” the savings curve in the neoclassical capital market model shifts to the right and the investment curve to the left. The equilibrium (or natural/neutral) interest rate falls, possibly even below zero.
In the neoclassical theory it is assumed that the real interest rate is determined by the marginal productivity of capital on the demand side of the capital market and by the time preference of savers on the supply side. Thus, the market equilibrium interest rate is determined by the marginal return on capital (which drives the demand for capital) and the marginal utility of exchanging present goods against future goods (which determines the supply of capital). The equilibrium rate matching savings to investment has been called the neutral or natural rate.
The natural or neutral rate of interest is a theoretical concept and cannot be observed directly.Mises (1944) argued that it is difficult to know the natural interest rate. In free markets, given sound money, long-term rates reflect on average the natural rate, which is determined by time preference (see below). A model is needed. Economists of a neoclassical persuasion have tried to derive it from the marginal product of capital of empirically estimated production functions. Those with a Keynesian preference have used Wicksell’s (1898) notion of a given interest rate prevailing in economic equilibrium to define the natural rate as the interest rate which keeps price inflation stable and output growth at its potential (see Woodford 2003).Wicksell’s (1898) natural rate ensures price stability (zero inflation). In contrast, the notion of the natural rate by Laubach and Williams (2015) as well as Rachel and Summers (2015) ensures a stable rate of price inflation (for example, 2 percent). The definition of Wicksell (1898) would imply in the modern world that the target for the inflation rate in the steady state is 0 percent. Also note that whereas Woodford (2003) assumes that the natural interest rate closes the output gap, this requirement is not found in Wicksell (1898). Thus, Laubach and Williams (2015) as well as Rachel and Summers (2019) define the natural or neutral interest rate as the real short-term interest rate consistent with the economy operating at its full potential, without upward or downward pressure on consumer price inflation. Gourinchas and Rey (2019) see a structural decline of the ratio of consumption to wealth as an indication of a decline of the natural interest rate. Following this line of thought would lead to the conclusion that rising asset prices drive down the natural interest rate.
Laubach and Williams (2015) as well as Rachel and Summers (2019) estimate the output gap via the Keynesian IS curveThe IS curve represents all equilibrium combinations of the real interest rate, r, and the real income, Y, at which the goods market is ceteris paribus in equilibrium. and inflation with the Phillips curve, which links price changes to the level of unemployment. As they find a negative output gap and declining (measured)Meanwhile, a discussion has emerged about whether officially measured inflation rates are understated or overstated. A core point in this discussion is how changes in quality of goods should be incorporated in inflation measurement (hedonic price measurement). Whereas one side argues that quality improvements are not sufficiently incorporated in hedonic price measurement (Feldstein 2017), others see declining quality being overlooked (Komlos 2018; Kitov 2012; Linz and Eckert 2002). Furthermore, the question arises, if asset price inflation (for instance for owner-occupied housing) should be included in inflation measurement, as monetary policy is increasingly transmitted to financial markets rather than goods markets (Schnabl 2015a). consumer price inflation, the natural or neutral interest rate estimated with their model declines from the 1980s. The decline has accelerated since the 2007–08 global financial crisis, with the natural interest rate turning negative recently. These findings are confirmed by the estimates of Jordá and Taylor (2019), who argue that half of the decline trend is due to structural factors, such as lower productivity growth and an aging population, and the rest to central bank policy.
To derive policy implications, Laubach and Williams (2015) apply the estimated natural interest rate to the Taylor (1993) rule. The original Taylor rule assumes a real interest rate of 2 percent, which was constant and close to the long-term US growth rate of 2.2 percent observed at the time. With an assumed inflation target of 2 percent,Note that different central banks use different measures of inflation for monetary policymaking.Market participants claim that the Fed is targeting core PCE, as it aims to stabilize inflation “over the long run.” The European Central Bank aims to keep the percent change rate of the Harmonized Consumer Prices Index at “close to but less than 2%” in the medium term. It is unclear whether the ECB is targeting headline or core inflation. An increasing number of commentators think that the ECB targets core inflation rather than headline inflation as in the past. The reason is that in cases when headline inflation was close to 2 percent while core inflation was substantially below 2 percent, ECB representatives claimed to have missed the target. More generally, the ECB (2016) claims that “many central banks, including the ECB, monitor a wide range of underlying inflation measures, which abstract from short-term volatility, to gauge inflationary trends. In addition to HICP inflation excluding energy and food, the ECB monitors various exclusion-based measures and model-based measures of inflation, as well as developments in long-term inflation expectations.” The Bank of Japan (2013) “sets the ‘price stability target’ at 2 percent in terms of the year-on-year rate of change in the consumer price index (CPI)—a main price index.” this implied at the time a long-term equilibrium or nominal natural interest rate of 4 percent, consistent with inflation and output at target levels.The Taylor rule is i = r + π + 0.5(π –π) + 0.5(y – y), with i being the nominal (central bank target) interest rate, r being the real interest rate (assumed to be constant in the long term), π being the inflation rate, and y being real output. π marks the inflation target and y* the trend output. Inserting their estimates of a declining natural interest rate into the Taylor rule, Laubach and Williams (2015) arrive at the policy recommendation to gradually decrease the key policy interest rate toward or even below zero. If the natural interest rate falls, the policymaker has to cut the nominal interest rate to achieve the inflation target.
The Keynesian-Neoclassical Framework
In the seminal Keynesian macroeconomic framework, consumption is determined by real income (Y), with the propensity to consume declining over time (as in Keynes 1936). Bernanke (2005) and Summers (2014) argue that the propensity to consume (propensity to save) declines (increases) when the population is aging and the working-age population is shrinking:
(equation 1)
where C denotes real consumption, k the marginal propensity to consume, D the aging (shrinking) of the (working-age) population, and Y the real gross domestic product (GDP), with D > 0 and < 0.The view that savings increase when a population ages is based on considerations of plausibility instead of empirical observations. It is argued that working age people save for retirement as they grow older. At the same time, however, retirees may dissave. Whether saving for retirement is greater or smaller than dissaving in retirement is an empirical issue which Bernanke (2005) and Summers (2014) regard as resolved by their observation that populations are aging and interest rates are declining.
Real investment, I, is a function of the real interest rate, i:
(equation 2)
Investment increases when the interest rate falls ( < 0).
The price level, P, is a function of the economy-wide capacity utilization (output gap), measured by the ratio between actual real GDP (Y) and potential real GDP (Ypot).
(equation 3)
Prices rise when real output grows above potential .
Real GDP in a closed economy is the sum of consumption and investment:
(equation 4)
Inserting (1) and (2) in (4) and solving for Y yields:
(equation 5)
Substituting (5) into (3) gives:
(equation 6)
In this framework, if a society is aging, the propensity to consume, k, decreases, and the price level and output fall. To compensate for this effect, a central bank pursuing an inflation target needs to decrease the real interest rate to increase investment, output, and thereby the price level again, as explained by Laubach and Williams (2015) as well as by Rachel and Summers (2019). Interest rate cuts are necessary to maintain the inflation target and an equilibrium in the goods market.
The IS model abstracts from the supply side, as potential output is assumed to be given exogenously. It can be augmented, however, by adding a neoclassical element in the form of a production function where potential output is dependent on the capital stock, K:
(equation 8)
with the change in the capital stock being equivalent to investment (∆K = I).For parsimony we abstract from the depreciation of the capital stock. Assuming profit maximization, the marginal product of capital equals its real return, r:
(equation 9)
An investment project would usually only be financed when the real return is expected to be larger than the real interest rate on credit (i) plus the risk premium (rp). Hence,
(equation 10)
where rp is assumed to be constant for the sake of simplicity.
The upshot is that the propensity to consume (k) falls when the population ages, and savings increase (as S = Y – C). The resulting decline in demand and output prompts the central bank to reduce i. At the same time, as argued by Summers (2014) and Gordon (2012), investment and productivity growth decline, which lowers r.Note, however, that lower interest rates as a result of a savings glut (Summers 2014) conflict with the explanation of low interest rates as a result of slowing productivity growth (Gordon 2012). Summers (2014) assumes that the decline of output is due to increasing savings and declining consumption. This implies a decline of output below potential output from the demand side and therefore deflationary pressure. Gordon (2012) assumes a decline of potential output below output. This implies growing inflationary pressure from the supply side.
THE AUSTRIAN OVERINVESTMENT FRAMEWORK AND THE ROLE OF THE FINANCIAL SECTOR The overinvestment theory of Mises (1912) and Hayek (1931) says that a credit interest rate manipulated by the central bank below the natural interest rate at first induces an economic upswing, which is fueled by credit creation of the banking sector.For details see Schnabl (2019a). When interest rates are lifted again by the central bank to contain inflation, the upswing turns into a downswing. When interest rates then are strongly cut in response to the downswing, distorted economic structures created during the upswing are conserved, which leads to persistently low growth.
The Austrian Overinvestment Framework
According to Böhm-Bawerk (1884) and Mises (1940), the interest rate is a measure for time preference, with finitely living people assigning greater value to goods and services today than goods and services available at a future point in time.Therefore, in the view of Austrian economists, the interest rate always has to be positive, because it requires time to achieve a certain objective and time is scarce for mortal men. The borrowing of funds to produce capital goods requires the payment of interest as a compensation for the present consumption foregone on the part of the lender (agio). According to Böhm-Bawerk’s (1884) concept of roundaboutness, this positive interest rate payment is possible if the time-consuming move to a more capital-intensive production process allows higher production in the future. If a roundabout method would not result in a more productive production process, people will not engage in time-consuming roundabouts of producing the capital goods required for an increase of consumption in the future.But they could hoard products for future consumption if needed.
Before consumer goods can be produced, capital goods have to be produced. Whereas a high interest rate is an impediment for many investment projects with a comparatively low expected return, a low interest rate stimulates investment, as the costs of roundabouts decline. A lower interest rate signals higher present savings and as a result higher consumption in the future. This provides an incentive to increase capacity for the production of consumption goods. When some enterprises start to invest in response to a lower interest rate, they need inputs from other enterprises, which extend their production capacities as well.
A cumulative upswing sets in which is financed by credit creation of banks.Ohlin (1937) argued in his loanable funds theory that nominal investment can be financed by nominal household savings (S) and credit creation of banks (ΔC): In = Sn + ΔC. To grant a credit to an enterprise or a household, the bank does not necessarily need to collect deposits from savers. By providing a loan, the bank enlarges its claims on the private sector on the asset side of the balance sheet. When the credit is transferred to the debtor’s bank account, the deposits of the bank increase on the liability side of the balance sheet. This implies that private banks can increase the money supply (ΔM) by providing credit (ΔC). With the interest rate being determined by credit supply and demand, an exogenous extension of credit reduces the equilibrium interest rate. This allows real investment (I) to temporarily exceed real savings (S). Banks create additional credit to keep interest rates aligned with the central bank interest rate. In the first phase of the upswing, when less than the full labor force is in use, wages do not increase. The profits of banks and enterprises grow, which is reflected in rising stock prices.Hayek (1931) also acknowledges that during an upswing stock and real estateprices can become delinked from fundamentals as speculation sets in. When unemployment has declined to a very low level, the negotiating power of labor unions strengthens and wages rise. Enterprises have to lift prices to cover their costs, which pushes up inflation. When rising inflation forces the central bank to raise interest rates, the benchmark for the profitability of past and future investment projects is raised.
Owing to higher financing costs, incomplete investment projects need to be abandoned, and new investment projects become unprofitable. A cumulative downswing evolves. During the downswing—according to the overinvestment theory—the central bank keeps the credit rate, via the central bank interest rate, above the natural interest rate, which falls as investment declines. As interest rate is kept above the natural interest rate, the downturn is aggravated. As unemployment grows, wages and prices fall. The dismantling of investment projects with low profitability and falling wages and prices are seen as prerequisites for the economic recovery. The downswing entails a cleansing effect (Schumpeter 1912), as resources can be shifted to higher return investment projects.
Transmission via the Financial Sector
In the Keynesian model the central bank steers the money market interest rate via the LM-curve by expanding the money supply.The LM-curve represents all combinations of the real interest rate (i) and real output (Y) at which the money market is in equilibrium. An equilibrium in the money market implies that money supply (M) equals money demand (L), which is equivalent to liquidity preference. According to Keynes’s (1936) concept of liquidity preference, the interest is a monetary phenomenon, determined by supply and demand for money. There are neither banks nor capital markets involved. In contrast, in the Austrian model the banking sector transmits the interest rate policy of the central bank to credit rates through credit extension of banks. Investment can increase the fixed capital stock (nonfinancial investment, e.g., machinery for producing consumer or investment goods) or financial assets.
To model the role of banks in financing investment, the relationship between nominal savings and nominal investment can be represented as
(equation 11)
The variable Pnf denotes the price of real nonfinancial investment goods (Inf, fixed capital investment) and Pf the price for real financial investments (If) such as equities. Sn is equivalent to (nominal) savings out of existing money, ∆C is the credit (and money) creation of banks.Money is created by banks through credit expansion. See also the loanable funds theory of Ohlin (1937). In a financially open economy, financial and nonfinancial investment can also be financed by net foreign lending. We assume that Inf, If, and ∆C are all negative functions of the interest rate (i). If the interest rate falls, nonfinancial and financial investments grow and additional credit is created domestically. Savings are assumed to increase (fall), when the credit interest i increases (falls).
The prices of nonfinancial investments and financial investments are assumed to depend positively on investment activity. If more is invested, the prices of the real and financial investment goods rise:
(equation 12) with
(equation 13) with
If the credit interest rate (i) declines, savings decrease. Nonfinancial investment and financial investment increase, with the additional demand for funding covered by domestic bank credit creation (∆C > 0). The presence of banks allows the funding of nonfinancial and financial investment not only from existing savings but also from credit (i.e., new money) created by the banks. Nominal investment can temporarily be higher than saving:
(equation 14)
During the upswing nonfinancial investment grows, as low interest rates set by central banks signal higher present savings and thereby higher future consumption (Mises 1912; Hayek 1931). Resources are redirected from the production of consumer goods to the production of capital goods.As this tightens the supply of consumer goods, prices of consumer goods will drift upward. Alternatively, financial investment increases. As deposit rates are low, consumers have an incentive to withdraw deposits from banks and buy stocks of enterprises and banks, whose profits increase during the upswing. If equity prices are expected to rise further, speculation may set in, with the valuation of equities becoming delinked from their fundamentals. A credit boom evolves, with prices of nonfinancial and financial investment rising. The speculative boom may also attract additional funds from abroad, as observed during the 2003–07 US subprime boom and the boom in the southern European countries during the same time period.
When rising wages force enterprises to lift prices, a central bank targeting goods price inflation is forced to increase the interest rate. At higher interest rates nonfinancial and financial investments with comparatively low expected returns become unprofitable and need to be abandoned. As the central bank keeps the interest rate high during the downswing, the commercial banks tighten credit (∆C < 0). Nonfinancial and financial investments have to be abandoned, and their prices fall. In the resulting recession, unemployment rises.
If central banks change interest rates in an asymmetric way—i.e., interest rates are cut more during the recession than they are lifted during the recovery from the crisis to prevent unemploymentFrom a historical perspective it has been argued—in line with the overinvestment theory—that the Federal Reserve kept monetary policy too tight during the Great Depression (Bernanke 1983). Under Federal Reserve chairman Alan Greenspan an asymmetric policy emerged with an eye to stock prices. Monetary policy tended to respond to falling stock prices while refraining from intervening against rising stock prices on the grounds that bubbles could not be identified (Hoffmann 2009). In the so-called Jackson Hole consensus, US central bankers agreed that central banks do not have sufficient information to spot and prick bubbles but should intervene in times of financial turmoil (Blinder and Reis 2005).—interest rates will gradually decline toward zero, as shown in figure 1. The average productivity of investment will also be affected: while during the upswing financial and nonfinancial investments with comparatively low marginal productivity are realized, these investment projects are not scrapped in the downswing. The average productivity of investments declines, and growth weakens.
EMPIRICAL EVIDENCE In both the Keynesian/neoclassical and the Austrian models, the natural or neutral interest rate is a theoretical concept which cannot be observed directly in reality. Empirical estimates of the natural interest rate, as discussed earlier, are only as reliable as the underlying model is an appropriate representation of reality. Any specification errors would be captured by the interest rate derived from the model. The Keynesian model does not model the banking sector and ignores credit (or money) creation by banks. Furthermore, the Phillips curve, relating the output gap to inflation, on which the Keynesian model relies, has flattened and become unstable in most industrialized countries.See Hooper, Mishkin, and Sufi (2012); and Israel (2017).
Global Savings Glut, Aging Societies, and Increasing Inequality
A core argument of the secular stagnation hypothesis is that interest rates have been driven down by aging societies, in which people save more for retirement (section 2). This would imply that low birth rates in the industrial countries and China would go along with growing household savings rates.
To provide empirical evidence for the savings glut hypothesis, Demary and Voigtländer (2018) create an econometric model estimating real interest rate developments in twenty-four Organisation for Economic Co-operation and Development (OECD) countries with proxies for the savings glut (life expectancy, old-age dependency, young-age dependency) and secular stagnation hypotheses (total factor productivity growth, labor force growth). In contrast to the secular stagnation hypotheses, total factor productivity growth has no statistically significant effect on real interest rates in their estimates. In contrast to the savings glut hypothesis, both the old- and young-age dependency ratios have a statistically significant negative influence on real interest rates.These results are inconsistent with both the savings glut and the secular stagnationhypotheses. Furthermore, the specification ignores credit creation for investmentby the banking sector and interest rate setting by central banks as determinants ofthe real interest rate, therefore suffering from omitted variable bias.
Empirically the link between aging populations and household savings rates is weak. The most prominent example is Japan, where since the 1980s the fast aging of the society has come along with declining household savings rates. Figure 2 shows that together with the short-term interest rate, which has been pushed down by the Bank of Japan to zero, household net savings as a percentage of GDP and as percentage of disposable income has declined as well. Latsos (2019) shows empirically that the main determinant of Japanese household savings rates has been the declining interest rate set by the Bank of Japan, with interest rate cuts constituting an incentive to save less. This is in stark contrast to the aging population hypothesis of Bernanke (2005), Summers (2014), and Weizsäcker (2014).
Figure 2. Household Saving Rate and Short-Term Interest Rate in Japan
Source: OECD, IMF, Bank of Japan. A broader sample of OECD countries also shows no robust evidence of a correlation between aging populations and growing household savings rates. Figure 3 shows the change in the old-age dependency ratios of several OECD countriesCountries where data were unavailable are excluded. since 1995 on the x axis, calculated by subtracting the old-age dependency ratio in 1995 from the old-age dependency ratio in 2018. A positive value indicates an aging population. The populations of all the OECD countries in the sample have aged according to this measure. Japan stands out as a particularly fast-aging country. The y axis shows the difference in the household savings rate between 2018 and 1995 in percentage points. A negative (positive) value indicates a declining (increasing) household savings rate since 1995. Based on this measure, the majority of the countries experienced a decline in the household savings rate. The aging-society-savings-glut hypothesis would imply a close positive relationship between the two indicators in form of an upward-trending line moving from left to right. But there is no correlation at all.
Instead of household savings rates, enterprise savings rates have increased in some industrialized countries such as Germany and Japan (figure 4). This has been due to three reasons. First, interest rate cuts have reduced the financing costs of enterprises, which traditionally have been borrowers in capital markets. Lower interest expenses have raised retained earnings. Second, for the enterprises of export-oriented economies, such as Japan and Germany, depreciation of the domestic currencies caused by strong monetary expansions has generated windfall profits. Third, fixed capital investment as percent of GDP has tended to decline. This could be explained, in the tradition of Hansen (1939), by slowing population growth (Summers 2014) and slowing technological innovation (Gordon 2012). More likely, however, enterprises expected lower demand owing to downward pressure on real wages because of relaxed interest rate constraints (see below).
Figure 3. Old-Age Dependency and Household Savings Rates in OECD Countries, 1995–2018
Source: OECD. Changes in household savings rates as a percent of GDP. Finally, Summers (2014) argues that increased income inequality reduces (increases) the propensity to consume (save). However, growing income and wealth inequality may not be driven by “the laws of capitalism” (as, for instance, suggested by Piketty 2014), but by expansionary monetary policies (see Duarte and Schnabl 2018). The redistributive effects of persistently loose monetary policies have several dimensions.
One important transmission channel for growing wealth inequality is asset prices, which ultraloose monetary policies drive up, since assets are disproportionately held by wealthier people. In contrast, the interest rates on bank deposits, which are the preferred saving vehicle of the middle- and lower-income classes, are depressed in real terms into negative territory. Growing income inequality can also arise from the negative impact of persistently loose monetary policy on real wages, as will be explained below.
Figure 4. Net Corporate Lending in the US, Japan, Germany, and China
Source: OECD. Corporate net lending is equivalent to enterprises’ net savings minus net investment, plus net capital transfers, minus acquisitions less disposals of nonfinancial nonproduced assets. Constant Marginal Efficiency of Investment in Industrialized Countries
The neoclassical extension of the IS model by Gordon (2012) assumes that the marginal productivity of capital has declined, possibly into negative territory. Figure 5 shows that this hypothesis cannot be supported empirically for industrialized countries such as the US, Japan, and Germany. The marginal productivity of capital, defined according to equation (9) as the ratio of absolute change in real GDP to real investment, is largely constant in the US, Japan, and Germany.The data look similar for the euro area.
Apart from the cyclical downturn during the global financial crisis in 2008–09, the marginal productivity has remained positive and fairly stable around 10 percent. This implies that gradual interest rate cuts and increasing money creation by the large central banks in the industrialized countries have not boosted real nonfinancial investment to an extent that would lower the marginal productivity of real capital. This is consistent with the fact, that—together with slowing output growth—fixed capital investment as a percent of GDP has tended to decline, in particular in industrial countries such as Japan and Germany (see figure 6).
Figure 5. Marginal Productivity of Capital of the US, Japan, China, and Germany
Source: AMECO. Marginal productivity of capital is defined as the absolute change in real output compared to the previous year divided by real investment of the current year. Since the turn of the millennium—driven by capital inflows from the industrialized countries—the capital stock has expanded very fast in China (figure 6) and other East Asian countries (Schnabl 2019b). Chinese investment (as a percent of GDP) increased far beyond that in the industrialized countries.Other overinvestment booms have taken place in the oil sector (shale oil), aircraft sector, and digitalization. At the same time, as shown in figure 5, the marginal productivity of capital in China has declined substantially since the early 1990s.
Moreover, the gradual decline of interest rates seems to have boosted real financial investment in the industrialized countries, with financial markets expanding. New asset classes, such as asset-backed securities, were created, and new countries, such as a number of emerging market economies, joined the international capital markets. Also, asset prices strongly increased, as shown in figure 7. Since the late 1980s, the arithmetic mean of equity and real estate prices in the US, Japan, and Germany has—with fluctuations—increased strongly relative to consumer prices. With asset prices being inflated, the marginal productivity of financial investment seems to have declined, indicated, for instance, by increasing price-to-rent ratios in many real estate markets.
Figure 6. Fixed Capital Investment as a Percentage of GDP
Source: IMF. The inverse relationship between low interest rates (associated with a high degree of new money creation by central banks) and asset prices can be illustrated with the Gordon (1959) growth model of equity valuation, which relates the price-earnings ratio of enterprises to the interest rate. A simple version of this model can be written as
(15)
where SP denotes the equity price per share, E earnings per share, g expected nominal earnings growth, and k the discount rate, representing the financing costs of the enterprise. The secular stagnation hypothesis suggests that the price-earnings ratio of equities should have been largely unaffected by the decline in interest rates, as expected earnings growth should have declined in parallel to fading growth dynamics. Thus, the relationship between stock prices and earnings should have remained stable. On the other hand, if the interest rate decreases exogenously and expected earnings growth remains widely unchanged, the price-earnings ratio rises.
Figure 7. Consumer, Stock, and Real Estate Prices in the US, Germany, and Japan
Source: IMF. Arithmetic mean. The rise of the price-earnings ratios since the start of the global asymmetric monetary policies in the second half of the 1980s is consistent with a decline in interest rates relative to the growth of expected earnings. The US S&P 500 Shiller cyclically adjusted price-earnings ratio has increased sharply on trend since the late 1980s (figure 8). It reached a peak in the year 2000 and has remained far above the level of the 1980s. A similarly strong expansion occurred in the second half of the 1920s before the black Friday in September 1929, which triggered the Great Depression. It seems that central banks pursing point inflation targetsAs consumer price inflation rates remained very low (but above zero) following the global financial crisis, maximum inflation targets as pursued, for instance, by the ECB until 2003 would not have justified unconventional monetary policy measures. Only the shift to inflation point targets as it occurred in the case of the ECB in 2003 allowed very extensive asset purchases, which kept, for instance, the debt burden of highly indebted euro area member states sustainable (See also footnote 12). More generally, the operational rule for sound money cannot be expressed in terms of unknown natural rates.Note that since the turn of the millennium, low interest rates in the US have boosted capital flows to China, where the capital stock has been strongly extended by borrowing abroad. Thus, large overcapacities have been created, which have led to sales at prices subsidized with cheap credit on the world markets (Schnabl 2019b). This has depressed inflation in the industrialized countries and set—given inflation point targets—the stage for further monetary expansion. during a period when, inter alia, global factors have depressed inflation have not only pushed real interest rates in credit and capital markets to ever-lower levels, but have also boosted asset prices to record highs.If real wage growth slows down in an environment of slowing productivity gains, the ability of enterprises to increase prices is undermined. If, furthermore, the persistently loose monetary policies redistribute income from lower- and middle-income to highincome classes, consumer prices tend to remain low while asset prices increase.
Figure 8. US S&P 500 Shiller Cyclically Adjusted Price-Earnings Ratio
Source: Macrobond. Increasing Debt, Declining Labor Productivity, Wage and Financial Repression
When interest rates are pushed ever lower, possibly below the growth of real income, increasing levels of debt become sustainable. It becomes more attractive for enterprises to raise their return on equity through financial leverage than through nonfinancial investment aimed at increasing productivity.In addition, asymmetric monetary policies constitute an implicit insurance mechanism for speculation in financial markets, as interest rates are cut when asset prices collapse. The interest rate cuts either stabilize the market segments in a crisis or create alternative speculation opportunities, which allow valuation losses to be offset. In contrast, possible losses from investment in innovation and efficiency gains (i.e., fixed capital investment) have to be borne by the entrepreneurs. This policy pattern constitutes an incentive to shift resources from nonfinancial investment to financial investment. Financial investment can include takeovers of competitors and firms’ buybacks of their own shares. This can be illustrated by decomposing the return to equity into profits (R), equity (E), turnover (T), and total capital (K).The so-called Dupont analysis (see Gropelli and Ehsan 2000, 444–45).
(16)
The rate of return to equity () can be raised by increasing the profit margin (), capital productivity (), and/or financial leverage () (through an increase of the ratio of debt to equity capital). In a competitive environment the increase in profit margins () is limited. The productivity of capital () has remained broadly stable over a longer time horizon, as shown in figure 11. Therefore, an increase in the return on equity () as shown in figure 6 can be achieved only if the ratio of total capital to earnings (), i.e., the financial leverage, is increased.
Figure 9. Credit to Nonfinancial Corporations
Source: BIS. Indeed, enterprises have raised their indebtedness substantially (and much more than their output and prices), in particular in the United States and China (figure 9). In China, the additional credit has been used to build up a large real capital stock. Elsewhere it has driven financial investment more than real investment. In Germany, large enterprises in particular have strongly expanded the amount of outstanding bonds since 2008, encouraged by low interest rates and by the European Central Bank’s corporate bond purchases. The additional funds have served different purposes, not the least of which have been takeovers and acquisitions. As shown in the lower panel of figure 10, the volume of mergers and acquisitions has strongly increased since the 1980s, reaching a peak in 2015. Mergers and acquisitions increased the market and pricing power, thereby creating monopolistic rents.
US enterprises have bought back large amounts of shares, which has boosted the return to equity by reducing the amount of outstanding stocks and increasing leverage. As shown in the upper panel of figure 10, stock buybacks have increased since the turn of the millennium, in particular between 2003 and 2007 as well as since 2009. The preference of large enterprises to use cheap credit for share buybacks and mergers and acquisitions instead of investment in new real capital can be explained by skepticism concerning future economic development. If income growth is expected to slow, extending capacities will not be effective. Instead, the price-earnings ratio can be increased by increasing leverage and profit margins, with the latter achieved by expanding market power through mergers and acquisitions.Indeed, market concentration seems to have substantially increased, as found by Gutiérrez and Philippon (2017) as well as by De Loecker and Eeckhout (2017). Enterprises can charge a higher markup on prices or have stronger power versus trade unions in wage negotiations.
Figure 10. Stock Buybacks and Mergers and Acquisitions in the US
Source: Macrobond and IMMA Institute. High equity valuations (SP/E) and low earnings yields (E/SP) should have lowered the assumed costs of equity in the evaluation of new investment projects. However, the decline in interest rates has not lowered the weighted average costs of capital, which listed companies in general use for the evaluation of new projects (Gehringer and Mayer 2017).The weighted cost of capital is the rate that a company is expected to pay to finance its assets. It is calculated as the weighted average of the costs of debt, i.e., the interest rate, and of internal financing, i.e., equity. Lehmann (2019) argues that listed companies have raised their imputed costs of equity by increasing the risk premium on equity returns as they increase leverage.This is in line with the Modigliani-Miller theorem, which argues that abstracting from taxes, default risk, and agency costs and given perfect information, the form of financing does not affect the value of a firm (Modigliani and Miller 1958). Thus, enterprises have not followed the markets, which raised equity valuations, anticipating lower equity returns in the future.
If low interest rates induce enterprises to raise financial instead of fixed-capital investment and keep enterprises in business that would have been unprofitable otherwise, growth will decline, as overinvestment and malinvestment are conserved and capital is misallocated (Schnabl 2019a). McKinnon (1973) and Shaw (1973) showed for the developing countries and emerging market economies in the 1950s and 1960s that state-directed capital allocation at low interest rates depressed growth.McKinnon (1973) and Shaw (1973) dubbed this policy “financial repression.” For Japan, Schnabl (2015) shows that an ultraloose monetary policy has continued to cause financial instability and sluggish growth.Similarly, Rungcharoenkitkul, Borio, and Disyatat (2019) argue that interest rates that are too low can induce the emergence of a new unprofitable sector in the economy, which reduces the average marginal productivity of the economy. Monetary policy that leans insufficiently against the buildup of financial imbalances increases the economy’s vulnerability to financial busts over successive cycles. “As a result, low rates beget lower rates.”
Peek and Rosengreen (2005) argue that persistently low interest rates in Japan have constituted what they call a “perverse” incentive to keep low-return investments alive via a misallocation of credit to enterprises with low returns. Caballero, Hoshi, and Kashyap (2008) find a link between forbearing credit extensions by Japanese banks to otherwise insolvent enterprises and paralyzed market dynamics and higher costs for profitable enterprises. They also link postponed restructuring in depressed industries to lower productivity growth caused by what they call “zombie enterprises.” Similarly, Acharya et al. (2019) associate low interest rates and the unconventional monetary policies of the European Central Bank with lower productivity growth in the euro area.See Schnabl (2019b) on overinvestment in China as well as Shen and Chen (2016) on zombie firms in China.
The distorted allocation of funds comes along with distortions in the financial sector, as the ultraloose monetary policy reduces the incentive to cleanse bank balance sheets of bad loans. Furthermore, the margins of the traditional banking sector are squeezed (Gerstenberger and Schnabl 2017). With short-term interest rates being held at or below zero and long-term interest rates being pushed further down via unconventional monetary policy measures, banks’ traditional sources of income—i.e., credit margins (credit rates minus deposit rates) and transformation margins (long-term interest rates minus short-term rates)—shrink. Brunnermeier and Kolby (2019) show that at some point interest rate cuts have a negative effect on credit growth, investment, and output because the positive effect of low interest rates on the valuation of bank assets is overwritten by their negative effect on bank profits. The overall value of assets falls, thereby forcing banks to restrict new lending.In addition, the growing regulatory burden after the financial crisis may restrict lending.
Figure 11. Average Capital Productivity in the US, Japan, Germany, the Euro Area, and China
Source: AMECO Database and Penn World Tables. Average capital productivity calculated as output divided by capital stock (both in 2010/2011 prices). Figure 12. Real GDP and Long-Term Trend
Source: Macrobond. These findings are supported by the development of the average (in contrast to the marginal) productivity of capital over time. As shown in figure 11, average capital productivity in the US, euro area, and Japan has dropped in the wake of each financial crisis (1990–91 in Japan and 2007–08 in the US and the euro area), and it has not returned to its precrisis level in the subsequent upswing. The consequence has been a persistent shortfall of output below its long-term trend, as observed in Japan since the 1990s. The bursting of the so-called bubble economy triggered interest rate cuts toward zero and—after the lower zero interest rate bound was reached in 1999—comprehensive unconventional monetary policy measures, which have inflated the Bank of Japan’s balance sheet from 10 percent of GDP to more than 100 percent of GDP. In contrast to the desired recovery of the Japanese economy, output has been lagging behind the long-term trend (see the bottom graph of figure 12).
Similarly, since the outbreak of the global financial crisis, the US Federal Reserve and the European Central Bank have moved to extensive unconventional monetary policy measures. As in Japan, in both the US and the euro area output has also not returned to its long-term growth path since then (see upper and center panels of figure 12). A savings glut or secular stagnation should have affected growth more gradually and should not have started with the financial crises.
The upshot is that output growth has declined while increasingly loose monetary policies have prevented or even reduced unemployment by preserving distorted economic structures. Moreover, in many countries, such as Japan and Germany, the number of employed has increased as real incomes have declined and more people have entered the labor market (Israel and Latsos 2020). Therefore, the increasingly expansionary monetary policies of the large central banks have come along with declining labor productivity gains, as shown in figure 13.
Figure 13. Labor Productivity Gains in the US, Japan, and Germany
Source: OECD. Four-period backward-looking rolling averages. In neoclassical theory, labor productivity gains are the prerequisite for real wage increases. If persistently loose monetary policies have reduced the incentives for banks and enterprises to innovate and to create productivity gains, real wage levels will be depressed. This effect is most pronounced in Japan, where real wages have been trending downward since 1998 (Latsos 2019). If enterprises expect a declining consumer purchasing power, they will hesitate to increase the capital stock, shifting their activities to financial investment. Thus, the policy of low interest rates induces the redistribution of income and wealth from wage earners to recipients of capital income and widens gender and educational pay gaps (Saiki and Frost 2014; Israel and Latsos 2020).
Kornai (1986) dubbed a similar process in the central and eastern European planned economies “soft budget constraints.” Because unemployment was politically inopportune, public banks were forced to provide unconditional credit to highly inefficient enterprises. The losses of state-owned banks were covered by the printing press of the national central banks. The outcome was low or even negative productivity growth, which came along with a low consumption level compared to the western industrialized countries. From this perspective, the persistently loose monetary policies are quasi soft budget constraints, which have become a major impediment to productivity growth.
ECONOMIC POLICY IMPLICATIONS The Keynesian and neoclassical schools of thought explain the secular decline of nominal and real interest rates since the 2007–08 global financial crisis as the result of a savings glut and secular stagnation. According to this view, monetary policy has only reacted to a given structural change in a new economic environment. This article has argued that both the Keynesian and neoclassical models omit the banking sector and therefore do not capture the capital market implications of asymmetric central bank interest rate cuts. The ability of banks to extend credit ex nihilo and the fact that capital goods need to be produced before they can increase the capital stock is ignored by the IS identity, which in the Keynesian theory is assumed to hold permanently. There is also no empirical evidence for the savings glut and secular stagnation hypotheses.
In contrast to the Keynesian and neoclassical models, the Austrian model incorporates the banking sector, which finances either real fixed capital or financial investment. Interest rates have become depressed by a proactive monetary policy while technological progress, closer trade ties, and overinvestment in China exerted downward pressure on prices. The global deflationary pressure originates in subsidized credit and overinvestment in China. Thus, on the back of the newly introduced point inflation targets expansionary monetary policies have boosted asset instead of goods prices and contributed to growing income inequality.
The Austrian view suggests that the depression of interest rates lowers productivity gains and trend GDP growth via quasi “soft budget constraints” for enterprises. It leads to an inefficient allocation of resources, as can be observed in Japan and increasingly in Europe. These effects have become even further magnified by the policy responses to the corona crisis. The policy implication is that only the end of the manipulation of interest rates would reanimate growth. The interest rate on credit is the most important single price in an economy. It connects a society’s time preference to its ability to create capital in an efficient way. When bureaucrats at central banks determine the interest rate, it is a pretense of knowledge they do not have. They would truly serve society if they left the determination of interest rates to the markets.
Abstract: The conventional wisdom has it that US Democrats and those on the American left support incremental steps in the direction of socialism, if not an all-out endorsement of the concept. However, in at least one area—regulation—Republicans and the American political right have also, albeit unwittingly, spread the seeds of socialism not just in Washington, DC, but all across the world. This article reviews the history of federal regulation in the United States, and in particular the arcane, technical history of cost-benefit analysis (CBA), a tool that has become increasingly central in battles over regulation between the Left and the Right. Although right-wing political operatives latched on to CBA in the late 1970s and early 1980s, the tool has a long, complicated history, aspects of which could even be called socialist in nature.
JEL Classification: B14, D61, D71, I31, K23, L51
James Broughel (jbroughel@mercatus.gmu.edu) is a senior research fellow at the Mercatus Center at George Mason University and an adjunct professor of law at the Antonin Scalia Law School. The author is grateful to Kyle Precourt and an anonymous reviewer for helpful suggestions and comments.
INTRODUCTION The conventional wisdom has it that US Democrats and those on the American left endorse a powerful central government, are skeptical of business, and, perhaps now more than ever, support incremental steps in the direction of socialism, if not an all-out endorsement of the concept. But this conventional wisdom is misleading in the sense that the American political right and Republicans have also, albeit unwittingly, spread the seeds of socialism not just in Washington, DC, but all across the world. In at least one area—regulation—this unlikely turn of events seems to be precisely what has happened.
To understand why, one must review the history of federal regulation in the United States, and in particular the arcane, technical history of cost-benefit analysis (CBA), a tool that has become increasingly central in battles over regulation between the Left and the Right.Throughout this article, I will generalize somewhat with respect to what constitutes a “left-wing” and a “right-wing” perspective. The political orientations of the economists and legal scholars discussed here are not monolithic. However, it is the belief of this author that dividing groups in this way helps to clarify some of the developments that have transpired over the past century with respect to cost-benefit analysis. CBA’s origins are in the United States, and although initially controversial, the tool came to be a widely accepted part of regulatory analysis, eventually adopted by European Union member states and countries all over the globe (Lianos, Fazekas, and Karliuk 2016).According to Jacobs, Cordova and Associates, a consulting firm that specializes in regulatory impact analysis, over sixty countries have adopted regulatory impact analysis as a mandatory step in developing new laws. Cost-benefit analysis is a standard part of regulatory impact analysis. See “RIA Resources and News,” Jacobs, Cordova & Associates, accessed October 11, 2020, http://regulatoryreform.com/ria-community/.
CBA was primarily advanced in the US federal government by the political right. Although the tool’s roots in federal policy trace back as far as the 1930s, including early use by the Army Corps of Engineers (Tozzi 2011), CBA’s place in government wasn’t cemented until the 1980s and the Reagan Revolution. In one of his first acts as president, Ronald Reagan signed executive order 12291, which required that executive branch regulatory agencies prepare a cost-benefit analysis for their major regulations.Exec. Order No. 12291, 46 Fed. Reg. 13193 (Feb. 17, 1981). The order also required that rules and their accompanying analysis undergo a review process overseen by the Office of Information and Regulatory Affairs (OIRA), which had recently been set up to manage paperwork burdens across the government.
Reagan’s executive order stirred controversy at first. Some on the left viewed it as a radical step aimed at deregulation.Many still oppose OIRA review of regulations in its current form. See, for example, James Goodwin, “The Progressive Case against OIRA,” Center for Progressive Reform, Accessed October 11, 2020, https://progressivereform.org/our-work/regulatory-policy/progressive-case-against-oira/. See, also, Steinzor (2012). Many Democrats wanted the order repealed and OIRA review of regulations suspended. To them, cost-benefit analysis interfered with the discretion of publicly interested regulatory agencies, and OIRA unduly politicized rulemaking by acting as an access point for special interests and political interference from the president. Moreover, those who had pushed hardest for CBA in the late 1970s and early 1980s had come largely from the political right. In particular, the so-called law and economics movement, which consisted of many free-market leaning economists and legal scholars, promoted CBA for its ability to make policy more evidence based and efficient.For a history and review of the law and economics perspective, see Graham (2008).
However, when a Democrat, Bill Clinton, was eventually elected to the presidency more than a decade after 12291 was signed, he responded in a somewhat unexpected way. Although Clinton did repeal executive order 12291, he replaced it with an order of his own that left intact the core elements of Reagan’s order.Exec. Order No. 12866, 58 Fed. Reg. 190 (1993). Cost-benefit analysis would still be required for the most significant federal regulations, and OIRA review would continue. Minor modifications were made beyond this, but they paled in comparison to the broader shifts in the federal administrative apparatus that Reagan’s order helped usher in and which Clinton’s order reaffirmed.
Despite this development, many on the left continued to resist the cost-benefit state, even while the analytical tool became institutionalized in American government and even started to be adopted by the fifty states and by other countries. Those on the left were critical, for example, of the CBA practice of assigning dollar values to societal benefits, most notably the practice of putting a dollar value on a human life or on aspects of the environment (Heinzerling and Ackerman 2002). They were also skeptical of discounting, a practice that seemed to treat benefits and costs, including human lives, as akin to money that can be invested in an account and earn interest.
Those on the left who opposed CBA lost these battles over discounting and the value of life, in academic debates as well as in policy settings, as these are now standard parts of cost-benefit analysis. Although the exact discount rate to use in analysis remains controversial, and there are still those scholars who argue that life is priceless or that its value is at least significantly higher than most current estimates used in CBA (Friedman 2020), by the time the Obama administration came into power in the late 2000s, many on the left had moved on from these early controversies, which largely centered around the ethics of cost-benefit analysis.
Instead, left-wing academics began to argue that the American left should embrace cost-benefit analysis, especially by emphasizing the benefits that regulations can bestow upon the public (Revesz and Livermore 2011). The Obama administration harnessed CBA to promote its aggressive regulatory program in a way that previous Democratic presidents had resisted. Harvard law professor and Obama OIRA administrator Cass Sunstein went so far as to dub Obama “the cost-benefit president.”See “Farewell to the Chief: Our Columnists Assess Obama’s Presidency.” Bloomberg, Jan. 10, 2017, https://www.bloomberg.com/opinion/articles/2017-01-10/farewell-to-the-chief-our-columnists-assess-obama-s-presidency
By contrast, in recent years, some see former President Trump as having downplayed the significance of CBA, in stark contrast with the Obama years.For example, Professor Stuart Shapiro has claimed the Trump administration is waging a “war on analysis,” which has “spread to portions of the Republican establishment that have historically been among the advocates for an analytical approach to policy.” See Stuart Shapiro, “Trump Still Ignoring Facts, but Numbers Don’t Lie,” The Hill, Aug. 1, 2017, https://thehill.com/blogs/pundits-blog/the-administration/344798-tell-trump-numbers-dont-lie-how-the-president-ignores. See, also, Stuart Shapiro, “The War on Analysis under the Trump Administration,” The Hill, Aug. 13, 2019. Available at: https://thehill.com/blogs/pundits-blog/the-administration/344798-tell-trump-numbers-dont-lie-how-the-president-ignores. The Trump administration even developed an entirely new scheme of regulatory accounting that emphasizes financial costs and cost savings, downplaying nonmarket benefits such as those environmental outcomes so cherished by the Obama administration (Sunstein 2020). In short, roles have reversed in recent years, with the American left emerging as the newest champions of CBA.
THE DICTATORIAL ORIGINS OF COST-BENEFIT ANALYSIS Nothing about the Left’s eventual shift toward embracing cost-benefit analysis, nor the Right’s eventual retreat from it, should be surprising. CBA’s academic origins trace back long before right-wing political operatives latched on to the tool in the late 1970s and early 1980s. Aspects of these academic origins could even be called socialist in nature.
As discussed above, crude versions of CBA were used in the federal government as far back as the 1930s. However, CBA’s academic foundations had yet to be fully developed at that point, making those early years a kind of analytical Wild West. That began to change around the middle of the twentieth century. One critical moment in CBA’s history came in 1950, with the publication of the article “A Difficulty in the Concept of Social Welfare,” which was written by a young, up-and-coming economist by the name of Kenneth Arrow (1950). Economists at that time were trying to answer a simple question: What should policy aim to do? Arrow, in a now famous article, was looking for a “social welfare function.” He sought a decision rule that could be applied consistently to a broad range of social problems—a logical framework from which one could rank policies (or any other outcomes, for that matter) to determine which best promote societal well-being.
Arrow set certain ground rules in his endeavor. For example, he wanted the decision rule to be based on the preferences of the members of the community being governed (as opposed to being imposed arbitrarily). After establishing a further set of seemingly reasonable restrictions for the social welfare function, he reached the surprising conclusion that the only rule satisfying his criteria is to have the same person in society always decide for everyone. Any other attempts to turn individual preferences into a group decision-making formula will at some point lead to paradoxes, contradictions, or anomalies.
Yet Arrow was clever about how he structured his argument. Rather than prove that the only rational form of collective decision-making is to anoint a dictator, he proactively ruled out that possibility in the assumptions of his theorem. So, what might have been called a “dictatorship theorem” came instead to be known as an “impossibility theorem,” on the grounds that it seemed to prove that generating a consistent, rational, and broadly applicable social welfare function from the ordinal preferences of the individuals comprising society is impossible.
Right-wing economists in particular interpreted the impossibility theorem as generally ruling out a social welfare function as the normative basis for CBA. Instead, they focused on a simpler welfare measure: economic efficiency. To paraphrase this line of thinking, social welfare is simply too nebulous, too difficult to measure, and too riddled with subjective value judgments. These right-leaning economists latched on to a notion of efficiency that had first been proposed in the late 1930s, known as Kaldor-Hicks efficiency. According to the Kaldor-Hicks criterion, a policy increases efficiency if those who benefit from the policy gain by enough to compensate the people who lose. In theory, everyone could be made at least as well off as (or better than) they were before the policy. The critical catch, however, is that the compensation need not actually happen. Thus, this “potential compensation test” makes no guarantee that a policy will increase present citizens’ welfare—only that it will increase aggregate wealth.
To those on the right, focusing on wealth seemed the most scientific way forward, by stripping out most value judgments from the analysis. But this was not the lesson that Arrow himself took from his own work. He was critical of the potential compensation test and of Kaldor-Hicks efficiency for failing to satisfy all of his criteria about what constitutes a rational decision rule (Arrow 1951, 1963).A famous reason why can be found in Scitovszky (1941).
Arrow never said that constructing a social welfare function is impossible. On the contrary, Arrow based CBA on a mathematical social welfare function. Sometimes he used another name for it, such as a “criterion function” (Arrow and Kurz 1970), or a resource allocation problem that a “social planner” is tasked with solving for society (Arrow et al. 2014). But it was a social welfare function nonetheless. The specific equation he supported for this purpose was (perhaps not surprisingly given his theorem) a single individual’s utility function—an individual who looks a lot like a dictator.
Now few, if any, proponents of Arrow equate their support of his ideas with support for actual dictatorship. The “dictator” in question is a benevolent figure whose aim is maximizing the well-being of the members of the community he is charged with planning. In fact, sometimes the dictator is simply viewed as representing the collective welfare of the present generation of citizens. Moreover, the benevolent dictator’s well-being increases by making the members of the community better off according to their own values (as measured by their willingness to pay for or accept various benefits and costs).
Still, “dictator” was Arrow’s word, and he spent much of his career working out the intricacies of the dictator’s welfare function, including detailing the resource allocation problem that the dictator is tasked with solving (Arrow and Debreu 1954). It paid off, too: Arrow won the Nobel Prize in economics in 1972, and the social welfare function he endorsed forms the normative foundation for CBA for many economists on the American left.For a theoretical description of what this article refers to as the “left-wing” approach to cost-benefit analysis, see Drèze and Stern (1987).
TWO FRAMEWORKS, ONLY ONE OF WHICH IS COHERENT It should be clear at this point that there is no consensus among economists as to what CBA measures (Broughel 2019). This is a point that economists choose not to advertise too often, but it is a fact nonetheless. On one side, there are those predominantly left-wing economists such as Arrow who want CBA to evaluate some measure of social welfare. For whatever reason, these economists tend to be highly mathematical, viewing the economy as essentially an engineering problem that requires solving.Tjalling Koopmans, a colleague of Arrow’s at the Cowles Commission, was another important person in this movement. Koopmans codeveloped an economic growth model centered around the same social welfare function that came to underlie cost-benefit analysis. In this way, the left-wing approach to CBA has a connection to economic growth theory that is generally missing from the right-wing, or law and economics, perspective. On the other side there are those, often right-wing and, as it happens, often less mathematically inclined economists and law professors associated with the law and economics movement, who want CBA focused on efficiency and wealth maximization.
Confusing matters further is that if CBA is to measure economic efficiency, there are actually two kinds that economists are concerned with. One refers to an equilibrium situation whereby no one can be made better off without making someone else worse off. This concept, known as Pareto efficiency after the Italian economist Vilfredo Pareto, is well accepted in economics, irrespective of economists’ political orientation. However, it is not very useful; there are a nearly infinite number of Pareto-efficient outcomes. How do policymakers know which one to strive for?
The second form of efficiency, alluded to already, emerged in the late 1930s and early 1940s based on the work of economists Nicholas Kaldor and John Hicks (Kaldor 1939; Hicks 1939). Efficiency in this sense refers to maximizing the dollar value of society’s scarce resources. Wealth in the Kaldor-Hicks context includes just about anything people are willing to pay for. Thus, it accounts for benefits to human health and the environment, not just goods and services traded in markets.
An important difference between the two forms of efficiency is how they deal with issues of wealth redistribution. Pareto efficiency can be achieved in a competitive market even after substantial redistribution occurs, as the “second fundamental theorem of welfare economics” proves. Many left-leaning economists, including Arrow, see value in Pareto efficiency and incorporate it into their theoretical framework.As evidence, Arrow incorporated a Pareto criterion into his impossibility theorem. Indeed, if a market is more or less competitive, nearly any policy can be expected to produce an efficient result in the Pareto sense; the resulting market equilibrium after people adjust their behavior will eventually be a Pareto-efficient one.
By contrast, the Kaldor-Hicks wealth-maximizing form of efficiency will often show that redistribution destroys some of society’s overall wealth and is therefore inefficient. That is because in the process of redistributing, some wealth is typically lost, leading to a reduction in society’s total. By and large, left-leaning economists such as Arrow tend to be skeptical of Kaldor-Hicks efficiency, in large part due to its utter indifference to the distribution of wealth. Right-leaning economists tend to view this indifference as a feature and not a bug, either because they tend to see issues of equity and distribution as unscientific, or simply because they view equity as something that should be considered separately from efficiency.One example of this view comes from Posner (2000, 1154–55), which states: “it is possible to set distributive considerations to one side and use the Kaldor-Hicks approach with a good conscience.” This is not meant to imply distributive considerations are unimportant, but rather “that distributive justice can be shown to be the proper business of some other branch of government or policy instrument (for example, redistributive taxation and spending).”
This rather unusual state of affairs, whereby left-wing economists base CBA on a benevolent dictator’s welfare function, and right-wing economists base CBA on Kaldor-Hicks efficiency and the potential compensation test, is essentially where things have stood for the better part of four decades. In a way, this was a serendipitous outcome. Somehow, despite not even agreeing on what CBA measures, economists settled on two analytical approaches that more or less align in their conclusions in most instances. This is a stunning result. Why not be happy, even grateful, for the current equilibrium?
The problem, in a nutshell, is that the efficiency perspective promoted largely by right-wing academics from the law and economics movement is incoherent. It is true, the two approaches frequently produce similar results, but neither approach actually satisfies the right-wing’s policy objectives because neither approach measures Kaldor-Hicks efficiency. Right-wing economists are calling something efficiency that does not meet the definition of efficiency.
If CBA is to measure Kaldor-Hicks efficiency, then it must evaluate wealth in the aggregate, irrespective of its distribution. Specifically, “it treats a dollar as worth the same to everyone” (Posner 2000, 1154). However, modern cost-benefit analysis is not indifferent to distribution in this way.
The reason relates to the social discount rate mentioned earlier: a weight applied to lives and other benefits in the future to determine their present value. Right-wing economists tend to use the discount rate to account for the “opportunity cost of capital”—similar to how a banker uses a discount rate to account for the forgone rate of return cash would earn if left in an account instead of being spent.The right-wing approach to discounting is known as the “social opportunity cost” approach in the economics literature. The left-wing approach is known as the “social time preference” approach. In general, the right-wing method recommends higher social discount rates than the left-wing method. For a review of these approaches, see Spackman (2004) and Broughel (2020b). See also Cowen’s (2007, 5) explanation of “right-wing” vs. “left-wing” approaches to discounting. Again, I am generalizing somewhat by referring to these groups in political terms. Nonetheless, this framing can be helpful in understanding the nature of these debates.
It turns out that the right-wing approach to discounting is wrong. CBA is more complicated than ordinary cash flow analysis due to its inclusion of nonmonetary benefits and costs, such as health or lives saved, which do not sit in investment or bank accounts like cash does. In CBA, a discount rate can only be used to account for the opportunity cost of capital under very specific conditions, which don’t, as a general matter, hold. (These conditions include specific scenarios such as when all policy benefits are “just like cash” in that they can all be reinvested at the same rates of return forgone due to a policy’s financial costs or when a project displaces investment only up until the date a consumption benefit is delivered but no further investment is displaced thereafter.)
The conditions that must be met for a discount rate to account for the opportunity cost of capital represent extremes that are unlikely to be satisfied except when analysis is purely financial. Social regulations—those affecting health, safety, or the environment—constitute precisely the situations when discounting in the manner right-wing economists do is incorrect, and, as it happens, social regulations are also those rules which are subjected to comprehensive CBA most often.See, for example, the annual Office of Management and Budget Report to Congress on the Benefits and Costs of Federal Regulations. A disproportionate share of rules with monetized benefits and costs in these reports are social regulations. Reports are available at https://www.whitehouse.gov/omb/information-regulatory-affairs/reports/#ORC.
Not only are right-wing economists not measuring efficiency, but discounting in the manner they do produces calculations with no clear meaning. Social discounting is not consistent with Kaldor-Hicks efficiency, because it by definition reintroduces issues of distribution into analysis by weighting consumption differently depending on who receives it (and when). This violates the standard that one dollar’s worth of benefits be treated equally, irrespective of whose pocket it goes in. Thus, the American right pushed CBA into the US federal government without fully understanding the tool they were championing. Meanwhile, governments around the world quickly followed America’s lead by adopting CBA in their own rulemaking procedures.
COST-BENEFIT ANALYSIS IS A DICTATORSHIP OF THE PRESENT Unlike the right-wing framework, the left-wing framework is perfectly coherent, at least from a logical point of view. Theirs is the framework of Kenneth Arrow and his followers, where the aim of policymakers is to allocate resources across the economy in a manner consistent with a benevolent social planner’s preferences. Left-wing economists also see the social discount rate differently. Rather than account for capital’s opportunity cost, it simply reflects the dictator’s time preference.In the left-wing approach to CBA, the opportunity cost of capital is usually either downplayed or ignored altogether, which is a reason for ongoing debate between the left-wing and right-wing approaches to discounting. See Broughel (2020b).
This kind of top-down approach to resource allocation sounds a lot like socialism, wherein the government owns and controls the means of production in society. In this case, a single government planner is tasked with arranging all of the resources in society according to how the present generation of citizens values them most. This method may not meet the textbook definition of socialism, but it is similar in spirit and could easily be viewed as a modern variant. This is the tool that right-wing economists have championed since the early 1980s, have institutionalized in government, and which has now taken hold all over the world, since this is the only coherent rationale for CBA as it is presently conducted.
Because the Kaldor-Hicks approach to CBA is tied up in internal contradictions, right-wing economists unwittingly became advocates for a tool whose true foundations few of them would likely have supported had they fully understood them. Some left-wing economists almost certainly recognized the mistakes made by those on the right and must have been amused, particularly by the role that mathematics seems to have played in confusing their political adversaries. It is not surprising that those on the left would not make much effort to correct the law and economics scholars. After all, those on the right were promoting their method within government and the halls of academia—something unimaginable had the right-wing scholars fully understood CBA’s foundations in Arrow’s dictatorship theorem or the social welfare function he derived from it.
Careful observers may note that the method by which the social planner allocates resources in Arrow’s framework is modeled after the market mechanism, which distributes resources according to how much individuals in society are willing to pay for them. Could Arrow’s framework be considered promarket? After all, markets fail in many instances, so perhaps a benevolent social planner could improve upon market outcomes by correcting well-known problems such as externalities or a lack of competition.
There are important differences between Arrow’s conception of what policy should aim to do and what the real-world market process is doing. The most notable difference is that the solution to the resource allocation problem Arrow was trying to solve is a static one—that is, it is an optimum from the perspective of the present moment in time only. In a famous paper, Arrow, along with coauthor Gérard Debreu, proved the existence of an optimal allocation of resources in the economy (Arrow and Debreu 1954). But in that framework, time matters only to the extent that present citizens might want to set up contracts for goods and services to be delivered in the future. There is no market that future citizens might participate in to advance their own agendas. The solution is an optimum from the standpoint of present citizens only, not future ones.In general equilibrium models of the Arrow-Debreu sort, time is often treated in a manner no different than location, with interest rates representing simple ratios of present and future prices (known as “own rates of return”), rather than a rate at which resources can be transformed into more resources in the future (Cowen 1983). In this sense, general equilibrium models often lack a compelling treatment of capital in addition to time.
This rather strange treatment of time extends to cost-benefit analysis. In a CBA, benefits and costs at future dates get counted, but these benefits and costs are converted into units of present utility through the practice of discounting (Broughel 2020a). In other words, future benefits and costs matter only to the extent they impact present utility. It should not be surprising, therefore, that the social welfare function underlying the left-wing CBA framework, a social welfare function known as the discounted utility model, has been labeled a “dictatorship of the present” (Chichilnisky 1996).
Unlike CBA, the market process is not a dictatorship of the present. In real-world markets, entrepreneurs are solving two problems simultaneously. One is to put all of the resources in the right place right now (Arrow and Debreu’s concern), but the other is to accumulate as many resources as possible so that there will be more resources available to allocate in the future.
In a typical CBA, benefits are evaluated on the basis of what those who gain are willing to pay for them and costs are based on what those who lose would be willing to accept voluntarily for absorbing the loss. But no money changes hands between these groups when the policy is implemented. There is no requirement, for example, that society’s capital stock increase as a result of the policy; indeed the capital stock may well be reduced if present citizens are willing to forgo some investment in order to consume right away. It is therefore easy to imagine a set of policies that pass a cost-benefit test because they meet the approval of the current members of society but that gradually slow the growth rate of the economy.
Entrepreneurs in the market face a different, and dual, test: first, they seek to serve their customers in a manner consistent with those individuals’ own values; second, they try to do so in a manner that earns them a profit. A typical CBA focuses only on the first test, ensuring that policies are in line with the preferences of current citizens. But the second test, making a profit, is arguably the more important one. This is what helps ensure that the economy continues to grow, that more resources are available for future allocation, and that economic exchanges do not gradually destroy all of society’s wealth.
Without the profit requirement, there could be a situation where a series of policies or other actions all pass a cost-benefit test, because they increase welfare in the present, but nonetheless end up reducing welfare over time. What if everyone today wanted to throw a giant party with all of the wealth that our ancestors bestowed upon us as a bequest? It is easy to see why this might be in line with present preferences, but it is certainly not in the long-run interests of society.
Casting aside the profit and loss test may leave the present generation content. It is the well-being of people in the future that is in jeopardy when capital is relegated to the sidelines of policy analysis. The oft-overlooked external future benefits of wealth creation are perhaps the most underappreciated aspect of capitalism, and this is precisely the aspect of real-world markets with which modern CBA dispenses.
COST-BENEFIT ANALYSIS AT A CROSSROADS Today, CBA stands at a crossroads. It is becoming ever more clear that, as presently conducted, CBA has virtually no connection to the efficiency-maximizing tool that the law and economics movement sold to the public in the early 1980s. It has become a convention among economists to speak about the outputs of CBA as if those outputs revealed something about economic efficiency. But when economists speak in this manner, they are speaking in error. In this way, the language of economists is actually an impediment to progress.
The outputs of CBA are not a statement about wealth, but rather about the utility of an amorphous agent in an economic model. The most charitable way to view this agent is perhaps as representing the collective well-being of present citizens—those whose preferences dictate policy for the time they are alive. But it’s hard to see why either those on the left or the right should find this acceptable. The social welfare function underlying CBA is inconsistent with Kaldor-Hicks efficiency, presumably what right-wing economists want. And from a fairness standpoint, presumably the concern of those on the left, the welfare of future generations counts for nothing in this analysis except to the limited extent that it matters to people today.In the language of economists, the representative agent might value leaving bequests to successors. This could increase the agent’s utility today, but successors’ utility does not enter into the social welfare function directly.
It is in this analytical void left by mainstream welfare economics that Austrian and public choice economists may have something to offer as a replacement. However, many free market economists have abandoned the cost-benefit enterprise. Some express doubt about the ability to measure cost objectively (e.g., Buchanan 1969; Rothbard 1997). Many express concern about asymmetry in analytical assumptions regarding agents in the market as compared to agents in the government. James Buchanan, for example, expressed deep skepticism of the “benevolent despot” figure that appears so prominently in public economics, and he warned of “political externalities” being bad or worse than market externalities when the assumption of total benevolence is relaxed (Buchanan 1962). Buchanan chastised those who view the role of economist as that of a social engineer tasked with allocating society’s scarce resources, and he argued for a more humble and democratic approach to policymaking (Buchanan 1964).
These concerns, raised in the Austrian and public choice literatures, certainly have some validity. These critiques help explain why cost-benefit has been known to be abused for political ends (Zycher 2018) and why regulatory analysis, of which CBA is a part, is sometimes cynically referred to as an “advocacy document” (Elliott 2014; Carrigan and Shapiro 2017). Although it is beyond the scope of this article to address each of these concerns about cost-benefit analysis, it can be said that Austrian economists have something to contribute to current debates surrounding cost-benefit analysis, in large part due to their somewhat unique treatment of the concept of efficiency. Austrian economists tend to view efficiency, and general equilibrium, as an endpoint that entrepreneurial discovery and voluntary, mutually advantageous exchanges move the economy toward (Kirzner 1997). Entrepreneurs identify discrepancies between market prices and resources’ opportunity costs, and these “market failures,” for lack of a better term, are corrected when entrepreneurs reallocate resources toward higher-valued uses, capturing a profit while doing so. In this way, the market is a process that moves the economy toward an efficient allocation,19 although the market process never actually achieves that end.
The law and economics scholars could learn from the Austrian notion of efficiency and perhaps shore up some of the inconsistencies in their own methods. A first step in this process is likely to involve measuring costs and benefits in dollars, rather than units of a dictator’s utility as is the case now. From a technical point of view, it might not be hard to do this. Indeed, the Trump administration’s recent experimentation with financial forms of analysis is a clear step in this direction (Broughel 2020a). Such analysis might better approximate economic efficiency than modern CBA, and by extension better account for the actual tradeoffs society confronts when enacting new policies.
None of this is meant to suggest that it would have been better had “the cost-benefit revolution” never happened. Even in its present problematic form, CBA at least forces regulators to have to explain their basic reasoning for programs and regulations that can cost billions of dollars. Analysis requires them to organize the relevant facts and evidence together and to go through an orderly decision-making process. This plausibly makes it more likely that policies achieve their desired outcomes and that some of the worst regulations may never see the light of day as a result of the added scrutiny. Moreover, the institutions that have been set up to produce and review CBA could potentially be reformed in the future to focus on more meaningful measures of welfare.
That said, it will become increasingly obvious to the public and to policymakers that the emperor, in this case CBA, has no clothes—and this will have serious implications for the credibility of economists, as well as the credibility of governments around the world that have chosen to adopt these methods without fully understanding them. Distrust of experts and of expert institutions seems to be at an all-time high. When it comes to cost-benefit analysis and the institutions that support it globally, that lack of trust is entirely deserved.
Download the slides from this lecture at Mises.org/MU21_PPT_29.
Recorded at the Mises Institute in Auburn, Alabama, on July 22, 2021.
Download the slides from this lecture at Mises.org/MU21_PPT_20.
Recorded at the Mises Institute in Auburn, Alabama, on July 21, 2021.
As Mark Thornton has shown, the big legislative change that FDR made at the start of his presidency, the decision that affected every single American citizen from one coast to the other, was the repeal of the thirteen-year hell of Prohibition.
Original Article: "Prohibition's Repeal: What Made FDR Popular"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Mises's firm anti-inflation view—and his recommendation for a return to sound money (that is, free market money)—rested on his awareness of the disastrous consequences of an inflationary policy.
Original Article: "Inflation Breeds Even More Inflation"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Private firearms ownership decentralizes coercive power, transferring some of it from the state to the private individual. Naturally, political regimes oppose this. But even many non-Americans embrace private arms.
Original Article: "The Right to Own a Gun Isn't Just for Americans".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
The feds claim the chicken industry is trying to exploit the consumer. Yet several decades ago, chicken was more expensive than beef, but thanks to industry efforts, chicken is exceptionally affordable now.
Original Article: "Another Pointless Antitrust Campaign by Federal Regulators".
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
ABSTRACT: This paper recounts the history of food inspection from a voluntaryist perspective. In England and the United States, the efforts to achieve food safety have relied upon two main methods: education and legislation. Governments did nothing that could not be done on the free market (and in many cases was already being done). Books on how to test for adulterated products at home were published. Some manufacturers voluntarily observed the highest standards of sanitation and cleanliness in their manufacturing plants. Private commercial testing labs were established, and third-party certifications such as the Good Housekeeping Seal came into being. At the same time, we might ask: Why was not strict liability for causing sickness or death imposed upon manufacturers and retailers that sold foods or drugs? Where were the insurance companies that might have provided product liability insurance? To answer these questions, this article looks at the historical evolution of negligence, product liability, and tort law.
Carl Watner (editor@voluntaryist.com) is an independent scholar. This article appeared in The Voluntaryist, digital issue 192, at voluntaryist.com.
When I took over the operation of Inman Feed Mill in late 1987, none of the animal products that we processed and bagged were tagged. Cracked corn, whole corn, sweet feed, and chicken scratch all went out the loading door in plain, unmarked bags. The feed mill had been started in the early 1950s in a very rural area of upstate South Carolina, and most of its customers had face–to–face contact with the various owners. Never was there a doubt in the customer’s mind about what they were getting. Feed bags were not sewn; pieces of string tied in the ubiquitous miller's knot secured their contents. If there was a question, we only had to untie the bag, show the contents to the customer, or place it on the scale if somehow the customer doubted how many pounds he was buying. If there were federal feed and grain laws, there was no evidence of their enforcement. However, there were South Carolina Department of Agriculture regulations which mandated that statements of feed ingredients and analysis (of protein, fat, and fiber content) be placed on the bags. Due to very lax enforcement by state inspectors and the very local nature of our business, the tagging laws were not enforced until about 2015.
Why am I recounting this history? Because this was how most food and drugs for people were sold well into the late nineteenth and early twentieth centuries—no food labels; no statements of ingredients; no stated weight; no serving breakdowns of calories, fat, fiber, sugar, and protein; and no prescriptions required—not even for dangerous drugs. What first called my attention to this topic was a book by Deborah Blum titled The Poison Squad: One Chemist's Single-Minded Crusade for Food Safety at the Turn of the Twentieth Century. The Poison Squad consisted of young healthy men who volunteered as human guinea pigs to test the safety of additives, adulterants, and preservatives in foods sold for human consumption. It was an experimental program designed to test the toxicity of ingredients in food. It was begun in late 1902 by Harvey Wiley, who was chief chemist of the United States Department of Agriculture from 1882 to 1912. Wiley used the the Poison Squad’s results and the publicity surrounding the publication of Upton Sinclair’s The Jungle to promote the Pure Food and Drug Act, which was passed in 1906.
The purpose of this paper is to recount the history of food inspection from a voluntaryist perspective. In England and the United States, the efforts to achieve food safety have relied upon two main methods: education and legislation (Whorton 2010, 156). I suppose one could argue that if education were sufficient and successful, legislation would be unnecessary, but we shall see how this argument worked out historically. But even if legislation were necessary, which I am not granting, governments did nothing that could not be done on the free market (and in many cases was already being done). Books on how to test for adulterated products at home were published. Some manufacturers voluntarily observed the highest standards of sanitation and cleanliness in their manufacturing plants and used only the best ingredients in their products. . Private commercial testing labs were established, and third-party product certifications such as the Good Housekeeping Seal came into being. At the same time, we might ask: Why was not strict liability for causing sickness or death imposed upon manufacturers and retailers that sold foods or drugs? Where were the insurance companies that might have provided product liability insurance? To answer these questions requires a look at the historical evolution of negligence, product liability, and tort law.
As B. I. Smith (2013) has noted, “Legislation designed to prevent the sale of unsafe or unwholesome food represents one of the oldest forms of government” intervention in the marketplace. The English Assize of Bread and Ale, enacted during the reign of King John during the mid-1200s, contains one of the earliest references to food adulteration. Both in England and in British North America the establishment of public markets was usually a prerogative of city governments. The first meat inspection law in North America was enacted in New France (now Canada) in 1706 and required butchers to notify the authorities before animals were slaughtered (Institute of Medicine 1990). Municipal legislation covered everything from licensing vendors, mandating the use of just weights and measures, and “prohibitions on buying and selling outside the public market, prohibition on reselling, forestalling, and engrossing.” “In New York, unsound beef, pork, fish, or hides were to be destroyed by municipal officials by ‘casting them into the streams of the East or Hudson rivers,’” and in New Orleans, officials were authorized to throw diseased meat into the Mississippi. In 1765, Lord Mansfield upheld the existence of public market regulations by referring to “the need for the ‘preservation of order, and the prevention of irregular behavior’” (Novak 1996, 95–98).
In England, during much of the nineteenth century there were few regulations on the sale of adulterated foods and poisons. For example, arsenic—which is very similar in color and texture to white sugar, flour, or baking powder—was sold by grocers and an odd assortment of tradesmen and hucksters. “In short, anyone could sell” and anyone could buy. “Nothing more was expected of buyers than they must mind what they were buying.” The rule was caveat emptor. The burden of proof was on the buyer to be sure that his purchase caused him no harm. Since there was no statutory definition of a druggist or chemist, anyone could sell arsenic, and people commonly purchased it for use as a rat killer. The British Pharmaceutical Society, founded in 1841, devoted much of its activity to “achieving a Parliamentary definition of the title ‘Chemist and Druggist’” and agitated for a law that would permit only those vendors who met the legislative requirements to traffic in drugs and poisons (Whorton 2010, 113–14, 135).
As a result, arsenic was often implicated in both accidental and purposeful deaths. Unhappy wives often used arsenic to poison their husbands, and even if they were indicted for manslaughter, “juries were reluctant to convict unless it could be demonstrated that the suspect had actually bought some of the poison.” People who caused accidental poisoning were usually not punished at all. Between 1837 and 1839, over five hundred cases of accidental poisoning by arsenic were reported. Deaths continued to mount during the 1840s. A classic example of a possible poisoning was that of a little girl in 1851 who was sent to a rural grocer to get “tea, sugar, flour, currants, red herrings, and two ounces of arsenic to deal with rats.” Absent labeling, how was her mother to know which was arsenic? Parliament finally passed An Act to Regulate the Sale of Arsenic in June 1851, which required records be made of every sale and mandated that any quantity of less than ten pounds be colored so that it could not be confused with food ingredients (Whorton 2010, 114, 131, 133).
The law was often ignored by both buyers and sellers. Less than three months after its passage a woman used uncolored arsenic to kill her husband. She was executed, and the two pharmacists who sold her the arsenic were fined. Violations of the law continued, finally culminating in a ghastly tragedy in Bradford, Yorkshire, on October 25, 1858, when a confectioner’s assistant requested a quantity of plaster of Paris, which was supposed to be used as an adulterant in the candy they were making, but was mistakenly sold uncolored arsenic. Despite the fact that one worker became sick while mixing the arsenic into the peppermint lozenges that he was preparing and that “the candies took an unusually long time to dry and were darker in color than usual,” the confectioner did not realize there was a problem. He sold forty pounds of the lozenges to a vendor at Bradford’s Saturday market and mixed the remainder into an assortment of other sweets, known as a Scotch mixture. In less than three days, twenty-one people had died from eating the candy and over seventy–eight were known to be seriously ill. The confectioner and the chemist and his apprentice, who had sold the arsenic, were arrested and indicted for manslaughter. “When the trial was held…the jury could find no violation of the law. The episode was simply a highly regrettable accident” even though it was a case of gross negligence (Whorton 2010, 135–37, 139, 163).
Similar incidents of death and sickness due to food poisoning occurred in the United States. In his 1853 book The Milk Trade in New York and Vicinity, John Mullaly “included reports from frustrated physicians that thousands of children were killed in New York City every year by dirty (bacteria-laden) and deliberately tainted milk,” which was commonly known as “swill” milk. Thomas Hoskins, a Boston physician, published his What We Eat: An Account of the Most Common Adulterations of Food and Drink with Simple Tests by Which Many of Them May Be Detected in 1861. In an 1879 speech before the American Social Science Public Health Association, George Thorndike Angell “recited a disgusting list of commercially sold foods that included diseased and parasite-ridden meat…that poison and cheat the consumer.” Jesse Battershall, a New York chemist, published his book Food Adulteration and Its Detection in 1887, in which he decried “candy laced with poisonous metallic dyes, mostly arsenic and lead chromate,” and “warned of cyanide, indigo, soapstone, gypsum, sand, and turmeric in teas” (Blum 2018, 2, 15, 29).
During the Spanish-American War, the US Army contracted with Swift, Armour, and Morris, three of the biggest meat-packing companies in Chicago, to supply refrigerated and canned meat provisions to soldiers in Cuba and the Philippines. Much of the meat arriving in Cuba “was found to be so poorly preserved, chemically adulterated, and/or spoiled that it was toxic and dangerous to consume.” After the war a court of inquiry was held to investigate these problems, and Commanding General Nelson A. Miles of the American forces in Cuba referred to the refrigerated products provided to the army as “embalmed beef.” General Charles P. Eagan, commissary general, defended his procurement practices and in the end “there were no official findings of large-scale trouble with meat supplies” (“United States Army Beef Scandal” 2020).
The “embalmed beef scandal” was just one of many events that gave impetus to the passage of new federal laws. Muckrakers at the beginning of the twentieth century highlighted the problems they saw in the Chicago meat-packing industry. The publication of Upton Sinclair's The Jungle as a magazine series in 1905, and then its publication as a book in early 1906, brought pressure to bear on President Theodore Roosevelt to push for the adoption of the Meat Inspection Act and the Pure Food and Drug Act. Prior to their passage on June 30, 1906, there had been a number of what can only be called “political inspections” of the meat processors in Chicago. One inspection supported the the meat companies’ claims that their processing facilities and methods were sufficiently up to industry standards, while another confirmed the descriptions in The Jungle. On March 10, 1906, investigators sent by Secretary of Agriculture James Wilson arrived in Chicago to report on the conditions in the packing houses. They held Sinclair responsible for “willful and deliberate misrepresentation of fact” (Schlosser 2006). In their initial report a month later, they “concluded that meat inspection could and should be improved, but (they) also refuted most of the charges made in…The Jungle” (Ogle 2013,78). Finally, in a June 8, 1906, letter to the president transmitting the reports of the Agricultural Department’s committee’s inspection of the stock yards, the inspectors stated that they believed that Sinclair had “selected the worst possible conditions which could be found in any establishment as typical of the general conditions existing in the Chicago abattoirs, and…willfully closed his eyes to establishments where excellent conditions prevail” (US House of Representatives 1906, 349). By early May 1906, Roosevelt had already decided to dispatch Commissioner of Labor Charles P. Neill and Assistant Secretary of the Treasury James B. Reynolds to Chicago for further investigation. This time “Roosevelt's inspectors found stockyard conditions comparable to those Sinclair had portrayed and told of rooms reeking with filth, of walls, floors, and pillars caked with offal, dried blood, and flesh of unspeakable uncleanliness” (Goodwin 2013, 462).
The Meat Inspection Act of 1906 amended the earlier Meat Inspection Acts of 1890, 1891, and 1895, which had provided for “inspection of slaughtered animals and meat products but (which) had proven ineffective in regulating many unsafe and unsanitary practices” (Rouse 2020). The new law provided for the inspection of “all cattle, swine, sheep, goats, and horses both before and after they were slaughtered for human consumption,” as well as establishing new sanitary standards and ongoing monitoring and inspection of all slaughter and processing operations (ibid.) The Pure Food and Drug Act of 1906, on the other hand, banned all “foreign and interstate traffic in adulterated or mislabeled food and drug products” (“Pure Food and Drug Act” 2020). It was primarily a “truth in labeling law” that for the first time in federal legislation defined “misbranding” and “adulteration” by referring to the standards set by the US Pharmacopoeia and the National Formulary. As Harvey Wiley, chief chemist and the chief proponent of the new law put it, “The real evil of food adulteration (and mislabeling) was the deception of the consumer” (Blum 2018, 103).
Despite these laws a new tragedy occurred some three decades later. During September and October of 1937, more than one hundred people in fifteen states died after having taken the Elixir Sulfanilamide, which had been formulated by the chief chemist of the S. E. Massengill Company of Bristol, Tennessee. Sulfanilamide had been used in powder and tablet form to treat streptococcal infections. When it was found that it could be dissolved in diethylene glycol, it was marketed in liquid form after being tested for flavor, appearance, and fragrance. It was not, however, tested for toxicity, and the formulating chemist failed to realize that diethylene glycol was a deadly poison. After the product had been distributed, reports came back of deaths and sickness. The Food and Drug Administration then attempted to retrieve all of the product that had been sold. “Although selling toxic drugs was undoubtedly bad for business and could damage a firm’s reputation, it was not illegal. In 1937 the law did not prohibit sale of dangerous, untested, or poisonous drugs.” The unsold and unused elixir was seized, because it was misbranded, not because it was poisonous. According to the FDA, “elixir” implied that the product was in an alcoholic solution, whereas diethylene glycol contained no alcohol. “If the product had been called a ‘solution’ instead of an ‘elixir’ no charge of violating the law could have been made.” Dr. Samuel Evans Massengill, the owner of the firm, refused to accept any responsibility: “My chemists and I deeply regret the fatal results, but there was no error in the manufacture of the product. We have been supplying a legitimate professional demand and not once could have foreseen the unlooked-for results. I do not feel there was any responsibility on our part.” The company paid a fine of $ 26,100 for mislabeling and the commissioner of the FDA at that time, Walter Campbell, “pointed out how the inadequacy of the law had contributed to the disaster….[T]hen citing other harmful products, [he] announced that ‘The only remedy for such a situation is the enactment by Congress of an adequate and comprehensive national Food and Drug Act,’” which came about the following year (Ballentine 1981).
How would these tragedies have been handled on the free market? No one can say for sure that they could have been avoided, because there are no guarantees in this world. Would the free market provide more equitable, practical, and moral solutions to the problems of swindling and cheating that have been part of human history? We do not maintain that market solutions woulud solve all of humanity’s problems, but neither can we assume that because markets and other social mechanisms produce imperfect results that a central monopolistic authority will produce better ones. “Markets are desirable not because they lead smoothly to improved knowledge and better coordination, but because they provide a process for learning from our mistakes and the incentives to correct them” (Knych and Horwitz 2011, 33). As voluntaryists, we conclude from examining human nature, human incentives, and human history that a stateless society would not be perfect but would be a more moral and practical way of dealing with human aggression than reliance on a centralized, monopolized institution. Governments require taxes; taxes require coercion; coercion necessitates the violation of persons and properties, hardly moral or practical alternatives. Furthermore, we can say that government regulation usually gives consumers a false sense of security and reduces their incentive to do their own checking and acquire information about what they are buying. Government inspection and meeting government standards tend to preempt nongovernmental forms of inspection, such as product testing by third parties.
It is safe to say that a thorough application of the libertarian common law legal code and common sense would go far in preventing the kinds of catastrophes described here. The first thing to recognize is that in the absence of the state every manufacturer and every retailer would have strict liability for the products they sold. This incentive would induce them to exercise extreme care. As we have seen, particularly in the Massengill episode, neither the manufacturer nor any officials in the government’s Food and Drug Administration recognized that they had any personal responsibility for what happened. So long as they met the technical requirements of the statutory law, they were not liable for the deaths caused by sulfanilamide. As Rothbard has pointed out in Power and Market, with government regulation and reliance on government experts there is not the same measure of success or failure as when the individual relies on competitive market experts. “On the market, individuals tend to patronize those experts whose advice proves most successful. Good doctors or lawyers reap rewards on the free market, while the poor ones fail; the privately hired expert tends to flourish in proportion to his demonstrated ability” (Rothbard 1970, 17).
Where governments exist and government regulations and government inspections fail to prevent something like the sulfanilamide tragedy, what do the government regulators do? They call for new and more encompassing regulations. It is comparable to a successful terrorist attack today being used to call for stricter gun regulations and new antiterrorist laws. This is a perfect example of one government intervention leading to another.
How would the disasters described here be handled under the libertarian legal code? As Rothbard has written, “The free-market method of dealing, say, with the collapse of a building killing several persons is to” hold the owner of the building responsible for manslaughter.” Furthermore “a mis-statement of ingredients is a breach of contract—the customer is not getting what the seller states in his product.” This is “taking someone else’s property under false pretenses,” and therefore “under…the legal code of the free society which would prohibit all invasions of persons and property” the perpetrator would become liable. If the adulterated product injures the health of the buyer by substituting a toxic ingredient, the seller is further liable for prosecution for injuring and assaulting the person of the buyer (Rothbard 1970, 34).
Even with the existence of government, meat packers and manufacturers such as Armour and Swift still had an incentive to maintain quality and prevent food poisonings and deaths caused by their products. But they also had an incentive to use the fact that their products met government minimum standards as a shield against potential liability. As one commentator put it, “the responsible packer cannot afford to put upon the market meat virulently diseased. Government inspection, however…permits the packer to sell under sanction of law questionable products as first class” (US House of Representatives 1906, 345). This confirms Rothbard's analysis that setting quality standards has an injurious effect upon the market:
Thus, the government defines “bread” as being of a certain composition. This is supposed to be a safeguard against “adulteration,” but in fact it prohibits improvement. If the government defines a product in a certain way, it prohibits change. A change, to be accepted by consumers, has to be an improvement, either absolutely or in the form of a lower price. Yet it may take a long time, if not forever, to persuade the government bureaucracy to change the requirements. In the meantime, competition is injured, and technological improvements are blocked. “Quality” standards, by shifting decisions about quality from the consumers to arbitrary government boards, impose rigidities and monopolization on the economic system. (Rothbard 1970, 18, 34)
Even in the face of government inspection and regulation, there is nothing to keep reputable producers from trying to exceed government standards. In England, Crosse and Blackwell, purveyors of food to the royalty, began using purity as a general marketing device in the mid-1850s. (Wilson, 141–143) Henry J. Heinz’s company, which is still in existence today, is another example. “Between 1865 and 1880, the H. J. Heinz Company had established a reputation for high-quality condiments.” Heinz predicated his business upon his belief that a “wide market awaited the manufacturer of food products who set purity and quality above everything else.” All of the company’s marketing and advertising efforts were focused on “Pure Food for the Table” and maintaining an unblemished brand record. In 1890, Heinz opened his factories to the public and invited his customers to come and inspect his operation for themselves. “Within a decade, more than 20,000 people per year were touring (his) manufacturing facilities.” As early as 1901, Heinz became one of the first companies to hire chemists and establish a quality control department. Nevertheless, Heinz was one of the few large-scale producers that supported government legislation covering “food production, labeling, and sales” (Koehn 2001, 72–86). As one historian has noted:
Heinz's involvement in the campaign for food regulation grew out of his commitment to producing safe, healthy food. But he also had strategic reasons for championing federal regulation. Heinz believed that such legislation would help increase consumers’ confidence in processed foods, legitimating the broader industry and guaranteeing its survival. Stringent guidelines for food manufacturing and labeling, he believed, would enhance the reputation of the overall (food processing) business. Such guidelines might also focus public attention on his brand’s core attributes of purity and quality. Heinz’s standards for ingredients, production processes, and cleanliness were among the highest in the industry. The entrepreneur welcomed another opportunity to promote his products and his company’s identity.
From Heinz’s perspective, there were other advantages to endorsing federal regulation. Government-imposed standards for food manufacturing, labeling, and distribution would alter the terms of competition in the industry, forcing some companies to change their operating policies, usually at higher cost. Other manufacturers would be driven out of business. Both possibilities, Heinz realized, would enhance the Heinz Company’s competitive position. (Koehn 2001, 86–87)
So, there were definitely mixed motives at work among those who supported or opposed the passage of government legislation governing food inspection. The problem is that given the existence of government, opposition to specific legislation is exactly that. One can support it, or call for its amendment, but in either case one is in effect legitimizing the government. True opposition on voluntaryist grounds would be to oppose the government itself, calling for its abandonment rather than trying to challenge it on grounds that certain of its regulations are too stringent or inadequate.
What historical elements can we discern at work that give us some idea of how the free market in food safety might work were there no government? As we have seen, there were books written about food adulteration and how to detect adulterants. The What to Eat Magazine began publishing in August 1896 and made consumers aware of the importance of food safety. In England, the names of manufacturers and of their toxic food products were made known to the public via books and lectures (Whorton 2010, 148, 151). During the nineteenth century, “Canada’s Hiram Walker Company, producer of Canadian Club blended whiskey, reacted to fakery in the U.S. market by hiring detectives to hunt cheats. The company took out newspaper advertisements listing the perpetrators or had names listed on billboard posters proclaiming ‘A Swindle, These People Sell Bogus Liquors.’” From the company's perspective this was more effective than instituting legal proceedings against those who copied their blend. Other nineteenth-century examples include a variety of clubs such as the General Federation of Women’s Clubs, the National Consumers League, and the Woman’s Christian Temperance Union (which opposed the use of cocaine in Coca-Cola), all of which could have mobilized consumer boycotts that would have pressured producers to change their ways (ibid., 148, 151, 157). Today, other professionals and their associations, such as the National Association of Nutrition Professionals, would certainly promote healthy foods. Health insurance companies, who have a proprietary interest in seeing that their customers come to no harm, would want to alert them to untested, potentially dangerous, and toxic food and chemicals (Blum 2018, 50, 114, 299).
The Good Housekeeping magazine was a commercial enterprise sustained by subscription and advertising revenues. It was first published in 1885, and by 1912, when Harvey Wiley (of Poison Squad notoriety) resigned his post at the Department of Agriculture and became director of the Good Housekeeping Bureau of Foods, Sanitation, and Health, it had over four hundred thousand subscribers (Blum 2018, 272). By 1925 it had over 1.5 million subscribers (Anderson 1958, 24). Its Experiment Station was started in 1900 and was the predecessor of the Good Housekeeping Research Institute, which was established in 1910. “In 1909, the magazine established the Good Housekeeping Seal of Approval,” which continues to this day. Consumers’ Research was started in 1929, and its spinoff, Consumers Union, was organized in 1936. Both were devoted to publishing “comparative test results on brand-name products and publicized deceptive advertising claims (“Consumers’ Research” 2020). The principals involved in these organizations published a best-selling book in 1933 titled 100,000,000 Guinea Pigs in which they pointed out that “pure food laws do not protect you” (Blum 2018, 285). The Non-GMO Verified Project is another example of a consumer education organization. Begun in 2007 by two food retailers who wanted consumers to know that their products contained no genetically modified ingredients, its first official food label was applied to tea products in 2012. A more recent effort can be found in The Moms Across America’s Gold Standard seal program, which began in late 2019. It “is a multi-tiered level of verification that can be achieved only by food and supplement brands that” meet the most stringent standards (Temple 2019). There can be problems with corruption and violation of trust within such private groups, but this same criticism applies equally to government organizations, which are supported by taxes and even more prone to be influenced by lobbyists.
As we ponder this history, several overriding questions remain. Whether we champion the free market or the state, why did these abuses happen? Why weren't manufacturers and retailers held responsible? Where were the insurance companies that could have provided some measure of protection to both the consumers and manufacturers? It certainly is a criticism of both the common law and government legislation that people who were readily known and identified were not held responsible for their actions, which caused death and harm to others. The bottom-line answer is that “during the 19th century, manufacturers had no liability for the goods they made. The liability of manufacturers for the losses suffered by consumers took several centuries to be established” in both common law and statutory legislation ( “Example of the Development of Court Made Law” n.d.).
There are two aspects of the common law with which we need to be concerned. The common law concerns itself with contracts, under which two parties engage in a transaction in which the terms are normally outlined in advance and evidenced by a written or oral agreement. Fraud, which is intentional deception, usually occurs within the context of a contract (“Fraud” 2020). Torts, which are “wrongdoings not arising out of contractual obligations” evolved out of the common law of prosecutions in eighteenth-century England ( “The Historical Development of Law of Torts in England” 2017, introduction). Negligence is a form of tort. “A person who is negligent does not intend to cause harm” but is still held responsible, “because their careless actions injured someone” (FindLaw 2018a). Most of the deaths we have discussed here are examples of torts. The people who died were not intentionally poisoned but rather died due to accidents caused by carelessness.
As Rothbard explains,
In the free economy, there would be ample means to obtain redress for direct injuries or fraudulent “adulteration.”…If a man is sold adulterated food, then clearly the seller has committed fraud, violating his contract to sell the food. Thus, if A sells B breakfast food, and it turns out to be straw, A has committed an illegal act of fraud by telling B he is selling him food, while actually selling straw….The legal code of the free society…would prohibit all invasions of persons and property….[I]f a man simply sells what he calls “bread,” it must meet the common definition of bread held by consumers, and not some arbitrary specification. However, if he specifies the composition on the loaf, he is liable for…breaching a contract—taking someone else’s property under false pretenses. (Rothbard 1970, 19)
Under the common law, as it was interpreted throughout most of the nineteenth century, “a plaintiff could not recover for a defendant's negligent production or distribution of a harmful instrumentality unless the two were in privity of contract” (“Common Law” 2020). Under this doctrine, there was no privity between a consumer who bought a product from a retailer and the manufacturer that produced it. An 1837 case in England, well-known to law students, illustrates how privity was originally seen.
A man purchased a gun from a gun maker, warranted to be safe. The man’s son used the gun and one of the barrels exploded, resulting in the mutilation of the son’s hand. As the son did not buy the gun there was no remedy in contract law. The court was asked to consider if the son could sue the gun seller or manufacturer, and if so what for. The Court said he could not sue because 1) in contract the son did not buy the gun and 2) could not sue for negligence because negligence did not exist in law. (“Example of the Development of Court Made Law” n.d.)
In another English case five years later, the court “recognized that there would be ‘absurd and outrageous consequences’ if an injured person could sue any person peripherally involved, and knew it had to draw the line somewhere…. The Court looked to the contractual relationships, and held that liability would only flow as far as the person in immediate contract (‘privity’) with the negligent party.” An early exception to the privity rule is found in a New York State case of 1852. Here it was held that mislabeling a potentially poisonous herb which could “put human life in imminent danger” was reason enough to breach the privity rule, especially since the herb was intended to be sold through a dealer. In an English case of 1883, a ship’s painter was injured when the platform (slung over the side of the ship) on which he was standing collapsed. The platform was faulty but there was no contract between the injured painter and the company that built it. The court ruled that the builder of the platform owed a duty to whomsoever used it, regardless of whether there was privity between them. As the court opined, “It is undoubted, however, that there may be the obligation of such a duty from one person to another although there is no contract between them with regard to such duty” (“Common Law” 2020).
Nevertheless, the privity rule survived. In 1915, a federal appeals court for the New York region held that “a car owner could not recover for injuries (caused by) a defective wheel.” The car’s owner’s contract was with the automobile dealer, not with the manufacturer. The court concluded that manufacturers were “not liable to third parties for injuries caused by them, except in cases of willful injury or fraud” (“Common Law” 2020). Finally, in 1932, the English courts recognized that third parties had the right to seek damages even if they had no direct dealings with the manufacturer of defective goods. A new rule of law, known as the duty of care, was enunciated. “The new law placed on the manufacturer a direct duty of care (due) to the consumer, not just the purchaser.” The ultimate consumer—“the person for whom the goods were intended”—was now protected under the law of negligence even though there was no contract between the end user and the producer of the product (“Example of the Development of Court Made Law” n.d.). Thus the core concept of negligence as it has developed in English and American law is that “people should exercise reasonable care in their actions, by taking account of the potential harm they might foreseeably cause to other people or their property” (“Negligence” 2020).
So, to return to our question: where were the insurance companies? The answer must be that for the most part, until the development of product liability, implied warranty, and negligence laws, there was nothing for the insurance companies to insure. However, it is clear from the general role that insurance companies would play in a free society that they would have a very significant impact on assuring food safety and setting requirements which their insureds would have to meet in order to maintain product liability coverage.
It is interesting to see how recent federal laws were applied to those responsible for a deadly outbreak of salmonella poisoning that occurred in 2008 and 2009. Executives and owners of the Peanut Corporation of America knowingly ordered that tainted peanut butter be shipped out to their distributors with the result that nine people died and at least 714 others were sickened. Here are excerpts from a CNN report: “Food safety advocates said the trial was groundbreaking because it’s so rare corporate executives are held accountable in court for bacteria in food. Never before had a jury heard a criminal case in which a corporate chief faced federal felony charges for knowingly shipping out food containing salmonella.” (Basu 2014) “Stewart Parnell (one of the owners) and his co-defendants were not on trial for poisoning people or causing any deaths stemming from the outbreak, and prosecutors did not mention these deaths to the jury” (ibid.). In other words, the perpetrators were still not held responsible for the death and sickness caused by their bad product. This was little different from the Bradford, Yorkshire, case 150 years ago, where the claim was that “no law was violated” or from the 1937 Massengill tragedy, where the most that could be claimed was a case of mislabeling. Would the libertarian legal code be more robust in response to such events? All we can hope is that it would be so.
Who is responsible for the foods that consumers put into their mouths, the market or the government, the buyer or the seller? As one consumer advocate has concluded, “government intervention to stop bad food has always come later than it should; and it has never been adequate to the problem” (Wilson 2008, 326–27). “Who is right? Who can say?” (Wilson 2008, 247) Paraphrasing Ayn Rand: Who decides what is the right way to make an automobile? Her answer was: “any man who cares to acquire the appropriate knowledge and to judge, at and for his own risk and sake.” So, to return to the question posed in our title: Who should decide what goes into a can of tomatoes? (Ogle 2013, 67) The answer is relatively simple: the owner of the can, the owner of the tomatoes, the insurance company that insures them, and the person who acquires the appropriate knowledge as to what is safe and is not safe, and is willing to take the responsibility for that decision (Rand 1990). Additionally, it is up to us as individual consumers to “do what is in our power to prevent ourselves and our families” from being cheated and poisoned. “Buy fresh foods, in whole form. Buy organic, where possible. Buy food from someone you can trust…. Cook it yourself…. Above all, trust your own senses” (Wilson 2008, 326–27).
Unfortunately, conquest and subjugation of others is hardly a trait unique to Europeans.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "Let's Stop Ignoring the History of Conquests and Atrocities Committed by Non-Europeans".
The introduction of Obamacare was only the natural evolution of many decades of increasing state control of the healthcare industry.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Original Article: "One Hundred Years of Medical Fascism".
We have reached the end of Murray Rothbard's definitive treatise Man, Economy, and State!
Dr. Patrick Newman joins the show to wrap up the final chapters—labeled separately as Power and Market—showing Rothbard's economic analysis of government interventions. Newman and Jeff Deist discuss this quintessentially Rothbardian treatment of everything from price controls to taxes to subsidies to "public ownership," presented as always with clarity and devastating logic. Want to find out why the original publisher thought these concluding chapters were too hot for an economics treatise? Don't miss this episode!
Read the book free of charge in searchable HTML format here.
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Bob Murphy's study guide to Man, Economy, and State: Mises.org/StudyMES
Man, Economy, and State: Mises.org/MES
If we want to understand the numbers behind the need to "flatten the curve," we must look at how government programs like Medicare have reduced hospital capacity in recent decades.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "How Government Healthcare Has Reduced Access to Hospital Beds"
If we can spend a few trillion overnight to bail out investors and send out 150 million stimulus checks, why not also launch a universal basic income and a slavery reparations program?
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "How Bailouts and Stimulus Pave the Way for a Lot More Spending on Everything".
Central bankers are saying two things at once. First, they say that negative interest rates are a natural historical development. But then they say negative rates are an essential tool central banks are using to manipulate the economy.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Are Negative Rates a Natural Historical Development?".
The Left has an enormous desire to "do good to" the mass of other people. But since many people often resist, the leftist inevitably ends by reaching for the big stick with which to push the ungrateful masses around.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Great Society: A Libertarian Critique".
Download the slides from this lecture at Mises.org/MU20_PPT_28.
Recorded at the Mises Institute in Auburn, Alabama, on July 16, 2020.
Download the slides from this lecture at Mises.org/MU20_PPT_20.
Recorded at the Mises Institute in Auburn, Alabama, on 15 July 2020.
Introduction by Murray Rothbard: We are all indebted to Carl Watner for uncovering an unknown work by the great Lysander Spooner, one that managed to escape the editor of Spooner's Collected Works.
Both the title and the substance of "Vices are not Crimes" highlight the unique role that morality and moral principle had for Spooner among the anarchists and libertarians of his day. For Spooner was the last of the great natural-rights theorists among anarchists, classical liberals, or moral theorists generally; the doughty old heir of the natural law–natural rights tradition of the 17th and 18th centuries was fighting a rearguard battle against the collapse of the idea of a scientific or rational morality, or of the science of justice or of individual right.
Not only had natural law and natural rights given way throughout society to the arbitrary rule of utilitarian calculation or nihilistic whim, but the same degenerative process had occurred among libertarians and anarchists as well. Spooner knew that the foundation for individual rights and liberty was tinsel if all values and ethics were arbitrary and subjective.
Yet, even in his own anarchist movement Spooner was the last of the Old Guard believers in natural rights; his successors in the individualist-anarchist movement, led by Benjamin R. Tucker, all proclaimed arbitrary whim and might-makes-right as the foundation of libertarian moral theory. And yet, Spooner knew that this was no foundation at all; for the State is far mightier than any individual, and if the individual cannot use a theory of justice as his armor against State oppression, then he has no solid base from which to roll back and defeat it.
With his emphasis on cognitive moral principles and natural rights, Spooner must have looked hopelessly old-fashioned to Tucker and the young anarchists of the 1870s and 1880s. And yet now, a century later, it is the latter's once fashionable nihilism and tough amoralism that strike us as being empty and destructive of the very liberty they all tried hard to bring about. We are now beginning to recapture the once-great tradition of objectively grounded rights of the individual. In philosophy, in economics, in social analysis, we are beginning to see that the tossing aside of moral rights was not the brave new world it once seemed—but rather a long and disastrous detour in political philosophy, which is now fortunately drawing to a close.
Opponents of the idea of an objective morality commonly charge that moral theory functions as a tyranny over the individual. This, of course, happens with many theories of morality, but it cannot happen when the moral theory makes a sharp and clear distinction between the "immoral" and the "illegal," or, in Spooner's words, between "vices" and "crimes." The immoral or the "vicious" may consist of a myriad of human actions, from matters of vital importance down to being nasty to one's neighbor or to willful failure to take one's vitamins. But none of them should be confused with an action that should be "illegal," that is, an action to be prohibited by the violence of law. The latter, in Spooner's libertarian view, should be confined strictly to the initiation of violence against the rights of person and property.
Other moral theories attempt to apply the law—the engine of socially legitimated violence—to compelling obedience to various norms of behavior; in contrast, libertarian moral theory asserts the immorality and injustice of interfering with any man's (or rather, any noncriminal man's) right to run his own life and property without interference. For the natural-rights libertarian, then, his cognitive theory of justice is a great bulwark against the State's eternal invasion of rights—in contrast to other moral theories that attempt to employ the State to combat immorality.
It is instructive to consider Spooner and his essay in the light of the fascinating insights into 19th century American politics provided in recent years by the "new political history." While this new history has been applied to most of the 19th century, the best work has been done for the Midwest after the Civil War, in particular the brilliant study by Paul Kleppner, The Cross of Culture.Paul Kleppner, The Cross of Culture: A Social Analysis of Midwestern Politics, 1850–1900 (New York: Free Press, 1970). Also see Richard Jensen, The Winning of the Midwest: Social and Political Conflicts, 1888–1896 (Chicago: University of Chicago Press, 1971).
What Kleppner and others have shown is that the political ideas of Americans can be reduced, with almost remarkable precision, back to their religious attitudes and beliefs. In particular, their political and economic views depend on the degree to which they conform to the two basic poles of Christian belief: pietistic or liturgical (although the latter might be amended to liturgical plus doctrinal). Pietistic, by the 19th century, meant all groups of Protestants except Episcopalian, High Church Lutheran, and orthodox Calvinist; liturgical meant the latter plus Roman Catholic. (And "pietistic" attitudes, often included deist and atheist.)
Briefly, the pietist tends to hold that to be truly religious, a person must experience an emotional conversion; the convert, in what has been called "the baptism of the Holy Spirit," has a direct relationship to God or to Jesus. The liturgical, on the other hand, is interested in either doctrinal belief or the following of prescribed church ritual as the key to salvation.
Now, it might seem as if the pietistic emphasis on the individual might lead to a political individualism, to the belief that the State may not interfere in each individual's moral choices and actions. In 17th-century pietism, it often meant just that. But by the 19th century, unfortunately, such was not the case. Most pietists took the following view: since we can't gauge an individual's morality by his following rituals or even by his professed adherence to creed, we must watch his actions and see if he is really moral.
From there the pietists concluded that it was everyone's moral duty to his own salvation to see to it that his fellow men as well as himself are kept out of temptation's path. That is, it was supposed to be the State's business to enforce compulsory morality, to create the proper moral climate for maximizing salvation. In short, instead of an individualist, the pietist now tended to become a pest, a busybody, a moral watchdog for his fellowman, and a compulsory moralist using the State to outlaw "vice" as well as crime.
The liturgicals, on the other hand, took the view that morality and salvation were to be achieved by following the creed and the rituals of their church. The experts on those church beliefs and practices were, of course, not the State but the priests or bishops of the church (or, in the case of the few orthodox Calvinists, the ministers.) The liturgicals, secure in their church teachings and practices, simply wanted to be left alone to follow the counsel of their priests; they were not interested in pestering or forcing their fellow human beings into being saved. And they believed profoundly that morality was not the business of the State, but only of their own church mentors.
From the 1850s to the 1890s the Republican party was almost exclusively the pietist party, known commonly as the "party of great moral ideas"; the Democratic party, on the other hand, was almost exclusively the liturgical party, and was known widely as the "party of personal liberty."
Specifically, after the Civil War there were three interconnected local struggles that kept reappearing throughout America; in each case, the Republicans and Democrats played out their contrasting roles. These were: the attempt by pietist groups (almost always Republican) to enforce prohibition; the attempt by the same groups to enforce Sunday blue laws; and the attempt by the selfsame pietists to enforce compulsory attendance in the public schools, in order to use these schools to "Christianize" the Catholics.
What of the political and economic struggles that historians have, until recently, focused on almost exclusively—sound money vs. fiat money or silver inflation; free trade vs. a protective tariff; free markets vs. government regulation; small vs. large government spending? It is true that these were fought out repeatedly, but these were on the national level, and generally remote from the concerns of the average person. I have long wondered how it was that the 19th century saw the mass of the public get highly excited about such recondite matters as the tariff, bank credits, or the currency. How could that happen when it is almost impossible to interest the mass of the public in these matters today?
Kleppner and the others have provided the missing link, the middle term between these abstract economic issues and the gut social issues close to the hearts and lives of the public. Specifically, the Democrats, who (at least until 1896) favored the free-market libertarian position on all these economic issues, linked them (and properly so) in the minds of their liturgical supporters, with their opposition to prohibition, blue laws, etc. The Democrats pointed out that all these statist economic measures—including inflation—were "paternalistic" in the same way as the hated pietistic invasions of their personal liberty. In that way, the Democrat leaders were able to "raise the consciousness" of their followers from their local and personal concerns to wider and more abstract economic issues, and to take the libertarian position on all of them.
The pietist Republicans did similarly for their mass base, pointing out that big government should regulate and control economic matters as it should control morality. In this stance, the Republicans followed in the footsteps of their predecessors, the Whigs, who for example were generally the fathers of the public school system in their local areas.
Generally, the "mind your own business" liturgicals almost instinctively took the libertarian position on every question. But there was of course one area—before the Civil War—where pestering and hectoring were needed to right a monstrous injustice: slavery. Here the typical pietistic concern with universal moral principles and seeing them put into action brought us the abolitionist and antislavery movements. Slavery was the great flaw in the American system in more senses than one: for it was also the flaw in the instinctive liturgical resentment against great moral crusades.
To return now to Lysander Spooner—Spooner, born in the New England pietist tradition, began his distinguished ideological career as an all-out abolitionist. Despite differences over interpretation of the US Constitution, Spooner was basically in the anarchistic, "no-government" Garrisonian wing of the abolitionist movement—the wing that sought the abolition of slavery not through the use of the central government (which was in any case dominated by the South), but by a combination of moral fervor and slave rebellion. Far from being fervent supporters of the Union, the Garrisonians held that the northern states should secede from a proslaveholding United States of America.
So far, Spooner and the Garrisonians took the proper libertarian approach toward slavery. But the tragic betrayal came when the Union went to war with the Southern states over the issue of their declared independence. Garrison and his former "no-government" movement forgot their anarchistic principles in their enthusiasm for militarism, mass murder, and centralized statism on behalf of what they correctly figured would be a war against slavery.
Only Lysander Spooner and a very few others stood foursquare against this betrayal; only Spooner realized that it would be compounding crime and error to try to use government to right the wrongs committed by another government. And so, among his pietistic and moralizing antislavery colleagues, only Spooner was able to see with shining clarity, despite all temptations, the stark difference between vice and crime. He saw that it was correct to denounce the crimes of governments, but that it was only compounding those crimes to maximize government power as an attempted remedy. Spooner never followed other pietists in endorsing crime or in trying to outlaw vice.
Spooner's anarchism was, like his abolitionism, another valuable part of his pietist legacy. For, here again, his pietistic concern for universal principles—in this case, as in the case of slavery, for the complete triumph of justice and the elimination of injustice—brought him to a consistent and courageous application of libertarian principles where it was not socially convenient (to put it mildly) to have the question raised.
Talk about a suppressed intellectual tradition!
While the liturgicals proved to be far more libertarian than the pietists during the second half of the 19th century, a pietistic spirit is always important in libertarianism to emphasize a tireless determination to eradicate crime and injustice. Surely it is no accident that Spooner's greatest and most fervent anarchistic tracts were directed in dialogue against the Democrats Cleveland and Bayard; he did not bother with the openly statist Republicans. A pietistic leaven in the quasi-libertarian liturgical lump?
But it takes firmness in libertarian principle to make sure to confine one's pietistic moral crusade to crime (e.g., slavery, statism), and not have it spill over to what anyone might designate as "vice." Fortunately, we have the immortal Lysander Spooner, in his life and in his works, to guide us along the correct path.
Murray N. RothbardLos Altos, California1977
The division of labor promotes peaceful exchange and continues peace. But this can all break down when governments intervene to prevent peaceful interaction and when government incompetence promotes violence.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "COVID Lockdowns Crippled the Division of Labor, Setting the Stage for Civil Unrest".
Economists have long tried to use the idea of "public goods" as justification for a wide variety of government interventions. But there is no objective measure for what's a public good and what's not.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why "Public Goods" Don't Justify Government Intervention".
Mises knew: “Mass unemployment destroys the moral foundations of the social order. The young people…forced to remain idle, are the ferment out of which the most radical political movements are formed."
Narrated by Daniella Bassi.
Original Article: "Governments Have Crippled the World's Economies. Revolution May Soon Follow".
Why economics abandoned the analysis of human action in favor of Keynes-inspired math-centered economics.
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Original Article: "Progressives and the Origins of the Economic 'Consensus'".
Of course, anyone who deals in interacting with the real world (i.e., not lifelong bureaucrats like Fauci, who needs not exhibit any actual competence to collect his $400,000 paycheck) understands that preserving and augmenting wealth is key in enhancing health and life.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Cost of Lockdowns in Human Health and Human Lives Is Becoming Increasingly Clear"
There's now no difference between monetary policy and other government programs designed to prop up firms, industries, and other favored groups. The Fed is simply another government planning agency.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "The Fed Is Doing "Whatever It Takes" to Prop Up the Economy. That's a Very Bad Thing."
Abstract: The concept of intellectual property (IP) has been variously criticized as incompatible with natural rights and detrimental to the dissemination of innovations. In this paper I argue that it can be criticized on an even more fundamental level—namely as a praxeological impossibility. More specifically, it is suggested that since ideas are not economic goods, but preconditions of action, and since physical goods transformed by ideas become as heterogeneous (and thus as intellectually unique) as the individuals who enact such transformations, no economic goods can be meaningfully designated as appropriable in virtue of embodying the objectively definable value of one’s intellectual labor. In view of the above, I subsequently suggest that IP protection laws constitute an exceptionally arbitrary and thus exceptionally disruptive form of interventionism directed against the very essence of the entrepreneurial market process.
JEL Classification: K00, L26, O34, P48 Jakub Bożydar Wiśniewski (jakub@cantab.net) is an assistant professor at the Institute of Economics at the University of Wroclaw and an affiliated scholar with the Ludwig von Mises Institute Poland.
- INTRODUCTION The concept of intellectual property (IP) has been criticized from a number of distinct perspectives. Proponents of libertarian ethics have criticized it as incompatible with the axiom of self-ownership and the resultant structure of natural rights. More specifically, they have pointed out that the category of property applies exclusively to scarce goods, while ideas—that is, the fruits of intellectual labor—are superabundant in virtue of their infinite replicability. Thus, forcibly restricting their replication amounts to a major act of aggression against the bodily integrity and physical property of the replicating agent (Kinsella 2008).
On the other hand, mainstream economists have demonstrated that patents and copyrights, far from promoting innovation, actually hinder economic development and Schumpeterian creative destruction. This is due to the fact that patent and copyright holders are effectively intellectual monopolists, capable of nipping in the bud the commercial development of any given idea (Boldrine and Levine 2008).
While acknowledging the validity and significance of the above criticisms, this paper offers a different take on the titular concept. Instead of suggesting that intellectual property is morally indefensible or economically harmful, it suggests that it is praxeologically impossible. In other words, this paper suggests that intellectual property laws constitute not so much an attempt at monopolizing a praxeologically distinct category of resources, but rather an arbitrary curtailment of entrepreneurial initiatives aimed at resource heterogenization. This, in turn, implies that the so-called protection of intellectual property creates not so much “intellectual monopolists,” but rather uninvited institutional co-owners (Hülsmann 2006) of their potential business competitors’ arbitrarily selected physical property.
The following section states the argument in more detail. Section 3 considers some potential counterarguments to the proposition, and section 4 concludes with a presentation of some of its further ramifications.
- THE ARGUMENT The fundamental insight of the marginalist-subjectivist tradition in economics is the observation that what makes a good is not its physical characteristics, but its ability to enter into causal relationships with subjective preference scales of purposive agents. Thus, even physically identical goods may differ significantly in terms of their economic value in virtue of their differing causal histories and ideational connections.
However, this crucial emphasis on the subjective nature of economic value does not change the fact that genuine economic goods, in order to qualify as such, have to exhibit objective physical scarcity. Otherwise they are not goods, but the “general conditions” of action (Rothbard 2004, 4). In other words, the marginalist-subjectivist tradition—particularly as exemplified by the Menger-Mises branch—avoids the twin pitfalls of hypersubjectivism and panphysicalism: it postulates that physically scarce objects become economic goods by being “mixed” with the ideational processes of intentional beings.
Hence, ideation turns out to be a psychological rather than a praxeological activity—in and of itself it does not fall within the purview of economic analysis, nor, by extension, within the purview of property valuation. It is only when it is translated into action that it becomes a fundamental datum of economic theory and history. And yet, as soon as it enters the realm of demonstrated preferences, it inevitably heterogenizes the resulting goods, thereby ensuring their intellectual and valuational distinctness.
This is because human action is necessarily future oriented and thus entrepreneurial in the broad sense of the term—it consists not in frictionless adjustment of supply and demand, but in the deployment of scarce means toward specific ends to be accomplished in the uncertain future (Salerno 2008). Hence, ideas, viewed as preconditions of agency, are never, strictly speaking, replicated—instead, they are adapted to one’s specific circumstances, plans, and capabilities. This, in turn, implies that as soon as a particular agent transforms particular physical objects in accordance with a given idea—even if this idea is “borrowed” from someone else—they become unique goods, infused with his unique productive touch. It should be noted here that this argument is independent of the contention that property rights apply exclusively to the physical integrity of a resource, not to its value, since the latter derives entirely from the mental states of all those individuals who are interested in putting it to some use (Hoppe and Block 2002). Although few may be willing to reject this contention in full and endorse the notion that maintaining the value of one’s resources can extend to owning others’ mental states, some may be willing to concede the inadmissibility of certain actions that diminish the value of another’s assets. Underselling the originator of a “novel product” by offering exact replicas of his merchandise could be thought of as a canonical example here. However, the argument advanced in the present paper uproots this issue entirely, since it points out that physically identical products cannot be regarded as identical in terms of the sources of their value, thus making their putative ownership and their potential positive externalities a moot point.
This observation is exceptionally striking in the context of entrepreneurship narrowly conceived—that is, in the context of exercising the ownership function over capital structures of production created and recreated under conditions of uncertainty (Foss and Klein 2012). After all, the essential determinant of the success of any given business plan is not the physical capabilities of the resources owned by a given businessman, nor even the objectively definable ideas embodied in them, but the subjective evaluation of the potential residing in these and other elements of the overall entrepreneurial vision and the corresponding capital stock (Kirzner 1997). Objectively definable inventions are technical, not economic, phenomena—it is only when they help bring about subjectively conceived innovations that they contribute to economic growth and development (McCloskey 2010). This is by no means simply a repetition of the anti-IP argument that an idea is a general prerequisite of production and not subject to ownership. It is also the realization that, as far as their productive potential is concerned, ideas implemented in concrete processes of production are entirely dissimilar to ideas conceived in abstract terms. Thus, to regard all physical objects whose creation involved some use of the fruits of one’s mental labor as falling within the ambit of one’s “intellectual property” is to commit a fundamental categorical mistake—i.e., to confuse the results of subjective plans with their objective mental preconditions.
If, on the other hand, one were to claim that it is precisely the specific conceptual content of those mental preconditions that can be subjected to intellectual property protection, then an equally flagrant categorical mistake would be made. After all, such a claim would amount to trying to obtain exclusive use not of the results of any given action, but of a necessary prerequisite of a potentially infinite range of actions. In other words, it would amount to trying to put a price tag on something that is naturally priceless—on something that is not just contingently nonscarce (as so-called free goods are), but is necessarily so (as all general conditions of action have to be).
To use a specific example, this would involve attempting to obtain exclusive use not of any particular product of, say, spelling or singing, but of the very concepts of spelling or singing. Taken to its ultimate conclusion, such an approach would paralyze all human action, destroying humankind almost on the spot by making everyone unsure of whether engaging in perfectly mundane activities violates someone else’s intellectual property rights. And if one tried to avoid this conclusion by suggesting that it is only sufficiently complex concepts that merit this kind of exclusive appropriation, one natural response would be to point out that such a suggestion smacks of sheer legalistic arbitrariness, since it has to rely on a purely discretionary standard of “sufficient complexity.” Admittedly, making it a matter of pure legal convention which ideas are subject to IP protection would not be a logically incoherent move, but it would be a move bereft of any appeal to economic justification. More specifically, it would offer no support for the claim that the purpose of licensing the use of complex concepts is to allow their authors to reap their full market value, since it would not involve laying down any precise methods of measuring the extent to which the market value of any given good derives from its embodying any such concept (Cordato 1992, 80).
Furthermore, it has to be borne in mind that all entrepreneurial activity involves resource heterogenization (Lewin and Baetjer 2011), even if it does not consist in the Schumpeterian kind of entrepreneurship, which is typically associated with the introduction of innovations and other quintessentially conceptual tasks. Hence, for instance, buying a trademarked product and simply relocating it from a relatively saturated market to a relatively unsaturated one in order to sell it at a profit suffices to create a substantially new product, associated with uniquely specific preference scales, valuational conditions, and organizational structures. In fact, in today’s age of electronic transactions an act of physical relocation is not even necessary: it suffices to engage in online arbitrage to heterogenize physically and conceptually identical goods in a productive manner. After all, if all human action is broadly entrepreneurial—that is, it requires creative confrontation with the uncertain future—then exploiting arbitrage opportunities is solidly innovative in its own right (Kirzner 2009).
In other words, even, say, using a general scientific formula in production without in any way altering it should count as an instance of adaptation rather than replication, since its successful commercialization requires integrating it with a specific, time- and space-bound capital structure of production. To repeat, ideational replication is a purely mental operation, and it is only entrepreneurial implementation of replicated ideas that can be economically meaningful in this context, since only the latter can be economically profitable or unprofitable, and thereby also more or less successful in addressing the problem of natural (i.e., nonartificial) scarcity.
Moreover, it must be stressed that the argument presented here is not reducible to the more familiar contention that ideas cannot be subject to property rights, since rights are, by definition, enforceable claims, with the “force” component tying in to the physical aspect of human control over scarce resources. Although this contention is perfectly reasonable, it does not immediately answer the objection that the originator of a certain idea may regard himself as a partial owner of all the scarce resources that in some degree embody its distinctive conceptual features. Of course, at this point one might make a solid case that the creative process, although certainly capable of increasing the value of specific goods, nevertheless does not automatically imply ownership of them, be it complete or partial. This, however, would shift the discussion to the normative level, having to do with defining the ethical or legal criteria of genuine appropriation. This argument is purely praxeological: it points out that there is no necessary valuational link between the conceptual features of ideas contemplated in abstract terms and the conceptual features of specific goods that incorporate those ideas.
In other words, the process of ideation might be thought of in terms of identifying potential profit opportunities, but from a realistically conceived entrepreneurial standpoint such opportunities are only imagined rather than discovered (Klein 2008). And since the fruits of one’s imagination can be translated into actual business ventures in an endless variety of ways, it is incoherent to claim that the value of imagined profit opportunities can be automatically imputed to their actually exploited counterparts, entitling the originators of the former to the proceeds from the latter.
In sum, the subjectivist theory of value coupled with a praxeological understanding of the market process leads to the conclusion that, economically speaking, intellectual property is a contradiction in terms. In short, ideas are not economic goods, but preconditions of action, while physical goods transformed by ideas become as heterogeneous (and thus as intellectually unique) as the individuals who enact such transformations. This, in turn, implies that as important as it is to point out the efficiency-reducing and normatively troubling consequences of so-called intellectual property protection, it is possible to raise doubts about the concept on an even more fundamental, purely logical level.
- POTENTIAL COUNTERARGUMENTS Let us now analyze some potential counterarguments to the suggestion advanced in the present paper.
First, it might be claimed that, regardless of one’s views on the normative aspects of the titular concept, it is an overstatement to deny its descriptive coherence. After all, one might say, it is perfectly reasonable to define the fruits of one’s intellectual labor as goal-specific technical recipes,For the purpose of this paper, the terms “recipe,” “idea,” and “concept” are treated as interchangeable. readily identifiable in terms of the specific material effects that their implementation produces. This, in turn, should make it conceptually unobjectionable to designate the goods that embody such effects as bearing the marks of one’s intellectual property, even if we do not believe that such “property” is associated with enforceable natural rights or economically beneficial consequences.
The main problem with this suggestion is that, once again, it conceives of goods in technical rather than economic terms and treats ideas as if they were praxeological rather than psychological factors. Since, however, economics deals with subjective evaluations embodied in demonstrated preferences, not with scientific discoveries and their technical content, it must reject the notion that there always exists a unique, objective description of the way in which any given good can usefully incorporate a technical recipe. On the contrary, subjectivist economics, coupled with a mature theory of capital and entrepreneurship, clearly recognizes the fact that productive factors are essentially characterized in terms of their subjectively perceived attributes, functions, and uses (Foss, Foss, Klein, and Klein 2007). Hence, there is a potentially infinite number of ways in which any given technically defined object can be imbued with the fruits of entrepreneurial creativity, alertness, and foresight, thereby becoming not just conceptually novel, but also endowed with unique economic value.
Another objection that might be leveled against the titular contention is that it cannot claim universal economic validity, since it refers to a strictly normative concept (i.e., property), while economics is a positive science. Thus, one might argue, it is a category mistake to ascribe inherent incoherence to a phenomenon whose definition is ultimately a matter of legal convention or moral imagination.
The primary error of this counterargument lies in confusing the value freedom of economics with its supposed value irrelevance. Although clearly value-free as far as the contents of its theorems are concerned, economics is crucially dependent on the evaluative and normative concepts contained in its descriptions of the catallactic order (Casey 2012). For instance, the theorem of the impossibility of rational economic calculation under socialism clearly refers to the importance of certain normative institutions (private property in the means of production, free exchange of private property titles, etc.), but it does so exclusively in order to elucidate the nature of the corresponding logically necessary causal relations, without proclaiming their ethical desirability. By the same token, the theorem in question also demonstrates that certain normative visions—such as that of an economically thriving socialist commonwealth—are not so much ethically wrong as they are inherently unviable. To put it differently, ethical evaluations of intrinsically incoherent concepts are inevitably futile, since they run afoul of the principle of “ought implies can,” which often reveals such concepts to be misleading placeholders for something altogether different.
Thus, the fact that the titular contention refers to a normative concept in no way detracts from its strictly positive character. After all, it does not matter in this context whether or not one endorses the notion of intellectual property on ethical grounds—what matters is that such an endorsement cannot be couched in economically meaningful language. Consequently, the argument of this text does not violate the distinction between the positive and the normative—instead, it aims at demonstrating that it is the proponents of intellectual property who necessarily violate the distinction between the psychological and the praxeological.
At this point, one might argue that the above train of thought rests on the dubious premise that if an idea is by nature a general condition of action, this cannot be changed by legal enactment. In fact, however, no such premise is presupposed. Although it is clearly possible to legislate artificial scarcity into existence, it is impossible to ground such legislation in praxeologically meaningful facts. In other words, although it is possible to prosecute individuals or organizations for the supposed unlawful use of another’s ideas, it does not change the purely praxeological observation that anchoring any given abstract idea in the specific circumstances of one’s individual venture turns it into a fundamentally distinct idea, with no necessary valuational link between the two akin to that postulated by the Mengerian law of imputation. Hence, appealing to the conceivability of artificial scarcity in no way impugns the value freedom of this paper’s contention.
Finally, it might be suggested that the supposed economic coherence of the notion of intellectual property can be established by pointing to the specificity of the interventionist effects caused by IP protection laws. If, for instance, one subscribes to the claim that such laws hinder economic development and the corresponding creation and dissemination of innovations, then one implicitly recognizes the existence of a special category of goods whose preemptive appropriation by patent and copyright holders leads to economically suboptimal results. Thus, one might argue, intellectual property emerges as an economically meaningful concept in virtue of the economically meaningful effects of its legal enforcement.
The chief weakness of the above contention is the implicit assumption that praxeologically specific consequences must be associated with a praxeologically distinct category of goods in order to retain their analytical meaningfulness. It is the case, however, that they might as well be associated with a praxeologically distinct kind of activities. For example, in the context under consideration it might be suggested that IP protection laws hamper not so much the production and dissemination of “intellectual goods,” but the very process of heterogenization of goods—that is, the process whereby physically scarce objects become increasingly differentiated through their association with individual entrepreneurial visions. In other words, IP laws might be plausibly regarded not as a means of preemptive appropriation of “intellectual goods,” but as a tool for implementing the principles of “conservative socialism” (Hoppe 1989, chap. 5). Hence, it seems perfectly feasible to recognize the economically harmful effects of interventions aimed at the suppression of entrepreneurial utilization and reutilization of generally accessible ideas without being simultaneously committed to accepting the economic meaningfulness of the concept of intellectual property.
In sum, far from being an exaggeration, the claim that so-called intellectual property is incoherent as an economic notion appears to be a solidly justifiable proposition. Let me now conclude by briefly exploring some of its further analytical ramifications and practical implications.
- CONCLUSION If intellectual property is indeed a praxeologically meaningless concept, then, as proposed in the previous section, IP laws do not prevent entrepreneurs from utilizing freely a specific, precisely definable category of goods, but instead serve as a pretext for essentially arbitrary acts of opportunistic interventionism. This indicates that they are far more capable of paralyzing the operation of the market process than is suggested by the traditional arguments centered on the economically stifling influence of “intellectual monopolies.” More concretely, IP laws’ definitional arbitrariness appears particularly capable of saddling entrepreneurs with a highly troublesome layer of regime uncertainty (Higgs 1997), which does not generate additional (though predictable) costs for entrepreneurial activity so much as it makes such activity essentially unpredictable on the institutional level (Kinsella 1995, 150–51).
Furthermore, the laws in question are especially likely to cripple the operations of specifically “Schumpeterian” firms (Mueller 2003, chap. 4), that is, those that rely exceptionally heavily on creating value through resource heterogenization based on ingenious adaptation of existing technical recipes. Such firms, which are typically at the forefront of robust economic development, are especially exposed to the arbitrary interventionism of the established players, who are constantly on the lookout for excuses to accuse the newcomers of “intellectual free riding.” In addition, this kind of environment gives the management of Schumpeterian firms an extra incentive to join the establishment’s interventionist game as soon as possible, thereby perpetuating and further strengthening the vicious circle of rent seeking, cronyism, and enforced economic petrification.
Finally, the unhampered entrepreneurial transformation of various technical concepts is a phenomenon whose continuation is particularly important to a globally interconnected and organizationally complex society. If such a society suddenly becomes irresponsive to the economic challenges continually generated by its dynamically changing environment, which is bound to happen under conditions of repressed resource heterogenization, it will fall victim to institutional fragility (Taleb 2012) and become incapable of sustaining its complexity, ultimately collapsing under its own weight.
In conclusion, since intellectual property is a praxeologically incoherent term, IP laws turn out to constitute an exceptionally arbitrary and thus exceptionally disruptive form of interventionism directed against the very essence of the entrepreneurial market process (Kirzner 2017). Hence, intellectual property laws should be viewed as an even more fundamental obstacle to robust economic development than has been suggested by hitherto prevailing arguments.
Economist David R. Henderson returns to the podcast to explain some of the major problems with the so-called "stimulus" bill, including its payment of $600 a week to the unemployed, as well as perverse payments to airlines. He then discusses the protest he helped organize against California's lockdown.
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France faces a future of spiraling debt and declining economic growth. So Emmanuel Macron has now embraced economic nationalism as a way out. It's not likely to work.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Facing Economic Disaster, France Turns against Globalism"
We continue our survey of Human Action by finishing up Part Six of the book, Mises's analysis of interventionism—or the so-called "third way" between capitalism and socialism.
Mises exposes how state intervention in the market economy makes us all poorer, even while it claims to act against poverty and inequality on behalf of social justice. That perverse "justice" takes the form of currency manipulation, confiscation of land and capital, protectionism for syndicates and unions, and civilization-destroying total wars. This is a solo episode with Jeff Deist, who enjoys Mises's demolition of the hampered market economy masquerading as laissez-faire capitalism.
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Government restrictions on production are driving prices up as unemployment drives them down. It's impossible to say now whether price inflation or price deflation will be the predominant factor in the crisis's next phase.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "We Don't Know If the COVID-19 Shock Will Be Inflationary or Deflationary"
Government restrictions on production are driving prices up as unemployment drives them down. It's impossible to say now whether price inflation or price deflation will be the predominant factor in the crisis's next phase.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Why the Current Unemployment Is Worse Than the Great Depression "
"Saving lives versus saving money" comparisons confuse ends with means. The end of saving the economy is not to have more money. The end is to have resources necessary to preserve the lives and health of countless human beings.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Ending the Lockdowns Isn't about Saving Money. It's about Saving Lives."
Professor Peter Klein from Baylor University joins the show to discuss Part Six of Human Action, where Mises presents his exposition of interventionism in all its manifestations. Mises breaks socialism down into Soviet and German versions; the first purely bureaucratic (state ownership) and the second nominally private but state-directed. He gives us a contrasting definition of laissez-faire, the choice of freedom over government omnipotence. Successive chapters take readers through taxation, restrictionism (tariffs, regulations, labor laws), and price controls (goods, wages, interest rates).
Dr. Klein is a fascinating guest with great insights into Mises and "the Hampered Market Economy." This is a conversation you don't want to miss!
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Additional Resources Human Action: Mises.org/HumanAction
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From medical practices to grocery shipments, governments are loosening restrictions in order to keep goods and services affordable. But if these restrictions are unnecessary now, why claim they are ever necessary?
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "COVID-19 Is Forcing Governments to Admit Their Regulations Aren't Really Necessary"
Efforts by US policymakers to boost crude prices and to throw a lifeline to high-cost US crude producers is the exact opposite of what prices are telling us the market needs at this time.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Three Reasons Why Politicians Must Leave Oil Markets Alone"
Professor Mark Thornton and Jeff Deist finish Part Four of Human Action with a look at Chapters 21–24 of the book—a powerful exposition of how social cooperation and market exchange create far more harmony in society than state power. Here Mises explains how we all choose labor or leisure every day, and why wages are not the exploitative pittance socialists imagine. Land and rents have been misconstrued as special factors of production, when in fact market exchange helps us understand their prices just like any other good.
These chapters serve as a nice summation of several themes in the book, and set the stage for considering full socialism in Part Five.
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Economist Tim Terrell explains why the common rankings of "health outcomes" are so often biased against the United States, and why big businesses often support certain environmental regulations. Hint: it's not for reasons progressives will like.
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Abstract: The purpose of the paper is to apply Fraser’s methodology from the Economic Freedom of North America report to Brazilian data. government size, tax and labor market indicators vary among subnational entities. Following Friedrich A. Hayek’s tribute on the occasion the 70th birthday of Ludwig von Mises, the importance of an index for Brazilian States is to bring principles of liberalism—based on clear evidence—to public figures (Hayek 2012), particularly in a country dominated by interventionist ideas since the 1930s. Besides the academic challenge of obtaining and processing data in the same manner as the Economic Freedom of North America, the current turning point in politics and economics in Brazil demands this kind of applied research. The results suggest that the Brazilian states’ freedom scores are getting worse in recent years (2012–16), following the same trend as that of the national index. We argue for the idea that the increasing government interventions at the federal level have spread out to states and municipalities and have had the effect of institutionalizing and justifying decreases in freedom and greater influence of public entities on citizens’ everyday life. The final remarks point out improvement in institutional measures for the index, as an ongoing project as Milton Friedman stated on his foreword to Economic Freedom of the World: 1975–1995: to “bring the indexes of economic freedom up to date and to incorporate the additional understanding that will be generated.”
government spending regulation taxes intervention economic freedom brazil JEL Classification: D78, H7, J45, J5, P47 Vladimir Fernandes Maciel (vladimir.maciel@mackenzie.br) is Head of the Mackenzie Center for Economic Freedom at Mackenzie Presbyterian University, Brazil.
Ulisses Monteiro Ruiz de Gamboa is a researcher and professor at Mackenzie Center for Economic Freedom.
Julian Alexienco Portillo is a M.A. student in Economics and Markets and Research Assistant at the Mackenzie Center for Economic Freedom.
Mariangela Ghizellini is a M.A. student in Economics and Markets and Research Assistant at the Mackenzie Center for Economic Freedom.
Authors are thankful to Robert Lawson, Dean Stansel, Ryan Murphy, Meg Tuszynski, Alex Padilla, Fred McMahon, Paulo Scarano and Randall Holcombe for their constructive suggestions and comments.
- INTRODUCTION Brazil is the largest economy in South America and the second largest economy in all the Americas (measured by GDP). However, its position on Fraser’s Economic Freedom Index is 137 (Gwartney, Lawson, and Hall 2017) with a 5.75 absolute score.
The purpose of this paper is to apply Fraser’s methodology from Economic Freedom of North America (Karabegovic, McMahon, and Samida 2002; hereafter EFNA) to Brazilian data. Government size, tax and labor market indicators vary among the subnational entities. Following Friedrich A. Hayek’s tribute to the 70th birthday of Ludwig von Mises, the importance of an index for Brazilian States is to bring principles of liberalism—based on clear evidence—to public men (Hayek 2012), particularly in a country dominated by interventionist ideas since the 1930s.
Although there are state level sustainability indexes, there has not been not any index or any objective information to discuss and compare the economic freedom level of Brazilian states, which are heterogeneous. Besides the academic challenge of obtaining and processing data in the same manner as the Economic Freedom of North America, the current turning point in politics and economics in Brazil demands this kind of applied research.
The so-called “Brazilian State Level Economic Freedom Index” (BSLEF) is a synthetic indicator that measures the extent to which the policies of the Brazilian states are able to support economic freedom, that is, the ability of individuals to act in the economic sphere without undue restraint.
In order to present BSLEF, we organized this paper in the following sections. Section 2 briefly discusses the literature on state level economic freedom. Section 3 describes the methodology applied to Brazilian data. Section 4 presents the results of BSLEF and its evolution over the period 2003–16. Section 5 contains the final comments, remarks and suggestions for future directions of research.
- LITERATURE REVIEW The calculation of an index for states and provinces is an attempt to explore institutional differences in countries which have some degree of independence among their jurisdictions. Capital accumulation, technology, labor productivity and even demographics can be affected by institutions, as pointed out by Acemoglu and Robinson (2013). Thus, local institutional frameworks can drive different social and economic outcomes inside the country.
The first work about state level economic freedom was the index developed in 2002 by the Fraser Institute for the states and the provinces of United States of America and Canada, respectively (Karabegović; McMahon, and Samida 2002). Since its original publication, several studies have been attempting to evaluate the index and “good outcomes,” such as economic growth. More precisely, there are evidences that the index is positively related to “good outcomes” and negatively related to “bad outcomes” (Hall, Stansel, and Tarabar 2015).
The subnational economic freedom index is calculated by adapting some components from the Economic Freedom of the World (Gwartney, Lawson, and Hall 2017; hereafter EFW) for state level/provincial data. The components have been extracted from “Size of Government” (Area 1) and “Regulation” (Area 5). Therefore, there are three areas in areas in the state/provincial index: “Government Spending” (Area 1), “Taxation” (Area 2) and “Freedom of Labor Market”—i.e. “Regulation”—(Area 3). (Stansel, Torra, and Mcmahon 2016)
Some evidences are particularly important for the work we are doing in Brazil. Compton et al. (2011) uses GMM methodology for a panel dataset, exploring both aggregated and disaggregated EFNA. They found that changes in economic freedom are positively associated to changes in growth—even considering differences in educational level and demographics.
Bennet (2016) explored 50 U.S. states and 10 Canadian provinces from 1980 to 2010. The results obtained show that subnational economic freedom is associated with higher levels of income per capita and lower rates of unemployment.
Also, Bennet (2016) found that subnational economic freedom is associated with higher income inequality across states and provinces of U.S and Canada. Nevertheless, the higher income inequality that arises due to economic freedom is associated with higher levels of economic growth fostered by a freer institutional environment—as shown by Bjørnskov (2016) and Wiseman (2016).
Income, employment and growth are consequences of human action, particularly entrepreneurship, as Mises (1966) explains. Empirical research shows there is a positive relationship between economic freedom and entrepreneurial activities. Sobel (2008) uses EFNA as a proxy for “institutional quality” for a cross-section of U.S. states. He found that a freer environment (e.g. ‘good institutional quality’) is strongly associated with net entrepreneurial activity, such as venture capital investments and patents.
These results are very important for Brazil, where the economy has been struggling since 2014 and has been engaged in debate concerning market oriented economic reforms towards growth, employment and development.
- METHODOLOGY Based on Stansel, Torra, and Mcmahon (2016), the overall summary index BSLEF is calculated by an equally weighted sum of three areas.
where A1 is “government spending,” A2 is “taxes” and A3 is “regulation” (freedom of the labor market). Each component in Area 1, Area 2 and Area 3 is normalized through the yearsFor A1 and A2 components Vmax is computed using the lower maximum value of the mean plus 1.5 standard deviations. For A3 components, Vmax and Vmin are the maximum and the minimum from the data for whole period (2003–16). according to:
Many components are calculated as a percentage of subnational income. For example, 1A is general consumption expenditure as percentage of income. The source for income data is National Survey from Home Sampling (e.g., PNAD), which is an annual household survey (except for census years, such as 2000 or 2010) that covers every state in Brazil. “Household income” is obtained similar to Canada and Mexico cases in EFNA.For 2010 we calculated income in the same fashion, but data are from the census.
3.1 Government Spending
In order to measure the degree of economic freedom of the Brazilian states (Area 1 of the BSLEF), based on the proportion of their expenditures in relation to annualized income, the data source was the Brazilian Treasury.
Following the methodology developed in Stansel, Torra, and McMahon (2016), we added public expenditures within the territory of each of the 26 Brazilian states (25 federal units plus the capital Brasília, considered the Federal District), which includes both those carried out by the governments such as those carried out by municipalities.
Thus, we will calculate three components, as detailed below: General Government Consumption Expenditure as a percentage of income (1A), Transfers and Subsidies as a percentage of income (1B), and Insurance and Retirement Payments as a percentage of Income (1C).
Since the objective of the present work is to make a comparison of the degree of economic freedom between the Brazilian states, the component Public Companies and Investment (1D), defined for all-government index only, was not calculated.
3.1.a. Component 1A: General Consumption Expenditures by Government as a Percentage of Income
In order to measure the proportion of the General Consumption Expenditures by Government as a percentage of annualized income, government subsidies and transfers were subtracted from total current public expenditures, in addition to the payment of interest on public debt. Table 1 presents the calculation of the government’s general consumption expenditure, according to the general methodology proposed in Stansel, Torra, and Mcmahon (2016):
Table 1. General Consumption Expenditures by Government
In the Brazilian case, however, since state governments spend a significant part of their budget on transfers and subsidies, not only for families, firms and other government entities, but also for multi-governmental institutions, public consortiums, foreign institutions and military service, the resulting expression is considerably more comprehensive. Thus, Table 2 presents this expression, which we applied to obtain the General Consumption Expenditures by Government, using fiscal data of each state (General Consumption Expenditures by Government I – GCEG I).
Table 2. General Consumption Expenditures by Government (States)
For municipalities located inside the geographical area of each Brazilian state, there is also a set of transfers and subsidies, almost as large as the previous case, which must be subtracted from current expenditure, together with interest payments, in order to reach their general consumption expenditure made in the corresponding state geographical area. Table 3 shows the methodology used to obtain this part of the component (General Consumption Expenditure II – GCEG II):
Table 3. General Consumption Expenditures by Government (Sum of Municipalities)
For each Brazilian State, component 1A value is obtained from the sum of GCE I with GCE II divided by the annualized income, as previously defined.
3.1.b. Component 1B: Transfers and Subsidies as a Percentage of Income
To calculate the component 1B value, all the previous transfers and subsidies for each of the states (Transfers and Subsidies I – TS I) and for the sum of the municipalities located in their respective geographical regions (Transfers and Subsidies II – TS II) have been added together. Tables 4 and 5 show the items included in this calculation.
Table 4. Transfers and Subsidies (States)
Table 5. Transfers and Subsidies (Sum of Municipalities)
In the same way, for each Brazilian state, the value of the component 1B will be calculated from the sum of TS I with TS II divided by the annualized income.
3.1.c. Component 1C: Insurance and Retirement Payments as a Percentage of Income
To obtain the component 1C value we added the public expenses related to employment insurance, pensions, other retirement payments and welfare payments for civilian and military servants. In Brazil, social security expenditures include both welfare and assistance payments. Tables 6 and 7 present the methodology used to determine the total expenses with employment insurance and pensions for the states (IRP I) and for the sum of the municipalities located in their respective geographical area (IRP II).
Table 6. Employment Insurance and Pensions (States)
Table 7. Employment Insurance and Pensions (Sum of Municipalities)
Source: own table. For each Brazilian state, component 1C value is obtained from the sum of IRP I with IRP II divided by the annualized income.
3.2 Taxation
Brazil has 25 states plus the Federal District—26 total—and 5571 municipalities in 2015. The Brazilian structure of fiscal federalism originates in the 1988 Federal Constitution. Only the federal government taxes income, and the top marginal income tax rate is the same for all citizens, e.g. 27.5 percent.
Despite being a federative republic, the aforementioned Constitution raised the degree of concentration of total tax receipts in the Federal Government, despite the massive transfers that it must carry out for states and municipalities. On the other hand, the same Constitution decentralized spending on health, safety and education, leaving states and municipalities with the responsibility to provide these services. This concentration of revenues at the federal level, together with the dispersion of expenses, generates the so-called flypaper effect.
In addition, the Brazilian tax system is very complex and bureaucratic, imposing high and varying tax burden on its citizens and enterprises. The Brazilian Federal Government collects an income tax, a manufactured good sale tax, a rural property tax, and social contributions; while states collect a value added tax, a vehicle property tax and an inheritance tax. Finally, the municipalities collect an urban property tax, a service sales tax and a real estate transaction tax.
Due to this tax structure, the following components will be calculated for Area 2 of the BSLEF: Income and payroll tax revenue as a percentage of income (2A), property tax and other taxes as a percentage of income (2C) and sales tax revenue as the percentage of income (2D), thus excluding the top marginal income tax rate and the income threshold (2Bi), defined at federal level. The data source was, once again, the Brazilian Secretary of Treasury.
Figure 1. Brazilian Tax Structure
3.2.a. Component 2A: Income and Payroll Tax Revenue as a Percentage of Income
Regarding component 2A, although the payroll tax is federal, there are retentions of its revenues at state and municipality levels, which need to be incorporated as taxation according to the geographical area of Brazilian states. The same is true for the capital tax and the tax on foreign remittances. Table 8 shows the taxes considered in the calculation of Income and Payroll Tax Revenue (IPTR), both for the Brazilian states and for the sum of municipalities:
Table 8. Income and Payroll Tax Revenue (States and Sum of Municipalities)
Source: own table. Thus, component 2A value is obtained, for each Brazilian state, dividing IPTR by annualized income.
3.2.b. Component 2C: Property Tax and Other Taxes as a Percentage of Income
With regard to component 2C, the taxes considered are vehicle property taxes and inheritance taxes, collected by the states, and, at the municipal level, the property transfer tax and the urban transfer tax. Table 9 shows the taxes considered in the calculation of Property Tax and Other Taxes (PTOT).
Table 9. Property Tax and Other Taxes (States and Sum of Municipalities)
For each Brazilian state, to determine 2C component value, we divided PTOT by the respective annualized income.
3.2.c. Component 2D: Sales Tax Revenue as a Percentage of Income
Finally, the sales tax revenue (STR) is determined, from the Brazilian states’ point of view, by the VAT on manufactured goods, electricity and telecommunications, and from the municipalities perspective, by VAT on services (See Table 10).
Table 10. Sales Tax Revenue (States and Sum of Municipalities)
To determine the 2D component value for each Brazilian State, we divided PTOT by the respective annualized income.
3.3 Labor Market Freedom
The data sources for “Labor Market Freedom” are obtained from the States’ Secretary of Labor, National Secretary of Labor and PNAD.
3.3.a. Component 3Ai: Minimum Wage Legislation
The institution of a minimum wage by the States is ensured by the complementary Law 103/2000. Thus, the States have the jurisdiction to legislate within their geographical limits, and the resident population must follow the regional minimum wage (exceptions are made to retirees and pensioners of the Federal Social Security System or those who follow federal law). The subnational minimum wage cannot be below the national minimum wage.
For each state, we compute the minimum wage multiplied by 12 as a percentage of per-capita annual income (from PNAD). States that have their own minimum wage are from the southern and southeastern regions (the richest regions in Brazil): Paraná, Rio de Janeiro, Rio Grande do Sul, Santa Catarina and São Paulo.
3.3.b. Component 3Aii: Government Employment as a Percentage of Total State Employment
Government employment includes public servants as well as those employed by government business enterprises. Military employment is excluded, following Stansel, Torra and Mcmahon (2016). Total State employment is obtained from PNAD, and it comprises formal and informal jobs.
3.3.c. Component 3Aiii: Union Density
The “Union Density” component measures the relationship between unionization and public policy, other than the level of government employment. We calculated the union score by regressing the unionization rate on government employment for each given year, following Stansel, Torra and Mcmahon (2016):
‘Unionization’ is the number of unionized workers as a percentage of total employment and ‘Government Employment’ is the component 3aii.
- RESULTS Figure 2 shows the summary index calculated for 2016 data—the latest available. The states with the highest level of economic freedom are located in the South, Southeast and Midwest regions of the country. With the exception of Minas Gerais, the states with the lowest level of economic freedom are located in the North and Middle West regions of Brazil (Figure 3).
Figure 2. Economic freedom scores for Brazilian States (2016)
Source: Appendix In terms of absolute value, the range of the overall scores for 2016 does not vary much—the lowest is 4.15 and the highest is 6.44. On the other hand, ranking positions have changed significantly over time. If one compares Figures 3 and 4, she sees the difference across the quintiles between 2003 and 2016.
Figure 3. Economic freedom for Brazilian States (2016)
Source: Appendix Figure 4. Economic freedom for Brazilian States (2003)
Source: Appendix Changes in ranking over time can be understood by Figure 5. In order to get easiness, we aggregated score data by the averages of geographic regions. Also, we plotted Brazil’s score in EFW. It can be noted that the scores followed relatively the same pattern from 2003 till 2009. As the score decreases for Brazil as a whole, the subnational’s scores strongly decrease. Moreover, the regions change their relative positions. It seems that there is a degree of covariation between national and regional scores. On average, subnational economic freedom got worse as national economic freedom decreases, as we might expect.
Figure 5. State Level Economic Freedom 2003-2016: Brazilian Region’s Average
Source: Appendix and EFW There are some hints about the sources of the decline in subnational economic freedom over the period 2003–16. The scores have fallen at different rates. Minimum wage legislation, property taxes (and other taxes) and union density are the three major sources of decreasing subnational economic freedom in Brazil.
Table 11. Scores variation in 2003-2016
Source: Appendix Another finding that is consistent with literature is the relationship between GDP per capita and economic freedom. Figure 6 shows that states with more economic freedom are more prosperous than states with less economic freedom. It can be noticed that we added an additional bar—named “without Federal District’ (e.g. ‘w/o FD’). The Federal District was artificially created and instituted in 1961 to be the headquarters of Federal Government. It comprises executive, legislative, and judiciary powers and their associated bureaucracies. Its economic freedom is usually low and therefore distorts the analysis.
Figure 6. State Level Economic Freedom 2016 and GDP per-capita (US$)
Source: Brazilian Institute of Geography and Statistics (‘IBGE’) There is also an important additional outcome for the labor market. Usually some critics of economic freedom are concerned with ‘vulnerability of employees’ and the ‘loss of rights’ related to the flexibility of labor laws. The outcome contradicts these statements. Figure 7 depicts informal employment as a percentage of total employment.
Figure 7. State Level Economic Freedom 2016 and the percentage of informal jobs
Source: Brazilian Institute of Geography and Statistics (‘IBGE’) As it can be seen, informal jobs are higher in less free states, especially if we exclude the Federal District among the group because of its distortion. Therefore, economic freedom is associated with more jobs that are formal.
- FINAL REMARKS The paper shows that it is feasible and possible to apply the methodology of EFNA to create a subnational economic freedom index for Brazil: BSLEF Additionally, BSLEF enlightens the discussion of economic freedom and market-oriented reforms in Brazil. The results indicate that the Brazilian states’ freedom scores are getting worse in recent years (2012–16), following the same trend as that of the national index. We argue for the idea that the increasing government interventions at the federal level have spread to states and municipalities and have been used to institutionalize and to justify decreases in freedom and greater influence of public entities on citizens’ everyday life.
Following the literature, BSLEF is consistent with evidence from North America. Brazilian states that have more economic freedom are more prosperous (e.g. enjoy higher GDP per capita). In addition, we found that the percentage of formal employment is higher in states with higher level of economic freedom.
Once we have a consistent measure of subnational economic freedom there are several new studies and researches that can be done in order to better explore outcomes and different institutional settlements for Brazil—similar to what EFNA has been inducing.
New improvements have now been planned. We would like to increase the information about the business environment for each state. This demands a qualitative research with businesspersons or trade associations among the different states—at least their capital cities. It would be an effort to calculate some other components for Area 3 (“Regulation”) other than “labor market freedom.” The improvement on institutional measures for the index as an ongoing project, follows Milton Friedman’s statement in his foreword to Economic Freedom of the World: 1975–1995—to “bring the indexes of economic freedom up to date and to incorporate the additional understanding that will be generated.”
APPENDIX
Abstract: The French social model is mainly a model of state interventionism, which creates a strange contrast between two things: the fact that France is a collectivized society and the fact that it has produced some of the most famous and important intellectuals (for instance, Turgot, Bastiat, and Jean-Baptiste Say). We are inclined to wonder why these liberal writers—who are famous all around the world—have not been able to convince French people so that France would be a model of liberalism.
socialism interventionism liberalism france Pascal Salin (pascal.salin@dauphine.fr) is professor emeritus at the Université Paris-Dauphine, and former president of the Mont Pelerin Society.
The present article is a lecture made at the Property and Freedom Society meeting in Bodrum, Turkey, in September 2018.
It is often said in France that there is a “French social model” which all people around the world do envy. But the French social model is mainly a model of state interventionism, since France has the sad record of being the country in which public expenditures and taxation are the highest. And it may also be one of the countries with the greatest number of public regulations. As a consequence of this situation, France has had a low economic growth rate and a high unemployment rate for many decades.
There is therefore a very strange contrast between two things: the fact that France is a collectivized society and the fact that it has produced some of the most famous and important liberal intellectuals (for instance Turgot, Bastiat, Jean-Baptiste Say, etc.).
As we may believe that “ideas have consequences,” we are inclined to wonder why these liberal writers—who are famous all around the world—have not been able to convince French people so that France would be a model of liberalism. Truly, I have always tried to find answers to this important question, but I must confess that, for the time being, I am not certain that I have found convincing explanations.
Milton Friedman answered to someone who wondered why liberalism had not been implemented in France: “To describe Hell correctly, you have to live inside.” This is certainly true. However, the most important liberal thinkers wrote their famous books at a period which has not been the worst in France. France has become less and less liberal—more and more close to hell—along the whole 20th century and the 21st century so that we are certainly living in hell now. However it is not during this recent period that outstanding liberal authors have been the most numerous.
Therefore we may even assume that there is a reverse causality: state interventionism is an obstacle to the development of liberal ideas. However it is also true that—maybe as a reaction to the present situation—there are more and more young people who are much interested by liberal ideas and I must say that it is the main hope I have for the future of my country.
In the present presentation I will recall some characteristic facts concerning both the history of France and the history of French liberal ideas. I will also tell about part of my own experience. And I will try to analyze the interplay of ideas and reality (the influence of ideas on policies and the influence of public powers on ideas).
In reality, there has always been in France the juxtaposition of liberal and extremely interventionist and authoritarian positions.
18TH–19TH CENTURIES Until the end of the 18th century—i.e., until the French Revolution in 1789—France was a very centralized kingdom in which the king had important powers.
As regards ideas in the 18th century (the “enlightenment century”) one must stress the influence of the physiocrats who believed in the importance of individual freedom and of natural law. Turgot is a remarkable representative of this liberal thought. According to him, each individual, looking for his personal interest, will contribute to the “general interest” because there is a natural order. Turgot, as a finance comptroller of the state, suppressed internal customs and promoted the free movement of corn. He had tried to suppress corporations, which would be done by the French Revolution. The physiocrats thus laid the foundations for a liberalism which will be developed by French and English writers.
The French Revolution
The French Revolution in 1789 may be considered as an example of the influence of ideas on social events. In fact, one may consider that the physiocrats had contributed to a change in the ideology of many people. Thus the Revolution has been a strong supporter of individual freedom, of the freedom of contracts and human rights (for instance property rights).
The official motto of France is “freedom, equality, fraternity.” It appeared during the French Revolution. This slogan became the official motto in the Constitution of 1848. Initially equality meant “equality in rights” as it has been claimed in the “Declaration of the Rights of People and Citizens” (1789) according to the famous sentence, “All human beings are born free and equal in rights.” But in the 20th century particularly, equality has been interpreted as an equality in standards of life and as a justification for redistributive policies. Similarly, fraternity has been interpreted as meaning that the state is in charge of charitable activities.
However, the French Revolution also offers to us an example of the ambiguous characteristic of French ideologies and policies. Thus, there have been nationalizations and as early as 1793 there was what has been called the “Terror,” i.e. a situation in which the state did not hesitate to kill political opponents. The Terror was also a period of hatred against bourgeois and wealth. In reality, people may have focused more on the organization of the state and its representatives than on individual rights. They cared mainly about the disappearance of kings.
In fact, the French revolution may be considered as a fundamental cause of the importance of the powers taken by the state. Thus, a few years after the Revolution, emperor Napoléon took public power and developed a very interventionist and authoritarian regime. Most activities became state activities, in particular education.
Liberal Ideas at the Beginning of the 19th Century
The development of the liberal theory was particularly important at the beginning of the 19th century:
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Thus, Benjamin Constant and the “groupe de Coppet” (Mrs. de Staël) were supporters of individual freedom. Benjamin Constant may be considered as the first supporter of liberal democracy, namely a democracy in which public power is limited to be respectful of individual freedoms. It is not sufficient to have a state organized according to the precepts of Montesquieu, i.e. a “separation of powers” in which public institutions are controlling one the other (“checks and balances” in the US).
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Frédéric Bastiat is certainly one of the most important French liberal thinkers. He wrote several books, such as Economic Harmonies, and it is not necessary to summarize his ideas since they may be well known. But it is characteristic that Bastiat has been completely forgotten in France for a very long time: from the end of the 19th century his books were not republished until 1983, when a French economist (Florin Aftalion) published a book entitled Œuvres économiques with some of the most interesting contributions of Bastiat.
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Jean-Baptiste Say had stressed that the value of goods were not to be explained by labor value but by utility. Moreover one may consider Say’s Law (“supply creates demand”) as a fruitful argument against Keynesianism. Jean-Baptiste Say stressed the role of the entrepreneur and his famous statement “goods are exchanged against goods” implies that there is no risk of overproduction; adjustment is done by prices and freedom of exchange.
During the 19th century, liberals were called economists. Their opponents were “socialists.” Liberal economists expressed their views in the Journal des économistes and the Société d’économie politique. They were not University professors. These French liberals were not utilitarist—as might be Anglo-Saxon liberals—but they considered individual liberty as a natural right.
In his famous book, Les soirées de la rue Saint Lazare, Gustave de Molinari imagined debates between three persons, an economist (liberal), a socialist, and a conservative. Now, it is interesting that, quite often, the socialist and the conservative agree together and disagree with the economist. One may compare this approach to that of Friedrich Hayek who stressed the opposition between liberals and constructivists: the constructivists may be either socialists or conservatives.
Evolution of Intellectual Ideas at that Time
However, in spite of the outstanding importance of liberal ideas, this period offers a characteristic example of the great divergence between dominant ideas. After the physiocrats, opposite ideas developed. Thus, at the end of the 18th century and the beginning of the 19th century, Saint-Simon got an important intellectual position. He believed that human will can rationally decide economic activities. Members of the Saint-Simon school—sometimes called “positivists”—are against private property and they suggest that the State be the owner of the means of production.
Charles Fourier in the same period was in favor of “phalanstères,” namely great production corporations in which workers would live together and decide production.
Proudhon is famous for having said “What is property? It is robbery.”
The explanation by Friedrich Hayek of the French situation may be the best answer to the initial question of the present article. In his book, The Counter-Revolution of Science, he devotes several chapters to the problems of France and one might be impressed by his incredible knowledge of French history and French writers. According to him the French problem is mainly a methodological problem: France has produced at the end of the 18th century and the beginning of the 20th century some of the most famous physicists. Given their success, people and intellectuals have been inclined to think that the method used in physical sciences ought to be used to understand social problems. Thus there has been a development of what Hayek calls rationalism, namely the belief that one may be clever enough as to understand and to manage social phenomena. Thus, there has been a development of social engineers, i.e. people who believe that they can rationally organize a society, as they would do for practical problems.
From this point of view Hayek pointed out the importance of École polytechnique (founded by Napoléon) in which the French elite has been educated, precisely with this positivist prejudice.
I suspect that, if Friedrich Hayek were writing his book now, he would stress the role not only of the École polytechnique, but also of the École nationale d’administration (ENA, national administration school) which is educating nearly all high civil servants. Many politicians are also former students of this school. Once I was asked to deliver a course on international economics to the students of ENA, but I had first to meet the students in order to tell them what I wanted to teach. I mentioned to them several important topics which we could study, but all students, without an exception, told me that they had no interest in ideas and that the only thing about which they cared was to know how civil servants were making their decisions. I could not deliver the course, but I thus got an interesting (and regrettable) illustration of the intellectual characteristics of those who have the power in France.
Hayek also wrote several chapters in his book about Saint-Simon and the Saint-Simonians (the positivists) and he stressed that they have played an important role in the development of French ideologies and French policies.
Thus, the characteristics of the French society and French politics are certainly contrary to what the famous liberal thinkers have written, but they are coherent with other ideas, those of the positivists. From this point of view there is not a paradox in the French situation because of the divergence between (liberal) ideas and realities, but there is a coherence between these realities and part of the intellectual mainstream (positivist ideas).
Hayek also devoted many pages in his book to explain why one might consider that Saint-Simon inspired the ideas of Hegel. From this point of view, it can be said that ideas have consequences, at least bad ideas! And the importance of Marxist ideas in France in the 20th century is coherent with the importance of Saint-Simonian ideas.
I must also say that I am fascinated by the attention devoted by Friedrich Hayek to French problems, which may mean that it is impossible to find something similar in other parts of the world: the French situation is very specific and needs specific explanations. Friedrich Hayek used to say that “whenever France becomes liberal, it will mean that the whole world would already have become liberal.” He thus considered France as the least liberal country in the world.
Let me then tell something which is one of my great memories. With some friends of mine we had organized a lecture of Friedrich Hayek at the National Assembly. The day after I visited him at his hotel and he told me, “your friends and you are part of the hope I have in the world.” He considered it as a great achievement and a great hope that liberals do exist in a non-liberal country such as France.
Economic Policies in the Early 19th Century
There have been rather liberal economic policies, for instance free trade and free enterprises; the Revolution had suppressed the corporations and had eliminated internal customs. There was in the 19th century an important development of industrial capitalism and a great increase in the number of wage-earners.
End of the 19th Century
In the second half of the 19th century there was a development of social Catholicism (Lamennais, La Tour du Pin, Le Play, etc...) advocating for trade unionism and State interventionism (“Le Sillon”—“the furrow”—of Marc Sangnier).
In the 20th century, after the first world war, social Catholicism will inspire several organizations which have had a very great influence: Action Catholique (specific organizations for students, women, etc..), Christian trade-unions, “Social weeks” (regular famous conferences).
Marxism has been successful in France, for instance with Jean Jaurès (end of the 19th century and beginning of the 20th century). After the second world war, it might be the most important ideology in France, particularly in universities.
In 1895 a revolutionary trade union was created, CGT (Confédération générale du travail). It was in favor of a state representative of trade unions, with workers owners of means of production. It has been close to the Communist party and it is still very active in France (for instance as organizer of many strikes).
EDUCATION AND IDEAS IN THE 19th AND 20th CENTURIES France has been for many centuries a very centralized country with a strong state. Thus, people are used to such a situation and, moreover, the state has the possibility to influence mainstream ideas. It is particularly true for education since there is a quasi-monopoly for public education in schools and universities. Some so-called private schools do exist, but it is forbidden to have more than 20 percent of private schools in France and, moreover, these schools are in fact much dependent on state decisions, for instance as regards teaching programs or the hiring of professors. As regards universities they are all public universities, with the exception of some so-called “great schools.” Thus there is a sort of vicious circle between the state and education: mainstream ideology is in favor of state interventionism and the state is imposing its ideology. Being a liberal in French universities is very difficult. Thus, when a student told me that he wanted me to be the supervisor for his doctoral dissertation, I felt obliged to tell him that, if ever he wished to do an academic career, he took a risk by writing his dissertation with a liberal supervisor such as myself.
At the end of the 19th century and the beginning of the 20th century, even economists considered liberals were in favor of state interventionism, particularly with regard to the labor market and protectionism. Between the first world war and the second world war the extreme left and the socialists were often successful in elections and there were fewer and fewer liberal economists. In fact, the first world war had increased the role of the state and state interventionism remained important in the twenties and thirties. It may be added that the great crisis of 1929 has certainly had an important influence on French minds, since it has been interpreted as a proof of the instability of capitalism.
During the second world war communists were first linked to Russia and Germany; then trade unions—mainly CGT and CFTC (Christian trade union)—joined the informal liberalization movement (Conseil national de la Résistance) and, when the war ended, they influenced the important reforms designed by General de Gaulle (usually considered as conservative, but who has been very close to communists and trade unions). Many state interventions were created at that time and they still exist now (for instance the privileges given to trade unions, the public monopoly for health insurance, etc.). After the end of the second world war many great firms were nationalized and national planning was decided. General de Gaulle claimed that “planning is an ardent obligation.”
For a long time, the communist party has had many members in the Parliament and there have been several communist ministers. Thus some French politicians have had close links with Stalin! Right now, the Communist Party has nearly disappeared, but there are several very active extreme-left parties.
In the forties there was the development of what has been called neo-liberalism, which is pragmatically in favor of state interventions. The Journal des économistes disappeared in 1940. It was also a period in which social Catholicism was developing.
Let me quote some of the economists who were considered liberals after the second world war:
- Maurice Allais, Nobel Prize of economics, who is usually considered as a liberal economist, tried to develop a synthesis between liberalism and socialism. He claimed, for instance, that profits and interest rates should be suppressed, he was in favor of collective property for soil. He participated in the first meeting of the Mont Pèlerin Society, but declined to become a member of the Society because it stressed the importance of private property rights!
Maurice Allais was a former student of École polytechnique. His methodology was close to positivism and opposite to Austrian methodology. He developed mathematical models of economics and he can be considered as a “social engineer,” according to the terminology used by Friedrich Hayek. Maurice Allais was mainly in favor of protectionism and I often heard people saying that protectionism was justified since a liberal economist such as Maurice Allais was supporting it!
There is a tremendous gap between someone like Frédéric Bastiat and Maurice Allais. It may be considered a symptom of the decline of liberal ideas in France. In my book, Libéralisme, I show in details which are the main ideas of both economists. I consider Frédéric Bastiat a representative of what I call “humanistic liberalism” and Maurice Allais as representative of “utilitarian liberalism.”
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Among intellectuals it was usual to say that “it is preferable to be wrong with Sartre than right with Aron.” Jean-Paul Sartre—founder of “existentialism”—was close to the Communist Party. As regards Raymond Aron he is often considered one of the most important French liberals in the 20th century. But, in fact, he was mainly opposed to communism, without a good understanding of economics (he was spontaneously more or less Keynesian and in favor of state interventions)
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Jacques Rueff—who is also one of the most famous French liberals—is another example of utilitarian liberalism. Former student at École polytechnique, he was a director of the public Treasury and he was most respectful of the state as a high-standard civil servant. To some extent he was famous more as an important civil servant than as a liberal.
An autodidact in economics, he used his own language and there is no real relation between what he wrote and traditional liberal literature. As with Maurice Allais, he was in favor of private property as an instrument of economic efficiency, but not for ethical reasons. He said that he was a liberal because the price system made possible economic equilibrium.
He was not against state interventionism insofar as it is not an obstacle to the working of the price system. But he did not criticize taxation because he considered that it did not modify the free working of the price system. Thus he was against price regulations by the state, but not against public expenditures and taxes.
He is certainly an important example of the traditional French “engineer-economists.” However, I remember a dinner at my home with Jacques Rueff and Friedrich Hayek (a long time ago) and, in spite of their intellectual differences, they had very friendly relations (since they met each other in the Mont Pèlerin Society meetings).
As regards politics, some politicians have been considered liberals during this period, for instance Raymond Barre or Valéry Giscard d’Estaing. But, in fact, they developed interventionist policies. As regards Raymond Barre, let me just relate the following anecdote. Taking the opportunity of the presence of Friedrich Hayek in Paris, I went with him to meet Raymond Barre, who was prime minister at that time. Raymond Barre had translated into French part of Hayek’s book, The Counter Revolution of Science (but not the chapters about France!) and I thought that both would appreciate this opportunity to meet. However, Raymond Barre did not want the meeting to last more than ten minutes and when Hayek suggested some reforms to be made (for instance as regards monetary policy to fight against inflation), Raymond Barre laughed and said : “It is not as easy as you believe!”
- Valéry Giscard d’Estaing—who was president of the Republic from 1974 to 1981—claimed to be in favor of “advanced liberalism,” but he prepared the way for the coming of socialists. At that time I used to say that Giscard was doing an “under-higher bid.” By using this expression, I meant that, whenever socialists were proposing a reform, Giscard d’Estaing, instead of supporting an opposite reform, agreed with the proposal, just saying that it ought to be somewhat smaller than what was sugested by socialists. He had said that, if ever taxation was to increase beyond 40 percent of GNP, the country would become a socialist country. But during his presidency, taxation increased from 33.5 percent to 39.4 percent, thus very close to socialist taxation according to his own opinion!
Taking the opportunity of a meeting with Giscard d’Estaing, after he had failed to be elected once more as president of the Republic in 1981, I asked him, “Why have you not carried out a liberal policy when you were president of the republic?” He answered : “As there was an economic crisis I did not want to implement liberal policies because people would have said that liberalism was responsible for the economic crisis.” He had not understood that liberalism was the way to cure the economic crisis!
In 1981 the extreme socialist François Mitterrand was elected as president of the Republic. I would like to quote a statement which is characteristic of the political mentality of this period. A socialist member of the Parliament answered to a member of the right: “You are wrong from a juridical point of view because you belong to a minority from a political point of view.” François Mitterrand decided upon dangerous socialist reforms, but a few years later the disappointment of people was so great that there was an exceptional growth of liberal ideas in public opinion and I had the feeling that France could become a liberal country. It appeared that socialists might soon lose the elections at the national Assembly in 1986, which was in fact the case. Liberalism was more and more desirable because of the obvious failure of socialism which was unable to solve the most important economic problems.
Therefore, anticipating this important change, before 1986 we had regular meetings between academics and liberal politicians to prepare the program of the government in 1986.
Meanwhile Jacques Chirac, who had previously claimed that he was in favor of “labor philosophy of the French fashion” (“travaillisme à la française”), happened to be convinced that a conversion to liberalism was politically fruitful. Therefore, in order to appear as a liberal politician, he asked me in 1984 to make a very long interview of him in an important magazine (Figaro-magazine). I wrote the numerous questions of the interview, but also most of the answers (which however were discussed with him and his adviser, Alain Juppé). Unhappily, some time later, he made statements which were not perfectly coherent with what was written in the interview.
The period 1986–88 was a period of great hope for me and all liberals: The Right won the elections at the National Assembly (but François Mitterrand was still the president of the Republic). There were six liberal ministers who were friends of mine and I had very regular contacts particularly with Alain Madelin, minister of industry, and Edouard Balladur, minister of economy and finance.I may mention that, at that time, the ministry of economy and finance was located in the famous Musée du Louvre. It is there that Edouard Balladur organized a nice reception to make me a member of the “Légion d’Honneur.” We had designed some important reforms, but, unhappily, Jacques Chirac, prime minister, did not really carry out a liberal policy and in 1988 Mitterrand again won the presidential election and socialists won elections at the National Assembly. Jacques Chirac was a candidate at the presidential election and, as he did not succeed, it was said that it was because he was liberal, in spite of the fact that he had not done many really liberal reforms, except, maybe, suppressing the wealth tax (but many people, particularly on the right, suggested that he lost elections because of this reform).
In 1995, Jacques Chirac was elected president of the republic and Alain Juppé became prime minister. Alain Madelin, the most liberal politician, was appointed as minister of economy and finance and I had again a great hope that liberal policies would be adopted. In particular I had prepared wih Alain Madelin, before his appointment, a very important tax reform and I was quite certain that it would be implemented. Unhappily, three months after having been appointed, Alain Madelin—who rightly disagreed with Alain Juppé—was dismissed by Jacques Chirac and our tax reform was never adopted. In 2002 Alain Madelin was a candidate in the presidential election and he got only 3.91 percent of the votes. Jacques Chirac was reelected president of the Republic at this same election.
French EconomistsCf. Arena (2000).
In universities there were, in the second half of the 20th century, liberal economists and economists who stressed the importance of sociological facts. For a long time marginalism and Keynesianism have been mainly studied outside universities. “Structuralism” (André Marchal) was mainly descriptive and did not care about the influence of institutions on individual behavior. These “realist and sociologist” economists were rightly critical of a mathematical approach of economics, but for them the solution consisted in describing economic structures and institutions and not in analyzing human behavior.
It must be stressed that there has been no department of economics in French universities in France until recently; economics were taught as a small part of the education of students in law. It was the case when I began to study at the University. However there has been for a long time a “concours d’agrégation” in economics (namely a national examining committee to appoint new professors in economics in all French universities), but examining committees cared more about teaching capabilities of candidates than their ability to do economic research.
According to François Facchini (2015), “in 1877, among Professors of economics, 64 percent were liberal, 9 percent socialists and 27 percent were in favor of a compromise between both schools”; “In 1970 liberals were 8 percent, 32 percent socialists and 59 percent in favor of an intermediate approach.”
In 1877 several professors of economics were appointed in law universities and in 1897 an option in economics was added for the “concours d’agrégation” of law. Until then economics had been taught mainly in “high schools.” Thus, at this time economics was taught by law professors. According to François Facchini, they were inspired by the Journal des économistes (a liberal publication), but they rather developed a kind of historicism since they did not believe in economic laws. In 1887 the Revue d’économie politique was created as a reaction against the Journal des économistes and this new magazine was intended mainly to contribute to the education of people in judicial, administrative, and political activities. These professors in favor of a mixed economy inspired politicians, for instance minister Méline, who made protectionist decisions. But some liberal economists still existed (for instance Daniel Villey). Moreover, the president of the “concours d’agrégation” was appointed by the government—as it is still the case now—and this had certainly an influence on the selection of candidates.
All the economists I have known in the fifties to eighties were Marxist and/or Keynesian.
Napoléon had decided to create a monopoly in the teaching of law, but this monopoly extended to economics and there has always been a vicious circle between state activities and academic activities. From this point of view one might say that ideas have consequences, but ideas may be manipulated by public authorities.
PERSONAL MEMORIES To illustrate part of what has been said before, let me give some examples from my own experience.
My family was much inspired by the ideas of social Catholicism and I had to discover liberalism by myself. I certainly did not learn anything from my professors at school and in universities. My academic training in Paris could be described as a social chatter with good feelings (for instance Christian charity, which was also inspiring the MRP which was the government party).
However, learning microeconomics I had the feeling that individual behavior was the foundation of any understanding of economics. I was frustrated because I felt that there was something else than what had been taught to me. With a few friends we created the Jean-Baptiste Say seminar of economic theory, but it was a provocation to our professors. They told us: “you read American journals and you are therefore in the trailer of American imperialism. You ought to develop a specific French way of thinking.” However the Jean-Baptiste Say seminar has been recognized and funded by the University and considered seriously.We have still meetings of the Jean-Baptiste Say seminar, but the seminar does not depend on any university or other organization.
As regards the French University, as soon as Keynesian economics were discovered in France, it became the dominant ideology (with Marxism) in both universities and in public opinion, certainly because it brought justification to state interventionism. And the teaching of economics which was in my time a “mundane chatter,” quickly became a mathematical approach. This is also consistent with the French tradition giving importance to engineers (and social engineers, as stressed by Hayek).
I learned economics with my friends of the Jean-Baptiste Say seminar mainly by reading American and British journals (such as AER, JPE, etc.). We had the feeling that we had learnt nothing during the numerous years we had been university students. But, at the beginning we had the prejudice that, to be a scientist, one has to do equations, and we even organized specific courses of mathematics for ourselves.
I also remember that I was shocked that Keynes was not well known in France. Thus, on the occasion of a meeting organized by the Jean-Baptiste Say seminar with Jacques Rueff, we were surprised that he did not understand the fundamental equations of Keynes.
But our first discovery was the Chicago school and we wrote a book on permanent income. Thus I got contact with Milton Friedman, who later introduced me to the Mont Pèlerin Society.
I discovered Robert Mundell, whose writings inspired my doctoral dissertation, particularly the monetary approach to the balance of payments which I still consider as an important contribution to economic theory.But I am less convinced by another theory of Robert Mundell, the theory of the optimal currency area.
Later on I discovered Hayek and the Austrian School. I had immediately the feeling that I had always been an Austrian economist without knowing it. I think that the first text I read was “The Use of Knowledge in Society.”
As a further example of the difficulty to be liberal in the French academic sphere, I would like to give the following example. In 2003 I was appointed by the minister of education as president of the “concours d’agrégation” (the committee in charge of appointing new professors of economics in all French universities) because there are traditional rules which implied that I had to be the president. But there was a terrific media campaign against me (and the members of the committee) because it was considered that a liberal ought not to be in charge of recruiting new professors in economics!
This appeared to me as being a particularly obvious—and regrettable—illustration of French intolerance and of the domination of anti-liberal ideas in universities and in public opinion. In fact, nearly all media are always very critical of liberalism.
Finally I would like to end this presentation by quoting the introduction of a new book of mine which is to be published soon and which I have written using articles I have published in various newspapers over about four decades. The title of this book might be Right and Left United in Errors:
The alternation has been frequent between the right and the left in past decades, but it is striking that the policies unfortunately were roughly the same regardless of the ruling parties. Yet it is precisely this regrettable phenomenon which explains the frequency of political alternation. As all presidents and all governments have made bad choices of economic policies, namely socialist policies, they necessarily failed to improve the economy. In the face of these visible failures, voters regularly hoped that a change in the majority could finally solve the problems. However, despite the electoral statements about the necessity of policy changes, the desirable changes have never been decided and thus French people have always been disappointed in their hopes.
Certainly, François Mitterrand, elected President of the Republic in 1981, implemented major policy changes, but in the wrong direction, and nobody radically questioned them. The book recalls the political alternatives and the regrettable similarity of all policies. It points out the severe confusion that exists from the point of view of ideas. Indeed, the failure of the policies conducted by socialists has often led voters to vote for majorities on the right. Insofar as these majorities have continued the same policies as socialists, they have obviously failed; however, as they were decided by majorities on the right, it was frequently argued that it was the failure of liberal policies. Unfortunately we have never had real liberal policies, but only a socialism from the left or from the right...
To conclude let me quote an idea of Bertrand de Jouvenel: When the state is very powerful and has many important activities, people do not try to fight the state, but they fight to get the state power. But one may add that, when a government has a very important role, people are inclined to care more about politics than about ideas. There is a politicization of social life in France and people are more concerned by the choice of politicians than by their programs and the role of the state. It can be considered as an illustration of Bastiat’s famous sentence: “The state is the great illusion according to which everyone tries to live at the expense of others.” Therefore, political debates—and intellectual debates—are more interested in the possibility of specific categories of people to get power than by general views on the working of the society. This may be one reason, among other ones, why liberals have difficulties in being heard.
Rob Bradley is the world’s leading expert in energy economics in the Austrian tradition. His treatise Oil, Gas, and Government is the definitive record of U.S. government intervention in the oil and gas markets. Rob chose Murray Rothbard as the chair for his dissertation in Political Economy. At one point in his career, Rob served as a speechwriter for Ken Lay, CEO of Enron, which afforded Rob a firsthand view of the skullduggery that would later be wrongly blamed on capitalism.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Even The New York Times now admits there is a deep state — and that it serves its own agenda while ignoring the elected civilian government.
Original Article: It's Trump vs. the Deep State vs. the Rest of Us.
Economic historian Mark Thornton has published several peer-reviewed articles on the economics of slavery in the American South. In this episode, he and Bob Murphy discuss the various ways in which government intervention propped up slavery and masked its inefficiency.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
It appears many Indians and Brazilians and Chinese are willing to risk the global warming for a chance at experiencing even a small piece of what wealthy first-world climate activists have been enjoying all their lives.Original Article: Greta Thunberg To Poor Countries: Drop Dead.
Professor Walter Block joins the Human Action Podcast for a fantastic in-depth discussion of Henry Hazlitt and his work. Dr. Block has great insights into Hazlitt's work on inflation, economic fallacies, ethics and utilitarianism, and more, plus great anecdotes about Hazlitt, Mises, and Rand. Economics in One Lesson may be the most important economics book ever written for lay readers, and the Mises Institute will release a new edition of the book later this fall—available free to tens of thousands of students across the world. There is still time to be listed as a patron in the book by donating here!
Articles discussed: "The Task Confronting Libertarians"
"The Case for the Minimal State" (PDF), page 103
Here is Hans Hoppe's first treatise in English — actually his first book in English — and the one that put him on the map as a social thinker and economist to watch. He argued that there are only two possible archetypes in economic affairs: socialism and capitalism. All systems are combinations of those two types. The capitalist model he defines as pure protection of private property, free association, and exchange — no exceptions. All deviations from that ideal are species of socialism, with public ownership and interference with trade.
Narrated by Jim Vann.
Download the complete audiobook (10 MP3 files) here. This audiobook is also available on Soundcloud, Apple Podcasts, Google Podcasts, and via RSS.
Michel Accad practices cardiology and general internal medicine in San Francisco, and holds a part-time clinical faculty appointment at the University of California San Francisco. This episode reproduces a discussion Bob had on Michel’s podcast, where they discussed the development of “welfare economics” in mainstream theory, in preparation for their subsequent discussion of Kenneth Arrow’s famous paper critiquing free-market healthcare delivery.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Bob Murphy has a friendly discussion and debate with Karl Smith. First, Bob pushes Karl to clarify the conditions under which government deficit spending could, even in theory, help a depressed economy. Then, they switch to the economics of climate change, and Bob’s view that the case for a carbon tax is much weaker than most economists admit.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Tucker Carlson gives unambiguous approval for Elizabeth Warren’s call for “economic nationalism,” saying her proposal sounds like “Trump at his best.” Carlson pillories American companies for outsourcing their operations to other countries, and blames Republican leadership for its dedication to doctrinaire libertarianism and Austrian economics. (Not a joke.) Bob disagrees with this take.
For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.
Money and Government: The Past and Future of EconomicsRobert SkidelskyYale University Press, 2018xiv + 402 pages
The title of Murray Rothbard’s Power and Market provides a useful entry to understanding Robert Skidelsky’s long and learned book. Rothbard drew a contrast between peaceful cooperation through the free market and State coercion. Which do you support, he asks: power or market? Skidelsky, a historian and economist who has written admiring biographies of Keynes and the British fascist Oswald Mosley, is for the most part clear in his answer: power should prevail over the market.
Thus, although he notes that mercantilism rests on economic fallacies, he still thinks this system has much to be said for it. “Rising prices were associated with prosperity; falling prices with dearth. This correlation led a group of seventeenth-century thinkers called mercantilists to identify money with wealth. The more money a kingdom had, the wealthier it was; the less, the poorer.” This view is mistaken: mercantilism was based on the “fallacy that exporting is better than importing and that the object of economic policy should therefore be to secure a favourable balance of trade ... of course, all countries cannot achieve a trade surplus simultaneously, so the pursuit of these policies involved continuing trade wars between the leading European powers.”
But what is wrong with trade wars? “The mercantilists believed that state activity and spending could galvanize the growth of national wealth. War was an investment decision by the state: the state needed sufficient revenue to conquer foreign markets.” Why rely on peaceful exchange when you can take what you want by force?
In addition, war has another benefit: it reduces inequality. “Recently, discussion of distribution has centred on the fact, and meaning, of the sharp rise in inequality since the 1970s, particularly in the United States and Britain. The most notable contributions here are Thomas Piketty’s Capital in the Twenty-First Century (2013) ... and Walter Scheidel’s The Great Leveler (2017). ... Both attribute the great compression of wealth and incomes in the middle years of the last century to the effects of the two world wars and Great Depression.”
Skidelsky is not content to urge the merits of power over market. He wishes to challenge advocates of the free market on their own ground. They take as their standard the welfare of consumers and on that basis argue for voluntary exchange. The fundamental argument of his book is that, in doing so, they fail to realize the disruptive effect of money. In a barter economy, Say’s Law, which Skidelsky wrongly states as “the infamous ... Law that supply creates its own demand” holds true. As W.H. Hutt pointed out in his major study A Rehabilitation of Say’s Law, the law is better stated as “all power to demand is derived from production and supply.” Another way to state the law is “the supply of a good on the market is demand for other goods.” There can be no overproduction that covers all of the economy.
Once money enters the scene, the situation alters. Instead of spending their money on consumption or investment goods, people can hoard money. “Speculators, too, have always known that in disturbed times they can profit from being liquid. Increased propensity to hoard, what Keynes called the ‘speculative demand for money’, thus arises from increased uncertainty. It slows down the economy by slowing down the spending of money on currently produced goods and diverting it into financial operations. Thus money earned in producing goods may be unavailable for spending on those goods, causing unemployment.”
As Skidelsky tells the tale, neoclassical economists who favored the free market attempted to solve this problem through the quantity theory of money. By varying the quantity of money, the monetary authorities could keep the value of money stable. In that way, the fears of speculators would be calmed and hoarding averted or countermanded. Milton Friedman’s monetarism is the best known example of this view, but Knut Wicksell, and even Keynes before the General Theory, supported it. As Keynes came to realize, though Friedman did not, monetarism does not work. The central monetary authority is unable to control the money supply in the way this theory supposes.
Although Skidelsky mentions Austrian economics several times, he never confronts the Austrian criticism of his entire line of reasoning. In the Austrian view, he has gotten wrong both the alleged problem posed by hoarding and the alleged “cure” that the proponents of the free market suggest for it.
As Murray Rothbard has pointed out in Man, Economy, and State, allocation of resources between consumption and investment depends on the rate of time preference. The demand to hold money creates no special problem for this allocation. In assuming otherwise, Keynes and his followers wrongly took the loan rate of interest to be primary, when in fact it is subordinate to the primary determinant of the rate of interest, the aforementioned rate of time preference.
Rothbard explained the basis of the Austrian account of the interest rate in this way: “People, therefore, allocate their money, among consumption, investment, and hoarding. The proportion between consumption and investment reflects individual time preferences. To think of the rate of interest as ‘inducing’ more or less saving or hoarding is to misunderstand the problem completely. ... One grave and fundamental Keynesian error is to persist in regarding the interest rate as a contract rate on loans, instead of the price spreads between stages of production.” In contrast to the Keynesian fear that expectations of falling consumption demand will lead to a cycle of further price falls and lowered expectations, Rothbard says, “The expectation of falling factor prices speeds up the movement toward equilibrium and hence toward the pure interest rate as determined by time preference.”
Moreover, the speculative bubbles that Keynes feared stem not from sudden and mysterious collapses of the “animal spirits” of investors but rather from injections of bank credit in fractional reserve banking, a system unsustainable without state control of the money supply. Skidelsky is well aware of this theory but has little to say about it, perhaps because he does not like its consequences for policy: “The causes of the crash of 1929 have been much disputed. Friedrich Hayek claimed that it was a result of excessive credit creation in the United States. In his account, the price stability of the mid-1920s, so much praised by the monetary reformers, was an indication of inflation, not of equilibrium, since productivity gains would have naturally produced a falling price level. ... ‘Excessive credit creation’ became the standard ‘Austrian’ explanation of the 1929 collapse. It resurfaced to explain the crash in 2008. ... On the Austrian analysis, recessions give a chance to reallocate ‘mal-invested’ productive factors to efficient uses. They should therefore be allowed to run unhindered until they have done their work. Economists whose common sense had not been completely destroyed by their theories rejected the drastic cure of destroying the existing economy in order to rebuild it in the correct proportions.” Skidelsky is sure that allowing prices to fall in a depression would ruin the economy, but as James Grant shows in his outstanding The Forgotten Depression, the US government did exactly that in coping with the downturn in 1920–1921, and the result was a speedy recovery. Skidelsky cites Grant’s book in his bibliography but ignores its relevance to his complaint against the “drastic cure.”
Further, Austrians reject the quantity theory of money. Mises in The Theory of Money and Credit said about it: “There is no justification whatever for the widespread belief that variations in the quantity of money must lead to inversely proportionate variations in the objective exchange value of money, so that, for example, a doubling of the quantity of money must lead to a halving of the purchasingpower of money.” Austrians thus oppose endeavors by the state to stabilize the value of money based on this theory. It is ironic that Skidelsky takes the failure of monetarism, a form of state intervention, to show the defects of the unhampered market economy. It is ironic that Skidelsky takes the failure of monetarism, a form of state intervention, to show the defects of the unhampered market economy.
Our account of Skidelsky’s book now takes a surprising turn. Although he opposes the free market, he is not prepared to dismiss entirely the views of the Austrians. To the contrary, he considers Hayek a great thinker and recognizes that his warnings against government intervention have merit. “Liberalism, or social democracy, unraveled with stagflation and ungovernability in the 1970s. ... Keynesian/social democratic policymakers succumbed to hubris, an intellectual corruption that convinced them they possessed the knowledge and the tools to manage and control the economy and society from the top. This was the malady against which Hayek had inveighed in his classic The Road to Serfdom (1944).”
Skidelsky recognizes that the Keynesians had no adequate answer to the “stagflation” of the 1970s. He also recognizes the force of the “public choice” analysis of government though he by no means commits himself fully to it. “Its main thrust was to emphasize the importance of the private incentives facing politicians and bureaucrats. The Keynesian-social democratic state was modelled as a private interest masquerading as guardian of the public interest. This was back to Adam Smith.” Skidelsky errs, though, when he says that “Public choice theory is simply rational expectations theory applied to government. It takes from REH [rational expectations hypothesis] the methodology of modelling public policies as the solution to individual maximization problems.” This is not correct. The basis of the theory is that politicians are self-interested actors, but this does not commit one to a particular model of how such actors behave.
Even readers who disagree with the thrust of the book will benefit from Skidelsky’s wide learning. The author sometimes makes mistakes. He says, “The French state, which emerged from the war [WWII] as the nation’s chief investor, did not have to learn its statism from Keynes; Colbert had pointed the way in the eighteenth century.” That was a neat trick for Colbert, who died in 1683. He calls the well-known businessman and New Deal financial expert Beardsley Ruml “Rummel.” But the slips are few and minor.
Just as in his earlier book How Much Is Enough? (2012), Skidelsky manifests an inordinate distaste for money and “greed.” Far better in his eyes is the pursuit of power by the State, even at the cost of wars and massive public debt. Some of us will not agree.
Why do so many people resent capitalism, even when they benefit enormously from it?
Ludwig von Mises explained so much of what still plagues us today in his underrated classic The Anti-Capitalistic Mentality.
Original Article: "Envy, Inc."
Many of the worst costs that will come with "Medicare for All" won't be calculated in dollars. They'll come in the form of doctor shortages, long wait times, and less access to care.
Original Article: "The Unseen Costs of "Medicare for All"".
Alexandria Ocasio-Cortez thinks Christian theology supports her bill on excessive interest. Her position ignores the actual history of Christian views of usury.
Original Article: "Tucker Carlson and AOC Are Wrong About Christianity and Usury".
The Time magazine article creating "the gateway drug" myth in the 1970s provided no citations for its claims, except ambiguous references to unnamed “experts.” The evidence remains elusive forty years later.
Original Article: "The Gateway Drug Myth".
The real money-creating machines are commercial banks. Loan dollars become deposit dollars. Lots of lending means the money aggregates increase. Little lending means the opposite.
Original Article: "Inflation: The Rumors of its Death are Greatly Exaggerated.
The number of jobs that require an occupational license now covers 30% of the US workforce, up from 5% in 1950.
Original Article: "Occupational Licensing — An Unnecessary Evil".
Social Security acts as a sort of "reverse insurance," doling out money now, leaving less for the future.
Original Article: "Unlike Real Insurance, Social Security 'Insurance' Creates Greater Risk for the Future".
Even though security might be a necessary condition for development, it is not a sufficient one.
Original Article: "Dear Mr. President, Security Does not Create Development".
Warren and her fellow progressives have the regulatory issue with respect to free markets and public utilities almost precisely backwards.
Original Article: "Elizabeth Warren's New Antitrust Crusade: A New Progressive War on Wealth".
Before wealth can be redistributed by the state, it must first be produced. But welfare-state policies end up destroying the very wealth which is necessary for redistribution.
Original Article: "How Countries Fall into the Welfare Trap".
The Green New Deal contains a wish list of progressive social and economic goals that come with a staggering price tag.
Original Article: "Study Estimates the Green New Deal to Cost $93 Trillion — That's a Conservative Estimate".
The real problem was the money supply inflation that happened during the boom phase. Combating deflation in the bust phase only superficially treats a symptom of the boom-bust cycle.
Original Article: "Central Banks Shouldn't Fight Deflation".
Equalization of incomes can be accomplished only by moving down the road toward serfdom.
Original Article: "This Way Toward Equality".
Need the state to provide national defense? Think again, and get ready for a wild intellectual ride. With eleven chapters by top libertarian scholars on all aspects of defense, this book edited by Hans-Hermann Hoppe represents an ambitious attempt to extend the idea of free enterprise to the provision of security services.
Narrated by George Pickering.
Download the complete audiobook (14 MP3 files) here. Also available on SoundCloud, Apple Podcasts, Google Podcasts, and via RSS.
Compiled by Edward W. FullerEdited with an Introduction by David Gordon
Are you a Murray Rothbard fan? Do you love his writing? His clarity and style? His razor-sharp economic analysis? His penchant for slaying sacred cows?
One of the most remarkable aspects of Murray Rothbard's career wasn't simply the power of his ideas, or his razor-sharp wit, but the sheer breadth of his knowledge.
A brilliant economist, revolutionary political philosopher, bold revisionist historian, and even joyful cultural commentator, Rothbard was one of the most prolific scholars — perhaps one of the most quotable.
This is the ultimate Rothbard reference book, and your single source for his best excerpts and quotes on all the core subjects: economics, philosophy, epistemology, ethics, history, law, and libertarianism.
Considering Rothbard's 62-page bibliography — consisting of 30 full-length books, 100 full chapters for edited works, and more than 1,000 scholarly and popular articles — consuming all of his work is almost impossible. Now, thanks to Rothbard A to Z, the ability to search for Rothbard's unique views on hundreds of topics is now at your fingertips.
Compiled by Edward W. Fuller and edited by David Gordon, this massive book is a must-have for any true Rothbard aficionado.
Prolific and radical hardly begin to describe him — but his important work has never been brought together like this, a reference guide and a fun book you can open at random for the best “Murrayisms” on any topic!
Here are just a few teasers:
Deflation, far from being a catastrophe, is the hallmark of sound and dynamic economic growth. Deflation — Making Economic Sense, p. 16 ...throughout history, despots and ruling elites of States have had far more need of the services of intellectuals than have peaceful citizens in a free society. For States have always needed opinion-moulding intellectuals to con the public into believing that its rule is wise, good, and inevitable; into believing that the “emperor has clothes.” Intellectuals — For a New Liberty, p. 14 Integration cannot be achieved by law and coercion; it must first come willingly into the hearts of men. Racism — Left and Right, p. 491 Professor Mises has keenly pointed out the paradox of interventionists who insist that consumers are too ignorant or incompetent to buy products intelligently, while at the same time proclaiming the virtues of democracy, where the same people vote for or against politicians whom they do not know and on policies which they scarcely understand. To put it another way, the partisans of intervention assume that individuals are not competent to run their own affairs or to hire experts to advise them, but also assume that these same individuals are competent to vote for these experts at the ballot box. Democracy — Man, Economy, and State, p. 886 Secession is a crucial part of the libertarian philosophy: that every state be allowed to secede from the nation, every sub-state from the state, every neighborhood from the city, and logically, every individual or group from the neighborhood. Secession — Libertarian Forum v. 1, p. 17
It's government — not markets — that intervene to "stimulate" ever greater amounts of spending and consumption. A healthy market economy, meanwhile, relies on both saving and spending.
Original Article: "Capitalism Doesn't Cause Consumerism — Governments Do".
Many people on the left regard economics as neither a science nor a principled field of study. For them, economics is just a pseudo-science invented as corporate propaganda, and people who push "free-market economics" do so because they are either evil or brainwashed by corporate masters.
Original Article: "Why the Left Isn't Convinced by Your Economics Arguments".
In a slave system, threats of brutality underlay the whole relationship.
Narrated by Floy Lilley. This article is excerpted from Conceived in Liberty, Volume 1, Chapter 6, "The Social Structure of Virginia: Bondservants and Slaves".
Was the Potato Famine an ecological accident, as historians usually say, or a politically created one? Text version: "What Caused the Irish Potato Famine?" Narrated by Chris Calton.
[Reprinted from the Quarterly Journal of Austrian Economics 20, no. 1 (Spring 2017): 84–96.]
Democracy in Chains: The Deep History of the Radical Right's Stealth Plan for AmericaBy Nancy MacLeanNew York: Viking Press, 2017
The primary theme of Democracy in Chains by Nancy MacLean, a Duke University history professor, is that participation in American democracy by conservatives or libertarians threatens the destruction of American democracy by imposing restraints on the unlimited growth of government. She claims to have only realized this dire threat in “the early 2010s” when “something extraordinarily troubling had somehow entered American politics” (p. xv). Rather than the usual “bipartisan” support for the never-ending growth of government by both parties, a few “actions” of a few Republican governors and congressmen “seemed intended in one way or another to reduce the authority and reach of government. ...” To Nancy MacLean this was “a fire bell in the night,” to borrow a phrase from Thomas Jefferson.
The alarming things that were so disturbing to MacLean were the actions of Wisconsin Governor Scott Walker attempting to save his state from bankruptcy by restraining the political clout of teachers’ unions and other public employee unions; New Jersey Governor Chris Christie’s criticisms of the teachers’ unions in his state; opposition to proposals to allow voter registration without showing proper I.D.; and the existence of articulate arguments in opposition to more socialist central planning of health care (a.k.a. “Obamacare”).
Everything seemed to be going swimmingly, with the most far-left ideologue in history occupying the White House, and Democrat Party dominance of Congress, and then all of this happens. Leftists like Nancy MacLean claim to have been blindsided by political opposition that they thought had been completely neutered. So left-wing academics, armed with their generous government and (left-wing) foundation grants, immediately “tried to get a better handle on what exactly was driving this sortie from the right.” This sudden opposition to the practice of effectively granting unlimited powers to raise taxes to public employee unions, and critiques of socialized medicine, is un-American, un-democratic, and a mortal threat to the American way of life, she claims.
There’s no need to panic, however, for MacLean claims to have discovered the root of the problem. Other leftist academics have attempted to uncover some kind of secret and sinister “master plan” to transform America into the dreaded (by the Nancy MacLeans of the world) free society by investigating the writings of Adam Smith, Milton Friedman, Ayn Rand, and F.A. Hayek, she says. But with no avail. “[S]uch inquiries ran aground, because none of the usual suspects had sired this campaign” (p. xvii). “The missing piece of the puzzle,” she victoriously announces, “was James McGill Buchanan” and the Public Choice school of economics (p. xvii). This, she claims, is “the true origin story of today’s well-heeled radical right.” Without Buchanan and public choice economics, the “far right” would be “incapable of doing serious damage to American society” (p. xvii).
The mortal threat to MacLean’s cherished goal of the relentless push toward unlimited government (i.e., totalitarian socialism) that the public choice school supposedly poses is that it has taught a great many people a great deal about how government actually works. Once they understand the process, it then becomes possible to propose changes to the process — or to the constitutional rules of the game — that could re-impose founding-father-style constitutional limits on the growth of government. All those years of Hamiltonian manipulation of “the living constitution” by leftist government lawyers in black robes could conceivably be reversed!
Indeed, Buchanan himself often said that public choice was essentially a rewriting of much of the writings of men like James Madison and Jefferson in the language of modern public choice economics (it was Jefferson who said that “the natural tendency of things is for government to gain ground and for liberty to yield”; and that government needed to be “bound by the chains of the Constitution”). He also was fond of saying that “no one could be a socialist” if they understood public choice theory. Perhaps Nancy MacLean is on to something here.
In Nancy MacLean’s mind, there’s nothing wrong with America’s government establishment employing vast resources educating people how to use the levers and processes of government to expand its size, scope, powers, and budgets. This is accomplished today with the help of the vast university system which has become one giant taxpayer-financed think tank for statism with only a handful of exceptions; through a “mainstream media” that seems every bit as propagandistic as Pravda was during the Cold War; hundreds of thousands of government bureaucrats at all levels of government, every one of which is a propagandist/lobbyist for bigger government; a K-12 school system that is thoroughly embedded with leftist political correctness; huge armies of political consultants, lobbyists, and paid propagandists; a popular culture that endlessly repeats anti-capitalist, anti-libertarian, and pro-statist themes; and thousands of government-funded nonprofit organizations, from the AARP to the Wilderness Society, that promote more interventionism and less freedom. On top of that are private foundations like Ford, Carnegie, and Rockefeller that have showered leftist academics with foundation grants for decades, not to mention the contributions of socialistic billionaires like George Soros, Ted Turner, and Bill Gates. For years, the Capital Research Center in Washington, D.C. published an annual study entitled Patterns of Corporate Philanthropy that documented that for every $1 corporate foundations gave to a conservative or libertarian organization, between $2 and $3 was given to a left-of-center group.
All of this is apparently a proper if not essential part of American democracy, but not the writings of James Buchanan and other public choice scholars, and certainly not conservative or libertarian foundations that would financially support such research and writing, even if their multi-million dollar donations are a mere pittance compared to the funding of the Left. Hence the purpose of Democracy in Chains is to discredit and even defame Buchanan, the public choice school, and especially wealthy conservative or libertarian philanthropists like Charles Koch who have funded such research and education. The bulk of the book is a relentless critique, sometimes bordering on libel and slander, of James Buchanan and Charles Koch, the bogeyman of the American Left.
MacLean learned a great deal about Buchanan by spending what must have been weeks, or months, going through all of his personal files in “Buchanan House” on the George Mason University campus. (When James Buchanan and his Public Choice Center moved from Virginia Polytechnic Institute to George Mason University in the mid 1980s the old president’s house was allocated to Buchanan as his office and was named “Buchanan House”).
MacLean boasts of how Buchanan’s intellectual heirs at George Mason left the door to Buchanan House unlocked so that someone like herself could rifle through all of the Nobel laureate’s private papers and files and use them to write a book that attempts to defame him. (She does call him a genius, but an “evil” genius).
The book is also an attack on libertarianism in general, as MacLean cherry picks quotations here and there from various libertarian-oriented writers, usually out of context, in order to critique and ridicule them. Oddly, there is only one mention of the most famous (non-academic) libertarian in the world, Ron Paul. MacLean mentions in passing on page 144 that, in the late 1970s, Ron Paul once voiced approval of a Reason Foundation proposal for city governments to put city services up for competitive bidding.
MacLean’s critique begins with a chapter about John C. Calhoun, of all people, who is not even cited a single time in Buchanan’s magnum opus (with Gordon Tullock), The Calculus of Consent. I never heard Buchanan mention Calhoun when I took his Ph.D.-level Public Finance course at VPI in the fall of 1977, or when I was a colleague of his for a few years at George Mason University in the 1980s. If he mentioned Calhoun in any of his writings, I am not aware of it. Neither is Nancy MacLean, apparently, for she does not present a single footnote to make the point that Buchanan was somehow following in Calhoun’s footsteps.
Nevertheless, Calhoun did write in the same philosophical spirit as Madison and other founders, and MacLean quotes Murray Rothbard (p. 2) to that effect. Buchanan did consider much of public choice theory to be derived from the kind of thinking possessed by the framers of the Constitution. Her discussion of Calhoun, however, is often distorted, just plain incorrect, and even cartoonish. For example, she claims that the only people in Calhoun’s South Carolina who would have been harmed by the 1828 Tariff of Abominations, which imposed an extortionate, 45 percent average tariff rate on imports, were wealthy plantation owners. The man who was supposedly Buchanan’s intellectual inspiration, she is saying, was a mere apologist for slave owners. Such talk is simply a joke, for high tariffs on woolen blankets (100 percent), shoes, farm tools, leather goods, and myriad other consumer products negatively affected the entire population. Moreover, the Tariff of Abominations was a deeply regressive tax that imposed a harsher burden on the lower-income people whom MacLean, as a card-carrying leftist, claims to be championing.
MacLean is also factually wrong when she calls South Carolina’s opposition to the Tariff of Abominations “the first regionwide tax rebellion in U.S. history” (p. 6). The Pennsylvania Whiskey Rebellion (1791) and Shay’s Rebellion in Massachusetts (1786) occurred decades earlier. The American Revolution itself was in part a tax rebellion (“Taxation Without Representation!”). Did the American colonists fight a revolution so that they could maintain the system of slavery that the king of England had imposed on them? This is what MacLean’s logic, such as it is, would suggest.
These facts illustrate another falsehood in the book, namely, slavery was absent” (p. 7). Yes, they did, and they were led mostly by yeoman farmers in Pennsylvania and Massachusetts who protested the imposition of national whiskey and property taxes.
MacLean’s apparent strategy here is to falsify history by insisting that all early-American tax protests occurred only to “protect slavery” for the wealthy “propertied class.” She quotes another leftist historian who wrote incorrectly that “the anti-government rhetoric that continues to saturate our political life is rooted in [support for] slavery rather than liberty” (p. 7). This would imply that all of the anti-government rhetoric of the founders, including Jefferson’s “train of abuses” in the Declaration of Independence, the writings of Thomas Paine, and much else was all designed only to “support slavery.” What nonsense.
She then makes numerous analogies to today’s libertarian intellectual critics of Big Government, arguing that they of course are not slavery defenders, but their motives are not much better — they are merely paid intellectual prostitutes defending the super-rich. The academic recipients of multi-million-dollar government or (left-wing) foundation grants, on the other hand, are assumed to be as morally pure and objectively honest as the driven snow.
Like all radical socialists, MacLean is a harsh, sneering critic of private property, following in the footsteps of Marx and Engels who called for the “ABOLITION OF PRIVATE PROPERTY” in The Communist Manifesto. She repeats her mantra in several chapters that libertarian defenders of property rights are really only defending the rights of perhaps the top one-half of one percent of income earners — the wealthiest of the wealthiest. Not even the “one-percenters,” she says, but the one-half-of-one-percenters. Who needs private property if only the wealthiest of the wealthy, who became wealthy in the first place by exploiting the rest of us, benefit from it?
That was supposedly true in Calhoun’s day, as it is today, she insists. She cites Mises, Rothbard, Hayek, and Friedman as though she has read their writings on property rights, but she either hasn’t or chose to ignore them. Mises was especially clear when he wrote in The Free and Prosperous Commonwealth (p. 67) that “Private property creates for the individual a sphere in which he is free of the state. It sets limits to the operation of the authoritarian will. ... It thus becomes the basis of all those activities that are free from violent interference on the part of the state. It is the soil in which the seeds of freedom are nurtured and in which the autonomy of the individual and... material progress are rooted.” Secure property rights are a prerequisite for market exchange, market prices, the division of labor, and the human civilization created thereby.
Like other advocates of unlimited powers of the central state, MacLean also falsifies the history of nullification and interposition by asserting that the idea began with Calhoun, and was only meant to defend slavery. But as Tom Woods (2010) shows in his book, Nullification, the American colonists were the first nullifiers. Jefferson and Madison then adopted the concept in the Virginia and Kentucky Resolutions of 1798 that nullified the outlawing of free political speech through the Sedition Act that was being enforced by the Hamiltonian Federalist Party. Northern states nullified the Fugitive Slave Act, and Ohio nullified the chartering of branches of the Bank of the United States within its borders. New Englanders cited Jefferson’s Kentucky Resolve to justify nullifying President Jefferson’s trade embargo and to decline participation in the War of 1812.
McLean also falsely asserts that Calhoun was the first to talk of two conflicted classes in terms of net taxpayers (producers) and net tax consumers. This, too, was not original with Calhoun, but was introduced to American political philosophy by Jefferson and others who were familiar with the writings of the French “Industrialist School” of such writers as Augustin Theiry, Charles Comte, Charles Donoyer, Antoine Destutt de Tracy, Benjamin Constant, and Jean-Baptiste Say (Raico, 2006). Nor was Calhoun the lone American writing about what is known as libertarian class analysis; William Leggett, the owner and editor of the New York Post during Calhoun’s time and a well-known abolitionist, was a prolific libertarian writer who also wrote of the injustice of empowering “net tax consumers” to plunder their fellow citizens.
MacLean really did her homework after spending all that time in Buchanan House, for a good portion of the book is a biographical sketch of James Buchanan, beginning with his birth in Gun, Tennessee in 1919. She briefly discusses his intellectual exodus from Middle Tennessee State Teachers College (triple major in English, Economics, and Mathematics), his time on the staff of Admiral Nimitz during World War II, the University of Tennessee (Master’s degree in Economics), the University of Chicago, University of Virginia, UCLA, Virginia Polytechnic Institute, and George Mason University. She discusses at length the Thomas Jefferson Center for Political Economy and Social Philosophy that Buchanan founded at the University of Virginia, which produced many fine scholars in the classical liberal tradition.
Throughout the book, MacLean strains mightily to distort Buchanan’s views to make him sound as outlandish as possible. For example, on page 49 she quotes Senator Harry F. Byrd of Virginia as having been opposed to any government borrowing at all for “public investments” and then writes that Byrd “would have applauded the book on public debt that Buchanan was writing at the time.” She is implying here that Buchanan shared this view of debt, which he did not. If she had read Buchanan’s book on public debt she would have learned that he approved of government debt for infrastructure, for example, as long as the taxes to service the debt were earmarked for that purpose.
There is a long-winded discussion of the resistance to desegregation of education in Virginia in the 1960s, which seems totally irrelevant to the supposed theme of the book, or to anything Buchanan was writing about at the time. Again, her purpose here seems to be to argue that the origins of modern libertarianism are in the Virginia opponents of desegregation. “In these final hours of the massive resistance [to desegregation] era ... can be found the seed of the ideas guiding today’s attack on the public sector and robust democracy alike,” she writes on page 72.
Another outlandish falsehood in Democracy in Chains is MacLean’s statement on page 79 that “the major deficiency” of the Virginia School (i.e., the Public Choice School), is “the failure to search for empirical tests of the new theories.” If MacLean had looked at any one issue of the journal Public Choice she would have learned that this is unequivocally untrue. Public Choice became very mainstream, and Buchanan was awarded the Nobel Prize for his part in it, precisely because there had been hundreds, or thousands, of published econometric tests of its propositions. Bob Tollison alone, Buchanan’s most prolific student, authored and co-authored literally hundreds of academic journal articles that were econometric tests of various hypotheses drawn from public choice theory. I personally attended every weekly Public Choice seminar, and every economics department seminar, at VPI from September 1976 to June 1979 as a graduate student and can attest that at least 90 percent of all the papers presented there contained some kind of empirical test. MacLean’s assertion is preposterous. It’s hard to believe that with all the effort that went into this book, sitting in Buchanan House for weeks on end, she never once looked at an issue of Public Choice on the shelf in Buchanan’s office.
Among the mountain of falsehoods in this book is the further statement on page 98 that public choice scholars involved in the rent-seeking literature “depicted as rent-seeking any collective efforts by citizens or public servants to prompt government action that involved tax revenues” (emphasis added). This is another silly falsehood. Buchanan and Tullock were not anarchists; they were proponents of limited, constitutional government who generally approved of the use of taxation for the constitutional functions of government. This viewpoint is quite pervasive in the rent-seeking literature for anyone who looks for it. This literature is highly empirical, as most of public choice research is, yet MacLean falsely claims that it only involves “hypothetical scenarios with no true research — no facts — to support them ...” (p. 98).
MacLean discusses Buchanan’s departure from the University of Virginia after Gordon Tullock was denied a promotion to full professor for the third time, an act that Buchanan believed was an outrage, considering Tullock’s achievements and reputation in the economics profession at the time. MacLean basically slanders the late Gordon Tullock by quoting an anonymous person who supposedly called him a “twit;” writing that “he was an awful teacher;” and “his publication record — apart from the book he coauthored with Buchanan — was undistinguished.” He didn’t deserve the promotion, in other words, so there must have been some other reason for Buchanan’s departure from Virginia.
I took Gordon Tullock’s Ph.D.-level seminar course in Public Choice in the fall of 1977 with some of the survivors of the first year of the graduate economics program at VPI (about half dropped out or flunked out after the first year). The Calculus of Consent was one of the textbooks and Tullock, being a University of Chicago-trained legal scholar, conducted the class like a law professor—or at least like the Harvard law professor portrayed in the movie Paper Chase. He would come to each class with a couple of questions that were of the sort that they could have been final exam questions, research paper topics, or even dissertation topics in public choice. He would arbitrarily hand one of us a piece of chalk, and instruct us to stand in front of the rest of the class at the blackboard and explain how we would go about answering the question. It became a team effort, led by the professor, to think through the problem. He was always helpful and encouraging, sharing his great learning with us. He was not an “awful” teacher.
As for MacLean’s smear that Tullock’s publication record was “undistinguished,” she should have taken ten seconds or so to Google “Gordon Tullock vita.” She would have discovered that by the time Buchanan and Tullock left Virginia Tullock had published six books, not one (The Calculus of Consent with Buchanan; The Politics of Bureaucracy; The Organization of Inquiry; Toward a Mathematics of Politics; Private Wants, Public Means; and The Logic of the Law). In addition, he had published four articles in the prestigious Journal of Political Economy, four in the American Economic Review, and others in the Quarterly Journal of Economics, Economic History Review, Oxford Economic Papers, Economic Journal, Western Economic Journal, Il Politico, and Social Science Quarterly, among others. All while founding and editing Public Choice and refereeing at least half of all the articles himself.
The second half of Democracy in Chains is mostly about Charles Koch, the network of conservative and libertarian organizations that he has funded, and his relationship, such as it was, with James Buchanan. MacLean accurately states that after spending many millions of dollars over some three decades, Koch’s efforts “produced few results” (p. 127). She details how Koch worked with Murray Rothbard to co-found the Cato Institute, but says nothing at all about how Koch later confiscated Rothbard’s shares in the organization and disassociated himself with Rothbard. No mention is made of this, or of the reasons why the two men had a falling out. She does get much of the Koch story backwards, however, by saying that Charles Koch insisted that his well-funded minions remain “uncompromisingly radical” (p. 145). That, in fact, is why Rothbard was booted — he was in fact uncompromisingly radical whereas Koch, who moved the Cato Institute from California to Washington, D.C., was not. He wanted to pursue a patently un-radical plan of trying to teach free-market and libertarian principles to the Washington, D.C. bureaucracy — at least in a watered-down and compromised form that would not be too offensive to them. That has always been the Cato Institute’s business plan.
In the middle of her discussion of Koch, MacLean inserts a diversion chapter to take one more swipe at Buchanan by noting that he, like Milton Friedman, had accepted an invitation from faculty members to speak at a Chilean university after the overthrow of the socialist government there in the 1970s. (The faculty members were University of Chicago graduates). He offered advice to the Chilean students and faculty about a balanced budget, an independent central bank, and the importance of some kind of system of constitutional checks and balances. MacLean uses this narrative to repeat once again the ridiculous falsehood that “there was no empirical research” in the public choice literature (p. 158) in order to make the argument that Buchanan was spouting nonsense to his Chilean hosts. The main purpose of this diversion chapter is apparently to once again attempt to imply that “libertarianism” is really an evil, stealthy, centuries-long plot to benefit dictators and billionaires at the expense of the rest of society. And MacLean claims that it is public choice economists who lack facts and evidence!
One interesting and informative part of the book is MacLean’s discussion in the last two chapters of how Charles Koch and his lieutenant, Richie Fink, talked seventy-nine-year-old James Buchanan into lending his name to an organization on the George Mason campus that would become essentially a lobbying arm of Koch Industries. The James Buchanan Center, funded by a $10 million grant to George Mason University in 1997, was staffed mostly by non-academics who conducted “outreach” programs for “Senators, Congressmen, and state legislators, legislative staff and regulators. ...” (p. 199). Some academics were involved, but they were in the minority, writes MacLean. Most were apparently Richie Fink’s political cronies from the D.C. corporate lobbying world.
Buchanan was not happy with this arrangement. MacLean uncovered a September 17, 1998 memo from Buchanan to Fink in the files at Buchanan House in which Buchanan wrote: “Quite frankly, I am pissed off.” What was being done under his name “verges on fraud and surely, at a minimum amounts to exploitation of me, of you, of JBC [the James Buchanan Center], of the university” (p. 201). “Buchanan had been played like a fiddle” by Koch and Fink, writes MacLean, and she is right. Buchanan retired to his farm in Blacksburg soon thereafter.
Buchanan was not the only George Mason faculty member who was disgusted with the Koch/Fink gambit. The late Charles Rowley, a distinguished public choice and law and economics scholar whom Buchanan had brought from England to George Mason and the Public Choice Center in 1985, wrote on his blog in 2012 that Richie Fink, Charles Koch’s top “strategist,” was “a third-rate political hack” and “a man who is very appropriately named” (p. 209). “Far too many libertarians have been seduced by Koch money into providing intellectual ammunition for an autocratic businessman,” he wrote. Many libertarians understood this, Rowley said, but remained silent because “too many of them benefit financially from the pocket money doled out by Charles and David Koch.”
When Buchanan died in 2013 Nancy MacLean attended the memorial service for him in Fairfax. “[N]either Koch nor Fink ... bothered to attend his memorial service,” she noticed. “Why should they? His days of usefulness to them had passed” (p. 204).
MacLean’s concluding chapter repeats for about the hundredth time her neo-Marxist, ad hominem theme that the whole history of classical liberalism, or libertarianism, is that of a small number of people working as paid apologists first for slave owners, and now for billionaires who want to use the powers of the state to line their own pockets at the expense of the rest of society. This is perhaps why, in a book about libertarianism in America, she completely ignores Ron Paul’s extraordinary, worldwide popularity; the millions of voters who wanted him to become president; his voluminous writings and speeches; and the millions of dollars of spontaneous individual contributions to his campaigns based on nothing more than his recitation of libertarian economics, defense of civil liberties, and his advocacy of a foreign policy of national defense instead of offense.
MacLean also completely ignores the educational institution that Ron Paul is most closely associated with, the Mises Institute, and the more than two dozen Mises institutes around the world (Chafuen, 2014). Not to mention the thousands of independent libertarian scholars, bloggers, columnists, authors, radio and podcast hosts, television personalities, and others. Acknowledging the existence of any of this would contradict her hoary Marxistinspired, ad hominem theme that opponents of socialism and defenders of freedom and property rights are all “capitalist tools,” paid liars for corporate plutocrats. This reality also makes her conspiracy theory of “the radical right’s stealth plan for America” appear to be simply crazy.
Season 1, Episode 2. How did Americans fall for the government's reefer madness? Chris Calton explains how junk science, overt racism, and myths of bloodthirsty soldiers all played a role in the criminalization of marijuana in America.
The minimum wage was a hot topic in the 2016 presidential campaign. By law, on January 1, 2017, the first group of Seattle workers reached $15 per hour with an average of $11 per hour in the rest of the state. Proponents in Washington and across the country claim that the increase will reduce poverty and income inequality, and finally allow workers to afford housing and everyday essentials. This is in spite of the accepted economic principle that wages are a result of the marginal productivity of the worker, not housing costs and disparity in incomes. Is this social interference economically sustainable?
In “Labor Economics: An Austrian Perspective,” you’ll get a clear, unpoliticized, understanding of what is being exchanged in labor contracts and where labor derives its value. In lectures by Peter Klein, Mark Thornton, Walter Block, and Ben Powell, you’ll learn about guiding principles for entrepreneurs’ hiring decisions, the pernicious effects of minimum wage laws and other labor market interventions, and why “sweatshops” are the best available option for many workers.
This course is free to all users for independent study.
[This series of four articles is a condensation of chapters in Human Action, by Ludwig von Mises, which deal with various forms of government interference with the free market. They were published in the Wall Street Journal, December 12, 13, 14, 15, 1949, and were recently found in a folder of newspaper clippings collected by Murray Rothbard. There is no byline or author name connected to the series.]
The Socialist SocietyIts Crucial Question: Can It Operate As a Workable System?"Economics is a theoretical science and as such abstains from any judgment of value. It is not its task to tell people what ends they should aim at. It is a science of the means to be applied for the attainment of the ends chosen, not, to be sure, a science of the choosing of ends.
"Ultimate decisions, the valuation and the choosing of ends, are beyond the scope of any science. Science never tells a man how he should act; it merely shows how a man must act if he wants to attain definite ends."
This is Ludwig von Mises' approach to economics. For instance, it is not the duty of economics, he thinks, to tell people whether they ought to choose or reject socialism as a way of organizing their economic life. The economist's duty is to determine first whether socialism is a workable system, and if so, what it will do. Arguments about the effect of socialism on men's personal lives, their liberties and happiness, are important — but they are for philosophers, not economists.
Socialism is not a workable economic system. It not only fails to deliver what it promises; it can deliver nothing but chaos.
This is one of the major conclusions in von Mises' comprehensive study of economics and civilization, Human Action, published this fall by the Yale University Press. The Wall Street Journal begins this morning a condensation of the chapters dealing with the economic problems of all the various forms of government interference with the free market. These forms of interference go under many names — communism, the managed economy, the welfare state — but they are all varieties of socialism. And all have one fatal economic flaw.
Only the main conclusions will be presented here. For the reasoning and the elaborate data supporting these conclusions, the reader is referred to the full work, possibly the most important economic treatise of our time.
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The socialist creed rests upon three dogmas:
First: Society is an omnipotent and omniscient being, free from human frailty and weakness.
Second: The coming of socialism is inevitable.
Third: As history is a continuous progress from less perfect conditions to more perfect conditions, the coming of socialism is desirable.
For the study of human action and economics, the only problem to be discussed in regard to socialism is this: Can a socialist system operate as a system of the division of labor?
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- *All older social reformers wanted to realize the good society be a confiscation of all private property and its subsequent redistribution; each man's share should be equal to that of every other.
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These plans became unrealizable when the large-scale enterprises in manufacturing, mining, and transportation appeared. The age-old program of redistribution was superseded by the idea of socialization. The means of production were to be expropriated, but no redistribution was to be resorted to. The state itself was to run all the plants and farms.
This inference became logically inescapable as soon as people began to ascribe to the state not only moral but also intellectual perfection. Then one could not help concluding that the infallible state was in a position to succeed in the conduct of production activities better than erring individuals. It would avoid all those errors that often frustrate the actions of entrepreneurs and capitalists. There would no longer be malinvestment or squandering of scarce factors of production; wealth would multiply. The "anarchy" of production appears wasteful when contrasted with the planning of the omniscient state.
The socialist mode of production then appears to be the only reasonable system, and the market economy seems the incarnation of unreason. In the eyes of the rationalist advocates of socialism, the market economy is simply an incomprehensible aberration of mankind. In the eyes of those influenced by historicism, the market economy is the social order of an inferior stage of human evolution which the inescapable process of progressive perfection will eliminate in order to establish the more adequate system of socialism. Both lines of thought agree that reason itself postulates the transition to socialism.
Karl Marx was not the originator of socialism. Nothing could be added to the description of the socialist system as developed by his predecessors, and Marx did not add anything. What he did was to integrate the socialist creed into this meliorist doctrine. The coming of socialism is inevitable, and this by itself proves that socialism is a higher and more perfect state of human affairs than the preceding state of capitalism. It is vain to discuss the pros and cons; socialism is bound to come "with the inexorability of a law of nature."
The Marxian taboo branded all attempts to examine the economic problems of a socialist commonwealth as "unscientific." Nobody was bold enough to defy this ban. It was tacitly assumed by both the friends and the foes of socialism that socialism is a realizable system of mankind's economic organization. The vast literature concerning socialism dealt with alleged shortcomings of capitalism and with the general cultural implications of socialism. It never dealt with the economics of socialism as such.
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- *The essential mark of socialism is that one will alone acts.
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It is immaterial whose will it is. The director may be an anointed king or a dictator, ruling by virtue of his charisma, he may be a Fuehrer or a board of Fuehrers appointed by the vote of the people. The main thing is that the employment of all factors of production is directed by one agency only. One will alone chooses, decides, directs, acts, gives orders. All the rest simply obey orders and instructions. Organization and a planned order are substituted for the "anarchy" of production and for various people's initiative.
In terming the director society (as the Marxians do), state (with a capital S), government, or authority, people tend to forget that the director is always a human being, not an abstract notion or a mythical collective entity. We may admit that the director or the board of directors are people of superior ability, wise and full of good intentions. But it would be nothing short of idiocy to assume that they are omniscient and infallible.
In an analysis of the problems of socialism, we are not concerned with the moral and ethical character of the director. Neither do we discuss his value judgments. What we are dealing with is merely the question of whether any mortal man, equipped with the logical structure of the human mind, can be equal to the tasks incumbent upon a director of a socialist society.
We assume that the director has at his disposal all the technological knowledge of his age. Moreover, he has a complete inventory of all the material factors of production available and a roster enumerating all manpower employable. The crowd of experts and specialists which he assembles provides him with perfect information and answer correctly all questions he may ask them.
But now he must act. He must choose among an infinite variety of projects in such a way that no want which he himself considers more urgent remains unsatisfied because the factors of production required for its satisfaction are employed for the satisfaction of wants which he considers less urgent.
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- *It is important to realize that this problem has nothing at all to do with the valuation of the ultimate ends. It refers only to the means by the employment of which the ultimate ends chosen are to be attained.
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We assume that the director has made up his mind with regard to the valuation of ultimate ends. We do not question his decision. Neither do we raise the question of whether the people — the wards — approve or disapprove of their director's decisions. We may assume, for the sake of argument, that a mysterious power makes everyone agree with one another and with the director in the valuation of ultimate ends.
Our problem — the crucial and only problem of socialism — is a purely economic problem, and as such refers merely to means and not to ultimate ends.
[The second article will deal with the specific problems of the social planner.]
The Socialist PlannerHis Plight Is That He Can't Plan At All[The private planner in the capitalist society measures his costs and returns — and chooses between alternatives — on the basis of prices set by the free market. Socialist economies substitute government action for the free market; the things called "prices" are controlled by the government, move up or down according to the desire of the moment.
How does the socialist planner plan? Can he do so on the basis of these government-controlled prices? If not, is there some other workable method of making judgments other than dependence on prices? Or need the government planner make economic calculations at all? May he not just plan to do what "ought" to be done and disregard the cost?
Let us say the socialist director has decided what he wants to do. He begins to plan how to do it. ...]
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- *The director wants to build a house.
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Now there are many methods that can be resorted to. Each of them offers, from the point of view of the director advantages and disadvantages with regard to the utilization of the future building, and results in a building's serviceableness. Each of them requires other expenditures of building materials and labor and absorbs other periods of production. Which method should the director choose?
Without meaningful prices, he cannot reduce to a common denominator the items of various materials and various kinds of labor to be expended. Therefore he cannot compare them. The plans of his architects enumerate a vast multiplicity of various material items in kind; they refer to the physical and chemical qualities of various materials and the physical productivity of various machines, tools, and procedures. But all their statements remain unrelated to each other. There is no means of establishing any connection between them.
Imagine the plight of the director when faced with a project. What he needs to know is whether or not the execution of the project will increase well-being, that is, add something to wealth available without impairing the satisfaction of wants which he considers more urgent. But none of the reports he receives gives him any clue to the solution of this problem.
We may for the sake of argument disregard the dilemmas involved in the choice of goods to be produced. We may assume [in the socialist economy] this problem is settled. But there is the embarrassing multitude of producers' goods and the infinite variety of procedures that can be resorted to for manufacturing define consumer goods.
The most advantageous location of each industry and the optimum size of each plant and of each piece of equipment must be determined. One must determine what kind of mechanical power should be employed in each of them, and which of the various formulas for the production of this energy should be applied. Each case offers special conditions and requires an individual solution. The director does not deal with coal as such, but with thousands of pits already in operation and with the possibility for digging new pits, with various methods of mining in each of them, with the different qualities of the coal in various deposits, and with the various methods of utilizing the coat for production of heat, power, and a great-number of derivatives.
Eliminate economic calculation and you have no means of making a rational choice between the various alternatives.
We have assumed that the director has already made up his mind with regard to the construction of a definite plant or building. However, in order to make such a decision he already needs economic calculation. If a hydroelectric power station is to be built, one must know whether or not this is the most economical way to produce the energy needed. How can he know if he cannot calculate costs and output?
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- *For more than a hundred years the substitution of socialist planning for private enterprise has been the main political issue. Thousands and thousands of books have been published for and against the plans. Wars have been fought and rivers of blood have been shed for the cause of socialism. Yet, in all these years the essential question has not been the raised.
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From the writings of the mathematical economists the imaginary construction of a socialist commonwealth emerges as realizable system of cooperation under the division of labor, as a full-fledged alternative to the economic system based on private control of the means of production.
The director of the socialist community [it is alleged] will be in a position to allocate the various factors of production in a rational way, i.e., on the ground of calculation. Men can have both socialist cooperation under the division of labor and rational employment of the factors of production. They are free to adopt socialism without abandoning economy in the choice of means. Socialism does not enjoin the renunciation of rationality in the employment of the factors of production. It is a variety of rational social action.
An apparent verification of these errors was seen in the experience of the socialist governments of Soviet Russia and Nazi Germany. People did not realize that these were not isolated socialist systems. They were operating in an environment in which the price system still worked. They could resort to economic calculation on the ground of prices established abroad. Without the aid of these prices their actions would have been aimless and planless.
Only because they were able to refer to these foreign prices were they able to calculate to keep books, and to prepare their much talked about plans.
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- *We may admit that in its initial period a socialist regime could to some extent rely upon the experience of the preceding age of capitalism. But what is to be done later, as conditions change more and more? Of what use could the prices of 1900 be for the director of 1949? And what use can the director in 1980 derive from the knowledge of the prices of 1949?
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The paradox of "planning" is that it cannot plan because of the absence of economic calculation. What is called a planned economy is no economy at all. It is just a system of groping in the dark. There is no question of a rational choice of means for the best possible attainment of the ultimate ends sought. What is called conscious planning is precisely the elimination of conscious purposive action.
[The third article will discuss attempted methods of making calculations other than by the price mechanism.]
Socialism's Unique ProblemIt Can Find No Way to Make Its Economic CalculationsThe socialist tracts deal with everything except the essential and unique problem of socialism — viz., economic calculation.
It is only in the last years that socialist writers have no longer been able to avoid paying attention to this primordial matter. They have begun to suspect that the Marxian technique of smearing "bourgeois" economics is not an entirely sufficient method for the realization of the socialist utopia. They have embarked upon schemes for socialist economic calculation.
It would hardly be necessary to deal with these schemes were it not for the fact that such examination offers a good opportunity to bring into relief fundamental features of both the market society and of the imaginary construction of a [socialist] non-market society.
The various schemes proposed can be classified:
Calculation in kind is to be substituted for calculation in terms of money. This method is worthless. One cannot add or subtract numbers of different kinds (heterogeneous quantities).
The "labor-hour" is recommended as the unit of calculation. This suggestion does not take into account the original material factors of production and it ignores - the different qualities of work accomplished in the various labor-hours worked by the same and by different people.
The unit is to be a "quantity" of utility. However, acting man does not measure utility. He arranges in scales of gradation. Market prices in the free economy are not expressive of equivalence but of a divergence in the valuation of the two exchanging parties.
Or:
Calculation is to be made possible by the establishment of an artificial quasi-market.
Calculation is to be made with the aid of the differential equations of mathematics.
Calculation is to be made superfluous by resorting to the method of trial and error.
Trial and Error. The entrepreneurs do not have advance assurance about whether their plans are the most appropriate solution for the allocation of factors of production, to the various branches of industry. It is only later experience that shows them whether they are right or wrong; they apply trial and error. Why, say some socialists, should not the socialist director resort to the same method?
The method of trial and error is applicable in all cases in which the correct solution is recognizable as such by unmistakable marks not dependent on the method of trial and error itself. If a man mislays his wallet, he may hunt it in various places. If he finds it, he recognizes it as his property. There is no doubt about the success of trial and error.
Things are quite different if the only mark of the correct solution is that is has been reached by the application of a method considered appropriate. Here the method of trial and error is not a substitute for the arithmetical process. It would be quite futile if the arithmetical process did not provide a yardstick for discriminating what is incorrect from what is correct.
If one wants to call entrepreneurial action an application of the method of trial and error, one must not forget that the correct solution is easily recognizable as such. It is the emergence of a surplus of proceeds over costs. Profit tells that consumers approve; loss that they disapprove.
We may assume that in the socialist commonwealth there is a market for consumers' goods and that money prices for consumers' goods are determined on the market. But the characteristic market of the socialist system is that the producers' goods are controlled by one agency; they are neither bought nor sold and there are no "prices" for them. Thus there cannot be any question of comparing input and output by the methods of arithmetic.
We do not assert that the capitalist mode of economic calculation guarantees the absolutely best solution of the allocation of factors of production. Perfect solutions are out of reach of mortal men.
What the operation of a market not sabotaged by the interference of compulsion and coercion can bring about is merely the best solution accessible to the human mind. As soon as any man discovers a discrepancy between the real state of production and a realizable better state, the profit motive pushes him toward the utmost effort to realize his plans. The sale of his products will show whether he was right or wrong. This is the only important respect in which one can call the market economy a system of trial and error.
The problem of socialist economic calculation is precisely this: that in the absence of market prices for the factors of production, a computation of profit or loss is not feasible.
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- *The Quasi-market. It is nothing short of a full acknowledgment of the irrefutability of the economists' analysis of the socialists' plans that the Intellectual leaders of socialism are now busy designing schemes for a socialist system in which the market and market prices for the factors of production are to be preserved. They are now eager to justify socialism by pointing out that it is possible to preserve these institutions even under socialism.
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What these neo-socialists suggest is paradoxical. They want to abolish private control of the means of the production, market prices and competition. But they want to organize the socialist utopia in such a way that people could act as if these things were present. Nothing will change except the ownership of the capital invested. Society will be substituted for the shareholders; the people will henceforth pocket the dividends. That is all.
The cardinal fallacy in this and all kindred proposals is that they consider the structure of industrial production and the allocation of capital to the various branches as rigid, and do not take into consideration the necessity of altering the structure to adjust to changing conditions.
The entrepreneurs establish corporations, enlarge or reduce their size, dissolve them or merge them; they buy and sell shares and bonds of existing corporations; they grant and recover credits; they perform all those acts the totality of which is the capital and money market. It is these transactions of promoters and speculators that direct production into those channels in which it satisfies the most urgent wants of consumers. These transactions constitute the market. If one eliminates them, one does not preserve any part of the market.
Our problem does not refer to the managerial activities; it concerns the allocation of capital. The question is: In which branches should production be increased or restricted, in which branches should the objective of production be altered, what new branches inaugurated? Those who confuse entrepreneurship and management close their eyes to the economic problem.
Those suggesting a quasi-market have never wanted to preserve the free stock and commodity exchanges, the trading in futures and the bankers and money lenders. But one cannot play speculation and investment. Investors expose their own destiny; this makes them responsible to the consumers, the ultimate bosses. If one relieves investors of this responsibility, one deprives them of their very character.
All the hazards of this insecurity fall only upon society, the exclusive owner of all resources. If the director were without hesitation to allocate the funds available to those who bid most, he would simply put a premium upon audacity, carelessness and unreasonable optimism. He must reserve to himself the decision on how society's funds should be utilized. But then we are back again where we started.
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- *Differential equations: In devising imaginary construction of an evenly rotating economy we assume that all the factors of production [will then be] employed in such a way that each of them renders the mostly highly valued services it can possibly render. No further change in the employment of any of these factors could improve the state of want-satisfaction. This situation — in which no further changes in the disposition of the factors of production are to be resorted to — is described [by the mathematical economists] by systems of differential equations.
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But for utilization of the equations describing the [desired] state of equilibrium, a knowledge of the gradation of the values of consumers' goods in this state of equilibrium is required. This gradation is one of the elements of these equations assumed as known. Yet the director knows only his present valuations. He believes that, with regard to his present valuations, the allocation of the factors of production is unsatisfactory and wants to change it. But he knows nothing about how he himself will value on the day the equilibrium will be reached.
It was a serious mistake to believe that the state of equilibrium could be computed by mathematical operations on the basis of the knowledge of conditions in a non-equilibrium state. There is therefore no need to stress the point that the fabulous number of equations which one would have to solve each day anew for a practical utilization of the method would make the whole idea absurd.
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- *The employment of the means of production can be continued either by private owners or by the social apparatus of coercion and compulsion.
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In the first case there is a market, there are market prices for all factors of production, and economic calculation is possible. In the second case all these things are absent. We do not deal with the acts of the omnipresent and omniscient Deity, but with the actions of men endowed with a human mind only. Such a mind cannot plan without economic calculation.
[The fourth article will discuss forms of government intervention in the market which are short of "all-out" socialism.]
Socialism in DisguiseIt Creeps Up in Many Tempting MasquesPrivate ownership of the means of production (market economy) and public ownership of the means of production (socialism) can be neatly distinguished. Each of these two systems of society's economic organization is open to precise and unambiguous description and definition.
The dualism of the market and the government's power of compulsion suggests various [other] ideas. Should it not be a task of government to interfere and to correct the operation of the market? Is it necessary to put up with the alternative of capitalism or socialism? Are there not perhaps other realizable systems of social organization which are neither communism nor pure and unhampered market economy?
Thus people have contrived a variety of third systems. Their authors allege that these systems are non-socialist because they aim to preserve private ownership of the means of production and that they are not capitalistic because they eliminate the "deficiencies" of the market economy.
The task of economics is to analyze. With regard to this interventionism it has only one question to ask: How does it work? We do not raise the question whether such interference is good or bad. We merely ask whether or not it can attain those ends which those advocating and resorting to it are trying to attain.
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- *[The following are merely two examples of the many forms of government interference discussed by von Mises.]
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Interference with production. We deal here with those measures which are primarily intended to divert production from the ways it would take in an unhampered market economy.
Restriction of production means that the government either forbids or makes more expensive the production, or distribution of definite articles, or the application of definite modes of production, transportation or distribution. The effect of its interference is that people are prevented from using their knowledge, their labor and their material means in the way in which they would earn the highest returns. Such interference makes people poorer.
Wealth is produced by expending a certain quantity of the factors of production. Curtailing this quantity does not increase but decreases the amount of goods produced.
Economics does not contend that restriction is a bad system of production. It asserts that it is not a system of production at all but rather a system of quasi-consumption. The enormous popularity which restriction enjoys in our day is due to the fact that people do not recognize its consequences. It is important to emphasize that what produces wealth and well-being is production and not restriction.
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- *Interference with prices. Interference with the structure of the market means that the authority aims at fixing prices or commodities and services and interest rates at a height different from what the unhampered market would have determined. In resorting to such measures the government wants to favor either the buyer — as in the case of maximum prices — or the seller — as in the case of minimum prices.
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The characteristic feature of the market price is that it equalizes supply and demand. But if the government fixes prices at a height different from what the market would have fixed if left alone, this equilibrium of demand and supply is disrupted.
Then there are — with maximum prices — potential buyers who cannot buy although they are ready to pay the price fixed by the authority, or even a higher price. Then there are — with minimum prices — potential sellers who cannot sell although they are ready to sell at the price fixed by the authority, or even at a lower price.
There emerges a tendency to shift production activities from the production of goods affected by the maximum prices into the production of other goods. This outcome is manifestly contrary to the intentions of the government; it considered these commodities so vital that it singled them out to make it possible even for poor people to be amply supplied with them. But the result of interference is that production drops — or stops altogether.
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- *Interventionism [government interference with the market] cannot lead to a permanent system of social organization.
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All varieties of interference with the market phenomena not only fall to achieve the ends aimed at by their authors and supporters, but bring about a state of affairs which — from the point of view of their authors' and advocates' valuations — is less desirable than the previous state of affairs which they were designed to alter.
If one wants to correct their manifest unsuitableness by supplementing the first acts of intervention with more and more acts, one must go farther and farther until the market economy has been destroyed and socialism has been substituted for it.
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- *As long as the United States clings to the market economy and does not adopt the system of full government control of business, the socialist economies of western Europe will still be in a position to calculate. Their conduct of business still lacks the characteristic feature of socialist conduct; it is still based on economic calculation. It is therefore very different from what it would become if all the world turned toward socialism.
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Optimists hope that at least those nations which have in the past developed the capitalist market economy and its civilization will cling to it. It is vain to speculate about the outcome of the great ideological conflict between the principles of private ownership and public ownership, of individualism and totalitarianism. All that we can know beforehand can be condensed in the following three statements:
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Nothing suggests the belief that progress toward more satisfactory conditions is inevitable or a relapse into very unsatisfactory conditions impossible.
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Men must choose between the market economy and socialism. They cannot evade deciding between these alternatives by adopting a "middle-of-the-road" position, whatever name they give it.
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In abolishing economic calculation the general adoption of socialism would result in complete chaos and the disintegration of social cooperation under the divisions of labor. ...
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A Conversation With Per BylundMISES INSTITUTE: Why is the concept of the “unseen” so important to understanding the effects of regulation?
PER BYLUND: It is essential for understanding regulation, but the “unseen” is actually fundamental for economic understanding and analysis in general. What’s “unseen” is the proper benchmark. We need to consider both what didn’t happen but would have happened.
Oftentimes people, including so-called experts, compare apples and oranges by looking at data “before” and “after” an event, for instance, when discussing the effects of raising the minimum wage. So they might say that employment before was similar to after the hike, and then conclude that the change had no effect. But this is wrong, because there are plenty of changes in the economy that took place between the before and after — not only the minimum wage. So in order to figure out the effect of the minimum wage specifically, we must compare the “after” situation with what would have been had there been no minimum wage hike — the unseen.
This of course applies to any change in the economy, and not only regulation. Bastiat, in his classic essay on the broken window fallacy, discusses the effects as a boy smashes a window. But in modern state-planned economies, regulation is by far the most common and most destructive change, so that’s where we also find most analysis. As economic analysis is used to assess the effects of regulations before they’re implemented, it’s important to use the proper comparisons — the seen and the unseen, not the seen at different times (before and after).
MI: You also employ the concept of “the unrealized.”
PB: The unrealized is really my own extension to Bastiat’s famous analysis, and it is intended to redirect our attention from the macro level of the economy to how changes affect individuals — and especially what options they’re presented with. The point of the book is to show that regulating one part of the economy will have effects throughout the economic system, and that this type of artificial restriction will lead to some people being stripped of the choices they otherwise would have.
I exemplify this with the sweatshop, which is often argued against using only “the seen.” The working conditions are terrible in a sweatshop, especially compared to our cushy jobs in the West. Ben Powell and others have done great work pointing out that there’s also the unseen in the sense that without the sweatshop those workers would be in even worse shape. In fact, they are very eager to get jobs in the sweatshop because they’re so much better than all other options they have.
With the “unrealized,” however, I think we get a more nuanced picture. I argue that the reason the sweatshop workers make a choice between the hard work in a sweatshop, and something that is much worse, is regulation. Had this been a free market, then there would likely have been many businesses offering jobs in sweatshops, and they would probably compete with each other by offering higher pay, better work conditions, and so on. There’s obviously money to be made from running sweatshops, so why don’t more businesses do this?
The existence of a sweatshop shows that the market is sufficiently developed to support it: the technology and capital structure, including transportation and supply chains, are obviously there. The economic conditions also speak in favor of sweatshops over toiling in the fields and the other much worse options sweatshop workers are presented with. The workers are more productive in sweatshops. So there’s really no reason why there wouldn’t be competition for their labor by several sweatshops. But, the many options that should be there aren’t.
So it’s likely that something is restricting the creation of these other options. Those other businesses that never came to be are the unrealized alternatives, and the argument in the book is that these options would have been available had it not been for regulation.
Moreover, those regulations can really be very distant from these workers, since a restriction redirects economic actors to other, and comparatively less valuable, actions. In turn, the regulations have ripple effects — a type of Cantillon effect, you might say — throughout the economy as seen actions replace the unseen, or what should have been.
These other things happen instead of what should have happened, if actors had not been arbitrarily restricted by regulations. But, these “other things” are suboptimal and harm people since they’re not what people would have chosen to do in the absence of the regulations. In this sense, a regulation anywhere in the economy causes harm, and this harm primarily affects those with little or no influence over policy or the means to avoid it. So the major harm is on poor people in poor countries, even where regulations appear to be limited to relatively rich people in rich countries.
MI: In the case of a business being regulated, how much of that burden falls directly on that business? Are other groups — such as the customers — affected by the regulations also?
PB: It really depends on the business. Regulations make it costlier to act — and therefore some actions are no longer profitable when they would have been otherwise. So, for those businesses that lack political influence and aren’t the most effective, a regulation may decide whether there is a business or not. At the same time, businesses that survive the regulation might benefit from a protected situation because the regulation raises barriers to entry. This is why, for instance, it is rational for Walmart to support a high minimum wage — it will hurt Walmart’s competitors more than it hurts Walmart.
The real losers are common people who, as consumers, do not get the valuable goods and services they otherwise would have, and, as producers, cannot find the jobs they otherwise would. The winners are the incumbents, at least short-term, and — as always — the political class.
MI: You refer to markets using terms like “messy,” “approximate,” and “imperfect.” Isn’t this an argument against markets? Can’t government regulation give us more rational results?
PB: On the contrary, the messiness is an argument for markets. Rational government planning might be doable in an economy with fixed boundaries. That is, where there is no growth, no new value creation, and thus the “extent” of the market stays the same. But there are no such economies in the real world, and I’m not sure it is even possible long-term. An economy is really the combined uses of resources devoted to satisfying wants. So, it is inconceivable to have an economy that doesn’t get better over time — or which malfunctions and declines. In an entrepreneurially driven and creative market process, there is no basis for planning an economy through a governmental central plan. I elaborate on how this process of market expansion happens in my previous 2016 book, The Problem of Production: A New Theory of the Firm (Routledge).
Growth and entrepreneurship in a market is not so much about allocating existing resources within the market as it is about speculating about how resources can be created and used in more valuable ways. The market is a creative enterprise always aiming for the future and satisfying more wants and newly discovered wants. Thus, a governmental regulator or central planner has no data to use in making a “rational” plan because the data doesn’t exist yet. That’s the problem with central planning — you cannot plan with only unknowns and unknowables. That’s also why markets are messy, but decentralized decision-making within a profit-and-loss system generates the very structure needed for such decision-making.
MI: But in a purely unregulated economy, won’t businesses exploit workers?
PB: I conclude exactly the opposite in the book. There’s a case to be made for Marxist-type exploitation of workers in factories, perhaps more so in countries where there are sweatshop-style factories than elsewhere. But, the reason for this exploitation is regulation. Had the workers not been stripped of their choices — the unrealized — they wouldn’t be satisfied with the sweatshop jobs they’re relatively content with as things are today. Exploitation is not so much a result of capitalists paying workers less than they otherwise could have been paid. It is a result of the workers’ options having been taken away. The business with a sweatshop in a poor country isn’t the party taking away workers’ options. The business is the one giving workers an option. It’s not as good as it otherwise would’ve been, but that’s not necessarily the fault of the business. What hurts the workers — and keeps them poor by not putting sufficient competitive pressure on the business — is regulation, which restricts competition, and thus empowers business at workers’ expense.
So the issue of exploitation, and especially how to get rid of it, is a matter of finding the real and ultimate cause of the situation. It’s usually not a matter of employers having “power” over the worker. Such power does not occur naturally, but is caused by something, and my argument suggests that the employers’ economic power is a symptom, but not the cause. The real cause is government regulation.
Water covers some 75 percent of the earth’s surface, while land covers 25 percent, approximately. Yet the former accounts for less than 1 percent of world GDP, the latter 99 percent plus. Part of the reason for this imbalance is that there are more people located on land than water. But a more important explanation is that while land is privately owned, water is unowned (with the exception of a few small lakes and ponds), or governmentally owned (rivers, large lakes). This gives rise to the tragedy of the commons: when something is unowned, people have less of an incentive to care for it, preserve it, and protect it, than when they own it. As a result we have oil spills, depletion of fish stocks, threatened extinction of some species (e.g., whales), shark attacks, polluted and dried-up rivers, misallocated water, unsafe boating, piracy, and other indices of economic disarray which, if they had occurred on the land, would have been more easily identified as the result of the tragedy of the commons and/or government ownership and mismanagement. The purpose of this book is to make the case for privatization of all bodies of water, without exception. In the tragic example of the Soviet Union, the 97 percent of the land owned by the state accounted for 75 percent of the crops. On the 3 percent of the land privately owned, 25 percent of the crops were grown. The obvious mandate requires that we privatize the land, and prosper. The present volume applies this lesson, in detail, to bodies of water.
Longaberger can't sell its basket-shaped headquarters. As Peter Klein explains, resources in a modern economy are complex and specific — which is why we need free markets.
Peter Klein is the Mises Institute's Carl Menger Research Fellow.
Quarterly Journal of Austrian Economics 19, no. 2 (Summer 2016)Henry Hazlitt Memorial Lecture
In this lecture, I will look at a debate in the 1960s between Frank Knight, the subject of my new book (2006) in Palgrave Macmillan's Great Thinkers in Economics series, and Henry Hazlitt, memorialized by this lecture. I will look at the dispute they had on welfare, freedom and power, which was an important debate then and now. I will take Knight’s observations and apply them to today’s debate on inequality, and what I suggest are the economic indulgences referenced in my lecture title.
Our own Senior Fellow Dr. Mark Thornton recently appeared on Press TV to make the libertarian case for real free trade, as opposed to unholy negotiated trade deals like the Trans-Pacific Partnership. Brent Budowsky, a journalist for The Hill newspaper in Washington DC, also joined the show to present a pro-union, left-populist perspective. They both conclude that complex trade schemes, which often involve creating supra-national regulatory bodies, are bad for America and the economy — but for totally different reasons.
The Quarterly Journal of Austrian Economics
Vol. 19 | No. 2 | 131–148Summer 2016
Economic Indulgences: Old and New Debates on Welfare and Freedom
David CowanDavid Cowan (david.cowan@bc.edu) is a visiting scholar at Boston College. The Henry Hazlitt Memorial Lecture was sponsored by Hunter Lewis.
Henry Hazlitt Memorial LectureAustrian Economics Research ConferenceLudwig von Mises InstituteAuburn, AlabamaMarch 31, 2016
INTRODUCTIONIn this lecture, I will look at a debate in the 1960s between Frank Knight, the subject of my new book (2016) in Palgrave Macmillan’s Great Thinkers in Economics series, and Henry Hazlitt, memorialized by this lecture. I will look at the dispute they had on welfare, freedom and power, which was an important debate then and now. I will take Knight’s observations and apply them to today’s debate on inequality, and what I suggest are the economic indulgences referenced in my lecture title.
FRANK KNIGHTFrank Knight was a curmudgeonly character, who I dare say, in our politically correct and overly-sensitive age, would not last long, and certainly would never make tenure, because as we know tenure means never having to say you’re sorry. Knight was not the kind of debater or discussant easily given to flights of fancy or expressing misgivings. I assume at least a passing acquaintance with Frank Knight on the part of this audience, but perhaps a lamentably short intellectual biographical note is in order. Within the economic world today he is chiefly noted for the notion of Knightian uncertainty featured in his first book Risk, Uncertainty and Profit, establishing his reputation in the pantheon of economic thinkers on a book that was essentially his Ph.D. thesis. Knight was brought up in a conservatively theological home, which was also a Republican household. His early undergraduate work was actually at evangelical colleges in the neighboring state to this one, he attended colleges in Tennessee. In spite of all this, he grew up to have distaste for much organized religion, though he attended the Unitarian church for much of his life.
Aside from being “kicked out” of Cornell’s Philosophy Department and a couple of stints at the State University of Iowa, Knight spent his academic career at the University of Chicago. He inspired an almost cult-like devotion among his students at Chicago, leading his students (which included most notably Milton Friedman, James Buchanan and George Stigler) to say there is no God but Frank Knight is his prophet. Knight was a co-founder of the “Chicago School” of Economics, but he was a teacher more than a theorist or producer of books. It is because Knight was essentially a teacher and a critic that he did not pen the major volumes one might have hoped for. Buchanan, who became a long-time friend and a Nobel Prize winner, notes in the foreword to the 1982 edition of Freedom and Reform that Frank Knight was a critic, and apart from Risk, Uncertainty and Profit his work “can be interpreted as a series of long book reviews.” His work is thus scattered across a host of economic journals in essay form standing on the base of his first and major work Risk, Uncertainty and Profit, published in 1921. What ideas he had were stated, restated and then refashioned multiple times in various essays. Hence to synthesize his work, which I have attempted to do in my own book (2016), means working through the remainder of his writings comprised of essays, lectures and book reviews, the most notable being collected in the single volumes of The Economic Organization (1933), The Ethics of Competition and Other Essays (1935), The Economic Order and Religion, with T.W. Merriam (1945), Freedom and Reform (1947), On the History and Method of Economics (1956), and lastly Intelligence and Democratic Action published in 1960.
Knight himself described his “social function” as one of “exposing fallacies, nonsense and absurdities in what was passed off as sophisticated scientific discourse.” (Knight, 1982 [1947], p. xi) His relevance as a great economic thinker for us today, apart from Knightian uncertainty and his status as a founding father of the Chicago School, can be stated in a threefold sense. First, he is arguably one of the most interdisciplinary of economists, and thus provides a basis on which thinkers can discuss economic issues from their own disciplines. Second, he raised issues that are prevalent in the latest stages of capitalism, and the issues we currently face and will continue to face in the future. Lastly, he was an economic realist who knew the weaknesses and strengths of capitalism, so while remaining a supporter of capitalism as the best system, he also addressed the limitations and difficulties thrown up by this imperfect way of organizing our economic affairs without overthrowing what he saw as an ultimately workable system. In pursuing this agenda, Knight found himself in a number of fights, specifically with Keynes and the Austrians, with protracted arguments in the 1930s with Friedrich Hayek. In many respects I would typify these not as full scale arguments, but instead boundary disputes, somewhat akin to members of the same club or union fighting over the rules of association. Which brings me to the boundary dispute that is the subject of this lecture, the one between Knight and Henry Hazlitt.
KNIGHT ON HAZLITT, APRIL 1966The journalist Hazlitt and the academic Knight had a short but fractious relationship in print, which started from the lecture podium at Mont Pelerin and was waged via the pages of the journal Ethics. For his part, Hazlitt thought Knight’s attack on him was one quite unprovoked on his side. Having initially fired a salvo or two at Hazlitt from the podium, Knight committed his more sustained attack to print in an essay published in April 1966, entitled “Abstract Economics as Absolute Ethics.” In the essay, he offered a critique of Hazlitt’s book The Foundations of Morality (1964). Knight refers to the work as a polemic, at the heart of which lie two chapters entitled “The Ethics of Capitalism” and “The Ethics of Socialism.”
Knight started out by stating that Hazlitt’s book demonstrated good workmanship and the makings of a good treatise on socio-political ethics. A kind of condescending “could do better” is the tenor of his remarks. This is because he surmised that Hazlitt’s work contained many of the faults he believed that defenders of capitalism tend to have, namely that it was the kind of oversimplified, extremist propaganda that ignored changing theory and practice. Hence, he wrote, Hazlitt’s work failed to deal with the complexity of modern society and defeated the purpose of the argument.
Knight outlines the content of the chapters as they apply to ethical rules, and turns to the question of justice, which he says is settled for Hazlitt by John Bates Clark’s argument in his 1899 book The Distribution of Wealth, with its thesis “that ‘Free competition tends to give to labor what labor creates, to capitalists what capital creates, and to the entrepreneur what the coordinating function creates…. [It tends] to give each producer the amount of wealth that he specifically brings into existence.’” This argument, Knight quickly points out, is fallacious for three reasons. First, there is only a general tendency, he says, to remunerate each productive agent. Second, society does not consist entirely of producers. Lastly, producers are not “economic men.” Apart from the key factors of economic capacity, labor power, and managerial skill and property ownership, Knight points out that production also involves a large portion of “luck.” Hence, individual production “is due much more to biological and social inheritance, for which the individual is not responsible, than to the individual’s past efforts.” Knight concludes that Hazlitt simply applies the principle of production too broadly.
Knight then turns to the ethical argument. Hazlitt summarizes capitalist ethics as a system of freedom, justice and productivity, which Knight argues cannot be precisely defined, besides which distributive justice has a number of meanings. The real point Knight wants to make is against Hazlitt’s individualist ethic, which he argues is individualistic to an extreme; to the point he never even mentions the family (Knight, 1966, p. 166). Knight goes on to say ethically one must “condemn the unfairness of an unequal start in the competition of life” and this “inequality inheritance” he argues tends to increase with each succeeding generation (Knight, 1966, p. 166).
It is this notion of “inequality inheritance” that is at the heart of the welfare question for Knight, and of course at the heart of notions of injustice tackled by many a socialist pamphleteer who wants to overthrow the capitalist system. Yet, to have socialism instead of capitalism is to replace business with politics, and Knight explains that many of the features most objected to in “capitalism” are in general similar in politics, though in his view “very obviously worse” (Knight, 1966, p. 168). They are very much alike in that functionaries in direct control inevitably have, he explained, “much arbitrary power and get their positions chiefly by competitive persuasion, or simply by accident.” Rivalry, which he calls an instrumentally irrational motive, “is more natural to men than rational co-operation.” Although it permeates both, Knight states this competitive persuasion takes the form of propaganda in politics and sales activity in business.
They do, however, also differ. Firstly, no-one has the power or effective freedom to form a state or jurisdiction, while there is some, albeit limited power, to start a business enterprise; obviously for Knight, limited by access to investment, skills, inheritance, and so on. Second, people are born into a state and family, but in capitalism they can choose membership among many organizations, and so for instance a laborer has a wide choice of employers to work for.
In pursuing our choices we seek better conditions, and Knight explains that when social groups seek better conditions, which they feel are rightfully theirs, their efforts can create social problems since social changes that benefit some can lead to a worsening situation for others. This can lead to a conflict between freedom and progress. For this reason, social conflict is not necessarily the oft-stated problem simply of order. It becomes a problem of power, and I will return to this later, but first let’s see how Hazlitt responded to Knight.
REPLY TO KNIGHT OCTOBER 1966For his part, Hazlitt (1966) said, “Space does not permit me an examination of Knight’s own obscure pronouncements, though they seriously need one.” He does, however, offer up a defense against Knight, with the opening salvo of calling Knight’s original attack at Mont Pelerin “a strange performance.” Hazlitt stated he did not recognize the opinions attributed to him by Knight in the written assault. He rebuts a number of the points Knight made, and explains that his book as a whole is neither polemic, nor are the two chapters Knight singles out at the heart of the book. Contrary to Knight, Hazlitt explained the heart of the book is the much earlier chapter 6 on “Social Cooperation,” although the same could be said he suggests of chapters 7 and 8, or even the conclusion, bur certainly not the chapters Knight singled out. He also rebuts a number of specific points; including the ones I have drawn attention to earlier. These are not important to go through, and I suspect they are simply a case of an academic and a practitioner talking past each other.
Hazlitt set out what he considered to be the essential justice of the capitalist method of distribution. As Knight noted, Hazlitt was drawing on The Distribution of Wealth by John Bates Clark (1908 [1899]). The central thesis Clark put forward was the point I quoted earlier, and merits repeating here, that “free competition tends,” a word Hazlitt italicizes, “to give to labor what labor creates, to capitalists what capital creates, and to entrepreneurs what the coordinating function creates…[It tends] to give each producer the amount of wealth that he specifically brings into existence” (Hazlitt, 1966, p. 60). This is the point Knight called fallacious. Hazlitt points out that Knight is at pains to make the qualification that this is a tendency, but as Hazlitt’s italics demonstrate, this qualification is in the original quote. To which Hazlitt adds that in his own book he explained certain qualifications were necessary, and he was well aware Clark’s thesis had been contested. However, he suggested much is overlooked in the dispute with Clark, and what he wanted to do was to correct this by drawing our attention to three matters.
First, Clark was rebutting the Marxian argument that capitalism systemically exploits labor and robbed the workman of his produce. He argued that Clark in fact proves that the capitalist method of distribution is not inherently unjust, which many people believe to this day, and he states that this falsehood has given rise to “unrest, resentment, demagogy, revolutions, and wars that now threaten to destroy not only “capitalism” but civilization itself.” Second, Clark in Hazlitt’s view demonstrated the tendency of the competitive market system to give to each what they create and this is in accord with the most generally accepted principle of distributive justice, at least in the first instance of economic reward for labor. He explained there is then nothing to stop people to redistribute their wealth voluntarily, and indeed capitalism does nothing to hinder or discourage charity and generosity. What is problematic is the attempt to coerce by means of a socialist or equalitarian rule a redistribution that ignores effort or efficiency, and destroys incentives and production. True justice, Hazlitt argues, is not achieved through a “leveling down.” Lastly, Clark was not really describing a purely economic system in his description of capitalism and its consequences, rather he was describing a legal system that protects property rights, promotes free labor, markets and wages, enforces contracts and regulates against fraud, violence and other illegalities.
Hazlitt argued capitalism evolved over centuries and had a moral origin. The evolution of capitalism, unlike the socialist and communist revolutions, was never instantaneous or expedient. And so the real oversimplifiers (and recall this is what Knight called Hazlitt) are those who contend ethical and legal considerations are irrelevant in judging capitalism. So, after an interesting passage of defense, Hazlitt returns to Knight and concludes ”I find Knight’s article rambling, fuzzy, and full of inconsistencies. Even after a second or third reading I cannot decipher.” (Hazlitt, 1966, p. 61). On this criticism, I certainly experienced Hazlitt’s sense of a terrain that was rambling and difficult, but I hope for my reader’s sake I have successfully deciphered his work.
KNIGHT’S RESPONSE OCTOBER 1967Exactly one year later, Knight’s response to Hazlitt’s defense was published, with the telling title “A Word of Explanation” (1967a). Knight does not attempt a formal rejoinder, he says, rather a clarification. While he notes the odd touché or two with Hazlitt, he responds by clarifying rather than admitting a defeat on the point. This is a little like when an Englishman says “with the greatest respect” and then proceeds to insult you. So having said, with the greatest respect, Knight states that the major fault with Hazlitt’s book is the “constant harping on co-operation,” which Knight argued was never defined and neglected its opposite, rivalry. For his part, Knight thought of cooperation as implying freedom and “discussion” as a means of reaching free agreement. Knight concluded his rejoinder by accusing Hazlitt of making sweeping statements of half-truths; and, I should point out here that Knight himself was accused of the same crimes by his own critics at various points during his career. He goes on to say, “I regret my critique being so negative; but some clearing away, even of rubbish, often precedes building; and social construction is a complex and hard problem. If Hazlitt-style propaganda is politically effective, I dread the consequences for the better society that might be had through wiser policies” (Knight, 1967a, p. 85). His last word in these exchanges is “And anyhow, blessed are they to whom all things are simple; and in pudd’nhead Wilson’s adage, it’s differences of opinions that makes hoss-races” (Knight, 1967a, p. 85).
Having looked at the demarcation dispute between Knight and Hazlitt, we can delve a little deeper into Knight’s notion of cooperation, which has the three aspects of welfare, freedom and power. There is not sufficient time to go in depth into each of these, but I would like to highlight some of the key points of each.
WELFAREAt the core of Knight’s conception of welfare “is the premise that economic welfare must not be identified with aggregate (i.e. allocative) economic efficiency. Rather, welfare must be seen as the sum of economic freedom, the balance of economic power, and economic efficiency” (Nash, 1998, p. 161). He also offered an argument that the outcomes of imperfect competition reflect the relative power imbalances in an industry, and these outcomes are fundamentally unfair. We can extrapolate from this the general conclusion for all markets that unconstrained self-interest will not always lead to fair outcomes, or outcomes beneficial for society as a whole. This is a challenge to the “invisible hand” of Smithian economic thinking, and provides an alternative notion of perfect competition to orthodox economics, critical to which is Knight’s conception of economic welfare.
Thus, in looking at welfare, Knight draws our attention to the relationship between the ‘economic’ and ‘moral’ domains of our society, arguing that self-interest cannot maximize the value of the aggregate ‘social welfare function.’ (Nash, 1998, p. 165). He refused to separate the intellectual from the moral pursuit of understanding society, nor could he accept there was a way of having widespread agreement on the goals of social policy. The idea that social and economic thinking can achieve the best ends for society is not an idea agreeable to him. The problem we face in social policy-making is one of values, not of facts, he argued, and social problems arise through conflict caused by the mere assertion of opposite claims. In a market society, a price theory amounts to a value theory because price is the means by which we arrive at agreement between individuals in exchange. Yet, we have higher wants and goals of conduct with which to test our values, rather than simply having a system that accepts and satisfies wants.
We see in his analysis how Knight used his “economics” and “social philosophy” combined to help us understand the human predicament. If we simply look at the competitive system as a wants-satisfying system, then we will see into a mirror that reflects back who we are rather than what are our highest ideals. Knight argued that the social order we have may gratify us, but it also shapes our wants, and hence our system must be judged ethically by the type of character it encourages and forges in the people within this social order, since giving the public what it wants “usually means corrupting popular tastes” (Knight, 1935, p. 49). The problem emerges, however, that price is the measure of efficiency and reflects what the people really want, through their free choice in the market, while also leading to the corruption of public taste. Yet, who is to say what is in good taste? Is this not simply liberal elitism? In the conclusion to my book Economic Parables: The Monetary Teachings of Jesus Christ (2007), I make the point that the economy is like a mirror. If we look into the mirror and think we look a little ugly then smashing the mirror is not going to make us look any prettier. The problem is not the system, it is us.
FREEDOMPut plainly, for Knight economics is about freedom. Knight’s essays in Freedom and Reform were collected and published in 1947, essentially as a sequel to the 1935 The Ethics of Competition, and again on the initiative of some of his former students. The major theme of the work, as the title implies, is freedom, but the reference to reform makes this very much a Knightian expedition, as he sought to mount an attack on any superficial grasp of freedom, and root it in some deep economic and philosophical soil. If we think of freedom in terms of laissez-faire then Knight, in his major essay Laissez-Faire: Pro and Con (1967b), explained that the relationship between laissez-faire and government control cannot arise outside of an economic and political order operating under market conditions. He argued it is absurd to draw strict battle lines between laissez-faire and “planning.” He explained that humans are social animals, and social life sets many limits to freedom, which includes social and welfare issues. He also explains that laissez-faire has been rapidly modified down the ages by political regulation, but how far this change will go he suggests is a question for prophets. The point remains: we need to recognize the necessity of a democratic political order and its inherent limitations on freedom.
Certainly, Knight is in the business of supporting the market, but this means addressing the significant challenges faced by capitalism in respect to freedom and equality, and there are many aspects of inequality to consider in the Knightian view. He accepted inequality as an inevitable outcome of freedom, even if at times it leads to unfortunate outcomes for some. The past is very much a foreign land in Knight’s view, making freedom he wrote an “historical anomaly. A few generations ago the opposite was the case; conformity and obedience were moral norms of social life” (Knight, 1960, p. 112). Complaints about inequalities, big business and monopolies are for Knight borne out of a romanticism, and he argued this is not the way to confront the real economic problems we face, though he is by no means denying the seriousness of the problems that exist. What is essential for Knight is that such romantics need to see freedom as the core sentiment, if we are fully to understand economic society.
POWERUltimately—and this is at the heart of Knight’s welfare approach—social policy must deal with power and weakness as well as freedom. He finds Hazlitt’s conception of freedom problematic and ignorant of the problems of weakness and rivalry. He argued that Hazlitt failed to address adequately the relations between freedom and power, and this is related to his treatment of equality and inequality. A proper treatment would recognize that “serious inequality of power, especially economic power, limits the effective freedom of the weaker party, and, if extreme, destroys it, making him helpless”(Knight, 1960, p. 174). Freedom thus effectively depends on power, which is power an individual possesses with meaningful content only insofar as the person has means and effective freedom to exercise their power, which for half the normal population means little, as they have no such power or means.
As noted, people will aspire to improve their position, which they will do by improving their wealth and income and by gaining distinction and power, and they will do this in any way open to them. This means using whatever power they possess to persuade and influence. To get influence they must get attention, which is what people want anyway, and he says it is at “this point that social rivalry is most acute, and free society often seems to be mostly a phenomenon of competitive “screaming” for notice in one connection or another”(Knight, 1960, p. 173). Such attention-seeking, he says, refined people find repugnant, while the Marxists would hope their dictatorship would educate this out of human nature.
Hazlitt’s individualism, in Knight’s view, ignored these problems of power, weakness, rivalry and inequality. For Knight, “the family, not the individual, is the effective unit in society, because he explained “differential inheritance—particularly of wealth—entails an unequal start in the competition of life, which violates fundamental individualistic ethics”(Knight, 1960, p. 174). Knight typifies Hazlitt’s approach as an ideal of a primitive society or small tribal groups with face-to-face interaction, and he operated under what Knight called a “cheerful assumption” that if society let men be they will cooperate rationally based on known rules. In contrast, Knight has a somewhat Augustinian view of human nature, and as such believed something akin to original sin militates against any such hope. In contrast, Knight’s understanding is that people—to be moral—must change themselves and then by mutual understanding change the world. This is what he means by discussion. This is also a very theological approach to the problem, found in conservative and Augustinian schools of theology. To paraphrase Luther, you can try and rule the world with the Gospel, but you better fill it with real Christians first. In other words, we remain in a world of conflicted values.
So, what kind of discussion of values can we have? Perhaps we can conclude that Knight fails on his own terms, because as he himself states, people are “screaming” for attention for their cause, and whatever change results is likely to be disagreeable to others. He is certainty right about the screaming, though goodness knows what he would make of today’s presidential primaries or the attempts to pull down monuments of the past because of racial politics. Knight is not against change, and he certainly does not want to see things stay as they are. Neither is he a progressive.
A WORLD OF INDULGENCE IN NEED OF COOPERATIONIn concluding this lecture, I want to set out in a Knightian way how we can come to terms with the moral question of modern capitalism. In the Knightian view, there is inevitability about inequality and the conflict between various desires. The problem of equality and inequality lies at the confluence of welfare, freedom and power. We see inequalities in developed nations and emerging nations. We see different levels of poverty. There is not sufficient time to go into the nuances of these differences. It must suffice to say when we think of extreme poverty in Africa, for instance, the causes are similar to our own—it is more a matter of scale. The problems of Africa, and the contradictions of wealth and poverty on that continent, reflect the same root cause I am about to unpack in drawing this conclusion. Just as capitalism brought many out of poverty in the west, so it can in Africa and elsewhere. The nations cry out for a legal and political system complementary to capitalism and technical assistance, but are at the mercy of corruption and skewed property rights.
All of which brings me to today and the problem I identify of indulgences, of which there are many, but I will unpack the main kinds. I suggest we live in an era of emotionalism, or emotional indulgence, where what one thinks is less important than expressing what one feels. Rationality does not trump giving offense. This emotionalism leaves many people in a spiritual search in the economy and in this search they are looking for easy ways, looking for indulgences. I borrow the term indulgences from the turning point of the medieval period that led to the Reformation, and a new age of enlightenment. As we all know, Martin Luther railed against the selling of indulgences in the Western Catholic Church as an easy morality, a forgiveness of sins without conforming to God’s will. It was merely the buying of a certificate.
Today’s indulgences come in the form of cash till receipts for free trade and organic produce, as people scream out the “gotcha” examples of extreme poverty in Africa and environmental damage caused by “big business.” It comes in the form of Occupy Wall Street and other protests, as they point the finger at the bankers and financiers. It comes in the form of celebrities campaigning for a better world and against capitalist greed, which naturally they do as CEOs of their own multinational businesses. It comes in the form of the runaway sales of the book on capital and inequality, by French economist Thomas Piketty. All these instances admirably demonstrate I suggest that the specter of inequality is never far away in the consciences of the Left, but very distant in terms of solving the actual problem of inequality.
For what is inequality? If we listen to Knight, it just is. It is unavoidable. We can do something about inequality in a limited sense, but only through discussion and cooperation. Perhaps the instances I just suggested are Knightian discussions. After all the celebrities and protesters are all discussing the problem aren’t they? Well, yes, but in a somewhat self-serving way. They are long in talking and “caring” about the problems, but well short of a realistic solution. The challenge is to solve the problem, which is why Knight argued passionately in favor of capitalism. It helps far more than it hinders, a reversal of the Leftist view, so we need a balance or nuance in our understanding of capitalism if we are to make the world a better place, and even then we are unlikely to make it a better place for everyone due to human nature.
If we take the working class of which Marx wrote so passionately, it has improved its lot greatly. Indeed, in his own terms many of the working class has become bourgeois. This change is a process of embourgeoisement, though this was reportedly dismissed for good by sociologist John Goldthorpe back in 1963. But the world has changed a great deal since Goldthorpe was writing. The “working class” today takes foreign holidays, owns property and even goes to the opera on occasion. The definition of poverty today is more related to how many cars or TVs you have, rather than subsistence. More significantly, poverty today is more defined by desire, in terms of satisfaction of wants and social aspirations, than needs. What we have to some extent is an inequality in satisfaction of desires rather than needs, though again I hasten to point out that middle classes and liberal protesters seem to have their desires satisfied by taking to what they see as the high moral ground. It is because the problem is one of desire that resentment has been breeding amongst the middle classes, especially since the 2008 recession.
The reality is that in terms of income, the poor have benefitted from the creation of wealth under capitalism; this is its great strength. We have all seen the graph of income as flatlining from the exit to the Garden Eden until the 1750s, and then moving on a steep upward curve ever since. While communists under Stalin and Mao were being executed, the poor in the western economies were buying their own homes. During the time of communism, however, intellectuals and leftists could always pretend there was an alternative. Their economic theorists could posit alternative universes. The fall of communism, and the victory of the market, appeared to show there is only one economic system—albeit flawed—but as Knight argued it is flawed because it is a system that deals with scarcity amongst flawed humanity. This system may have triumphed, and poverty may have changed, but what has not changed is the socialist bourgeois guilt over the continuing presence of the poor; hence the popularity of the Piketty book and the crowds at Occupy Wall Street gigs as they contemplate their own difficulties. Though, as I stated just now, I suspect the problem has much more to do with resentment than guilt.
Whatever it is, guilt or resentment, the fall of communist and socialist systems due to capitalist economic change, and I would add the inevitable impact of reality, has broken apart Marxism, socialism and communism. However, they have not disappeared altogether. There may be a systemic breakdown, but the same instincts remain, and these instincts are dispersed in the shattered pieces that remain in the range of causes and groups that challenge the basic assumptions of capitalism in much the same way as these grand movements tried to do. Yet, while they are dispersed, they are not freely blowing in the wind. They have become part of the capitalist system itself. To which I may add there is a significant market for these causes. Radical chic sells.
There is another indulgence, which you can find on both sides of a narrative about the ills of capitalism. On one side, we have the “social responsibility” executives, who have both the wealth and the salve for their consciences. They jostle for attention alongside the Wall Street protesters I mentioned who seem to have the time, technology and money to camp on the streets instead of working or looking for work. This is a far cry from the working classes that needed to break apart their chains; it seems they are the workers who simply prize open their wallet. Thus, the problem of inequality is a middle class problem. Of course, there has always been an air of the snob around the left, a middle class enclave that looks down at the working class as their own personal playground. This thought came to me recently, on another continent, when I heard a Corporate Social Responsibility person say how they wanted to visit poor areas, to see how “real” people live in the particular country we were visiting. It seems the Left has to travel further distances, and expand their carbon footprint, to fulfill their fantasy of how the poor live in need of their help. The so-called “anti-capitalists” and “anti-globalization” camps that periodically spring up, oddly in times of recession, are the modern day kibbutz for the spoiled to search for meaning in their own life. They still imagine a life of the greedy boss and the despoiled and alienated worker.
Such a view is out of touch with reality. Companies today are focused on employee engagement, because recognizing the engaged and interested worker is more productive. This is the antidote to alienation. Indeed, alienation is not the preserve of the factory worker or the low-paid. Many people in the workplace and in society feel this way. Managers and government bureaucrats alike can feel alienated from the workplace or the goals of the business as well. They too can be trapped by the mortgage or the sense that they lack advancement. The path to better engagement is dialogue, connecting people to each other in the workplace in a common cause, not trying to find reasons to divide them. Ultimately, in searching for our material satisfaction, we ought to be questioning what we are searching for beyond the economy not just within it. Before we get carried away with this, however, we have to recognize that whatever our search, and whatever our role in the economy, it is curbed by human nature, both ours and others’. As Jean-Paul Sartre said, hell is other people.
Of course none of this is very romantic. It is essentially a question of power. In the economy people can feel powerless, and the same may be said of our political system, both points made by Knight. It is wonderful that the market economy has moved so many out of poverty and low incomes, but it seems that we are a generation that remains in search of spiritual meaning. Our material status does not answer the spiritual problem, except perhaps in the mundane terms of retail therapy. It is simply the other side of a coin. To use again Marx’s famous image, we can see this as the switching of one set of chains for another. The historical move we have seen is the freeing of the chains of poverty for vast swaths of the population only to find themselves feeling chained by the materialism and indulgences of our age. This is what is revealed by the middle class recession we witnessed these past few years, because the working class has become middle class in relative terms and a larger middle class, overextending and indulging itself through debt and property speculation, got caught out by the inevitable force of economic gravity and resent the impact. After all, when house prices were going up I don’t recall anybody ever complaining to me how much their home is “worth,” so why complain on the way down? What suffered was their desire and expectations, and this impacted their pocket and consciences.
No matter how successful our economy, or even if humanity triumphed in the way the Left dreams, the problem will not be solved on material terms. Our economy is a reflection of our human condition. It puts numbers on what we truly care about, and this has to be the starting point of any moral understanding of the economy. Knight is correct. We do need to face the brutal reality of inequality, and we ought to recognize the inheritance deficit and help others to have a start in life, but what policies and social attitudes are necessary to tackle these is the question. There also needs to be a point where we say enough is enough, and not allow the emotionalism to dictate economic policy, which has two impacts in terms of how we might cooperate to tackle inequality and social welfare. First, we need to educate people better in fundamental economics at school so we can have better informed and more realistic discussion about economic matters, which will make cooperation more informed. We obsess about teaching God and sex, so why not money? Second, we need to turn away from the emotionalism of our times and recover the enlightenment idea that we are not simply sentient creatures; we are creatures of thought. Cooperation is a rational activity, not an emotional one, and indeed emotions tend to get in the way of cooperation. The curmudgeonly Knight may have set a high bar on this point, perhaps too high, but I fear we will make little progress politically or economically in these times if this attachment to emotionalism does not change in favor of economic realism.
REFERENCESClark, John B. 1899. The Distribution of Wealth: A Theory of Wages, Interest, and Profits. New York: Macmillan, 1908.
Cowan, David. 2007. Economic Parables: The Monetary Teachings of Jesus Christ, 2nd ed. Downers Grove, Ill.: InterVarsity Press.
——. 2016. Frank H. Knight: Prophet of Freedom. New York: Palgrave Macmillan.
Goldthorpe, John. 1963. The Affluent Worker: Political Attitudes and Behavior. Cambridge: Cambridge University Press.
Hazlitt, Henry. 1964. The Foundations of Morality. Irvington-on-Hudson, N.Y.: Foundation for Economic Education, 1998.
——. 1966. “A Reply to Frank Knight,” Ethics 77, no. 1: 57–61.
Knight, Frank. 1921. Risk, Uncertainty, and Profit. Boston: Houghton and Mifflin.
——. 1933. The Economic Organization. Chicago: University of Chicago Press.
——. 1935. The Ethics of Competition and Other Essays. New York: Harper.
——. 1947. Freedom and Reform. Indianapolis, Ind.: Liberty Fund, 1982.
——. 1956. On the History and Method of Economics: Selected Essays. Chicago: University of Chicago Press.
——. 1960. Intelligence and Democratic Action. Cambridge: Harvard University Press.
——. 1966. “Abstract Economics as Absolute Ethics,” Ethics 76, no. 3: 163–177.
——. 1967a. “A Word of Explanation,” Ethics 78, no. 1: 83–85.
——. 1967b. “Laissez-Faire: Pro and Con.” Journal of Political Economy 75: 782–795.
Knight, Frank, and Thornton W. Merriam. 1945. The Economic Order and Religion. New York: Harper.
Nash, Stephen John. 1998. Cost, Uncertainty, and Welfare: Frank Knight’s Theory of Imperfect Competition. Brookfield, Vt.: Ashgate.
A private graduate seminar. Recorded at the Mises Institute in Auburn, Alabama, on 27 July 2016.
Quarterly Journal of Austrian Economics 19, no. 1 (Spring 2016): 85–100
This book tells its readers a great deal about the inner workings of mainstream economics, particularly behavioral economics. This review details just how far the profession has drifted from reality. My general impression is that the authors are simply putting forth their opinions or perceptions of how the world should be, and then constructing a theory to justify those opinions. The theory is then supported by a selective construction of events.
The authors are both Nobel laureates and in 2009 wrote Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. Here they argued that because of emotions and psychology, the government’s response to the financial crisis must be decisive and overwhelming. The government’s response, particularly the Federal Reserve’s, gives the impression that the book was influential among policymakers.
Quarterly Journal of Austrian Economics 19, no. 1 (Spring 2016): 29–64
ABSTRACT: One hundred percent reserve banking is an essential foundation and prerequisite for a country to establish long-term financial stability and sustained economic growth. It is also an essential element for a country contemplating the adoption of a stable gold standard monetary system. Debt money, i.e., debt created by banks, was once called malum per se, a thing that is evil in its nature. It has supported excessive government debt, inflated speculative bubbles, fueled inflation, reduced investment and growth, and resulted in an unjust redistribution of wealth. In this paper, we discuss some of the detrimental consequences of fractional reserve banking and outline its abolition as the principal reform before one or more countries can establish a viable gold standard.
KEYWORDS: fractional reserve banking, financial repression, gold standard, inflation, money JEL CLASSIFICATION: E00, E4, E52, F33, G01, G21 The most challenging monetary reform in any country is the adoption of 100 percent reserve banking, or 100 percent money. Governments and banks have resisted this reform. A domestic gold standard becomes simply an appendix to 100 percent reserve banking or money by connecting money to the supply of gold. A 100 percent reserve banking system separates money from debt obligations; a bank can no longer create money in the form of demand deposits; and money would be independent of fluctuations in debt. A 100 percent reserve banking system was practiced by the Bank of Amsterdam (1609), the Bank of Hamburg (1619), the Postal System, and other 100 percent depository institutions that restricted their business to purely safe depository and transfer functions.
A fundamental condition for establishing a stable banking system has been the abolishment of fractional reserve banking, i.e., debt money, in favor of 100 percent reserve banking. This condition was stipulated by David Hume (1752), William Gouge (1833), Amasa Walker (1873), Charles H. Carroll (1850s), Frederick Soddy (1934), the authors of the Chicago PlanThe authors of the Chicago Plan were: Henry Simons, Frank Knight, Aaron Director, Garfield Cox, Lloyd Mints, Henry Schultz, Paul Douglas, and A. G. Hart. Professor Irving Fisher of Yale University was a strong supporter of the Plan. His book, 100 Percent Money (1936), was an attempt to win support for the plan among academics and policy makers. (1933), Irving Fisher (1936), Ludwig von Mises (1953), Murray Rothbard (1962), Maurice Allais (1999), and a number of other economists and authors. They essentially proposed a two-tier banking system:
i. 100 percent reserve banking strictly for depository and payments operationsii. Investment banking for financial intermediation and channeling savings into investments
One hundred percent reserve banking has been recommended for a number of reasons that include avoiding: (i) frequent bank failures and losses suffered by depositors;The Bank of England, founded in 1694, suspended convertibility of its notes into gold and silver as early as 1696, and not infrequently thereafter. It suspended convertibility during 1797–1821. (ii) wide expansion and contraction of the money supply that created speculative bubbles, crashes, deep recessions, and loss of output and employment; (iii) unjust wealth redistribution via fictitious credit in favor of borrowers and speculators; (iv) debt money that was too costly to use, since interest has to be paid on outstanding debt; and (v) debt money contracts if interest cannot be paid. With fractional reserve banking, many banks have been bankrupted with ominous financial losses for their depositors, or by taxpayers through subsidized deposit insurance schemes and bailouts. Hence, many writers deemed it essential to separate the deposit of money from the lending and debt obligations.With this separation, there is no need for insuring the safety of bank deposits through corporations such the Federal Deposit Insurance Corporation (FDIC). This separation was needed to sever the relation between the money supply and debt, so money would not fluctuate with debt, and to insure that banks hold and lend true savings and do not issue fictive credit. Money should not be created and destroyed through debt expansion and contraction via the credit multiplier.
The depository system is a fundamental feature of a modern economy and could be provided by private banks, or the state (e.g., Bank of Amsterdam and Bank of Hamburg). It accepts deposits for safekeeping and undertakes domestic and foreign payments against fees paid by the depositors. Some authors have suggested that the government could provide the deposit system through a banking and postal system so as to minimize fees and increase the quantity of money for the economy (Gouge, 1833; Simons, 1947). Investment banks in implementing their investment banking function create no money and accept no demand deposits; they borrow or issue equities and debt securities; and lend or buy securities. Essentially, investment banks would operate as other businesses, they issue shares and attract capital that they invest on behalf of their shareholders.
Debt-based money is associated with the advent of fractional reserve banking. By definition, the state grants a charter for a bank to create money. In countries with fractional reserve banking, debt money made economies navigate from booms to busts (Juglar, 1862) and destroyed the gold standard.Eminent writers stressed that debt money would certainly evict gold: David Hume (1752), Charles Jenkinson (1805), US Presidents Thomas Jefferson and Andrew Jackson, William Gouge (1833), Charles Holt Carroll (1850s), and Amasa Walker (1873). Ironically, it was the United Kingdom, the cornerstone of the gold standard and the world financial center, that dealt a fatal blow to the gold standard in 1931, which many of its eminent economists called a barbarous system. It was followed immediately by the United States, another model of the gold standard, abolishing gold money and sequestering the gold from its citizens in 1933, with the rest of the world following along. Proponents of debt money referred to the gold standard as gold shackles. But it was debt and paper money that have led to frequent financial crises after the gold standard was abolished (e.g., Greece 2009–2015, US and Eurozone 2009–2015, etc.). Moreover, debt-money system cannot stand on its own; it needs a central bank for liquidity and occasional government bailouts. It was the debt system that undermined the Bretton Woods gold exchange standard in 1971. Endless regulations in the 19th and 20th centuries have not prevented rapid creation of debt and financial booms and busts.
Money has been considered a principal pillar of the human civilization; it has enabled the development of commerce, industry, exchange and travel within and across countries and continents, and high level of scientific progress. If this pillar is undermined, economic decline follows, and social stability is put at risk.Examples of horrifying hyperinflations that ruined the real economy were John Law’s system in France (1716–1720), the French assignats (1789–1795), the US continental currency (1785–1790), and the German hyperinflation (1919–1923). In all these episodes, paper became worthless, the economy lost its money, and famine spread in the country. With the advent of fractional reserve banking, debt-based money has risen to prominence. In the pursuit of gains from interest on fictitious loans, banks and central banks kept issuing debt money, out-of-thin air, until the breakout of a financial crisis. Debt money calls for more debt to provide for rapidly rising prices, replace repaid debt, and pay interest. The central bank and banks validate any price and wage rise through more debt money. As soon as the debt process slows down or hits general bankruptcy, a severe financial crisis breaks out and wipes a large part of the debt money causing severe economic and financial disorders.Irving Fisher (1936) noted that US money was reduced by 35 percent during 1929–1933 following the collapse of debt money. He strongly advocated 100 percent reserve money so to eliminate the banks’ power in creating and destroying money. With debt organized as currency (Carroll, 1850s), financial crises became frequent; the most ominous was the Great Depression (1929–1936). The 2008 financial crisis was another ominous collapse of the debt money. Each financial crisis destroys money (Frederick Soddy, 1934; Irving Fisher, 1936), paralyses the economy, and spreads bankruptcies and human hardship. Governments resort to even pushing more interest-debt in order to cope with the disorders of the financial crisis. Hence, each economy is entangled in a vicious circle of debt followed by crises.
A 100 percent (or at least a long way toward 100 percent) reserve banking system or 100 percent money has become pressing in view of growing money disorders in the world. Many eminent writers had urged the abolition of debt-money and proposed reforms along the principles of 100 percent reserve banking and risk-sharing investment banking.We may cite David Hume (1752), Thomas Jefferson, Andrew Jackson, William Gouge (1833), Charles. H. Carroll (1850s), Amasa Walker (1873), Irving Fisher (1936), the numerous authors of the Chicago Plan (1933), Ludwig von Mises (1953), Murray Rothbard (1994), and Maurice Allais (1999). Despite repeated calls for reforms during the 18th–20th centuries, both governments and financial interests have remained adamantly against abolishing debt money. In what follows, we address the following themes:
• The nature of debt money• Inherent inflationism, instability, and uncertainty of debt money• Some notable rejections of debt money and proposals for 100 percent reserve banking• Suggested reforms for reintroducing 100 percent reserve banking and a domestic gold standard• 100 percent reserve banking and a convertible 100 percent domestic gold standard• Structural reforms to support 100 percent money
The Nature of Debt Money Debt money has been rising without limit in almost every country at rates that far exceed real GDP growth. Money supply, measured by M2 (currency plus deposits) may increase at a double-digit rate for decades in many countries. The source of this increase is simply debt. Simons (1947) stated:
We have reached a situation where private-bank credit represents all but a small fraction of our total effective circulation medium. ... Thus the State has forced the free-enterprise system, almost from the beginning, to live with a monetary system as bad as could well be devised. ... An enterprise system cannot function effectively in the face of extreme uncertainty as to the action of the monetary authorities or, for that matter, as to monetary legislation. We must avoid a situation where business venture becomes largely a speculation on the future of monetary policy. (p. 55)
If we examine the balance sheet of the US Federal Reserve (Fed), we see that gold and foreign assets ($30 billion) are negligible in relation to total liabilities ($4,452 billion), i.e., 0.6 percent. All money expansion was through money creation, with money becoming overly dependent on domestic debt. Moreover, as the latter expands, imports tend to rise faster while exports tend to shrink, which results in reduced net foreign assets. Moreover, debt money is costly; banks earn interest and commissions on the outstanding debt.
Debt money has fueled inflation.Two definitions of inflation are proposed. The most common one is a persistent general rise of prices. Another definition considers the general rise of prices as an effect of a rise of money supply that is not offset by a corresponding increase in the demand for broad money so that a fall in the objective exchange-value of money must occur. In this definition, inflation is measured by the increase in broad money supply. The latter has been considered as a form of fraud, which has to be eradicated.Inflation is an inherent feature of paper and debt money. It emanates from money created out-of-thin air in form of a monetization of fiscal deficits or issues of unbacked loans. Commodities are purchased against paper and not commodities. The practice of appropriating wealth unjustly was severely condemned by John Locke (1691). It is a fallacy that inflation stimulates employment and growth.Bastiat, The Seen and the Unseen, 1877. Inflation is a tax that unduly transfers free wealth to one group at the expense of another group. The income distribution is altered by a heavy inflation tax, which deprives labor from a sizable part of its real contribution to real GDP. At a high rate of money depreciation, holders of cash will get rid of it as soon as they receive it. Financial savings is discouraged (McKinnon, 1973; Shaw, 1973). Forced savings will replace voluntary savings, imposed upon creditors and workers through the inflation tax (Hayek, 1932). Production will be discouraged as producers hike prices and reduce output.In an inflationary context, producers reconstitute their money working capital through increasing prices and reducing quantities. In a non-inflationary context, they have to generate money working capital through higher quantities sold. They are compelled to produce much more to generate cash. The drop in prices improves in turn external competitiveness and exports. Exports will be reduced. Figure 1 portrays the Consumer Price Index (CPI) for the US and the Retail Price Index (RPI) for the UK under the metallic system during 1800–1913. In both countries, there was a significant trickling down of productivity gains and technical change in form of long-term trends of price declines. In 1913, the US CPI stood at 79 (1800 = 100) and the UK RPI stood at 82 (1800 = 100). Workers had shared in the fruits of growth (Farrer, 1898). Such sharing has been diminished under the debt money in almost every country where this system is in effect. Figure 2 portrays the inherent inflationary feature of the debt-money system supported by central banking in the UK and the US. Inflation tax has become permanent, penalizing the holders of the currency, workers, pensioners, and creditors. The inflation tax benefits the government, debtors, and speculators. Inflation is vital for the perpetuation of the debt system. There has been little trickling down of productivity gains to consumers.Mises (1953) noted that CPI underestimated inflation during 1922–1929, a period characterized by high productivity gains. Let the recorded CPI be 3 percent, let productivity gains be 7 percent; the true CPI would be 10 percent. In 2013, US CPI stood at 1,294 (1945 = 100), and the UK RPI stood at 3,766 (1945 = 100).
Figure 1: The United Kingdom and the United States Annual Price Indices, 1800–1913
Figure 2: The United Kingdom and the United States Annual Price Indices, 1945–2013
Inherent Inflationism, Instability, and Uncertainty of Debt Money The debt money model has resulted in adverse social consequences in many countries where it has been adopted.Interest-based bank money has been severely condemned by Thomas Jefferson, William Gouge, Charles Holt Carroll, Frederick Soddy, Amasa Walker, and many others. Mises, Rothbard, Irving Fisher, authors of Chicago Plan, Maurice Allais, and many authors proposed abolishing debt money and its replacement by a non-interest money. Recurring financial crises and ensuing economic dislocation have been its inherent features. In each debt crisis episode, economic prosperity was reversed into decline and mass-unemployment as demonstrated by the 2008 financial crisis. Being interrelated by a web of trade, banks and capital flows, a crisis breaking out in one country spreads to other countries. Fractional reserve banking was a violation of the original and authentic 100 percent reserve banking that characterized goldsmith houses as well as the Bank of Venice, the Bank of Amsterdam, and the Bank of Hamburg.These institutions were created as depository and payments institutions and not to economize on gold and silver, which were abundant in supply to the point of causing high inflation worldwide. It developed very fast in Europe and the US during the 18th–19th centuries mainly because of the leverage it provides to bank owners from the emission of banknotes and discounts, and ease of obtaining charters.
Figure 3: Monthly Central Bank Interest Rates, 2000–2013
By turning money into a policy tool, to secure full-employment of labor, devalue exchange rates, and inflate asset and housing prices, central bank actions could become somewhat arbitrary.Friedman (1959) opposed the discretion power of the Fed; he proposed a fixed rule according to which money supply ought to increase at about 2 percent-3 percent. He reiterated that the Fed could only control the money supply; it cannot control the unemployment rate, the interest rate, or the rate of inflation. Simons deplored money as an instrument policy and called discretionary policy as a form of lawlessness. He urged the abolition of fractional reserve banking and central banking, and the creation of a “National Monetary Authority” that controls money according to fixed rules. The systemic risk and uncertainty could be described by the cheap money policy of major central banks as portrayed by the interest rates in Figure 3. The Fed practiced a repressive policy, which lowered money rate to 1 percent during 2002–2004 under the guise of fighting deflation at a time the economy was operating at near full-employment for more than a decade. Credit rose at 12 percent year at the expense of creditworthiness; asset, housing, and commodities prices spiked. A financial collapse followed thereafter in 2008, creating massive unemployment in the US and Europe. After 2008, the Fed forced interest rates to near zero, this time, to fight unemployment. Hence, the Fed used a cheap money policy as a panacea for both diseases. The Fed decided to inflate money under quantitative easing programs; it hiked up without any restraint its credit to $4.5 trillion in 2015 from $0.8 trillion in 2008 (Figure 4).Excess reserves of banks at the Fed were $2.5 trillion in December 2015. If this amount is drawn down, credit expansion will be too gigantic and will increase credit risk as well as inflation. This gigantic money-out-of-thin air printing was aimed at monetizing record fiscal deficits and pushing cheap loans in the economy. The Fed, and most politicians and academics are convinced that near-zero interest and unlimited money were most appropriate policy for full-employment and economic growth.
Fed’s policy has in part led the Eurozone and other countries into monetary difficulties. As long as the dollar is a reserve currency, the Fed faces no external constraint in printing as much money as it wishes and in setting interest rates at near zero. The latter measure is dangerously distortive and assumes that real capital supply is overly abundant in relation to demand for capital. The danger of this policy was already established by the 2008 financial crisis.
Figure 4: The Federal Reserve Credit, 2002–2014 (Trillions of Dollars)
Debt money created too much uncertainty. The monetary base, credit, interest rates, exchange rates, asset prices and commodity prices are all moving in a most unpredictable and volatile way. Huge resources are devoted to hedging against high volatility of exchange rates and asset prices, which increases inefficiencies. In stable markets, hedging resources would have been used for productive investment.
With near-zero interest rates and cheap money, the US government debt skyrocketed to about $18 trillion in 2014 (103 percent of US GDP) and is still rising due to large deficits. Private debt had already reached bankruptcy point in 2008 and is still rising fast. The huge indebtedness makes inflation the only way out of debt. Most likely, the Fed will maintain ultra-cheap policy for some time, since any tightening of money policy will send debt into bankruptcy and result in a crash of asset prices.
Only reserve currency countries, today principally the United States, can afford the luxury of near-zero interest rates without setting off hyperinflation as happened in Germany 1919–1923. In 2015, central bank interest rates were 0.08 percent (US), 0.20 percent (Eurozone), 10 percent (Brazil), and 10 percent (India) (Figure 4). The contrast is obvious. Being non-reserve currency countries, Brazil and India could not afford to set interest rates at near zero. They face a foreign exchange constraint. Low interest rates would fire up inflation, undermine their banking sector, and destroy their export sector.
Setting interest rates at zero or near zero is most distortive policy. It leads to unlimited borrowing by subprime markets, encourages consumption through loans that may never be repaid, it consumes savings and depletes capital, and by introducing distortions enables mal-investment. It confiscates real capital from one group in favor of the group who benefits from cheap money. It exposes the banking sector to significant interest and credit risks. It pushes up asset and commodity prices, and creates an environment of economic uncertainty. Speculation becomes intense. Income and wealth inequality becomes aggravated. The harmful effects of cheap money policy appear only when a financial crisis breaks out. Abolition of fractional reserve banking is the reform that would reduce the depletion of capital, volatility, and ominous free redistribution of wealth via inflationism. Under a gold standard, low interest rates would immediately drain all the gold from the country, and force gold suspension as happened in the UK in 1931 and the US in 1971.
Some Distinguished Criticisms of Debt Money and Proposals for 100 Percent Reserve Banking Fractional reserve banking has provided the foundation for high leverageIn 1694, the Bank of England made a loan to the government; it immediately monetized the loan and issued banknotes in equal amount, extending more loans to both the government and business. Through leverage, the bank earned interest income on capital, which it did not possess. and swindling schemes, inflation of banknotes, financial crises resulting in economic dislocation and bankruptcies. As a result, numerous authors have called for a definitive end of fractional reserve banks, a cancellation of their charters, and the re-introduction of 100 percent reserve banking and money. A partisan of gold and 100 percent money, David Hume (Political Discourses) wrote: “of those institutions of banks, funds, and paper credit, with which we are in the kingdom so much infatuated. These render paper equivalent to money (i.e., gold), circulate it throughout the whole state, make it supply the place of gold and silver. ...” (Hume, 1752) The same discredit was held by Charles Jenkinson, Earl of Liverpool (1805): “Paper currency, which is carried to so great an extent, that it is become highly inconvenient to Your Majesty’s subjects, and may prove in its consequences, if no remedy is applied, dangerous to the credit of the kingdom.”
Aware of the danger of debt-money, the US Third President Thomas Jefferson wanted to abolish fractional reserve banking and preserve metallic money. In fact, he opposed the renewal of the charter of the First Bank of the United States. Witnessing the severe dislocation caused by banks and their corrupt nature, President Andrew Jackson pronounced to a delegation of bankers discussing the re-charter of the Second Bank of the United States in 1832: “You are a den of vipers and thieves. I intend to rout you out, and by the eternal God, I will rout you out.” He abolished central banking in the United States and allowed the country to enjoy sustained prosperity. The re-establishment of central banking in 1913 with the Federal Reserve inflicted on the US its worst economic depression during 1929–1936, and has been since destabilizing the economy and falsifying prices and income distribution.Ron Paul (2009) considered “the creation of the Fed the most tragic blunder ever committed by Congress. The day it was passed, old America died and a new era began. A new institution was born that was to cause the unprecedented economic instability in the decades to come. The longer we delay a conversion to sound money and away from central banking, the worse our crises will grow and the more the government will expand at the expense of our liberties. Our wealth is drained, our productivity is sharply diminished. Our freedoms are eroded. We have been through nearly a hundred years of this same repeating pattern, so it is time to wise up and learn something. When the printing presses are available to the government and the banking cartel, they will use them rather than do the right thing.”
Maurice Allais wrote (1999): “In essence, the present creation of money, out of nothing, by the banking system is, I do not hesitate to say it in order to make people clearly realize what is at stake here, similar to the creation of money by counterfeiters, so rightly condemned by law. In concrete terms, it leads to the same results.” Bastiat (1877) deplored the redistributive injustice of paper inflation. It steals wealth from losers and showers it for free on the gainers. He wrote:
I must also inform you that this depreciation, which, with paper, might go on till it came to nothing, is effected by continually making dupes; and of these, poor people, simple persons, workmen and countrymen are the chief. […] Sharp men, brokers, and men of business, will not suffer by it; for it is their trade to watch the fluctuations of prices, to observe the cause, and even to speculate upon it. But little tradesmen, countrymen, and workmen will bear the whole weight of it. (Bastiat, [1849] 2011, p. 131)
Carroll (1850s) severely condemned the redistributive injustice of fictive money and credit, favorably quoting Daniel Webster: “that of all the contrivances for cheating mankind, none has been more effectual than that which deludes them with paper money. This is the most effectual of inventions to fertilize the rich man’s field with the sweat of the poor man’s brow.” (Carroll, [1856] 1972, p. 35) Carroll noted that “the truth is, an expanded and consequently cheap currency is the most costly and wasteful machinery a nation can possess; the history of the world shows it to be uniformly unprofitable or disastrous. … There was never a greater mistake in any science, and never one so fatal to the stability of property and the well-being of society.” (Carroll, [1858] 1972, p. 76) Carroll deplored the devastating effects of paper money. He stated that “the value of money is regulated to disorder, to the impairing of contracts, and to the confusion of all just ideas regarding the rights of property, as effectually by the powers exercised by the States in granting bank charters, with authority to issue bills of credit.” (Carroll, [1855] 1972, p. 6) He described the notion of “price without value”; namely, currency generated by bank lending pours forth only to drive up prices without creating additional value.Figure 1 showed that an item that cost £1 in 1945 would cost £38 in 2013.
In 1833, William Gouge noted: “Our American Bankers have found that for which the ancient alchemists sought in vain; they have found that which turns everything into gold — in their own pockets; and it is difficult to persuade them that a system which is so very beneficial to themselves, can be very injurious to the rest of the community.” (Gouge, 1933, p. 227) He regretted the evils caused by banks of issues. These institutions constantly altered the measures of value, caused uncertainty to trade, and conferred undeserved advantages on some men over others. He stated: “It has always been my opinion, that of all evils which can be inflicted on a free state, banking establishments are the most alarming. They are the vultures that prey upon the vitals of the Constitution, and rob the body politic of its life-blood.” (Gouge, 1833, p. 111)
Gouge stressed the redistributive evils of bank money.
It made a lottery of all private property. These Banks, moreover, give rise to many kinds of stock-jobbing, by which the simple-minded are injured and the crafty benefitted. …They see wealth passing continually out of the hands of those whose labor produced it, or whose economy saved it, into the hands of those who neither work nor save. The natural reward of industry then goes to the idle, and the natural punishment of idleness falls on the industrious. The reckless speculator, who has no capital of his own, but who operates extensively on the capital of other people, has much cause to be well pleased with this system. (Gouge, 1833, p. 31)
Gouge rejected the notion of over-production as pure nonsense as huge human needs in food, shelter, medication, etc., in every country remain unfulfilled; he attributed the business disruption to the disappearance of fictive money created by banks. Irving Fisher (1936) explained the Great Depression (1929-1936) by the evaporation of bank money. His reform plan (100 percent money) urged the abolition of fractional reserve banking. He rejected the notion of elastic money, which underlined the Federal Reserve Act in 1913. He noted that
the flexibility or elasticity of Bank medium is not an excellence, but a defect, and that “expansions” and “contractions” are not made to suit the wants of the community, but from a simple regard to the profits and safety of the Banks. The uncertainty of trade produced by these successive “expansions” and “contractions,” is but one of the evils of the present system. That the Banks cause credit dealings to be carried to an extent that is highly pernicious — that they cause credit to be given to men who are not entitled to it, and deprive others of credit to whom it would be useful. (Gouge, 1833, p. 136)
He rejected the notion that banks make money plentiful, saying,
Banks make money plenty. Nay, they make real money scarce. As Bank notes are circulated, gold and silver are driven away. It is contrary to the laws of nature that two bodies should fill the same space at the same time; and no fact is better established than that, where there are two kinds of currency authorized by law or sanctioned by custom, that which has the least value will displace the other. (Gouge, 1833, p. 45)
Gouge challenged the principle that paper was cheaper than specie. That paper money has some advantages must be admitted; but its abuses are also inveterate. Gouge rejected also government paper stating that: “Government issues of paper would be incentives to extravagance in public expenditures in even the best of times; would prevent the placing of the fiscal concerns of the country on a proper basis, and would cause various evils. Further than this, Government should have no more concern with Banking and brokerage than it has with baking and tailoring.” In terms of reforms, Gouge was ahead of both the 1933 Chicago Plan and Irving Fisher’s 100 Percent Money (1936). For Gouge, debt-money is an evil that has no remedy, except be abolished or extinguish itself through bankruptcy or when paper become worthless. He stated:
[N]o legislative enactments can afford an adequate remedy for the evils which flow from incorporated paper money Banks. The system is, to use the language of the lawyers, malum per se — or a thing which is evil in its nature. The very principle of its foundation is wrong. No immunities should, in a Republican Government, be granted to any, save those which are common to all. (Gouge, 1833, p. 52)
And, “’You may say what you will, paper is paper, and money is money.’” (Gouge, 1833, p. 232)
Gouge proposed prohibition of all incorporated paper money banks; that is, to eliminate their privileges of limited liability and note issue. In their place he would have banks subject to unlimited liability, lending only their own capital plus savings deposits (time deposits) and maintaining a hundred percent specie reserve. “With private Banks, and public Offices of Transfer and Deposit, we should have all that is good in the present system, without the evil.” (Gouge, 1833, p. 230) For Gouge, money is metallic:
The high estimation in which the precious metals have been held, in nearly all ages and all regions, is evidence that they must possess something more than merely ideal value. It is not from the mere vagaries of fancy, that they are equally prized by the Laplander and the Siamese. It was not from compliance with any preconceived theories of philosophers or statesmen, that they were, for many thousand years in all commercial countries, the exclusive circulating medium. Men chose gold and silver for the material for money, for reasons similar to those which induced them to choose wool, flax, silk, and cotton, for materials for clothing, and stone, brick, and timber, for materials for building. They found the precious metals had those specific qualities, which fitted them to be standards and measures of value, and to serve, when in the shape of coin, the purposes of a circulating medium…. (Gouge, 1833, p. 10).
No instance is on record of a nation’s having arrived at great wealth without the use of gold and silver money. Nor is there, on the other hand, any instance of a nation’s endeavoring to supplant this natural money, by the use of paper money, without involving itself in distress and embarrassment. (Gouge, 1833, p. 17)
Gouge was cognizant of the time dimension of reform:
[T]he sudden dissolution of the banking system, without suitable prepa-ration, would put an end to the collection of debts, destroy private credit, break up many productive establishments, throw most of the property of the industrious into the hands of speculators, and deprive laboring people of employment. …[T]he system can be got rid of, without difficulty, by prohibiting, after a certain day, the issue of small notes, and proceeding gradually to those of the highest denomination. (Gouge, 1833, p. 138)
All that it will be necessary for Congress to do, will, probably, be to declare that, after a certain day, nothing but gold and silver shall be received in payment of dues to Government, and that no corporation shall be an agent in the management of its fiscal concerns. The people will then begin to distinguish between cash and credit; and public opinion will operate with so much force on state governments, that they will, one by one, take the necessary measures for supplanting paper by metallic money. (Gouge, 1833, p. 234)
The obstacles to reform noted by Gouge would not be very different from those of today. Besides political and deep-vested financial groups, Gouge recognized a degree of ignorance of people about the nature of the paper system.
Their only misfortune was, being ignorant of the principles of currency, and having rulers as ignorant as themselves. Certain individuals who have never caught a glimpse of a more improved state of society, boldly affirm that it cannot exist: they acquiesce in established evils, and console themselves for their existence by remarking that they could not possibly be otherwise. (Gouge, 1833, p. 227)
Henry Ford once said, “It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.” Holding similar views as Gouge and Carroll, the 1921 Nobel Prize winner in chemistry, Frederick Soddy (1934), condemned debt money as a form of legal swindling and counterfeiting and a violation of democracy. He accused it of sending millions of workers into unemployment and poverty and presenting a stumbling block to progress of technology, full employment, and the smooth distribution of the produce of industry. He urged abolition of debt-money and reconstitution of mints that would issue a state paper currency as a relief from taxation. Aware of hyperinflations in Germany, Austria, and many other countries, he recommended that state paper be regulated by a stable price index.
The money system condemned by Gouge, Carroll, and Walker was superior to the money system that has become deeply rooted since early 20th century. During their times labor, capital, and commodities markets were competitive with no customs barriers, no government-set prices and wages, no central bank, no labor unions, no formidable taxation, and oversized government.During the 19th century, labor markets recovered very quickly from depression caused by banking failure through a free market mechanism. In the depth of the Great Depression, with unemployment close to 25 percent, the US hiked up wage rates tremendously in the effort to stimulate spending. Not surprisingly, unemployment remained above 19 percent until the breakout of the war (1939–1944). With the war, unemployment fell to less than 1 percent. Simons (1947) lamented the erosion of competition, and the institutions that control capital and labor market. He was appalled by the use of government force in money area and money as policy tool, often referring to central bankers as “dictators” who inflicted great uncertainty and upheavals on the economy; he deplored the wide contraction and expansion of the money supply and the consequent alteration in the value of contracts which he called a perverse elasticity. He deemed that too much uncertainty was created needlessly by money policy. He strongly supported 100 percent money and abolition of both central banking and fractional reserve banking. Opposition to fractional reserve banking and its pillar central banking was not limited to the monetary system but also to the economic system it helped to shape in the form of too much government, too-powerful interest groups, and a totally rigid price and wage structure.Greece is an example of an economy saddled by oversized bureaucracy and deeply rooted rigidities that kept the economy in a depressed state during 2009–2015, with little scope for removing structural rigidities and downsizing government. Mises (1953) explained that rigidities and government support of monopolies of all kinds hindered recovery from depression. Massive quantitative easing in the US and the Eurozone illustrates clearly the belief of Mises, Simons, and many others on how deeply rigid the system has become. Mises argued that the best approach to unemployment was to remove legal restrictions on wage flexibility and let the labor markets clear on their own. Instead, governments force money expansion as the road to full-employment.
The principle of 100 percent reserve banking, (100 percent money) and the gold standard can be stated as follows. Banks are essential intermediaries in payments and investment; however, they should have no prerogative for money creation. Gold and silver are purely economic commodities and not an interest-based debt. Gold producers sell gold in the same manner as a farmer sells wheat. Gold is exchanged against wheat. As money, gold does not contract in the same fashion as a debt money, which contracts when borrowers pay it back or when issuers refuse to issue or when it goes into a general default. Gold does not expand at the stroke of a pen as debt-money does. Gold does not confer to any country a privilege status of a reserve currency. Under the gold standard, countries may not use their own currencies as a means of settlement and may have to settle balance of payments in gold if no other commodities are available for exports. Gold exerted the development of exports; nations exchanged commodities, and rarely settled in gold. With paper money, many countries neglected exports since they import with paper. Other countries, mainly developing countries, relied on borrowing, and in turn neglected their export sectors.
Suggested Reforms for Reintroducing 100 Percent Reserve Banking and a Domestic Gold Standard Restoring a gold standard following a suspension of gold convertibility is technically simple; it is purely a political decision. It requires relating changes in money (paper and demand deposits) to the flows of gold and foreign exchanges until the national currency reaches a stable rate vis-à-vis gold, at which point convertibility may be implemented on a permanent basis.The International Monetary Fund (IMF) adjustment programs imposed a strict ceiling or even reduction on the money supply in order to allow a country to reconstitute net foreign assets to a desired target. The IMF used the monetary approach to the balance of payments, which considered that the balance of payments reflected changes in domestic monetary aggregates. For instance, the German rentenmark was instantly pegged to gold in 1923, with no convertibility provision and almost no gold reserves, simply based on a full commitment to control the German money supply. Restoring a gold standard is exactly the same experience as restoring convertibility of a currency. After World War II, many European currencies, such as the French franc, were not convertible into foreign currencies at par as stipulated by the Bretton Woods system of fixed exchange rates. To reestablish convertibility, countries had to regain control of both money and fiscal policies and achieve macroeconomic stability. As long as the fiscal deficit was out of control and was being constantly monetized, countries could not attain convertibility.
Historical experiences of restoring the gold convertibility and gold standard are numerous. The basic principle was the same: strictly controlling banknotes and deposits emission. This principle was observed by the Bank of England in 1819 to pave the way for convertibility of its banknotes in 1821 following the suspension in 1797. In like manner, the US Treasury established gold convertibility of the greenbacks in 1879 through running fiscal surpluses that reduced paper money. As major industrial powers such as the United States, Germany, and France adopted gold standards during 1870–1900, the value of silver in relation to gold depreciated considerably. Numerous partner countries that were on a silver standard saw their currencies depreciate significantly, causing serious fiscal and external difficulties. Many silver standard countries had to introduce currency reforms consisting of achieving a fixed exchange rate of their currencies in relation to gold. These reforms were needed to establish stability of exchange rates and settle trade and capital operations in gold with gold standard countries (Kemmerer, 1916).
With the outbreak of war in 1914, many countries suspended the gold standard, meaning that their currencies were no longer convertible into gold; the currencies were floating in the exchange markets against each other. As soon as the war ended, countries were eager to restore the gold standard. An important feature of the return to a gold standard was the contrast between the doomed British experience and the successful French experience. The British experience restored gold at prewar parity in 1925 in the context of very high inflation. This rate did not reflect the very high degree of inflation since 1914 and was totally unrealistic. It necessitated a grave deflation that severely impaired the economy as well as external competitiveness. Mass unemployment developed, as wages could not be reduced. However, France was not as fast as the United Kingdom in restoring gold; it stabilized its economy until it reached a stable market rate of its currency in relation to gold that reflected past inflation as well as trade equilibrium. France restored a stable gold standard in 1928 at a highly devalued market rate, about one-fifth of the prewar parity, which enhanced external competitiveness without any reduction in nominal wages and was maintained with no difficulty thereafter.
Mises emphasized that a return to sound money, i.e., a gold standard, is technically simple; however, politically very difficult. His gold plan required an end to inflation by setting an insurmountable barrier to any further increase in paper and demand deposits; it required a safeguard against deflation. He proposed the establishment of a conversion agency, different from the central bank, which would be entrusted with exchange operations. The agency would have the monopoly to issue paper money against 100 percent gold and foreign exchange coverage. The banking system would be 100 percent reserve banking, with no discounting by the central bank. No privileges would be accorded to the agency, other than paper money issuance. It would not get a monopoly for dealing in gold or foreign exchange. The foreign exchange market would be perfectly free from any restrictions. Everybody would be free to buy or sell gold or foreign exchange. There would be no centralization of such transactions; any bank or dealer could settle foreign payments with foreign correspondents. Nobody would be forced to sell gold or foreign exchange to the agency or to buy gold or foreign exchange from it. Mises emphasized that the United States should restore the classical gold standard, which existed in the United States until 1933 with gold coins circulating freely, and not the gold-exchange standard. Gold should be in everybody’s cash holdings. Everybody should see gold coins changing hands, and everyone should be used to having gold coins in their pockets, receiving gold coins when they cash their paychecks, and spending gold coins when buying something from a store.
Rothbard (1962) proposed a gold standard with the dollar tied to gold permanently at a fixed weight, and redeemable in gold coin at that weight. The dollar should once again be defined as a unit of weight of gold. Rothbard urged the replacement of the name “dollar” by gold ounce or gold gram. Rothbard insisted that gold coins should circulate and be used in transactions. He emphasized that there seemed little point in advocating fundamental reforms while neglecting the causes that undermined the gold standard in the past. Besides abolishing the Federal Reserve, Rothbard wanted to eliminate, or at least dramatically reduce, inflation and business cycles. Consequently, he proposed 100 percent reserve banking, along the Chicago Plan (1933), Irving Fisher’s 100 Percent Money (1936), and Simons (1947) that would take away the ability of banks to create money and thus reduce leverage and inflationary and deflationary pressures. David Hume, Thomas Jefferson, Andrew Jackson, John Adams, W. Gouge, Charles H. Carroll, Amasa Walker, Isaiah W. Sylvester, Elgin Groseclose, and Ludwig von Mises all adhered to the 100 percent gold reserve tradition, i.e., paper and deposits are 100 percent covered by gold reserves. They considered the issuing of demand liabilities greater than reserves as a fraud.
Ron Paul (1985) asserted that Menger (1892) and Mises (1953) showed that money emerged by evolution from the market process. Namely, governments did not invent gold bullion as money. He proposed a new troy ounce gold coinage. Paul supported Mises’s Conversion Agency that would be responsible for issuing gold coins and bullion to the public and for exchanging gold and paper. Only the conversion agency should be allowed by law to legally exchange genuine coin for paper dollars at the par value. In Paul’s plan, a main step to restoring the gold monetary system is gold coinage; gold must be in the cash holdings of everyone. As with Mises, everybody must see gold coins changing hands; everybody must be used to having gold coins in their pockets, to receiving gold coins when they cash their paychecks, and spending gold coins when they go to buy goods in a store. In the critical importance of the gold coinage lies the key to establishing a new gold standard. In Paul’s gold standard plan, the coinage should be based on exact units of bullion weight. The coins should be denominated in troy ounces, half-ounces, and smaller sizes if feasible. The denomination of the coinage is the secret to success in the later stages of the political agenda.
Mises, Rothbard and Paul considered that a single country could go it alone and adopt the gold standard without waiting for the rest of the world to be under the gold standard.Soddy (1934) insisted that monetary reform is purely a national matter and should not require an international conference. The United Kingdom was the only gold standard country during 1816–1873. It introduced its gold legislation in 1816, without approval from another country; it rejected bimetallism proposed by the international monetary conferences of late 19th century in favor of its own gold standard. They rejected the idea of an international conference for restoring a gold standard, since in the past each country had gold money established by a sovereignty act and not by coordinating with partner countries. Mises (1944) wrote:
No international agreements or international planning is needed if a government wants to return to the gold standard. Every nation, whether rich or poor, powerful or feeble, can at any hour once again adopt the gold standard. The only condition required is the abandonment of an easy money policy and of the endeavors to combat imports by devaluation (p. 252).
In the same vein, Walker (1873) wrote:
If the principles we have previously laid down, and the practical results which follow, are such as we have stated, then no one nation needs to hesitate in making this experiment for fear that other nations may not follow their example; for the community which has the soundest currency will, other things being equal, have the most profitable industry and the most advantageous commerce. There need be no legal restriction whatever upon the issue of such a currency, and it matters not how voluminous it may be since it will be composed in fact of value money, will obey the laws of value, and, of course, will regulate itself. There would then be no expansions or contractions, except from the legitimate operations of trade; and the currency of the nation would be perfectly sound (p. 245).
One Hundred Percent Reserve Banking and a 100 Percent Convertible Gold Standard An essential reform, even before thinking about restoring the gold standard, is establishing 100 percent (or close to 100 percent) reserve banking or 100 percent money. The introduction of this reform has been thoroughly described by Soddy (1934), and Fisher (1936). Legislation has to change the banking into two components: (i) a 100 percent depository system, which issues no loans; and (ii) investment banking, which borrows or issues securities and bonds, and invests, lends or buys bonds and securities (Walker, 1873). This component cannot create money, i.e., issuing a loan, which has no money available, by simply crediting a borrower account and creating deposits. An investment bank operates like a development bankFor instance, the World Bank cannot lend without raising the funds prior to its lending by selling bonds. These funds are held at depository institutions. Certainly, it cannot create deposits in favor of its borrowers. or a mutual fund whose funds are held by a depository institution. Hence, starting from an implementation date, legislation has to require that a new loan issued by an investment bank would have to be fully covered by funds held in a separate depository institution. This decision will arrest the creation of new debt money; it will stabilize the money supply; and will enable the banking system to transit to a two-tier banking.To prevent a resurgence of fractional reserve banking, depository institutions issue no loans; they are payments institutions. Investment banks have no money creation role. The depository banks settle all their payments. Money holders would have to decide how much non-interest earning deposits they wish to keep, and how much interest-earning assets they acquire through the investment banking system. Simons stated that the best investment banking is the one that has no fixed money contracts at all:
What arrangements as to the financial structure would be conducive to lesser or minimum amplitude of industrial fluctuations? An approximate ideal condition is fairly obvious — and an unattainable. The danger of pervasive, synchronous, cumulative maladjustments would be minimized if there no fixed money contracts at all — if all property were held in residual equity or common stock form. With such a financial structure, no one would be in a position either to create effective money substitutes (whether for circulation or for hoarding) or to force enterprises into wholesale efforts of liquidation. (Simons, 1947, p. 165)
This reform enables the implementation of the McKinnon-Shaw financial deepening scheme. McKinnon and Shaw emphasized the importance of money deepening and a well-developed banking and financial sector. Large saving is pooled from small savers, large scale and efficient projects may be implemented, and risk is highly reduced. Investment banks borrow, or issue bonds, and stocks, and buy securities or extend loans to investment projects. Simons preferred that investment banks issue more equities than interest-bearing loans in mobilizing savings. Accordingly, the investment bank reduces its risk by linking the cost of its resources to the performance of its assets and to be able to raise long-term capital. Moreover, equity financing reduces the conflict between debtors and creditors and changes in value of debt due to changes in the price level.
The introduction of gold standard becomes an appendix to 100 percent reserve banking and 100 percent money, since a main obstacle to its existence has been removed, which is debt money. A gold standard with debt money would fail, since gold and debt money were like water and fire (Carroll, 1850s). A non-reserve currency country has nothing to lose by adopting a gold standard. It is presently in a pseudo-gold standard, since its foreign exchange can be converted instantly into gold at prevailing gold market prices. The gold standard cannot operate in any country with restrictions on the trade of gold. Gold restrictions were most futile and were imposed as a measure to force devalued paper on people as shown in France in 1720 and 1789–1795, the US after 1933, and the United Kingdom after 1931. A country has to establish a fully free gold market with no taxes on imports or exports of gold. The state assumes a role of quality control to prevent fraud. A free gold market establishes an equilibrium price free of distortions and contributes to a return to gold at true prices.
Peel’s Act in 1844 split the Bank of England into two departments: the Issue Department and the Banking Department. The issue department was in charge of issuing banknotes with 100 percent gold coverage. In like fashion, the central bank of a country envisaging 100 percent money with a gold standard will be re-organized into an issue department; the banking department becomes purely redundant in 100 percent money and may be eliminated. The issue department will issue national paper money only against foreign exchange and gold at floating market rates. The issue department has the strict monopoly of paper money. However, it has no monopoly in foreign exchange and gold markets. Banks, foreign exchange bureaus, and gold and silver dealers are entirely free in their trade of gold and foreign exchange within the regulatory framework. The issue department has no banking operations within or outside the country. It immediately turns its foreign exchange into gold at market rates and sells gold against national money at market rates.
A gold standard act would re-establish the mints and the gold and silver coins. The mints would be open to all the public, including domestic and foreign gold dealers, as well as to the issue department of the central bank. The mints would turn gold into coins and certify the quality of the coin at a simple fee for covering the cost of assaying and coining the gold metal. Nationals should be allowed to acquire gold coins minted locally or abroad. If residents export commodities, say, wheat, oil, and others, they may elect to import gold and transform the gold into coins. These coins should be allowed to circulate in the economy especially in settling large transactions. The purchase of gold coins should be facilitated through licensed banks and foreign exchange dealers. Monetary gold would be acquired through external trade, local mining if available, and diversion from non-money uses. The import of gold would be paid for by foreign exchange earned from exports of merchandise and services. Gold trade would be carried out at international prices in the same way as for all tradable commodities such as corn, crude oil, sugar, coffee, and others. The economy would have to export commodities in order to import gold or any other commodity. Gold would be bought and sold against national paper at the issue department or any appointed dealer at the market rate. Gold coins and bars may be deposited for safekeeping at depository institutions and used in payment operations. Depository institutions have to keep deposited gold in coins or bars and reconstitute them in coins or bars and never in paper money. Customers would convert their gold into national paper in separate operations at authorized banks and foreign exchange bureaus or directly at the issue department. During the transition period, gold would circulate alongside paper at floating rates in the same way as foreign currencies circulate alongside the paper. Traders may directly use their foreign currencies or convert them into paper to settle payments. Silver coins, to be issued by the mints, would circulate at a free rate as a commodity.
The issue department should monitor the exchange rate of the paper money in relation to gold only and not to foreign currencies; there should be no effort to economize on gold circulation or limit it only to bullion. The length of the transition is of little relevance, provided the issue department operates strictly as a conversion agency and the 100 percent money is in force. When paper is about to appreciate considerably in relation to gold, following a period of floating in relation to gold, a country would have reached the end of the transition period and would be ready to operate under a classical gold standard. The government may then fix the value of the paper in terms of gold. From this point of time onward, the issue department will buy and sell gold against paper at par. The paper has a denomination in units of accounts, and the gold coins and bars will continue to be denominated in weights. At par, paper will be as good as gold.
A country would have 100 percent coverage of any newly issued currency; that is, each new paper will have a full gold back up. Inversely, gold sold by the issue department entails a withdrawal from circulation of an equal amount of paper. The risk of a speculation against paper, once it is pegged to gold, is nil, since with 100 percent money, no money can be emitted as a debt. The paper has been strictly controlled and tightly linked to the transaction needs; there is no more redundancy of paper. However, there may be crop failure that necessitates considerable gold for imports, which may strain the gold holdings of the issue department or the foreign exchange dealers. In such contingency, the issue department may consider temporarily floating the currency until it reestablishes the previous parity again. We may observe that there should be a subsidiary metallic coin system in silver, copper, bronze, and nickel to supplement gold in the settlement of small transactions, as was the case with the UK system during 1816–1914. The subsidiary coinage is denominated not in weight but in decimals of units of account. To prevent inflation through subsidiary coinage, a number of paper money has to be drawn for each equivalent amount of decimal coins.
We should underscore that no initial condition is needed for the stock of the paper currency or the stock of gold. A country would not have to amass gold before it moves to a gold standard nor does it have to withdraw its paper currency from circulation through taxation and budget surpluses.A country can instantly peg its currency to gold at prevailing market rate, as the case of the German Rentenmark in 1923 with no convertibility provision. It reduces its currency when gold appreciates and expands when gold depreciates in relation to the fixed rate. The prior conditions would be to lift any restriction on gold as money and establish a totally free gold and silver market; establish a monopoly issue agency; and apply 100 percent reserve banking. The stock of gold acquired would be determined by the demand for gold; the higher the demand for gold, the more the country has to increase its exports and reduce its non-gold imports. The market would also determine the composition of its money in stocks of paper currency and gold and the convenience offered by each form of asset.
The Chicago Plan (1933) stressed 100 percent reserve money and equity-based banking without specific reference to gold. Why insist on re-introducing gold in a country when 100 percent reserve money would secure financial stability with paper money? We observe that all previous 100 percent money plans during the 18th and 19th centuries assumed a gold standard and aimed at securing gold convertibility. The authors of the Chicago Plan might have stressed a return to gold had they experienced a pure paper system such as prevailed after 1971. A removal of debt money is essential for stability under a paper or a gold system. Debt and money have to be split; money should not vary in relation to debt. Inconvertible paper is not natural money and did not emanate from market forces. As a result, the state has found paper money convenient to finance deficits. Paper representing gold may be coined as fully backed money; inconvertible paper is not, since it is often created through debt or fiscal deficit monetization. Moreover, gold is both a standard of value and an equivalent (i.e., exchanged commodity). Inconvertible paper has no intrinsic value and is not a standard of value. Hence, a country may not benefit by holding its foreign reserves in inconvertible paper. It will be safe to hold them in gold. A national paper pegged to gold has a known metal content and is stable money. It is no longer influenced by inconvertible and rapidly depreciating foreign currencies. A country will shelter its economy against the instability and uncertainties caused by reserve currencies countries. If not pegged to gold, the national paper will have an unstable exchange rate, and may suffer a degree of depreciation as reserve countries keep inflating their respective currencies. This will discourage investment and increases exchange rate risk and uncertainty.
Structural Reforms to Support 100 Percent Money: Fully Liberalized Labor, Capital, and Commodities Markets In almost every country, governments intervene in a multitude of sectors and areas of the economy. The more the government expands and intervenes, the more it needs resources, which it does by increasingly resorting to an inflation tax. Adam Smith, who demonstrated the fallacies of tariffs and bounties and warned against the expansion of the unproductive government sector, has detailed the dangers of government expansion and intervention. He confined the role of government to defense, justice, education, and public works. Among opponents to government intervention was Lysander Spooner (1886) who called for abolishing tariffs and monopolies and restoring free markets in capital, labor, and commodities. He stated:
[I]f a government is to “do equal and exact justice to all men,” it must do simply that, and nothing more. If it does more than that to any, that is, if it gives monopolies, privileges, exemptions, bounties, or favors to any, it can do so only by doing injustice to more or less to others. It can give to one only what it takes from others; for it has nothing of its own to give to anyone.(Spooner, 1886, p. 15)
Historically, therefore, the government had to force paper currency, make it a legal tender, to be able to levy inflation taxes and promote interest groups.
Paper money and fractional reserve banking have led to large government bureaucracies and powerful interest groups; the economy has reduced mechanisms for adjustment, except through inflation. Numerous writers have criticized the model of excessive intervention of the state in the economy. Mises (1949, 1953) stressed the necessity of unhampered markets and elimination of inflation as conditions for re-introducing a gold standard. He noted that government needed inflation to finance its expanding size. Simons (1947) deplored the devastating consequences of statism, and stressed that a monetary reform along the lines of 100 percent money has to be accompanied with abolishing monopolies and price rigidities. Hayek (1944) called it “the road to serfdom.” Anderson (1945), and a number of other writers showed the dangers of the present system of statism. The government keeps expanding in size.In his book, Our Enemy, the State, Albert Jay Nock (1935) showed the adverse consequences of an ever-bigger government in terms of economic decline, despotism, and social decline. F.A. Hayek (1944) deplored statism in many Western countries, which reduced people to serfdom. Failure of the state is called failure of the market. In spite of financial crises, economic decline and social inequities, this system is fully supported by politicians. Reserve currencies were able to finance their excessive statism by printing money. After 2008, reserve currency countries set interest rates at near zero with a view to running fiscal deficits and transferring part of the bailout cost to other countries. A non-reserve country has a strict external constraint. Admittedly, no Western country has the adoption of a gold standard on its radar, especially given wage and price rigidities, the dominance of statism, high spending, monetization of deficits, huge public and private debt, as well as the dominance of powerful financial groups. In many countries, the statist economic model has damaged exports, turned a previously rich agricultural economy into a food deficit country, and caused high external debt. With statism and rigid labor and control laws, a country will not be able to adopt a gold standard, or even, a restrictive money policy to tame inflation. It has to rely on inflation taxation to run large budget deficits.
A gold standard embedded in 100 percent reserve banking has been proposed by many writers since the 17th century because of the extensive damage caused by paper and fractional reserve banking. Although such a system has not existed in a recent past and there is no historical experience to prove its superiority, there are instead a great number of counterfactual cases regarding the disruptive consequences of inconvertible paper and debt money, by which leading industrial countries as well as developing countries are suffering economic stagnation, high unemployment, high inflation, high indebtedness, and continued financial instability. Very high income and wealth inequality prevails through redistribution caused by money printing, leverage and financial crises. The income distribution is no longer determined by the real contribution to the national output but by non-market advantages. In contrast, there is a substantive evidence that economic growth was rapid under the gold standard and benefited labor considerably in the form of substantial real wage increases with full-employment fully maintained in all gold standard countries (Farrer, 1898). Exchange rates were fixed for decades, and international trade was flourishing. However, the gold standard could not survive alongside fractional reserve banking. A system of 100 percent money, which abolishes debt money, does not allow money creation out of thin air.
Opponents of the gold standard have claimed that gold scarcity would prevent circulation of increasing volume of commodities, ignoring the role of clearing that clears almost all transactions in asset, commodities, international trade, etc., with almost no cash. Unlike the US Fed, which printed $4 trillion in money within 5 years to finance government expenditures, there is no mining company that could dig out as much gold within the same period. Banks, in emitting money, were guided by profit maximization and much less by commodity circulation. The redundancy of debt money evolved into a rampant inflation showing that too much paper was crippling the economy.Paradoxically, inconvertible paper creates money shortages. Cagan (1956) showed that real money was almost non-existent in hyperinflation countries. The US dollar has a purchasing power in 2016 that is less than 2 cents of what it had in 1914. Gold was used essentially as a standard; it rarely circulated as a means of payments as illustrated by the establishment of goldsmith houses, and the Bank of Venice, Bank of Amsterdam, Bank of Hamburg, and other similar banks that settled accounts without physical gold movements. By late 19th century, actual gold payments represented less than 2 percent of total payments in the United Kingdom. Be it for gold or paper, only the economy determines the actual real money in the economy via changes in prices. Moreover, there is a huge stock of gold buried deep in storage that could be released and used as money. Opponents also claim that gold impaired external competitiveness. In case of many countries, paper money inflation ruined the export sector as some countries relied on foreign debt to finance their external deficit, instead of exports. Moreover, domestic inflation impaired competitiveness. Improving external competitiveness via inflation and exchange rate depreciation amounts simply to a subsidy to exporters at the expense of importers and the fixed income groups; it is not a true improvement in competitiveness, which emanates from productivity gains and innovation. There is plenty of evidence that the gold standard improved competitiveness via substantial gains in productivity and a consequent drop in prices as witnessed during 1871–1914.
Conclusions We have recommended 100 percent (or realistically closer to 100 percent) reserve banking as the most important reform in restoring sound money and financial stability. This would also provide the foundation and a stepping stone to re-introducing a domestic gold standard in one or more countries that wished to do so. Sound monetary reform would help a country restore economic growth and social equity. As Gouge (1833) stated, fractional reserve banking is a malum per se, and has no remedy, except to be abolished and replaced by 100 percent reserve banking, in other words 100 percent money, as strongly advocated by the Chicago Plan (1933), Soddy (1934), and Irving Fisher (1936).
In the context of a cheap money policy by reserve currencies countries and consequent uncertainty, a non-reserve country might consider a gold standard to immunize its economy against fluctuations in exchange rates and prices. China has expressed such an interest at different times over the last 10 or so years. Besides 100 percent money, a country ought to encourage risk-sharing equity investment banking as suggested by Simons, thus alleviating the conflict between debtors and creditors and securing financial stability.
The inconvertible paper system has become highly unstable, as shown by the 2008 crisis, its aftermath as well as the turbulences that caused it. Controlling interest rates at near-zero bound will reduce savings, foster debt-financed consumption and misallocate resources away from their best physical investment opportunities in the real sector; increasing the level of debt, redistributing wealth with growing inequalities, fueling volatile exchange rates and asset prices, and all damaging growth, social equity, and international trade. By re-establishing 100 percent money, a country will have a most propitious money that will extricate an economy from inflation, restore fast growth, full employment, and enhance social justice, with its money and interest rates being market determined and not administered by the state.
Ryan McMaken appears on the Tom Woods Show to discuss his recent article, “The Trouble with Public Accommodation.”
The Journal of Libertarian StudiesAn Interdisciplinary ReviewVolume 13, Number 2, Summer 1998Ralph RaicoIntroduction
Julian SimonAre There Grounds for Limiting Immigration?
John HospersA Libertarian Argument Against Open Borders
Walter BlockA Libertarian Case for Free Immigration
Jesús Huerta de SotoA Libertarian Theory of Free Immigration
Tibor MachanImmigration Into a Free Society
Gary NorthThe Sanctuary Society and its Enemies
Hans-Hermann HoppeThe Case for Free Trade and Restricted Immigration
The Mises Institute hosts the first ever live episode of the Contra Krugman Show.
How does Paul Krugman, the New York Times's resident Keynesian and patron saint of leftwing economics, get everything so completely wrong? Bob Murphy and Tom Woods not only have a great time skewering Krugman, but also teach you how to refute the economic fallacies that so many of your family and friends fall for.
Recorded at Seattle's historic Town Hall on 21 May 2016. Includes an introduction by Betsy Hansen, opening remarks by Bob Murphy (2:41), The Contra Krugman Show (9:45), and closing remarks by Tom Woods (41:12) and Jeff Deist (50:21).
Special thanks to the Harvey Allison family for making this event possible.
Dr. Walter Block, a childhood classmate of Bernie Sanders, dissects one of the sacred cows of Seattle's latte-Left: minimum wage laws.
Recorded at Contra Krugman: Demolishing the Economic Myths of the 2016 Election: the Mises Circle at Seattle's historic Town Hall, on 21 May 2016.
Special thanks to the Harvey Allison family for making this event possible.
Why is the aviation world all atwitter? Peter Klein explains what free market competition is and is not. Klein is the Mises Institute's Carl Menger Research Fellow.
Quarterly Journal of Austrian Economics 18, no. 4 (Winter 2015)
ABSTRACT: The paper aims to defend the general validity of the ABCT against the assumption that the theory does not hold if entrepreneurs are able to anticipate correctly the inflationary effects of a fiduciary credit expansion. Hülsmann (1998) raises this critique and puts forward a general theory of error cycles centered on government intervention in the economy in order to overcome the perceived shortcomings of the traditional ABCT. The paper analyzes the main implications of this critique of the ABCT in terms of entrepreneurial foresight and the optimal course of action necessary to prevent a monetary induced business cycle, in particular in the context of fractional reserve banks operating under fiat currency. It concludes that within the general framework of human action, entre-preneurs cannot arbitrage away clusters of errors, and the ABCT remains valid. This paper also questions whether Hülsmann’s essentialist approach can be a viable alternative to the traditional ABCT, and find that, despite its merits, the approach can be refuted as a stand-alone theory.
KEYWORDS: business fluctuations, credit and money multipliers, interest rate, rational expectations, government interventionJEL CLASSIFICATION: E32, E51, E43, E03, P00
Quarterly Journal of Austrian Economics 18, no. 4 (Winter 2015): 562–567
Historians know that Afghanistan is the graveyard of empire; would-be conquerors dating all the way back to Alexander the Great have seen their imperial dreams dashed in the region for a variety of reasons. Less well known is the fact that Afghanistan, especially the Helmand River Valley, is also the graveyard of humanitarian intervention. German, Japanese, and American governments have all tried and failed to bring prosperity to the region via technical expertise and infrastructure projects. For example, a U.S.-backed project to construct dams and irrigation canals in the 1940s and 1950s eventually increased (after several false starts) the available water supply for agriculture in the region, but local farmers did not know how to handle the influx of water, and agricultural output actually decreased as fields flooded. After many similar setbacks the project was abandoned in the 1960s, but after 2001 the U.S. government was back again with remarkably similar plans that met with remarkably similar failure.
The repeated failures of humanitarian projects in the Helmand River Valley are Exhibit A for Chris Coyne’s case in Doing Bad by Doing Good: Why Humanitarian Action Fails. Over 204 pages, Coyne presents a devastating case against the dominant model of state-led humanitarian action worldwide. The implications of Coyne’s analysis, which draws heavily on the tradition of Austrian economic thought and is bolstered by thorough empirical research, are that this model is irredeemable and needs to be completely overhauled.
Although Phishing for Phools was published only a few months ago, it has already attracted much attention, owing to the eminence of its authors, both Nobel Laureates; but it has been misunderstood. Reviewers have taken it to be just another popularization of behavioral economics. The book does make use of behavioral economics, but its fundamental emphasis lies elsewhere. It is a radical attack both on the free market and a key part of standard economic theory.
The principal target of the book is a well-known and powerful argument in support of the free market. Akerlof and Shiller do not reject the argument entirely, but they drastically limit its scope. The argument in question is that the free market produces what consumers demand: “The central vision of economists is in terms of [Adam] Smith’s famous butchers, brewers, and bakers; they competitively respond to consumers’ demands, and decide how much to supply, based on what consumers are willing to pay. The system has an insistent equilibrium. If the economy is not in such an equilibrium, there is an opportunity for profit. If so, we would expect people to take advantage of it.”
The authors do not reject this argument altogether. “We do not argue with the economics textbooks about the merits of free markets: Our mind’s eye can take a journey across the boundary from China into North Korea, and then across the boundary into South Korea.”
We must not, though, “carry our praise of markets too far.” Conventional economics ignores a tendency to another equilibrium, one which is inimical to people’s welfare. This is the “phishing equilibrium.” Conventional economics “fails to see that competitive markets by their very nature spawn deception and trickery, as a result of the same profit motives that give us our prosperity. ... Just as much as the baker and the butcher and the brewer will be there if we have the resources to pay for what it takes them to supply the bread and the beer and the meat, so too the tricksters will be there to phish us for phools.” (By “phish,” the authors do not mean email schemes to get us to reveal our credit card information, the common meaning of the term. Rather, they have in mind efforts to trick consumers into buying what is not in their real interests. A “phool” is someone who, by their definition, is “successfully phished.”)
In brief, just as there is competition among sellers to satisfy consumers, so there is also competition to trick and shortchange them. Akerlof and Shiller say that their discovery of this “phishing equilibrium” is their main advance over standard behavioral economics. “The particularity of behavioral economics … have [sic] reinforced the notion that differences between what people really want and their monkey-on-the-shoulder tastes [tastes that aren’t really good for us] are not the norm. … But thinking about phishing generally … has cued us, on the contrary, to see that phishing for phools is not some occasional nuisance. It is all over the place.”
We shall soon examine the flimsy basis on which our authors question people’s choices. Even if they were right, though, that many people’s choices result from trickery, their claim to have proved a “phishing equilibrium” is a complete imposture.
Why is this so? In the standard competitive equilibrium, there is no counter tendency that threatens disruption. So long as you continue to produce what consumers demand, you will be successful. Not so if you trick or “phish” people. The claims you make for your product may at any time be exposed, and then you may face failure. If, e.g., you say that your new method of golf instruction will take twenty strokes off the average person’s game and it fails to do so, people may stop buying from you. Perhaps they won’t; but they may, and that is all I need for my argument. So long as a counter tendency exists, there is no proof of equilibrium.
Oddly enough, Akerlof and Shiller are aware that phishing schemes may be upended. They devote an entire chapter, “The Resistance and Its Heroes” to the topic. Agencies and magazines, like Consumer Reports, may rate products on how closely they meet standards. “As we see it, when we can measure the qualities of the goods, services, and assets we buy — then, for the most part, we get what we expect.” Further, even without such agencies, “businessmen of conscience with good products have both moral and economic reasons to sort out the phishermen. And they have developed some ways to do so. … The reliance of BBBs [Better Business Bureaus] on consumer complaints seems so obvious that it is taken for granted. But it provides a surprisingly subtle way for the members to take action against shoddy competitors. … Further protection against phishing comes from the norms of business communities.”
What then is the problem? Well, Akerlof and Shiller say, measures such as these are “much less effective against psychological phishing. If I have an urge to trash my budget or my diet, there are few protections against doing so.” But surely public spirited citizens can warn people against the dangers of bad diets, smoking, and the various other ills Akerlof and Shiller have in mind. The point, once more, is not how effective these measures prove to be. Even if Akerlof and Shiller were right that they do not work very well, so long as they are present no proof of a phishing equilibrium has been given.
But, you may object, are we not ignoring the crucial issue that Phishing for Phools raises? If Akerlof and Shiller have made exaggerated theoretical claims for their work, so what? Much more important, it may be contended, is their exposure of the businessmen who prey on our weaknesses by getting us to buy what we do not really want.
Of course, the question now arises, on what grounds do Akerlof and Shiller say that people buy what they do not really want? “We know because we see people making decisions that NO ONE COULD POSSIBLY WANT.” (Emphasis in original). How in turn, do we know this? Some of our supposed “choices” have bad consequences for us. Smoking leads to increased risks for lung cancer and other illnesses; surely smokers do not want this. People who eat large amounts of unhealthful food do not want to become obese. People who go into debt to purchase expensive luxury items do not want the worries that result from living beyond their means.
Akerlof and Shiller are very plausibly right that people do not welcome these bad consequences; but how does it follow from this that they do not really want what they choose? Our authors have adopted the implausible criterion that unless you like all the foreseeable consequences of what you choose, your choice does not reveal your true preferences. Yet on this flimsy basis, these distinguished economists are prepared to jettison a key part of standard economic theory. “A common precept of standard economics is that people only make the choices that maximize their welfare. This assumption even has a fancy name, ‘revealed preferences’: that people reveal what makes them better off by their choices. Such an assumption, of course, is exactly at odds with our concept of the difference between what people really want (what is good for them) and what they think they want (their monkey-on-the-shoulder tastes.)”
Once more, though, we must confront an objection. Even if they have arbitrarily defined matters so that if you choose something with bad consequences, your choice does not reflect your real preferences, could they not, with little damage to their case against the market, abandon this dubious view? They have only to say instead that, even if people follow their actual preferences when then choose, they often choose unwisely.
But to do this in fact would be fatal to their main argument. If people do not choose as their real preferences would dictate, then of course the issue of why they do so presents itself; and Akerlof and Shiller’s claim that businessmen phish people into doing so emerges as an explanation. If, though, we say instead that people are choosing according to their preferences but that, from an external standpoint, Akerlof and Shiller think their choices unwise, there is no problem of choice that requires an explanation. It may be that, in particular cases, businessmen trick their customers; but if people choose what they in fact prefer, we have no reason in the general case to think so.
When one looks at particular cases, it is surprising how little our authors require to charge that the phish is in. “But the most basic fact about tobacco and alcohol is that they are easily available with only moderate taxes. The easy availability of tobacco through the market, in and of itself, is the basic phish of the smokers; like-wise, the easy availability of alcohol is the basic phish of those who end up drinking too much.” You see how their “logic” goes; because people “really” do not prefer tobacco and alcohol, even though they purchase these items, sellers are tricking consumers by making these products available on the market. Phishing for Phools: an ugly title for a badly argued and pernicious book.
In the wake of numerous cases of lead poisoning through Flint, Michigan’s government-managed water supply, some commentators immediately began looking for ways to blame the private sector. Shortly thereafter, David Brodwin of U.S. News and World Report wrote “Flint: The Big Cost of Small Government.”
According to Brodwin, what caused lead-tainted water to gush forth from faucets in Flint were “attacks on investment in public infrastructure and on regulation of all kinds.” For these he blames “right-leaning libertarian interests,” although he does not name a single one.
America, writes Brodwin, has fallen under an “obsession with tax cuts [which] has reduced budgets to the point where they can no longer sustain basic infrastructure.” Attacks on regulation supposedly caused the failure of the Michigan Department of Environmental Quality to do its job. “Either its staff was buffaloed by those in power, or its professionals had been replaced by political hacks willing to ignore the mission of the agency.” Brodwin does not support these assertions with evidence.
But then comes a strange concession from Brodwin: “Local officials of the federal [Obama administration] Environmental Protection Agency failed as well.”
Brodwin’s conclusion is that “[i]f we don’t address the underlying ideologies that led to this problem, we’ll face it again and again, all over the United States.”
If you are wondering at what point in its history Flint, Michigan jumped onto the cutting edge of free-market thinking and practice, join the club.
Obviously Brodwin’s contradictory essay doesn’t begin to explain how small government caused lead-tainted water to pour out of Flint’s taps. From an economics perspective, what all the facts of the Flint case clearly point to is the all-too-typical failure of central planners to adequately think through the most important implications of a decision.
On 25 March 2013, Michigan state officials and the Flint city council (by a 7–1 vote) decided to switch the city’s water source from the Detroit Water and Sewerage Department (DWSD) to the new Karegnondi Water Authority (KWA), which would not begin operating until 2016.
In the meantime, an alternate source of water had to be found. The 26th of June 2013 was when the actual decision by the city (signed by the state-appointed emergency manager, Ed Kurtz) was made to hire an engineering firm to put Flint’s water plant into full-time operation, thus switching Flint’s water supply from Detroit to the Flint River. (The river was already Flint’s back-up water source.)
What city, county, and state officials all failed to do was take measures to ensure that the river’s corrosive water was sufficiently treated so that it did not absorb toxic lead from Flint’s water network.
Far from being unusually negligent for a government, this sad story is unfortunately understandable and predictable. Unlike the numerous suppliers of private bottled water, central planners have no competitive pressures to rigorously think through any and all of their decisions.
One civil servant in Spain, for example, just recently ended a stint of not showing up for work for six years. Successfully executing such a stunt in a private-sector job in a competitive industry is just about impossible.
Sebring, Ohio; Jackson, Mississippi; and the Trouble with Government WaterWhile most readers of this site will have undoubtedly heard a lot about the lead-tainted water in Flint, Michigan, the stories that comparatively few will have heard about are lead in the water in Sebring, Ohio and last Wednesday (February 24) in Jackson, Mississippi.
Again, what should come as no surprise is that the same type of government bungling that put lead in Flint’s waters is on full display in Sebring and Jackson as well.
On 17 February 2016, the Ohio Environmental Protection Agency fired two of its employees and demoted a third. The first employee who was terminated failed to verify that lab test results were received by a field office. In turn, this employee’s boss was terminated for not double checking the work of said subordinate who had a long record of incompetent job performance.
The third employee, the one demoted, was a manager who failed to notify his bosses that Sebring officials ignored warnings about their town’s lead-contaminated water.
None of the three individuals are being publicly identified. So much for state transparency.
In Jackson, Mississippi, of a hundred homes tested in January of 2016, almost a dozen had tap water with levels of lead that require correction. Fifty-eight of these homes had been tested in June of 2015 but the Mississippi State Department of Health did not (as required) notify Jackson officials that some homes had forbidden levels of lead in their tap water until January of 2016.
The Progressive Jihad Against Bottled WaterProgressives have placed a spotlight on Flint but not Sebring and Jackson because their ideology precludes them from acknowledging systemic problems with government and its central-planning process. Progressive economists such as Brodwin lay the blame at the feet of libertarian ideology. Worse than their delusions about the state, the ultimate dream of progressives is to outlaw just about all competition to government water.
They (including filmmaker Michael Moore) are apoplectic about Flint (and by extension Sebring and Jackson) residents consuming bottled water: it has to be transported in on “pollution-spewing” trucks and it creates waste and environmental damage in the form of empty plastic bottles.
When progressives succeeded at banning bottled water at the University of Vermont in 2013, the number of empty plastic bottles being discarded on campus actually increased as students, staff, and faculty members switched from consuming bottled water to less healthy bottled soft and other drinks. In other words, even in Bernie Sanders’s government-worshipping Vermont, consumers did everything they could to avoid government taps.
Before Lead, There Was Viagra and Anti-PsychoticsYears before the Flint, Sebring, and Jackson contaminations, an AP investigation in 2008 discovered everything from antibiotics, antidepressants, sex hormones, erectile-dysfunction drugs, to tranquilizers in the water supplies of twenty-four metropolitan areas with 41–46 million Americans exposed.
Consuming government water is a bad idea. At its very best, it has a repulsive over-chlorinated swimming-pool smell and even worse off-putting saturated chemical taste. At its worst it can be tainted with everything from trace or higher levels of Viagra or estrogen to dangerous levels of lead. Only a complete fool would regularly and solely consume it to the exclusion of its private alternatives.
In the cramped carriages of trains on the London underground, the bumping of body parts periodically furnishes occasion for a few murmured words between strangers. Aside from these apologetic exchanges, the passengers usually avoid getting involved with one another. Last November, however, this culture of British indifference was contravened when a group called Overweight Haters Ltd., apparently rapt by a sense of public duty, began an on-train shame campaign against fat Londoners, which involved giving out cards: “We disapprove of your wasting NHS [National Health Service] money to treat your selfish greed. ... You are a fat, ugly human.”
This odious act was, in part, sociological fallout from Britain’s nationalized system of health care. Single-payer medicine makes intimate health issues fair game for crass debate in the public square.
The government-employed statisticians and health experts, however, is the subject for analysis today. Writers of reports on obesity policy options are obliged, it seems, to include a section on the social cost of obesity — and the higher the number generated, the better. Their entire program of interventions dearly depends on this section for its implementation. In the words of one government source: “If rational individuals pay the full costs of their decisions about food intake and exercise, economists, policymakers, and public health officials should treat the obesity epidemic as a matter of indifference.” Theoretically, if the social cost is found to be low or zero, the rest of the report (all 150 pages of it) should end up in policymakers’ recycling baskets. Given this incentive structure, it is perhaps unsurprising that the UK Government Office for Science reported a number so obviously flawed.
How the Report Exaggerates CostAs a Crown-stamped document, the report emanates authority. This makes its estimate suitable for uncritical regurgitation by journalists, politicians, and pundits. It is now etched into the British psyche: obese people are an ungodly drain on our NHS. To fully comprehend what it means to be cast as an enemy of the NHS in modern day Britain, note that, in protest of the Conservative Party’s quasi-reformist healthcare policies, in the county of East Sussex last Guy Fawkes Night a giant, naked effigy of Prime Minister David Cameron was paraded, jeered, and burnt.
The report in question, Foresight Tackling Obesities: Future Choices Project, claims the cost of obesity to the NHS was £3.9 billion in 2015 — this includes the direct cost of treating obesity, as well as a proportion of the cost incurred by treating obesity-related diseases, e.g., diabetes, coronary heart disease, stroke. However, and this is the point we want to stress, no effort is made in the report to account for the fact that obese people die earlier, and so often do not cash out their state pensions. That is, it gives the gross cost of obesity, when it is the net cost (which is much, much lower) that is the true indicator of obesity’s burden on the public purse.
Let’s estimate the net cost. The National Audit Office, an independent parliamentary body, estimates that obesity accounted for 30,000 excess deaths in 1998 in England alone (no data is available for the rest of Britain). On average, each individual died nine years earlier than they would have done had they not been obese. Assume that, in every year following 1998, the same was true: 30,000 people died nine years early. It follows that there were 270,000 fewer people alive in England to collect their pensions in 2015 due to obesity. (The formula is number of deaths multiplied by number of years lost per person due to premature death, and the logic underpinning that formula is captured in the diagram below.)
Figure 1: Number of people not collecting a state pension every year on account of their having died an early, obesity-caused death.
In the diagram: Each dot represents 30,000 people “missing” from society due to untimely death. The first wave of people died nine years prematurely in 1998, and so there were 30,000 fewer people alive to collect state retirement payments from 1999 to 2007 — represented by red dots. The second wave of 30,000, who died in 1999, are represented by pink dots. By 2007, the number of people absent from society levels out at 270,000 (= 9 x 30,000). There are six dots above 2004, seven above 2005, eight above 2006; but nine above 2007, nine above 2008, nine above 2009, etc. Given the assumed death rate and years of life lost, 270,000 is the “long-run” number of English people missing from society because of obesity.
The state pays up to £8,300 per year to over-65s, which includes pension, top ups, heating allowance, and a TV license. Because in 2015 there were 270,000 fewer over-65s alive on account of premature death, the state’s liabilities in England alone were reduced by over £2.2 billion. This puts the net cost of obesity at about £1.7 billion, which is less than 2 percent of the NHS’ 2015/16 budget, and 56 percent lower than the gross cost. If we’d had the necessary data to include the rest of Britain (Scotland, Northern Ireland, and Wales), we might well have found the net effect of obesity on the state’s coffers in 2015 to be nil, or close thereto.
Of course, some obese people do claim out-of-work sick payments from the government, which inflates the net burden of obesity — but the amount is paltry (approximately £50 million a year) and this does not upset the conclusion of our analysis.
Government as an Agent of Social ConflictIn short, by highballing their estimate of the social cost of obesity, the report’s interventionist authors have unnecessarily contributed to the stigmatization of obese people in British society. Remember, Overweight Haters Ltd. cited the burden of obesity on public finances as their primary grievance.
Multiple studies have shown that fat-shaming causes obese people to gain more weight. This should be obvious given that obsessive eating is rooted in negative emotional states, from which sweet and fatty foods — calming opioids — provide fleeting respite. In fact, 69 percent of adults undergoing gastric bypass surgery report having suffered abuse as children, which makes sense given that tormented youngsters are more prone to suffer mental health issues in later life, and to use food as a conciliatory mechanism.
This is an age-old story: interventionists are known in libertarian circles for compounding the very problems they seek to solve. For example, when the Federal Reserve lowered interest rates after the dot-com crash, it stoked a housing bubble; when Western forces swore to defeat terrorism, they created ISIS; when Chairman Mao ordered the killing of grain-stealing sparrows, he caused a famine. This time, the interventionists sought to solve the obesity problem — and again they made the problem worse.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Music by Kevin MacLeod (incompetech.com).
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Music by Kevin MacLeod (incompetech.com).
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
From Chapter 8: "Basic Research". Narrated by Millian Quinteros. This audio book is made available through the generosity of Mr. Tyler Folger.
In this brilliant monograph Rothbard deftly turns the tables on the supporters of big government and their mandate for control of research and development in all areas of the hard sciences.
This audiobook is made available through the generosity of Mr. Tyler Folger. Music by Kevin MacLeod (incompetech.com).
Download the complete audiobook (12 MP3 files) here. This audiobook is also available on Soundcloud, Apple Podcasts, Google Podcasts, and via RSS.
The economic causes and consequences of immigration are among the most important issues facing the world today. Both pro- and anti-immigration advocates are digging in their heels, and both sides look increasingly unlikely to relent. Despite the bleak outlook, however, there is still hope for a peaceful and charitable discussion of the economics of immigration.
With that in mind, I want to consider Mises’s thoughts on the topic. For Mises, emigration and immigration are motivated by a simple economic fact: the conditions of production are not the same in all places. Natural and human conditions change constantly, and as a result, the productivity of land, labor, and capital do so as well. Therefore in order to take advantage of changing conditions and produce in the most productive ways possible, people must constantly migrate to those places where their contributions are most valuable (1919, pp. 84–85).
The desire to move from low-productivity to high-productivity regions is for Mises the fundamental explanation for the migration of peoples, and limits overpopulation (1919, p. 85). We can say a country is relatively overpopulated when the same amount of capital and labor is less productive there than in another nation. Reducing overpopulation means reducing this “disproportion” by allowing for the mobility of persons and goods (1919, p. 86). In Mises’s view, mobility was an achievement of liberalism:
The principles of freedom, which have gradually been gaining ground everywhere since the eighteenth century, gave people freedom of movement. … Now, however — as a result of a historical process of the past — the earth is divided up among nations. Each nation possesses definite territories that are inhabited exclusively or predominantly by its own members. Only a part of these territories has just that population which … it would also have under complete freedom of movement, so that neither an inflow or an outflow of people would take place. The remaining territories are settled in such a way that under complete freedom of movement they would have either to give up or to gain population. Migrations thus bring members of some nations into the territories of other nations. That gives rise to particularly characteristic conflicts between peoples. (1919, pp. 86–87)
Mises has two types of conflict in mind: economic and social. Economic conflict occurs because domestic workers resent that fact that immigration bids down their wages:
[I]n territories of immigration, immigration depresses the wage rate. That is a necessary side effect of migration of workers and not, say, as Social Democratic doctrine wants to have believed, an accidental consequence of the fact that the emigrants stem from territories of low culture and low wages. (1919, p. 87)
Social conflict can also arise. Mises emphasized, however, that in most cases immigrants are obliged to give up their national identity and adapt themselves to the culture of their new home. Only in relatively extreme cases, such as European imperialism, was it historically possible for immigrants to replace original inhabitants and their cultures (1919, p. 89). In fact, according to Mises, strong cultures need not resort to government in order to protect themselves:
A nation that believes in itself and its future, a nation that means to stress the sure feeling that its members are bound to one another not merely by accident of birth but also by the common possession of a culture that is valuable above all to each of them, would necessarily be able to remain unperturbed when it saw individual persons shift to other nations. A people conscious of its own worth would refrain from forcibly detaining those who wanted to move away and from forcibly incorporating into the national community those who were not joining it of their own free will. To let the attractive force of its own culture prove itself in free competition with other peoples — that alone is worthy of a proud nation, that alone would be true national and cultural policy. The means of power and of political rule were in no way necessary for that. (1919, pp. 103–04)
However, for Mises, cultural considerations are mainly an aside. In general, he saw conflicts over immigration as being driven mostly by protectionism rather than insurmountable differences in human beings or cultures (1935). In particular, domestic unions support government policies to restrict immigration and thus keep low-wage competition out of the labor market:
Public opinion has been led astray by the smoke-screen laid down by Marxist ideology which would have people believe that the union-organized “proletariat of all lands” have the same interests and that only entrepreneurs and capitalists are nationalistic. The hard fact of the matter — namely that the unions in all those countries which have more favorable conditions of production, relatively fewer workers and thus higher wages, seek to prevent an influx of workers from less favored lands—has been passed over in silence. (1935)
As Per Bylund notes, this is precisely what is happening in Sweden, where unions prevent the integration of immigrants so as to keep wages high. Protectionism at home also breeds protectionism abroad, as foreign nations try to cope with lower productivity through their own regulations designed to counter “unfair” competition on the world market. As economic conditions worsen in those countries where migration is prevented by the state, conflict becomes inevitable:
[People in these countries] will certainly still have just as much cause to complain as before — not over the unequal distribution of raw materials, but over the erection of migration barriers around the lands with more favorable conditions of production. And it may be that one day they will reach the conclusion that only weapons can change this unsatisfactory situation. Thus, we may face a great coalition of the lands of would-be emigrants standing in opposition to the lands that erect barricades to shut out would-be immigrants. … Without the reestablishment of freedom of migration throughout the world, there can be no lasting peace. (1935)
In this way, protectionist policies inevitably lead to conflict and the destruction of human life and welfare. In fact, Mises even hints that government policies aiming to control the movement and employment of individuals suffer from the same problems socialist central planning does (1919, p. 85). At the same time, entrepreneurship and the division of labor are the foundations of a rational social order, and neither is possible without free labor markets.
The main threat facing society then is illiberal ideology, and the only solution to this “principle of violence” is to develop a consistent liberal philosophy to serve as the basis for a peaceful society (1951, p. 49).
Mises believed that any society that rejected the values of liberalism was doomed. In an age of nationalism, protectionism, and war, it’s easy to see what he meant.
One day in 1959, hundreds of students, educators, and grandees filled the enormous lecture hall of the University of Buenos Aires to capacity, overflowing into two neighboring rooms. Argentina was still reeling from the reign of populist president, Juan Perón, who had been ousted four years before. Perón’s economic policies were supposed to empower and uplift the people, but only created poverty and chaos. Perhaps the men and women in that auditorium were ready for a different message. They certainly got one.
A dignified old man stepped before them, and delivered a bold, bracing message: what truly empowers and uplifts the people is capitalism, the much-maligned economic system that emerges from private ownership of the means of production.
This man, Ludwig von Mises, had been the world’s leading champion of capitalism for half a century, so his message was finely honed. Not only a creative genius, but a superb educator, he boiled down capitalism to the essential features that he believed every citizen needed to know. As his wife Margit recollected, the effect on the crowd was invigorating. Having spent years in an intellectual atmosphere of stale, stagnant ideas: “The audience reacted as if a window had been opened and fresh air allowed to breeze through the rooms.”
This lecture was the first in a series, the transcriptions of which are collected in the book Economic Policy: Thoughts for Today and Tomorrow, edited by Margit.
Life (and Death) Before CapitalismTo demonstrate in his lecture how revolutionary the advent of capitalism was in world history, Mises contrasted it with what he called the feudalistic principles of production during Europe’s earlier ages.
The feudal system was characterized by productive rigidity. Power, law, and custom prohibited individuals from leaving their station in the economic system and from entering another. Peasant serfs were irrevocably tied to the land they tilled, which in turn was inalienably tied to their noble lords. Princes and urban guilds strictly limited entry into whole industries, and precluded the emergence of new ones. Almost every productive role in society was a caste. This productive rigidity translated into socio-economic rigidity, or “social immobility.” As Mises reminded his Argentine audience:
a man’s social status was fixed from the beginning to the end of his life; he inherited it from his ancestors, and it never changed. If he was born poor, he always remained poor, and if he was born rich — a lord or a duke — he kept his dukedom and the property that went with it for the rest of his life.Over 90 percent of the population was consigned to food production, so as to precariously eke out sustenance for their own families and contribute to the banquets of their domineering, parasitic suzerains. They also had to make their own clothing and other consumers’ goods at home. So, production was largely autarkic and nonspecialized. As Mises highlighted, the small amount of specialized manufacturing that existed in the towns was devoted largely to the production of luxury goods for the elite.
From the High Middle Ages onward, production in Western Europe was higher, and the average person much less likely to be a chattel slave, than during antiquity and the Dark Ages. But the economic system was still fixed and moribund; the common man had no hope of progressing beyond a life teetering between bare subsistence and starvation.
And in the eighteenth century, in the Netherlands and England, said Mises, multitudes were about to go over the ledge, because the population had grown beyond the land then available to employ and sustain them.
It was then and there that capitalism entered the scene, saving the lives of millions, and vastly improving the lives of millions more.
Four key distinguishing features of capitalism can be gleaned from Mises’s lecture. What follows is an exposition of those features, which can be thought of as, to paraphrase Richard Feynman, “Mises in four easy pieces.”
It is important to note that, as Mises fully noted elsewhere, what emerged in the eighteenth century and developed subsequently was never a purely free market. So, the following characteristics have never been universal. But these features did come into play far more extensively in this period than ever before.
One: Dynamic ProductionUnder what Mises called “capitalistic principles of production,” feudal productive rigidity is replaced by productive flexibility and free entry. There are no legal privileges protecting anyone’s place in the system of production. Lords and guilds cannot exclude new entrants and innovations. And an upstart enterpriser’s capital, products, and proceeds are secure from the cupidity of princes and the jealousy of incumbents.
Of course free entry amounts to very little without the corresponding right of free exit. With capitalism, peasants are free to leave their fields and former masters for opportunities in the towns. And proprietors are free to sell or hire out their plots of land and other resources to the highest bidder. (Although, during the transition between feudal and capitalist production, it really should have been the peasants doing the selling and hiring out, as they were owed restitution never delivered for their past serfdom and expropriation.)
Free entry/exit is the logical corollary of liberty: inviolate self-ownership and private property. It is the freedom of an individual to put his labor and earnings to whatever productive use he finds advantageous, irrespective of the pretenses to privilege of vested interests.
Under capitalism, no longer can nobles rely on a captive labor force and “customer” base, or enjoy the impossibility of having resources bid away by more efficient producers. No longer can these robber barons turned landed barons rest on such laurels of past armed conquest.
Mises identified resentment of this fact as a prime source of anti-capitalism, which thus originated, not with the proletariat, but with the landed aristocracy. He cited the consternation of the Prussian Junkers of Germany over the Landflucht or ”flight from the countryside” of their peasant underlings. And he related a colorful story of how Otto von Bismarck, that prince of Junkers who founded the welfare state (with the express purpose of co-opting the masses), grumbled about a worker who left Bismarck’s estate for the higher wages and pleasant Biergartens of Berlin.
Under capitalism, no longer can tradesmen idle in old methods and old markets. To do so is impossible in a world in which any man with savings and gumption is a potential underseller and overbidder. Industry incumbents also loathe the competition, so their special pleading is another major source of anti-capitalist rhetoric.
Free entry/exit imposes the stimulus and discipline of competition on producers, impelling them to strive to outdo each other in satisfying potential customers. As Mises announced in Buenos Aires: “The development of capitalism consists in everyone’s having the right to serve the customer better and/or more cheaply.”
Production, formerly adrift in the standing water of feudalistic stagnation, sets sail under capitalistic dynamism, driven by the bracing winds of competition.
Two: Consumer SovereigntyWhen producers vie with each other to better serve customers, they unavoidably act more and more like devoted servants of those customers. This is true of even the biggest and wealthiest producers. As Mises brilliantly expressed it:
In talking about modern captains of industry and leaders of big business … they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king — or the steel king or the automobile king or any other king of modern industry — depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.With capitalism, just as producers play the role of servant, customers play the role of master or sovereign: in a figurative sense, of course. It is their wishes that hold sway, as producers strive to grant them. And strive they must, if they want to succeed in business. For, just as a sovereign of the ancien régime was free to withhold favor from one courtier and bestow it upon another, the “sovereign” customer is free to take his business elsewhere.
This relation is even expressed in the language we use to describe commerce. Customers are patrons who patronize shops and other sellers. These sellers say, “thank you for your business” or patronage, and insist that, “the customer is always right.” The polite, respectful deference formerly given by the ancient Roman cliens (client) to his patronus (patron) is now instead given by the producer to his customer/patron, except generally in a much more self-respecting and less groveling manner.
If the customer is himself also a producer on the market, he must pay forward that same solicitousness and deference to his own customers, lest he lose their business to competitors. Thus, his desires for goods from his eagerly attentive suppliers are shaped by his own eagerness to fulfill the desires of his own customers. Therefore, the higher order producer, by striving to make his customer happy, indirectly strives to make his customer’s customers happy as well.
This series terminates with the customers who have no customers: namely, the consumers, who are therefore the “engine” of this “train” of final causation. Thus, with capitalism, it is the consumers who hold ultimate sway over all production. Mises referred to this fundamental characteristic of capitalism as, speaking figuratively, consumer sovereignty.
Again, this is constrained to the extent that state intervention hampers capitalism. “Leaders of big business” can and often do use the state to acquire powers and privileges that enable them to flout the wishes of consumers and acquire wealth through domination instead of service. In fact, one of the most clear recent instances of this involved a real life person actually nicknamed, as in Mises’s example, the “chocolate king”: a confectionary tycoon named Petro Poroshenko who parlayed his business success into a political career which recently culminated in his election as president of the US-sponsored junta now ruling Ukraine.
Three: Mass Production for the MassesIn the first lecture of his online course “Why Capitalism,” David Gordon drew from his limitless reservoir of scholarly anecdotes to relate that Maurice Dobb, a British economist and communist, replied to Mises’s point about consumer sovereignty by averring that this feature of capitalism hardly does the common man any good, since the most significant consumers are the wealthiest. Dobb’s mistake, of course, is to neglect the fact that the relative importance of single consumers is not the issue here. The combined purchasing power of the preponderance of typically wealthy consumers vastly outstrips that of the atypically wealthy.
Therefore, as Mises pointed out, the capitalist’s main route to becoming one of those few wealthy consumers of extraordinary means is through mass producing wares that cater to the masses of consumers of ordinary means. Even a small per-unit profit margin, if multiplied millions or billions of times, adds up to some serious dough. Boutique enterprises catering only to the elite, as feudal era manufacturers did, simply cannot compare. And that is why, as Mises informed the stunned Perónistas:
Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses.
That is why, as Mises never tired of saying, capitalism is a system of mass production for the masses. It is overwhelmingly the masses of “regular folk” who are the sovereign consumers whose wishes are the guiding stars of capitalist production.
Capitalism flipped feudalism on its head. With feudalism, it was the elite (the landed aristocracy) whose will dominated the masses (the enserfed peasants). With capitalism, it is the wishes of the masses (ordinary consumers) that hold sway over the productive activity of the entrepreneurial elite, from retail giants to dot-com millionaires.
As Mises’s address implied, the yearned-for “people power” always promised by demagogues like Perón, but which invariably turns to ashes in the mouths of the masses, as it did with the Argentines, is the natural result of capitalism, a system so often derided as “economic royalism.”
Imagine his audience’s surprise!
But the full truth that Mises was imparting was even more surprising than that. Not only does capitalism fulfill the broken promises of economic populism, but, as Gordon brilliantly remarked in his lecture, it also follows through on the more specific promise offered by syndicalists and Marxian socialists: worker control over the means of production. That is because, as Mises stressed in his lecture, the vast majority of the masses of ordinary “sovereign” consumers are also workers.
With capitalism, the working people really do hold ultimate sway over the means of production. They just don’t do it in their role as workers, but in their role as consumers. They exert their sway in checkout aisles and website shopping carts, and not in the halls of labor unions, syndicates, soviets (revolutionary councils of workers), or a “dictatorship of the proletariat” that reigns in their name while it rides on their backs.
Capitalism has the charming arrangement of empowering the working person, while still preserving economic sanity by placing means (factors of production, like labor) at the service of ends (consumer demand), instead of the insanity of doing the opposite, as the labor fetish of syndicalism does.
Four: Prosperity for the PeopleCapitalism not only empowers the working person, but uplifts him.
Capitalism, as its name implies, is characterized by capital investment, which was the solution to the crisis of how the marginal millions of eighteenth-century England and the Netherlands were to integrate into the economy and survive.
Labor alone cannot produce; it needs to be applied to complementary material resources. If, with given production techniques, there is not enough land in the economy to employ all hands, then those hands must be placed upon capital goods, if the connected mouths are to eat. During the Industrial Revolution, such capital goods were lifelines that the owners of new factories threw to countless economic castaways and that pulled them from the abyss and back into the division of labor that kept their lives afloat.
Knowing this truth of the matter, Mises was rightly appalled at the anti-capitalist agitators who “falsified history” (Gordon identified Thomas Carlyle and Friedrich Engels as among the worst offenders) to spread the now dominant myth that capitalism was a bane to the working poor. He set the issue right with passion:
Of course, from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had already been existing at a virtually subhuman level.The famous old story, repeated hundreds of times, that the factories employed women and children and that these women and children, before they were working in factories, had lived under satisfactory conditions, is one of the greatest falsehoods of history. The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: precisely in these years in which British capitalism developed, precisely in the age called the Industrial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of England doubled, which means that hundreds or thousands of children — who would have died in preceding times — survived and grew to become men and women.
And as Mises further explained, capitalism not only saves lives, but it vastly improves them. That is because capitalism is also characterized by capital accumulation (which is why Mises embraced the term, in spite of it originating from its enemies as an epithet), which is the result of cumulative saving and perpetual reinvestment being unleashed by greater security of property from meddlesome laws as well as grasping princes and parliaments. Capital accumulation means ever growing labor productivity, which in turn means ever rising real wages for the worker.
These higher wages are the conduits through which workers acquire the purchasing power that crowns them with consumer sovereignty. And they are no petty sovereigns either. Thanks to his capital-enhanced high productivity, a modern worker’s wage-powered consumer demand guides the deployment of a globe-spanning, dizzying plethora of sophisticated machines, factories, vehicles, raw materials, and other resources, as well as the voluntary labor of the other workers who use them, all of which conspire to churn out a cornucopia of quality household staples, marvelous devices, amazing experiences, and other consumers’ goods and services for the worker to choose from for his delectation. Purchasing such goods with his higher wages is how the worker claims his portion of the greater abundance, which approximates to his own capital-enhanced contribution to it.
And higher wages are not the only way that the average working person can enrich himself through capitalism. Especially since the advent of investment funds, he can supplement, and upon retirement, even replace his wage income with interest and profit by putting his high-wage-fed savings to work and partaking in capital investment himself.
Because of these characteristics, as Mises proclaimed to those assembled: “[Capitalism] has, within a comparatively short time, transformed the whole world. It has made possible an unprecedented increase in world population.”
He returned to the subject of England for one of the more paradigmatic examples of this:
In 18th-century England, the land could support only 6 million people at a very low standard of living. Today more than 50 million people enjoy a much higher standard of living than even the rich enjoyed during the 18th-century. And today’s standard of living in England would probably be still higher, had not a great deal of the energy of the British been wasted in what were, from various points of view, avoidable political and military “adventures.”In one of those wonderful flashes of dry wit that would illuminate his discourse from time to time, Mises urged his auditors that, should they ever meet an anti-capitalist hailing from England, they should ask him: “… how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has succeeded, whether or not you consider your own life very valuable.”
Mises furthermore cited the more general and clearly evident fact that: “There is no Western, capitalistic country in which the conditions of the masses have not improved in an unprecedented way.”
And in the decades following his speech, the conditions of the masses improved incredibly in non-Western countries (like China) who partially opened up to capitalism as well.
Mises concluded his talk by urging his Argentine fellows to seize the day and strive for the economic liberation that would unleash the wonderworks of capitalism, and not to sit and wait for an economic miracle:
But you have to remember that, in economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle — the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of — and is the result of — sound economic policies.ConclusionIf the subsequent policies adopted in Argentina, South America, and the world are any indication, Mises’s message, as lucid and affecting as it was, did not propagate far beyond the auditorium walls that day. Perhaps in the age of camera phones, YouTube, and social media, it would have. But his brilliant encapsulation of the beneficence and beauty of capitalism did not dissipate vainly into the Argentine air. Thanks to his Margit and to his institutional namesake, his message was preserved for the ages, and is now only a mouse click away for billions.
Ludwig von Mises can still save the world by posthumously teaching its people the unknown truth about the inherently populist nature of capitalism in a way which speaks to their hopes and longings: that private property means dynamic production, which means a competitive, consumer-steered economy, which means a production system geared toward improving the lives of the masses, which first means widespread succor and ultimately ever-rising prosperity for the people of the world.
After many years of being out of print, this classic treatise from the brilliant political philosopher De Jouvenel (1952) provides an answer to a critical question: what is morally wrong with the idea of political management of incomes? Nearly every state in the world attempts to curb excess riches and boost the well being of the poor, and does so through a variety of programs that involve taxation and regulatory regimentation.
Yes, it generates disincentives to work but the author here deals with a more fundamental moral issue: to what extent and in what ways does redistribution compromise individual freedom and build the power of the state? It is in the transfer of power from people to government that the real problem with income management rests. De Jouvenel makes a devastating case against the most accepted of modern forms of economic intervention.
Robert Bradley, a leading free market energy economist, has in collaboration with Richard Fulmer put together an outstanding book that covers the huge subject of energy, beginning with answers to the most fundamental questions (What is energy? Where does energy come from?) and proceeding to current policy applications (Are we running out of oil? Is the globe warming?). It is ideal for students and classroom use. But it is also the best book for anyone who wants to think and talk intelligently about this huge topic.
Alarmists about energy have published book after book predicting an energy crisis. We shall soon run out of oil, they claim, and this will plunge the world’s economy in crisis. As if this were not enough, man-made global warming threatens to bring about catastrophic changes.
Bradley decisively refutes these doomsayers. Oil and other fossil fuels, he shows, are abundant. Increased exploration and new techniques for extraction have produced an ample supply of oil. We face no crisis, and there is no good reason to look to solar and wind power as replacements for oil. These have long ago been rejected as inefficient by the market.
Global warming proponents also take an unduly pessimistic view. If the globe is in fact warming, the changes that ensue are likely to be on the whole beneficial.
Our real problems with energy stem not from the free market, but from ill-advised government programs, such as price control and restrictions on resource extraction.
The modern age of economic intervention began under the pretense of helping workers. Professor Sennholz demolishes the entire edifice that gave rise to this movement.
We were told that workers must be organized into unions. They must have job protection. Their safety must be guaranteed by legislation. There must be a minimum wage. People under the age of 15 must never engage in remunerative work, for that would be exploitation. And workers need retirement income. If unemployment rises, nothing short of full scale central planning is required!
So on it goes, except for one inconvenient fact: the age of intervention accomplished precisely the opposite of its stated goals for workers. The unemployment of the 20th century was government created. And today, workers are taxed, regulated, and regimented to their own detriment.
Here is the uncompromising case against the entire interventionist regime erected on behalf of workers. No one does a better job in showing how the state has harmed the very group that it claimed to be backing.
Sennholz refutes dozens of theoretical fallacies and exposes the bad policies that flow from them. His focus on current trends like "mandated benefits" explains how they have so drastically increased labor costs. He also deals with the feminist arguments against the free market, and makes a strong case for the benefits of the underground economy. A principled and readable work that unfies theoretical rigor and a passion for liberty.
Now entrepreneurship classes are all the rage. While in real life government strangles businesses large and small everyday, the academic community has finally woken up to what creates wealth—entrepreneurial activity. This is a positive sign. And again it is an advancement for Austrian economics, as it has been the Austrian school that has focused on the role of the entrepreneur in the market process, while other schools of thought haven’t recognized the role of entrepreneurs at all.
Foss and Klein recognize entrepreneurship as judgmental decision making under uncertainty. They show how judgement is the driving force of the market economy and that to understand the performance of a firm, its managers, and organization, the acumen of entrepreneurs and managers must be analyzed and dissected.
George Reisman was a student of Mises's, a translator of his work, and, as he demonstrates in this outstanding treatise, a leading theorist in the Misesian tradition. This exposition deals with the method and theory of economics, and particularly excels in its application to matters of policy. Its sections on price controls, money, banking, and environmentalism apply Misesian theory to new times and new literature. The author deals patiently but devastatingly with the arguments of the interventionists. The end result is an integrated understanding of the theory and ethics of the capitalist economy.
What caused the war? Why did the Union defeat the Confederacy? What were the consequences of the War? The premise of the book is that historians have a comparative advantage in describing such events, but economists have the tools to help explain these events. This book does so, and marvelously.
The authors use Austrian and Public Choice analysis to address these principal questions and our conclusions generally run counter to the interpretations of historians. In contrast to historians who emphasize the land war and military strategy, the authors show that the most important battle took place at sea. One side, the blockade runners, did not wear uniforms or fire weapons at their opponents. The other side, the blockading fleet, was composed of sailors who had weapons and guns but they rarely fired their cannons in hopes of damaging their opponents. Their pay was based on the value of captured ships. Historians often have argued that the Confederacy lost because it was overly reluctant to use government power and economic controls, but we show the exact opposite. Big Confederate government brought the Confederacy to its knees.
Some now teach that slavery was the sole cause of the Civil War –- an explanation that historians have developed in the twentieth century. However, this analysis does not explain why the war started in 1861 (rather than 1851 or 1841) and it fails to explain why slavery was abolished elsewhere without such horrendous carnage.
The authors emphasize economics and politics as major factors leading to war. The Republicans who came to power in 1860 supported a mercantilist economic agenda of protectionism, inflation, public works, and big government. High tariffs would have been a boon to manufacturing and mining in the north, but would have been paid largely by those in the export-oriented agriculture economy.
Free Prices Now! begins by asking why the human race is still so poor. How can it be that billions still lack even enough to eat? It then provides the answer. A prosperous society is a cooperative society. Cooperation in turn depends on trust. And trust requires honesty.
The most reliable barometer of economic honesty is to be found in prices. Honest prices, neither manipulated nor controlled, provide both investors and consumers with reliable economic signals. They are the foundation for a successful economy.
A corrupt economic system does not want honest prices, honest information, or honest results. The truth may be unprofitable for powerful government leaders, private interests allied with them, or economic “experts” whose careers have been devoted to price manipulations and controls.
The US Federal Reserve and other central banks have created a system of “liar loans” and false prices. Other parts of government have contributed as well. In effect, the regulators on whom we depend have become dis-regulators.
Can it really be this simple, that economic prosperity and job growth depend on allowing economic prices to tell the truth, free from the self-dealing and self-interested theories of powerful special interests?
Yes.
Although Lewis takes us inside the complexities of the national economy and the Federal Reserve, his lively and transparently clear writing style makes it easy for anyone to follow him.
Why is the boom-and-bust cycle so persistent? Why did economists fail to predict the recent economic meltdown--or to pull us out of the crisis more quickly? And how can we prevent future calamities?
Mainstream economics has no adequate answers for these pressing questions. In the powerful and eye-opening new book It Didn't Have to Be This Way, Harry Veryser shows how the Austrian School of economic provides the proper alternative to the failed interventionist approach: liberty, private property, and the unhampered market.
Sweden might be heading toward reform of its very rigid labor laws, which include labor union control of wages and “last in — first out” hiring and firing rules. This means the previously most-untouchable tenet of the Swedish welfare state is finally being discussed as a problem, not a value. And the reason for this change of tone is the immigration crisis.
The Swedish State Prevents IntegrationThat Sweden struggles with immigration has become common knowledge. What is little known, however, is that the problem is not the immigration volume per se. There is plenty of room in Sweden but the country, given the welfare state, is in desperate need of young people to enter the labor force as the baby boomers en masse enter retirement.
The main problem is integration of those who immigrate: they are prohibited to work until their asylum or petition for residency has been approved. In other words, they are a cost in the state’s budget and a burden for taxpayers — often for many years — while bureaucrats process their application. Another effect of this is that immigrants aren’t integrated into Swedish society, since they’re effectively kept out of interacting with “ethnic Swedes” through the normal meeting places: school, the workplace, the commute, and so on.
A major force against allowing immigrants to get integrated into Swedish society is the powerful labor unions. Not only do they control the level of what is not formally — but is effectively — a minimum wage in most occupations, but they also have veto power in approving permanent residency status. Recent examples of the absurdity of this system include the long-time owner of a small business who (on paper) made the equivalent of 50 cents per day below the average salary of union members in this industry. This was deemed to be “too little,” and therefore doesn't meet the formal requirements to make a living. Consequently, and on the labor union’s recommendation, he was deported along with his family after many years living in Sweden.
The Role of Labor UnionsThe labor unions are routinely invited to comment on the salaries earned by immigrants who have already made it through most of the hoops (that is, who have been permitted to work). Unless they earn a sufficiently high salary, which is based on what others make in the same line of business, they are deemed unable to care for themselves and therefore deported. The labor unions, when asked, respond not with their required “minimum” wage but with the “average” wage earned by their members. In other words, unless immigrants in a certain line of work make at least as much as the average of those already employed, they might face deportation.
This type of protection measure is part of the very rigid Swedish labor laws, which also mandate employers to fire in the opposite order they hire: “last in — first out.” Needless to say, this means employers refrain from hiring unless absolutely necessary. It also means they will need to fire (without the possibility of rehiring) productive workers hired after a “bad apple” employee. This type of “protection” of course only leads to a static labor market, where very few workers change jobs as they will then face greater odds of unemployment regardless of their qualities or value to the employer.
Salaries are also set by the labor unions who in centralized negotiations with employers’ alliances decide on changes in wages for the whole country. While this is referred to as “negotiation,” the labor unions have always been negotiating with the threat of legal action: the social democrats, who ruled the country for most of the twentieth century, would legally mandate wage increases unless the parties to the labor market could agree “voluntarily.”
The Consensus Is FailingThis centralized model has always been a core part of the Swedish welfare state, and it has been beyond any type of scrutiny. Indeed, the “Swedish model” is based on this rule by the social democratic labor unions through “negotiation” with employers’ alliances under the threat of legal action by the other wing of the social democratic movement: the party.
But due to the recent increase in migration and millions of refugees seeking shelter, the failing integration of migrants was soon in the public eye — and with it the realization among the public of a major downside to the rigid labor market. This has led to a situation where there is an emergent discussion on the inability of the Swedish model to include new workers — whether they are ethnic Swedes graduating college or migrants from other countries — and possible solutions.
Who knows? Maybe this core of the Swedish welfare state will soon crumble. And as a result, both Swedes and immigrants will be better off.
Merry Christmas and Happy Holidays from everyone here at the Mises Institute!
As an exciting year comes to a close, we want to thank all of our incredible members that allow us to do the work we do in advancing Austrian economics, freedom, and peace.
In honor of the season, John Denson joined Jeff Deist for a special episode of Mises Weekends to discuss the Christmas Truce. This incredible moment during World War I, often completely ignored by historians, is a wonderful celebration of the human spirit — even in the darkest of times. We hope you and yours will enjoy this extraordinary testament of the power of the Christmas season.
And in case you missed any of them, here are this week’s featured Mises Daily articles, some of our most popular articles at Mises Wire, and some holiday selections from the Mises archive:
Half of Britain Wants To Leave the EU by Ryan McMakenWhy Capitalists Are Repeatedly "Fooled" By Business Cycles by Frank ShostakGet More Bang for Your Buck by Jeff DeistThere's No Such Thing As a Neutral Government by David GordonPoland, Free Markets, and the Eurozone by Mateusz MachajA Will To Peace by John V. DensonIn Defense of Scrooge by Michael LevinA Capitalist Christmas by Dale SteinreichSimple Economic Truths for Entrepreneurs by Per Bylund
If you missed it, Forbes recently reported that a college ranking organization has named the Mises Institute as the #9 most influential think tank in the United States — out of nearly 2,000 organizations!
All of the other top 10 organizations — among them the neocon American Enterprise Institute, the Fed-loving Brookings Institution, the Heritage Foundation, and the Cato Institute — have budgets and staffs vastly larger than ours. Yet our web traffic, name ID, reputation, and influence rival the biggest Beltway outfits.
Here’s what Forbes had to say:
In addition to the superb collection of scholarly books and studies in the Austrian tradition, especially by Ludwig von Mises, Murray Rothbard, and their disciples, Mises Institute sometimes releases provocative articles, defying political correctness and attracting wide readership. This increases its social media impact, but who is to say that think tanks were only created to influence the academic and policy elites?
As blogger Ryan Griggs puts it:
the Mises Institute is the “top pound for pound — or influence per dollar of revenue — educational and research institution in the country. … Simply put, Mises does more with less than all the rest.”
Of course the Mises Institute is not really a think tank at all. We’re not interested in “public policy,” we don’t provide intellectual cover for dubious legislation, we don’t court one faction or another in Congress, and we surely don’t support parties or candidates.
But if you’re reading this, you’re likely already familiar with the Mises Institute and what we do. That’s why we’re asking for your help. We need you to join us as a member, to consider donating, and to ask as many liberty-minded friends and family to do the same.
With an election year looming, our mission of winning hearts and minds is increasingly urgent. The 2016 presidential race is already a horror show, filled with statist platitudes, divisive rhetoric, warmongering, and mind-numbing repetitions of economic fallacies.
You know there’s a better way. America doesn’t need a central state, it doesn’t need a central bank, it doesn’t need a political class, and in fact it doesn’t need politics at all. It certainly doesn’t need an endless election season. What it needs is the peaceful and cooperative power of an unleashed market economy, coupled with a commitment to nonintervention in the affairs of other nations.
Will you help the Mises Institute stand as an intellectual counter to the political rhetoric and the false Left/Right dichotomy? Is there a single organization better suited to use the 2016 election as a platform to call for the rejection of politics as the means of organizing society?
That’s why we’re asking you to join us as a member if you haven’t already, and to help us enlist as many new members as possible in the coming year. It’s only $60 a year — ($5 a month!) and the benefits are tangible:
Join a Community. Join us and become part of the Austro-libertarian intellectual revolution taking hold around the world. Your membership puts you at the forefront as a radical and uncompromising advocate for Austrian economics and liberty: pro-market, pro-peace, anti-state, anti-Fed, anti-PC. And many of our members make professional contacts and lifelong friends through the Institute.Amplify Your Voice. Our website, live events, and academic conferences reach more than 4 million people every year. By engaging with the Mises Institute, the diffuse voices of libertarians around the world are concentrated, focused, and amplified.Arm Yourself Intellectually. Our daily articles, blog, social media feeds, and videos provide you with a steady source of Austrian and libertarian content to demolish progressive myths and interventionist disinformation. Our online library of foundational books — by giants like Mises, Rothbard, and Hoppe — is the biggest and best source for Austrian and libertarian literature in the world. Mises.org provides millions of people with a lifetime of free learning at their fingertips.Defy the State. More than anything, the state seeks to dumb us down and force young people into schools that are hostile to liberty and market economics. Mises University, Mises Academy, and our high school seminars teach thousands of students from around the world real economics, real history, and real philosophy. Those students tell us their lives changed forever by attending Mises Institute events, and they’re now deployed in business, academia, Wall Street, and the tech world. There’s nothing like our week-long Mises University available anywhere else, and it’s our most important program.Thank you for being engaged with the Mises Institute in 2015, and for having the courage to challenge the groupthink and distractions of our day. Every visit to mises.org, every new social media follower, every shared link, every person at our events, every new member, and every dollar helps us promote Austrian economics, freedom, and peace.
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Quarterly Journal of Austrian Economics 18, no. 3 (Fall 2015)It wouldn’t be a stretch to compare patent trolls to the playground bully, initiating scare tactics to gain control and in the case of the trolls, revenue. Following Bill Shughart’s informative foreword, William Watkins packs a good amount of information into his book about patent trolls. Watkins begins by giving the reader a brief history of patent law, explaining how trolls operate, outlines problems with the current laws and court system, as well as providing some recommendations for reform. The focal points of the book are not only the trolls themselves but also the incredibly plaintiff (troll)-friendly U.S. District Court in Eastern Texas.
Watkins calls on Congress to change the rules for corporate residence, inviting the Federal Circuit to revisit how it establishes personal jurisdiction, and again calls upon Congress to investigate creating a special patent court system with professional jurors. A modernized court system, according to Watkins, would greatly reduce the (rent-seeking) behavior of trolls, reduce the incidence of litigation, and would restore the incentive to innovate back to the forefront for U.S. businesses, a key component for economic growth.
Elections took place across the country this past Tuesday with some interesting results. Voters in Ohio decided they hated monopolies more than they liked marijuana, while residents in Houston voted down the left’s latest egalitarian menace. While there is never a reason to trust the empty promises of pandering politicians, elections can occasionally offer insight into who is winning the battle for ideas. So there may be reason for optimism when you see Hawaiians’ discussing secession or the fact that there is global momentum in the fight against prohibition. While central planners struggle — both in the US and abroad — to maintain the status quo, bad government will never be able to repeal good economics.
The question then turns to how to we advance the cause of Austrian economics, peace, and freedom? That is the topic of this weekends’ Mises Circle in Phoenix, Arizona. One of our speakers, Dr. William Boyes, joined Jeff Deist this week to offer a preview of his talk. The founder of Arizona State University’s Center for Economic Liberty and a successful author of economics textbooks, Dr. Boyes discusses how to advance liberty and capitalism in the face of a statist educational system. One option — our new Online Mises Boot Camp!
In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Activists Seek to Impoverish Thai Villagers to Save Monkeys from "Slavery" by David AdamsFor WHO, Red Meat Is a Red Herring by Yuri N. MaltsevThe Fed Desperately Tries to Maintain the Status Quo by Ronald-Peter StöferleHow Beijing and the West Work Together to Manipulate the Global Currency War by Brendan BrownWhy We Need Private Property to Deal with Scarce Resources by Patrick Barron"Social Expenditures" In the US Are Higher Than All Other OECD Countries, Except France by Ryan McMakenZwolinski and Woods on the Basic Income Guarantee by David GordonPot Battle in Ohio by Mark ThorntonPoverty Does Not Cause Obesity by Ryan McMakenWill Regulation Destroy a Revolution in Physics? by Matt McCaffreyMy Irish Eyes Are Smiling by Mark ThorntonA Practical Guide to Hawaiian Secession by Ryan McMakenMexico, Canada, and Ten American States Look Toward Marijuana Legalization by Ryan McMakenYellen on Negative Interest Rates by Jonathan Newman
Leave it to NPR to add guilt to your pleasure. That bon-bon hidden behind your two-year-old bottle of Scotch just took on a whole new layer of sin. With child slavery in the production of chocolate and animal cruelty in the harvesting of coconuts, the conflict confection is born.
According to an animal rights group featured in a recent edition of NPR’s The Salt, abused monkeys are a key ingredient in your Panang curry. While the Thai/Malay practice of using monkeys to harvest coconuts dates back hundreds of years, landing in the crosshairs of activist vegans and SJWs (Social Justice Warriors) is a new phenomenon. Anthropologist Leslie Sponsel, quoted briefly in the NPR article, offered a defense of simian symbiosis. I caught up with Dr. Sponsel at his Hawaii home in hopes of learning more about his fieldwork. “Debate on the morality of enslaving monkeys to get a job done is a Western dilemma, not a Thai one,” Sponsel explained.
A lifelong environmentalist and author of Spiritual Ecology: A Quiet Revolution, Sponsel had reservations about watching primate pickers at work. Instead of calling for a nationwide boycott of coconut products as some have done, Sponsel did what every anthropologist worth his salt is trained to do: take pause and observe. He noted that neither his wife — a Thai Buddhist — nor a fellow Thai professor from a local university framed the practice in moral terms. Add a complete lack of compunction from the local Muslim population and Sponsel concluded that monkeys on task are not a cause, but a part of the “isness” of peninsula living.
The British explorer Robert Shelford observed in his 1916 book: A Naturalist in Borneo:
The modus operandi is as follows: — A cord is fastened round the monkey’s waist, and it is led to a coconut palm which it rapidly climbs, it then lays hold of a nut, and if the owner judges the nut to be ripe for plucking he shouts to the monkey, which then twists the nut round and round till the stalk is broken and lets it fall to the ground; if the monkey catches hold of an unripe nut, the owner tugs the cord and the monkey tries another. ... [At times] the use of the cord was dispensed with altogether, the monkey being guided by the tones and inflections of his master’s voice.
According to Sponsel, “Working macaques are the difference between a livelihood and abject poverty for many South Thailand farmers. Snake bites, stinging ants, and life-ending falls face whoever or whatever goes up those trees.”
Given the best monkeys harvest coconuts at over twenty times the speed of the most skilled man, the incentive to continue a centuries-old partnership is clear. During his fieldwork, Sponsel never observed or heard of monkey abuse by their handlers. He noted that many were treated similar to the way a Westerner treats a family pet. “For some households,” he observed, “they may even rise even to the level of being a family member.”
For a country that sees its stray dog population driven in crates to Vietnam every Tet New Year to become a side dish, the Thai macaques could have it worse. According to Sponsel, “Young ones are trained and kept on a rope or chain tethered to the handler or to a shelter when not working.” It is this practice that has earned the ire of some activists. Sponsel counters that in our society it is a matter of civility to keep a pet on a leash. And who hasn’t seen the mother who ties a string to her own children on a walk through a busy mall! According to Sponsel, the monkeys he observed were well-fed, groomed and cared for. Indeed, he often saw macaques being pushed in carts by their handlers on the way to the plantation.
“This debate is not new,” Sponsel explained. “Back in 1952, Jean Marcel Brulle’s The Murder of the Missing Link tackled our moral obligation to primates.” In an account of science fiction, a man impregnates a female monkey and then kills the newborn to force a jury to deliberate whether murder extends beyond humankind. Be it a hairy chest, or his way with the ladies (simians included), Burt Reynolds played the lead in Skullduggery — a 1970’s take on Brulle’s dilemma.
As some ramp up calls for a boycott, Sponsel cautions the bandwagon. “They should seriously consider how their campaign may negatively impact the livelihood of poor farmers. Some activists appear to be more worried about non-human animals more so than humans; even though the latter are also animals and have rights too.”
In a perfect world, Thai farmers would have machines and monkeys would have unspoiled wilderness. But, for the world we have — one in which habitat destruction wipes out entire populations — coconuts and farmers in need may be all that keeps the macaques in the trees and off the dinner tables.
Our booming green-industrial complex built up by administrations of both parties in the US is effectively using the United Nations, its thirty two “sister” institutions — such as the World Bank, UNESCO, and numerous “tribunals” — and hundreds of training and research centers. This huge international bureaucratic buildup is already employing over a million “international civil servants” to administer what our socialist visionaries hope will become the world government of the future.
An increasingly important “sister institution” of the UN system is the highly politicized "World Health Department" also known as the World Health Organization (WHO) which, as part of a new scare campaign, has issued new declarations that sausages, hot dogs, bratwurst, and ham are carcinogenic, and that all red meat is “probably carcinogenic.”
This new anti-meat campaign, however, is not about your health, but about the “health of the planet.” WHO’s attack on meat is happening just before the Paris gathering on global warming and is a part of the slow motion socialist revolution poorly disguised as “climate change awareness.” As usual, socialist policies today are justified as “necessity for future generations.” Famous Nobel Laureate in physics, Dr. Ivar Giaever, once an Obama supporter, now stands against the president on global warming. “I would say that basically global warming is a non-problem.” Giaever ridiculed Obama for stating that “no challenge poses a greater threat to future generations than climate change.” The physicist called it a “ridiculous statement” and that Obama “gets bad advice” when it comes to global warming. I am sure that Obama and other politicians are peddling the climate change agenda not because of “bad advice,” but because advocates provide them with the argument for central planning and curtailing of individual liberty.
The 2015 United Nations Climate Change Conference, which will be held in Paris from November 30 to December 11, is designed by the Obama administration as the major leap forward toward world government and central planning. It will be the twenty-first yearly session of the Conference of the Parties to the 1992 United Nations Framework Convention on Climate Change (UNFCCC), and the eleventh session of the Meeting of the Parties to the 1997 Kyoto Protocol. The conference objective is to achieve a legally binding and universal agreement on climate, from all the countries, including the US.
All globalists were mobilized for preparation to this event. Pope Francis, for example, published an encyclical called Laudato Si’ help to secure success for the conference. The encyclical calls for immediate action against human-caused climate change. The International Trade Union Confederation, which traces its origins back to the First International founded and addressed by Karl Marx, has called for the goal to be "zero carbon, zero poverty," and its general secretary Sharan Burrow proclaimed that there are “no jobs on a dead planet.”
The war on meat is part of this public relations blitz. Lord Stern of the UK, a former chief economist of the World Bank, believes that “meat is a wasteful use of water and creates a lot of greenhouse gases. It puts enormous pressure on the world’s resources. A vegetarian diet is better.”
Another Stern, this time our own, is a US special envoy for climate change appointed by the Obama administration to secure a strong climate agreement at the Paris climate conference. Ambassador Todd Stern is now traveling to Brazil and Cuba to obtain support from these corrupt socialist governments to stand against “the global threat of climate change.”
In the US, socialist zealots and their “capitalist” cronies have already destroyed the coal industry and the whole energy sector is under attack. Now they are after the meat industry which is, according to them, “unsustainable.” The left-wing Union of Concerned Scientists lists meat-eating as the second-biggest environmental hazard facing the Earth. (Number one is fossil-fuel vehicles.)
In the Soviet Union, when it existed, beef was available only to Communist Party functionaries and everybody else could only find it on the black market. It was “explained” to the masses that meat was bad for their health. In Cuba today you cannot find beef in the food stores. Ground beef (usually mixed with soy), chicken, sausage, and ham are rationed by the government in the amount of a half pound per person every fifteen days. My Cuban friends complain, however, that most of these deliveries are unreliable and can be “canceled” without any explanation.
In the US, the 2015 Dietary Guidelines Advisory Committee worked on concocting a 571-page report of pseudoscientific “evidence” to encourage Americans to avoid red meat. US departments of Agriculture and Health and Human Services will use this junk science to guide federal nutrition policy, including the $16 billion school lunch program.
And it’s all being done at our own expense. The United States is bankrolling the UN and its “sister” institutions, including WHO, from one-quarter to one-third of their operating budgets. Let’s hope we don’t get all the world government we’re paying for.
The image of a dead three-year-old Syrian refugee washed up on a Greek shore sparked renewed international focus on the waves of Middle Eastern and North African immigrants fleeing their war torn homelands. The issue has been presented by politicians and the media almost exclusively through a statist lens: a choice between government-imposed integration as proposed by open borders advocates, or government-enforced exclusion advocated by nationalists who wish to wall off their nation from foreigners. But we must never lose sight of fundamental issues, namely property rights and the freedom of voluntary association.
For this reason, we felt it was important to bring back an article written in 2005 by Dr. Per Bylund addressing the complexity of the immigration issue. Dr. Bylund reminds us:
With the state as it is today, should we as libertarians champion open borders or enforced property rights (with citizens’ claims on “state property”)? Both views are equally troublesome when applied within the framework of the state, but they do not contradict each other; they are not opposites.
To dive deeper in this important topic, Dr. Bylund joined Jeff Deist for this week’s episode of Mises Weekends.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Real Wealth Weaker than GDP Stats Show by Frank ShostakAn Unhappy Union: Marriage and the State by Andrew SyriosWhy the Greeks Should Repudiate Their Government’s Debt by Simon WilsonAfter the Greek Crisis, Euro Elites Dream of a Unified Euro State by Ryan McMaken"Mathiness" vs. the Logic of Action by Jonathan NewmanWithout Government, Who Would Force a Men's Barbershop to Cut Women's Hair? by Ryan McMakenNext WeekAll eyes will be on the Federal Reserve as the FOMC meets to consider raising interest rates for the first time since 2006.
Jeff Deist and James Rickards discussed what the Fed will do on this episode of Mises Weekends.
Monday, September 14th, is the 66th anniversary of the first edition of Human Action.
[Updated Author’s Note: The issue of immigration has only become more pressing over the ten years that have passed since this article’s original publication. And, unfortunately, the libertarian movement has not reached a consensus on this issue. But it should be easy, considering how government is at both ends of the problem: government is the number one reason people choose to escape their countries, whether because of governments’ war or devastating poverty due to the lack of opportunities in regulated markets; and government is the reason ordinary people, in a desperate state because their lives have been forcefully uprooted, have a hard time choosing where to lead their lives in peace. The desperation is due to the so-called “failings” of their own governments, and augmented by ours.
I too have fled my country, though not because I’m fearing for my life but because I sought a better life and greater opportunities. While the immigration issue generally focuses on people from poor countries with little skill or education, it is hardly the case that governments welcome people at the other end of the spectrum: the highly productive, highly educated, and hard-working. On the contrary, government is the least forgiving, least reasonable, and most costly when it deals with non-citizens — those who cannot hold government officials accountable in any sense and do not have a voice. This should make immigration a prime target for the libertarian argument for freedom, peace, and property.]
Immigration Controls and the StateThe pre-1914 world saw no immigration issues or policies, and no real border controls. Instead, there was free movement in the real sense; there were no questions asked, people were treated respectfully and one did not even need official documents to enter or leave a country. This all changed with the First World War, after which states seem to compete with having the least humane view on foreigners seeking refuge within its territory.
The “immigration policies” of modern states is yet another licensing scheme of the twentieth century: the state has enforced licensing of movement. It is virtually impossible to move across the artificial boundaries of the state’s territory in the search for opportunity, love, or work; one needs a state-issued license to move one’s body, be it across a river, over a mountain, or through a forest. The Berlin Wall may be gone, but the basic principle of it lives and thrives.
Immigration controls are not different from other kinds of licensing even though it has been awarded a special name. Licensing has the same result regardless of what is licensed: licensing of physicians causes poor health care at higher cost just as licensing taxi businesses causes poor and untimely service at high cost — licensing on movement means restricted freedom and higher taxes for people (whether “citizens” or “foreigners”). From a libertarian point of view it should be clear that all licensing needs to be done away with, including licensing for immigrants.
Yet the immigration issue seems to be somewhat of a divide within libertarianism, with two seemingly conflicting views on how to deal with population growth through immigration. On the one hand, it is not possible as a libertarian to support a regulated immigration policy, since government itself is never legitimate. This is the somewhat classical libertarian standpoint on immigration: open borders.
On the other hand, the theory of natural rights and, especially, private property rights tells us anyone could move anywhere — but they need first to purchase their own piece of land on which to live or obtain necessary permission from the owner. Otherwise immigration becomes a violation of property rights, a trespass. This is an interpretation of a libertarian-principled immigration policy presented by Hans-Hermann Hoppe a few years ago, which since then has gained increasing recognition and support.
To a non-libertarian bystander, the discussion of the two alternatives must seem quite absurd. What is the use of this libertarian idea of liberty, if people cannot agree on a simple issue such as immigration? I intend to show that the libertarian idea is as powerful as we claim, and that there is no reason we should not be able to reach consensus on the immigration issue. Both sides in this debate, the anti-government-policy as well as the pro-private-property, somehow fail to realize there is no real contradiction in their views.
The Open Borders ArgumentThe people advocating “open borders” in the immigration issue argue state borders are artificial, they are creations based on the coercive powers of the state, and therefore nothing about them can be legitimate. As things are, we should not (or, rather: cannot) regulate immigration. Everyone has a right to settle down and live wherever they wish. This is a matter of natural right; no one enjoys the right to force his decision upon me unless it is an act of self-defense when I am violating his rights.
In a world order based on natural rights, this would be true. It is a golden rule, a universal rule of thumb proscribing that I’ll leave you alone if you leave me alone; if you attack me or try to force something or someone on me, I have a right to use force to defend myself and what is mine.
The problem with this idea is that it has too much of a macro perspective. While arguing there should be no states and therefore no state borders, it presents arguments with an intellectual point of departure in the division of mankind into territorial nationalities and ethnicity. It is simply not possible to make conclusions on immigration to, say, the United States, if we start our argument from the libertarian idea. What is “immigration” in a world with no states?
The Pro-Property ArgumentA less macro view on immigration is taken for granted in the pro-property argument. Here, the individual’s natural right to make his own choices and his right to personal property is the point of departure. Since we all have in our power to create value through putting our minds and bodies to work, we also enjoy a natural right to do as we please with that which we have created and place ourselves wherever we have property owners or guests. Or, as Hoppe puts it, “[i]n a natural order, immigration is a person's migration from one neighborhood-community into a different one.”
Consequently, the immigration issue is in real terms solved through the many choices made by sovereign individuals; how they act and interact in order to achieve their goals. There can simply be no immigration policy, since there is no government — only individuals, their actions and their rights (to property). The “open borders” argument is therefore not only irrelevant, since it has a macro point of view; it also fails to realize property rights as a natural regulation of movement. Since all property must be owned and created by the individual, government cannot own property. Furthermore, the property currently in government control was once stolen from individuals — and should be returned the second the state is abolished since property rights are absolute. There is consequently no unowned land to be homesteaded in the Western world, and so “open borders” is in essence a meaningless concept.
Libertarian UtopiaImmigration will thus be naturally restricted in a free society, since all landed property (at least in the Western world) is rightfully owned by self-owning individuals. Just like Nozick argues in his magnum opus Anarchy, State, and Utopia, a society based on natural rights should honor property rights in absolute terms, and therefore the rightful owners of each piece of property should be identified despite the fact that humankind has been plundered by a parasitic class for centuries.
What is to be considered just property when the welfare-warfare state is eventually abolished is not at all clear. Can one take for granted that the subjects (citizens) of a certain state have the right to an equal share of what is currently controlled by the government? Are they, at all, the rightful owners to what they currently control with the state’s legal protection? If we intend to seek the just origin of property, we need to roll back all transactions until the times before the modern state, before monarchies and feudalism, and probably to a time before the city states of ancient Greece. If we do, how should we consider the produced values of the generations we’ve effectively dismissed?
There is probably no way to sort out this unbelievable mess along the lines of absolute property rights. It should be dealt with this way, but I dare say it will be a practical issue when we get to that point, rather than a philosophical one.
A State Immigration ProblemAnother problem of immigration and property arises from the social welfare system financed by money extorted from citizens. With the open borders argument, private property rights might be undermined even further if immigrants are entitled to special rights such as housing, social security, minority status and rights, etc. Also, immigrants will automatically become part of the parasitic masses through enjoying the common right to use public roads, public schooling, and public health care — while not paying for it (yet).
The concept of private property rights seems to offer a solution to this, but it is not really a way out: it is not as simple as “private property rights — yes or no?” Private property rights is a philosophical position offering a morally superior fundamental framework for how to structure society, but it does not offer guidance in what to do with non-property such as that currently controlled by government.
It is deceivingly simple to claim all of the state’s subjects have just claims to “state property” since they are entitled to retribution for years of rights violations. This is, however, only part of the truth. It is also a matter of fact that all private production to some degree is part of the rights violation process, with direct state support through subsidies, tax breaks, patent laws, police protection, etc., or indirectly through state meddling with currency exchange rates, “protective” state legislation, through using publicly-owned and maintained property and services for transportation, and so on. There is simply no such thing as just private property anymore in the philosophical sense.
Therefore, it is impossible to say immigrants would be parasites to a greater degree than, e.g., Bill Gates: the Microsoft Corporation has benefited greatly thanks to state regulation of the market, but has also been severely punished in a number of ways. We are all both victims and beneficiaries. Of course, one might argue that forced benefits are not really benefits, but only one aspect of oppression. Well, in that case it would also be true for immigrants, who too are or will be victims of the state (but perhaps not for as long as you and I).
A Libertarian Stand on ImmigrationWe must not forget libertarianism is not a teleological dogma striving for a certain end; it rather sees individual freedom and rights as the natural point of departure for a just society. When people are truly free, whatever will be will be. Hence, the question is not what the effects of a certain immigration policy would be, but whether there should be one at all.
From a libertarian point of view, it is not relevant to discuss whether to support immigration policy A, B, or C. The answer is not open borders but no borders; the libertarian case is not whether private property rights restrict immigration or not, but that a free society is based on private property. Both of these views are equally libertarian — but they apply the libertarian idea from different points of view. The open borders argument provides the libertarian stand on immigration from a macro view, and therefore stresses the libertarian values of tolerance and openness. The private property argument assumes the micro view and therefore stresses the individual and natural rights.
There is no conflict between these views, except when each perspective is presented as a policy to be enforced by the state. With the state as it is today, should we as libertarians champion open borders or enforced property rights (with citizens’ claims on “state property”)? Both views are equally troublesome when applied within the framework of the state, but they do not contradict each other; they are not opposites.
Presidential hopeful Bernie Sanders recently raised the ire of both progressives and libertarians with his remarks concerning immigration:
“Open borders? No, that’s a Koch brothers proposal,” Sanders said. “That’s a right-wing proposal, which says essentially there is no United States.”
“It would make everybody in America poorer — you’re doing away with the concept of a nation state, and I don’t think there’s any country in the world that believes in that,” Sanders said. “If you believe in a nation state or in a country called the United States or (the United Kingdom) or Denmark or any other country, you have an obligation in my view to do everything we can to help poor people.”
In just a few sentences, Sanders manages to demonstrate a hodgepodge of nativist, nationalist, protectionist, and socialist sentiments. But for anyone wondering why he wandered off the progressive narrative on immigration, it’s because protectionist labor unions pay him better than, say, La Raza.
Sanders's comments reflect the widely and deeply held belief that nations are defined by states. This may be an uncomfortable reality for libertarians, but it is reality nonetheless.
National borders by definition are political boundaries. They mark the edge of a particular territory over which a political entity — a state — claims exclusive jurisdiction.
Since political borders require states, “open borders” is an oxymoron. Nothing controlled by government is “open,” whether we’re talking about the New York City taxi market or federal ethanol subsidies or the Brownsville, Texas border bridge. States require borders because they are defined by borders.
So from the statist perspective, Sanders is right: you can’t have large centralized states and unregulated borders, because those borders are at the heart of the state’s identity and its raison d’etre: control. The political technocrats who run modern nation-states have zero incentive to cede control over the flow of humans entering (or in some cases leaving) their territories. If anything, the political impulse is ever and always to expand the state’s zone of control by pushing borders outward.
Immigration is a tricky issue for libertarians precisely because the very concepts of states, borders, and “public” land (the commons) are wholly inconsistent with a political and legal philosophy based on self-ownership and property rights. It’s hard to speak rationally about immigration under the present circumstances, because we’re so far from a free society that we risk piling one kind of illibertarian “solution” upon another.
While the understandable libertarian impulse is to comport our principles with the innately human desire for free migration, we too often forget that the Noble Immigrant archetype is rooted in a statist view of immigration: one controlled by the state, in which public space trumps private property and free association. The benefits and detriments of immigration are weighed only in terms of their impact on the state.
In a libertarian society, there is no commons or public space. There are property lines, not borders. When it comes to real property and physical movement across such real property, there are owners, guests, licensees, business invitees, and trespassers — not legal and illegal immigrants.
Admittedly, it might be quite difficult to establish rightful (lawful) property owners under some sort of Lockean homesteading analysis — even in a nation as young as the US. While left-libertarians generally are absolutist regarding unfettered immigration, they will entertain “halfway” arguments about the most libertarian path available in a statist world on other topics (e.g. publicly-issued marriage licenses). But if Hans-Hermann Hoppe offers an interim argument for dealing with the societal costs imposed by immigrants given our current system of “public goods” and entitlements, he is considered a wrongheaded statist. The same progressives and left-libertarians who champion tort liability for corporations when it comes to environmental damage fall strangely silent on the enormous externalities caused by human migration.
Let’s be clear: the tendencies of a society based on property rights may well make progressives and left-libertarians quite unhappy. Such a society necessarily entails freedom of association and its corollary, the right to exclude. Free association would allows regions to develop naturally based on (gasp) shared familial, economic, linguistic, social, and cultural interests. Contra the DNC, government is not “the only thing we all belong to.”
This is not to say that a libertarian concept of naturally arising “nations” entails a clannish retreat into suspicious enclaves. Surely a free society would have regions where market demand for the cosmopolitan benefits of life in a multicultural society prevails (imagine a stateless Singapore). But multicultural social democracies with vast welfare states, like Western Europe and the US, did not arise through the “market.” They are big-government constructs, and they are quickly becoming unsustainable. Multicultural welfare states are a recipe for disaster.
Unfortunately, it appears for now we are stuck with the likes of Mr. Sanders and his faulty concept of nation-states. But if we want to advocate for a freer society, we need to apply first principles rather than sentimentality. There is a deep-rooted and natural human preference for the familiar face over the stranger, and human migration in a free society is likely to reflect this reality.
Presented at Mises Boot Camp, a one-day seminar for anyone seeking to learn the fundamentals of the Austrian school. Download the Syllabus.
Recorded at the Mises Institute in Auburn, Alabama, on 25 July 2015.
[Libertarian Forum (March 1983)]Wisdom has taught us to be calm and meek,To take one blow, and turn the other cheek;It is not written what a man shall do,If the rude caitiff smite the other too!—Oliver Wendell Holmes, Sr.Somewhere in Ayn Rand’s Fountainhead there is a striking passage where one of the Bad Guys (and Rand’s Bad Guys are always unmistakably bad) abandons the Communist Party and rushes off to India to plunge into Hindu/guru mysticism. Rand caught one of the striking intellectual movements of our age. Time and time again, left-collectivists, after toiling many years in the Marxian vineyard, get disillusioned, give up, and join some Maharishi cult or other, babbling about the ineffable Wisdom of the East. On the New Left, Rennie Davis was a striking example; before that, veteran Communist fellow traveler Louis Fischer suddenly rushed down to India to do a biography of Mahatma Gandhi.
In my own experience, I knew a bright young Trotskyite who, during the New Left epoch, suddenly discovered LSD, and started distributing LSD tracts instead of Trotskyite ones. Pretty soon, one mind-destroying experience begat another, and he was putting up Krishna/Vishnu Indian mystical posters and babbling accordingly.
One of the most thoughtful analysts of this phenomenon has been Arthur Koestler; even the titles of some of his works portray his insights: the Lotus and the Robot, the Yogi and the Commissar. The point is that the Yogi is but the flip side of the Commissar. After years of trying to transform the world by forcing others to do his bidding, the Commissar abandons the world and strives to obliterate his ego in some mystical Great All-is-One Nirvana.
- The Menace of GandhismIt is said that history comes the first time as tragedy, the second as farce. In my more pessimistic moments, I sometimes believe that the libertarian movement is destined to repeat-as-farce many of the calamities that have befallen the Marxian and other ideological movements. And so there is now a spectre haunting the libertarian movement: the spectre of Gandhian non-violence, of the old Hindu baloney sliced once again.
Part of this new fad undoubtedly stems from seeing the movie Gandhi, which has inspired a lot of this nonsense, and so the fad might well be over when the movie fades at last from the theater screens. But the non-violence fad cuts deeper than that. For one thing, it has been picking off some of the best and most radical Libertarian Party activists, ones which the Party can ill afford to lose if it is to retain its thrust and its principles.
There has long been an anti-party tendency in the libertarian movement, headed by Sam Konkin, a tendency holding all voting and political action to be immoral for libertarians. But, in confronting the challenge of activism by we pro-Party types: What is your strategy for rolling back the State, Konkin could only fall back on forming a cheering section for black marketeers. But most libertarians find this an unsatisfactory outlet for activism, first, because black markets, while helpful, do not strike at the core of State power, and second, because black markets will be formed by adept entrepreneurs and need no cheering squads to urge them on. The other major anti-party leader, George H. Smith, confronting the same challenge, has come up with another strategy that has already drawn many radical activists out of the LP: Bringing down the State by massive non-violent resistance, or civil disobedience. This is the nub of Smith’s recently formed Voluntaryist movement, and the current Gandhi film has lent effective focus to Voluntaryist efforts.
At the heart of the Voluntaryist strategy is an unquestionably correct syllogism: If the mass of the people were, at one blow, to withhold their obedience from the State, refuse to pay taxes, stop circulating the State’s paper money, or refuse to obey unjust laws, then the State would be brought down. The major problem, of course, is the likelihood of the If.
There are many successful examples of violent revolution against the State in modern history; the state only two examples of successful non-violent revolution. (Professor Gene Sharp, the current apostle of non-violence, mainly cites marginal examples which have a similar standing to Konkin’s black markets: they ease some of the pain of oppression without doing much to end it. E.g., Danish slowdowns in obeying Nazi orders during the German occupation in World War II). These two examples are instructive, especially in light of the fact that violent revolutions are attacked from all sides as leading to new forms of State oppression. For they are Gandhi’s India, which led to Mrs. Gandhi’s dictatorship and the horrifying experiment in compulsory sterilization; and the Khomeini revolution in Iran, which brought down the Shah’s regime by a series of non-violent actions culminating in a universal general strike. The non-violent Khomeini revolution, of course, has brought forth the monstrous tyranny of Khomeini’s Islamic fundamentalism.
The comparative record of non-violent revolutions is, then, worse than that of violent ones, for the violence of the American Revolution after all brought forth a pretty good result, while non-violence has accomplished nothing fruitful at all.
Which leads to a fundamental libertarian point: What’s so great about non-violence anyway? Libertarians, after all, are not opposed to violence per se; they are opposed only to violent aggression, to the initiation of violence against another’s person or property. With the exception of the LeFevrian aberration, all libertarians, including Konkin and the Smithian Voluntaryists, concede the right to use violence in defense against violent invasion of person and property. So what’s so great about non-violence? Why wantonly abandon an important tool of self-defense?
The new craze of non-violence or Gandhism, is a menace to the libertarian movement for several crucial reasons. It is a dead-end for the libertarian movement. It serves the function of providing burnt-out LP activists with the illusion of an alternative form of productive libertarian activity. My observation is that many, if not most, Voluntaryists or their fellow-travelers do not arrive at this strategy from a studied conviction that political action is immoral. (Even if it were, non-violent resistance would still be an illusory, dead-end strategy). Instead, they begin with various forms of disillusion or exhaustion with LP activities. At this perhaps temporary moment of weakness, they seize on Voluntaryism for providing them with a cosmic rationale for dropping out of a commitment to the libertarian movement.
Why is non-violent resistance a dead end? First, because if we observe the two successful examples of mass resistance, they emerged from a monolithic religious tradition (Shi-ite Islam) or were steeped in the religious culture of the country (Yogi/guru India.) The United States has no monolithic religion or religious culture, and we have no real tradition of coordinated mass non-violence. If anything, Americans, more than most other Western countries, have often been ready to pick up the club or the gun at infractions on their liberty.
Secondly, since there is zero possibility of Smith and his confreres generating a mass movement for civil disobedience, this means that the Voluntaryist movement is destined to take one of two roads, each disastrous in different ways. For when a dozen or so libertarians sit around for a year or two talking about bringing down the State by non-violent resistance, what is likely to happen? Either nothing, in which case everyone gets bored with meta-discussions of revolution, and the movement falls apart and disappears. Or the couple of dozen revolutionaries decide to put their talk into practice by confronting the State apparatus with their bodies, by throwing themselves into stalling the machinery of the State. And what will happen then is inevitable: They will get smashed. The police hate pacifists and non-resisters even worse than Commies, and they will be the first to have their bodies dragged through the muck. Since these are some of the finest young men and women I have ever known, the personal tragedy, let alone tragedy to the movement, will be incalculable. If the movement needs martyrs, I have scads of suitable candidates for martyrdom before George Smith, Wendy McElroy, Carl Watner and the others get ground under the heel.
Note that the inner contradiction, the inner tension, in a handful of people talking continually about non-violent revolution is almost the same as in any similar group sitting around talking about violent revolution (e.g., the Weathermen, et al., in the New Left period.) For then the tendency, after a while, is either for the members to dismiss the whole thing as fruitless palaver and re-enter the mainstream of life, or else to start bombing. Either way, the movement is finished.
For those who believe that libertarian political action is immoral, there are other forms of activism that do not involve what is tantamount to self-destruction: education, lobbying, even Common Cause-type membership organizations. But of course I do not believe for a minute that political action is immoral for a libertarian or an anarchist (see the article by Scott Olmsted and myself on “Is Voting Unlibertarian?” in the next issue of Libertarian Vanguard.)
It is true, moreover, that Smith and McElroy are squarely in the Benjamin Tucker tradition. Tucker and Liberty counselled against political action and called for mass nonviolent disobedience. Their call, of course, got exactly nowhere. The difference between Tucker and his followers, and Smith and his, is that Tucker shrewdly never tried to put his strategy into practice, only paid lip-service to civil disobedience, and remained content to forge a scintillating intellectual movement of individualist anarchism. Would that Smith and the Voluntaryists did the same! Unfortunately, Smith seems to be taking the more reckless and futile course.
Smith, McElroy and the others deny vehemently either that they are mystics or that they are courting martyrdom. I remain unconvinced. In the same way that Smith is certain that there is an inner logic of libertarian political action that leads ineluctably to sellout, so I am convinced that the inner logic of the new Voluntaryist fascination with Gandhite nonviolent resistance will lead ineluctably either to disintegration or to what the Black Panthers used to call “Custeristic” confrontations with the State apparatus.
Indeed, one of the keenest analysts of the libertarian scene attended Smith’s Voluntaryist workshop at the recent February California LP convention, and reported that “George is psyching himself up for confrontation with the State.” The “psyching up” is what Smith, Sharp and other preachers of non-violence refer to vaguely and disquietingly as “training.” I personally find the very word “training” one of the most irritating in the English language, conjuring up as it does linked words such as “basic”, “military”, or EST. Top sergeants “train” the humanity out of their recruits, so as to form a disciplined team, ready to carry out instant orders from above. Even apart from the military connotations, “training” implies distorting persons away from their natural inclinations and choices, and toward some form of imposed regimen. Even if the training is self-imposed, the word has the smell of suppression of the individual and his or her values and authentic personality.
In a session on non-violence held in New York recently, I challenged Professor Sharp in the Q. and A.:“You speak repeatedly of ‘training.’ What is this training? And more important, who is to train whom? Because I tell you one thing: I ain’t going to be ‘trained’ by anybody.” Sharp’s answer was that I had obviously already “trained myself.” Cute, but evasive.
II. The Mahatma DesanctifiedThe time has now come to rip off the veil of sanctity that has been carefully wrapped around Gandhi by his numerous disciples, that has been stirred anew by the hagiographical movie, and that has greatly inspired the new Voluntaryist upsurge. In considering various aspects of his thought and life, we must realize that, for Gandhi at least, they all formed part of a seamless web, an integrated whole.
(Note: this section is based on the superb revisionist article on Gandhi by Arthur Koestler, “Mahatma Gandhi: A Revaluation,” in Bricks to Babel [London: Hutchinson, 1980 pp. 595–619.)
- Economics
Let us not mince words: Mahatma Gandhi was an economic crazy. For Gandhi, not only modern technology but almost any technology was sinful and evil. Railroads were evil, the industrial revolution was evil, cotton textiles were evil, modern medicine was evil, education was evil.
On railroads, Gandhi literally took the line that if God meant us to move around he would have provided us with personal locomotives. Note the following from Bapu (“father”, a widely used term of affection for Gandhi in India) himself:
Man is so made by nature as to require him to restrict his movements as far as his hands and feet will take him. If we did not rush about from place to place by means of railways and other maddening conveniences, much of the confusion that arises would be obviated ... God set a limit to a man’s locomotive ambition in the construction of his body. Man immediately proceeded to discover means of overriding the limit. ... According to this reasoning, it must be apparent to you that railways are a most dangerous institution. Man has gone further away from his maker. (Quoted in Sir C. Sankavan Nair, Gandhi and Anarchy, Madras, 1922, pp. 4–5)
It is characteristic of Bapu that he nevertheless spent most of his life “rushing from place to place” in railway carriages in organizing his movement; it is also characteristic of his phony egalitarianism that he insisted on traveling third class—but with a special coach all to himself.
For Bapu, modern medicine and hospitals were pure evil: “Hospitals are institutions for propagating sin. ... Hospitals are the instruments that the devil has been using for his own purpose, in order to keep his hold on his kingdom. They perpetuate vice, misery and degradation and real slavery.” (Nair, pp. 6–7, 18). All his life, accordingly, the Mahatma experimented with nature-cures and remedies. And much of his life he was ill. But it was again typical of the quality of Gandhi’s alleged devotion to the unity of theory and practice that each time he was seriously ill he began on nature cures, refusing Western medicine and surgery, but invariably ended submitting to drugs, injections, and Western-style surgical procedures.
Again and again, Gandhi, though himself highly educated, attacked education: not just public schools, or private schools, but education per se. A typical quote: “To give millions a knowledge of English is to enslave them.” And: “A peasant earns his bread honestly. What do you propose to do by giving him a knowledge of letters? Will you add an inch to his happiness? Do you wish to make him discontented with his cottage or his lot?” (Mohandas K. Gandhi, Hind Swaraj or Indian Home Rule, Ahmedabad, 1946, pp. 63– 66)
But Gandhi’s nuttiest and most intensely held economic fallacy was his bitter attack on machine-made textiles and his holding up of homespun clothing as having virtually sacral value. It must be emphasized that Gandhi’s lifelong war against manufactured textiles was not just a tactic to boycott English products in his struggle against British imperialism. For Gandhi, the home spinning wheel, which he had designed as the centerpiece of the Indian flag, was a holy symbol of a hoped-for return by the Indian masses to the Simple Life, and of absolute rejection of the impious Industrial Revolution.
Thus: “The call of the spinning-wheel, Gandhi wrote in Young India, is the noblest of all. Because it is the call of love. ... The spinning-wheel is the reviving draught for the millions of our dying countrymen and countrywomen ...” (In The Gandhi Reader, London, 1958, pp. 229–230.) The cult of the spinning-wheel spread through the Gandhi movement, and Gandhi’s Congress Party resolved that all of its members should take up home spinning and pay their membership dues in self-spun yarn; Congress officeholders had to pay to the Congress 2000 yards of yarn per month. In its meetings, the top politicians of the Congress Party participated in the debates while operating their portable spinning-wheels. The plain white cap and white cloth became the uniform of the Congress movement, and Gandhi’s hand-picked successor, Pandit Nehru, called this uniform “the livery of freedom.” Gandhi, meanwhile, called the homespun cap and cloth “the sacrament of millions” and “a gateway to my spiritual salvation.”
Gandhi led large-scale public bonfires of foreign (manufactured) cloth. His burning of English cloth might be considered a tactic in the revolution against Britain, but why then burn all foreign cloth, British or no? In a reply to his lifelong admirer, the poet Rabindranath Tagore, who had accused him of employing a “magical formula” in burning all foreign cloth, Gandhi essentially confirmed the charge:
I do indeed ask the poet to spin the wheel as a sacrament. ... It was our love of foreign cloth that ousted the wheel from its position of dignity. Therefore I consider it a sin to wear foreign cloth. ... On the knowledge of my sin bursting upon me, I must consign the foreign garments to the flames and thus purify myself, and thenceforth rest content with the rough khadi made by my neighbors. (The Gandhi Reader, pp. 228–231)
The homespun khadi may have made a deep imprint on the Congress Party and other Gandhi cultists, but ironically it never did so for the mass of Indian peasantry and villagers for whom the khadi campaign was intended. The peasants after all, were not loonies, and it took them little time to realize that there were better things to do, and that foreign manufactured textiles were not only better in quality than homespun, but also that homespun cost fully three times as much! As Koestler sardonically writes: “The spinning-wheel found its place on the national flag, but not in the peasants’ cottages.”
Arthur Koestler begins his excellent article, with a quote from a long-time friend of Gandhi’s: “It takes a great deal of money to keep Bapu living in poverty.” Mrs. Naidu, who made that statement, was more perceptive than she knew, for the “great deal of money” applies not only to fund-raising campaigns for khadi, but also to the Indian masses who had to suffer from demented attempts at economic self-sufficiency and reversing the Industrial Revolution.
- Sex
From his late thirties, Mahatma Gandhi engaged in a lifelong crusade for chastity and against sex. For Gandhi, devotion to brahmacharya (sexual abstinence) was heavily influenced by the mystical Indian yogi tradition which can best be likened to the views of the nutty general in Dr. Strangelove (played by Sterling Hayden), who was chiefly concerned with “preserving his vital bodily fluids (bindu).” Whether married or not, people were supposed to engage in brahmacharya as “the conduct that leads to God”, as the “sine qua non for those who aspire to a spiritual or higher life.” From the age of 37, when he began the practice of abstinence, Gandhi repeatedly “tested” his devotion to brahmacharya by sleeping with a succession of women, beginning with his own wife and ending with the young granddaughter of a cousin.
It must be understood that, for Gandhi, sexual abstinence and non-violence (satyagraha) were mutually intertwined and interdependent. It was in 1906 that Gandhi embarked on his vow of chastity, and when he also launched his first campaign of non-violent resistance. Brahmacharya put Gandhi “in touch with the infinite,” with the soul-force which also powered satyagraha. For Gandhi, furthermore, sex is violence, and so abstention from the two evils become closely linked.
One of the worst aspects of Gandhi’s anti-sex crusade was the way he treated his own sons, conceived, of course, in his pre-chastity days of “sin” and lubricity. He apparently hated his sons for being the living embodiment of his own sin, and he tried his best to keep them from falling into the same sinful trap. He disowned his eldest son, Harilal, for daring to marry and thereby disobey his father’s injunctions to chastity, and when his second son, Manilal, committed the mortal sin of losing his virginity to a woman, the Mahatma went on a public pentential fast. Gandhi decreed that Manilal might never marry, and managed to persuade the guilty female to shave her hair in penitence.
Scorning all education, Gandhi kept his sons from school, intending to teach them himself. An admirable goal—except that, in his pursuit of the higher truth, he somehow never found the time.
Gandhi’s lifelong struggle to “purify” his diet was linked with his campaign against sex. When taking the vow of chastity, he wrote: “Control of the palate is the first essential in the observance of the vow. ... The brahmacharya’s food should be limited, simple, spiceless and if possible uncooked. ... Six years of experiment have shown me that the brahmacharya’s ideal food is fresh fruit and nuts.” (Gandhi, “How to Serve the Cow,” Ahmedabad.)
- The Scam of Non-Violence
It should be clear that the life of Mahatma Gandhi was essentially a scam, from start to finish. Making a big show of his allegedly deeply-held principles, claiming to make his life and thought a seamless web, he always ended Up betraying those principles. He rode on railways, he fell back repeatedly on Western medicine and surgery, and he continued to “test” his chastity with various females until the end of his life. The same is even true for his allegedly great contribution, the theory and practice of non-violence. Let us then examine two aspects of Gandhi and non-violence: first, how successful was Gandhi’s campaign, and second, how consistently did he adhere to the principle?
a. The Effectiveness of Gandhi’s Non-Violence
Mahatma Gandhi launched his first nationwide civil disobedience campaign in 1919. But the campaign was an abject failure, for the non-violent action quickly degenerated into violent rioting all over India. Gandhi suspended the action, confessed to having made a “Himalayan blunder,” and, characteristically, went on a penitential fast. He attributed the failure to launching the campaign before the Indian masses had been sufficiently “trained” in the philosophy and techniques of satyagraha.
A year later, apparently believing that sufficient training had now taken place, Gandhi launched another nationwide campaign of non-violent resistance. But it too led to widespread violent riots, culminating in the massacre of Chauri Chaura; Gandhi again suspended the action and went on a penitential fast.
Gandhi’s most successful campaign of civil disobedience occurred in 1930-31, in his “march to the sea” against the salt laws. But even here, there was widespread rioting by the Indian masses. His later satyagraha campaigns—1932–34, 1940–41, and 1942–43—were highly publicized, but inconclusive. In general, we can say that Gandhi’s nonviolence did not “liberate India”; on the contrary, the British decision to pull out of India was triggered far more by their general withdrawal from Empire after World War II, attendant up on British economic exhaustion, than it was by Gandhi’s campaigns of non-violent resistance. Indeed, many historians have pointed out that India would have won independence earlier without Gandhi’s existence. (See, for example, John Grigg, “A Quest for Gandhi,” London Sunday Times, Sept. 28, 1969).
What Gandhi did manage to achieve, in contrast, was (a) to make himself into a living and eternal legend, misleading countless Western seekers after truth; (b) poisoning the wells of Indian culture by perpetuating its most misguided, foolish, and genuinely reactionary economic and social views; (c) seeing to it that the reins of the new independent India were seized by his own statist and dictatorial—and scarcely nonviolent—Congress Party; and (d) achieving an independence that led to the decidedly non-nonviolent slaughter of literally millions of Hindus and Muslims.
b. How Consistent was Gandhi?
In some ways, Gandhi was horrifyingly consistent on nonviolence, especially if the non-violence was supposed to be practiced by other people in other countries. Thus, after the first nationwide pogrom against the Jews in Germany, in December 1938, Gandhi counselled the Jews to react in a nonviolent manner: “if the Jews can summon to their aid soul-power that comes only from non-violence, Herr Hitler will bow before the courage which he will own is infinitely superior to that shown by his best stormtroopers.” And after the news of the Holocaust became known, Gandhi, in 1946, counselled retroactively.
The Jews should have offered themselves to the butcher’s knife. They should have thrown themselves into the sea from cliffs. ... It would have roused the world and the people of Germany. (Geoffrey Ashe, Gandhi: A Study in Revolution, London, 1968, p. 341)
Perhaps what the Jews lacked was little Bapu to give them their “training.”
After the fall of France, the Mahatma praised Petain for his courage to surrender, and on July 6, 1940, Bapu published an “Appeal to Every Briton” to follow Petain’s lead:
want you to fight Nazism without arms or with non-violent arms. I would like you to lay down the arms you have. ... You will invite Herr Hitler and Signor Mussolini to take what they want of the countries you call your possessions. Let them take possession of your beautiful island, with your many beautiful buildings. You will give all these, but neither your souls, nor your minds. If these gentlemen choose to occupy your homes, you will vacate them. If they do not give you free passage out, you will allow yourself, man, woman, and child, to be slaughtered, but you will refuse to owe allegiance to them. (T. A. Raman, What Does Gandhi Want? Oxford, 1943, p. 24)
George, Wendy, Carl: In the grand old Randian phrase, check your premises! Is this really the credo that you would like Americans to adopt? I personally find it odious, repellent, and extraordinarily creepy, and I venture to predict that there are damned few libertarians, let alone the mass of Americans, who will go along with it. Arthur Koestler’s reaction to this paragraph was scintillating: “It would have taken a great deal of corpses to keep Bapu in non-violence.”
Perhaps the height of Gandhian idiocy on non-violence came in his reaction, on the last day of his life, before he was assassinated, when a Life magazine reporter asked him: “How would you meet the atom bomb ... with nonviolence?” Here’s Bapu’s answer to what is certainly a crucial question in our modern world:
I will come out in the open and let the pilot see I have not a trace of ill-will against him. The pilot will not see our faces from his great height, I know. But the longing in our hearts—that he will not come to harm—would reach up to him and his eyes would be opened. (The Essential Gandhi, London, 1963, p. 334)
I suppose that we should be thankful that we cannot now hear Bapu opine on how the longing in our hearts will reach out to button-pushers of missiles many thousands of miles away.
If the Mahatma was fiercely consistent on non-violence for other people, how was he on his own home ground? First, in 1918, he served as a recruiting sergeant for the British Army, stating that to achieve home rule India “should have the ability to defend ourselves, that is, the ability to bear arms and to use them”, and therefore “it is our duty to enlist in the army.” Three years later, Gandhi stated that “Under Independence I too would not hesitate to advise those who would bear arms to do so and fight for the country.” (The Essential Gandhi, p. 125; and Louis Fischer, The Life of Mahatma Gandhi, London, 1951, p. 371)
Gandhi later excused these positions as early lapses: “I had not yet found my feet ... I was not sufficiently sure of my ground.” (The Essential Gandhi, p. 125.) Okay, fair enough. At 52, Gandhi was not exactly a spring chicken, but nobody expects a man to arrive in the world a full-blown theoretician. Chalk that one up to a learning experience. But we surely cannot use such an alibi for the last years of Gandhi’s life, when he had long since found his ground. In late 1947, after the partition of the newly independent states of India and Pakistan, the two new states went to war over largely Muslim Kashmir (a province which India unfortunately was able to conquer and keep.) Where did Bapu stand on the India-Pakistan war? The true Bapu now took his stand. He had been, he said in an important speech:
an opponent of all warfare. But if there was no other way of securing justice from Pakistan, if Pakistan persistently refused to see its proved error and continued to minimize it, the Indian Union would have to go to war against it. War was no joke. No one wanted war. That way lay destruction. But he could never advise anyone to put up with injustice. (Nirmal Kumar Bose, My Days with Gandhi, Calcutta, 1953, p. 251)
In the crunch, then, when his theories came home to roost, the Mahatma caved in and sold out. Traveling through massacre-torn East Bengal, Gandhi admitted to his intimates that “for the time being!” he had “given up searching for a non-violent remedy applicable to the masses.” And a few days later: “Violence is horrible and retarding, but may be used in self-defense.” To Nirmal Bose, in commenting on Indian Deputy Premier Patel’s decision to send troops into Kashmir, the Mahatma confessed that:
he could no longer successfully apply the method of nonviolence which he used to wield with signal success. I have made the discovery that what I and the people with me termed non-violence was not the genuine article, but a weak copy known as passive resistance.
And to Professor Stuart Nelson, Gandhi admitted that “what he had mistaken for satyagraha was not more than passive resistance, which was a weapon of the weak ... Gandhiji proceeded to say that it was indeed true that he had all along laboured under an illusion. But he was never sorry for it.” (Bose, My Days, pp. 104, 107, 251, 270–71, 4n)
I suppose that being a successful ideologue means never having to say I’m sorry, even if millions of followers had been tragically misled. Gandhi never lived long enough to adumbrate any new doctrines of “genuine” civil disobedience, but I suppose that we are just as well off.
Legal recreational marijuana use in the state of Washington is now two-and-a-half-years old and retail sales of marijuana have been legal for one year. What are the results of this experiment? Who was wrong and who was right on legalization?
A new study has been released by the Drug Policy Alliance, a group that openly promotes “harm reduction policies” such as drug legalization, drug decriminalization, legal medical marijuana, and needle exchange programs. The study tracks several of the key social statistics connected with drug use.
Less Government SpendingThe most obvious result, and one that everyone agreed on, was that arrests and convictions for marijuana violations would decrease. The number of arrests in 2012, the year prior to legalization, was 6,196, while in 2014 the number of arrests was 2,316, a decrease of 63 percent. Most of those arrests were for possession of more than one ounce of marijuana. Convictions for marijuana violations have also declined by 81 percent.
The report notes that as a result of fewer arrests and convictions there have been millions of dollars saved in terms of police, prosecutors, courts, and jails. Just as important is that legalization has allowed people to save in terms of money, transaction costs, and stress. The most important result of all is that legalization has already saved thousands of law-abiding citizens from having a criminal arrest record.
Washington has received $83 million in marijuana tax revenues which was in the general range of expectations. Most of this tax revenue is used by the marijuana tax bureaucracy and to finance drug treatment and education programs, so that there is no net revenue gain for the state. There are also revenues from licenses and fees, but these are user fees so that there is no net revenue gain in this case, either.
The fact that marijuana legalization reduced the burden on the criminal justice system and funded drug deterrence programs was not in doubt. Nobody really questioned whether these results would be achieved. However, one area of disagreement was on the issue of crime. Opponents of legalization claimed that crime would increase. For example, law enforcement opposed legalization because of the potential impact on crime, in particular that it would increase organized crime. Proponents of legalization said that crime would decrease or be unaffected by legalization.
A Decrease in CrimeIn terms of crime in Washington State, violent crime decreased by about 10 percent while property crime was about the same between 2012 and 2014. However, crime in both these categories has been falling steadily in recent years, so that the 10 percent decrease in violent crime could be because police were available to deter and solve violent crimes, or it could be other factors. The point is that there has been no spike in any type of crime since legalization began. The predictions of prohibitionists were clearly wrong.
Law enforcement agencies in Washington also opposed legalization because they thought it would cause an increase in highway accidents and fatalities. With so little data available the Drug Policy Alliance report described the “crash risk” as “stable,” meaning little change from 2012 to 2014. However, I believe the available data clearly supports that legalization leads to safer streets.
In 2008, the number of fatalities involving a drug or alcohol impaired driver was 255. By 2012 that number had dropped to 212 with the five year rolling average of 232. The goal for 2013 was set at 247, but the actual number was 182, beating all previous years and smashing the goal by a wide margin of 26 percent. In 2012 there were 501 serious injuries involving a drug or alcohol impaired driver, with a moving average of 509. In 2013 there were only 411 such serious injuries, easily beating all other years in the report and the previous year by 18 percent. Law enforcement position was clearly wrong when it comes to crash risk.
Use Among Youths Not IncreasingLegalizing marijuana can be expected to make marijuana more available and subject to “diversion” to those twenty-one years of age or younger. That in itself is not a damning conclusion for legalization if young people are substituting marijuana for more dangerous drugs and alcohol. Relative to heroin, cocaine, synthetic narcotics, and pharmaceutical drugs, as well as possibly alcohol and tobacco, marijuana is safer and less addictive. However, according to the Drug Policy Alliance report marijuana use has not increased among the youth:
Between 2012 and 2014 usage rates for 8th and 10th graders decreased slightly and similar rates for 12th and 6th graders remained unchanged.
Marijuana use in this group is high at roughly twice the rate of cigarette-use, but this is largely due to government policies that have made alcohol and tobacco relatively difficult to obtain. Unable to obtain alcohol and tobacco at a reasonable price, these children turned to marijuana and found it to be relatively safe. Secretary of Health, John Wiesman seems to be clueless about this simple economic fact. According to him:
We’ve got to ring the alarm bell because teens are telling us in their own terms that they don’t consider marijuana use to be risky. ... We’ve got to take the lessons learned about tactics that helped curb tobacco and alcohol use and put them to good use educating our kids about risks of using other substances.
Wiesman fails to realize that the government’s own policies encouraged minors to switch from alcohol and tobacco to marijuana. Once they tried marijuana they realized that the government’s propaganda was highly misleading.
In contrast to the prohibitionist propaganda messages, legalization has resulted in fewer arrests, convictions, and criminal records. More resources were made available for enforcing property and violent crime. The number of fatalities and serious injuries attributed to alcohol and drugs declined noticeably. As the statistics are clearly proving, the prohibitionist propagandists were wrong and the advocates of legalization were correct.
This month, the Ultimate Fighting Championship (UFC) experienced one of its biggest Pay-Per-View events ever with “UFC 189,” live from Las Vegas, Nevada. Mixed Martial Arts (MMA) is widely considered to be the fastest growing sport in America and perhaps even the world. Thus, many different cities both inside and outside the United States have hosted MMA events. But in one state, New York, MMA remains illegal, and will likely remain that way for at least one more year. The sport is legal and regulated in the other 49 states.
The inability of New York legislators to end the prohibition of MMA remained the norm once again this year after a legalization bill was not brought before the New York State Assembly for a vote. The New York State Senate has passed a legalization bill each of the past six years. There was more hope for 2015 after former speaker of the New York Assembly Sheldon Silver, a major opponent of MMA legalization in the state, resigned due to an arrest on federal corruption charges back in January. But alas, there was not even a vote on the bill despite this advantage.
Who’s Against MMA?It’s tempting to think that the continued political resistance to state sanctioned MMA bouts is a simple case of government nanny-stating creeping into the world of sports. After all, it was former New York City Mayor Michael Bloomberg who banned trans-fats, public smoking, and extra-large sodas (amongst other things). So perhaps it would make sense that the elected officials in the state of New York would extend the same kind of heavy handedness that Bloomberg so regularly applied to NYC. However, the real story is far more complicated and reeks of far more corruption than do-good politicians who try to run people’s lives.
The story of MMA’s continued illegality in the Empire State centers around two of the UFC’s owners, brothers Frank and Lorenzo Fertitta. In addition to the UFC, the Fertittas also own Station Casinos in Las Vegas. This puts them at odds with the powerful Culinary Workers Union since Station Casinos is non-union. This union’s parent organization is called Unite Here and encompasses several different union organizations throughout the country. Unite Here’s headquarters is in New York City, and the union has managed to flex its muscle more effectively in New York. As a result, the union has kept legal MMA out of the state as part of its effort to ensure that businessmen who hire non-union staffs are not allowed to expand their business into New York. Union-bankrolled politicians have apparently been happy to assist in the effort.
Arbitrary IllegalityThe politicians who say they wish to ban MMA for safety reasons really have no leg to stand on. There has never been a life altering condition or death associated with the sport. Boxing can’t say the same, as anyone who has merely taken a glimpse of Mohammed Ali in the past twenty plus years can attest to. Football can’t say the same either, as Junior Seau, Dave Duerson, and Mike Webster all passed away long before their time. Both football and boxing are perfectly legal in the state of New York.
Not only are the dangers of MMA overblown, but there’s actually even more danger in not legalizing the sport. Just as occurred with alcohol prohibition in the 1920s and early 1930s, alcohol consumption was driven underground and behind closed doors, resulting in increased instances of death, blindness, and organized crime; this is happening with MMA today. MMA activities have been driven underground in New York where it is far more dangerous. Many politicians never seem to learn the lessons of unintended consequences that come from banning something that people want.
It appears the New York State Assembly is not only using dirty politics as a roadblock to prevent the expansion of a business which is legal everywhere else in the country, but their continuing prohibition of this business is actually harming those in the state who wish to engage in the prohibited activity. Combine these things with the revenue lost by New York to other states willing to hold sanctioned MMA bouts and it adds up to a very steep price to pay to keep the union bosses happy. So the politicians and the unions may have us believe that this prevented legality is somehow worth it, the reality of the costs tell us that this simply isn’t true.
When Murray Rothbard wrote “Science, Technology, and Government” in 1959, supporters of the free market needed to confront a challenge that remains relevant today. In 1957, the Soviet Union launched its “Sputnik” satellite, thereby defeating the United States in the race between the two countries to be first into space. Did this victory show, or at least suggest, the superiority of Soviet centrally-planned science to the American market economy? Critics of the free enterprise system like John Kenneth Galbraith (one of Rothbard’s least favorite economists) claimed that scientific research and development required government planning and control. The free market, these critics claimed, could not carry out the vast efforts research now required. Could private enterprise have built the atomic bomb? The Soviets have long since departed, but the fallacies in the arguments for centrally-controlled science live on today. Government spending on science and technology has increased far beyond its level in 1959.
In this brilliant monograph, Rothbard deftly turns the tables on the supporters of big government. In doing so, he displays his unique combination of mastery of theoretical principles and commanding knowledge of the empirical evidence and scholarly literature on every subject he addresses. He shows that science best advances under the free market: the claims to the contrary of the centralizers are spurious.
He begins with a fundamental question: how do we decide how much money to spend on research. The more we spend, the less we have to spend on other things. The decision is best left to the free market:
This fact of reality, then, must be faced: if there are to be more scientists, or more scientific research, then there must be less people and less resources available for producing all the other goods and services of the economy. The crucial question, then, is: how much? How many people and how much capital are to be funneled into each of the various occupations, including science and technology? One of the great, if often unsung, merits of the free enterprise economy is that it alone can insure a smooth, rational distribution and allocation of productive resources. Through the free price systems, consumers signal laborers, capitalists, and businessmen on which occupations are most urgently needed, and the intricate, automatic workings of the price system convey these messages to everyone, thereby creating an efficient, smoothly working economy.
If an objector says to this, “But hasn’t the free market, which you praise, resulted in a shortage of scientists?”, Rothbard has a devastating answer; What shortage?
If then, there is a shortage of scientists, market salaries for scientists will significantly rise, relative to other occupations. But since they have not so risen, is there really a shortage for scientists? This question was itself scientifically invested only recently ... since 1939, salaries of engineers relative to earnings of doctors, dentists and lawyers, have declined, and have also declined relative to manufacturing wage earners. Even the salaries of clergymen, pharmacists, and school teachers, rose relative to engineers in this period. How, then, can there be a shortage of engineers?
Even if there is no shortage of scientists, though, does it not remain the case that in current conditions, advances in scientific knowledge require gargantuan efforts beyond the scope of the free market? Rothbard meets this dogma head on:
The myth has arisen that government research is made necessary by our technological age, because only planned, directed, large-scale “team” research can produce important inventions of develop them properly. The day of the individual or small-scale inventor is supposedly over and done with. And the strong inference is that government, as potentially the “largest-scale” operator, must play a leading role in even non-military scientific research. This common myth has been completely exploded by the researches of John Jewkes, David Sawers, and Richard Stillerman in their highly important recent work. Taking sixty-one of the most important inventions of the twentieth century. ... Jewkes et. al. found that more than half of these were the work of individual inventors—with the individuals working at their own directions, and with very limited resources.
Not even the building of the atomic bomb is an exception to the superiority of the free market to governmentally-controlled science.
The fundamental atomic discoveries had been made by academic scientists working with simple equipment. One of the greatest of these scientists has commented: “we could not afford elaborate equipment, so we had to think.” Furthermore, virtually the entire early work on atomic energy, up to the end of 1940, was financed by private foundations and universities. And the development of the bomb was, for peacetime purposes, an extremely wasteful process.
The alleged great achievements of Soviet science, including the much-vaunted Sputnik, failed to impress Rothbard:
We have heard a great deal recently about the alleged glories of Soviet science, and about the necessity of the United States catching up with such wonders as sputniks. What is the real record of Soviet science? Professor [John R.] Baker, analyzing this record, shows that, at the beginnings of the Soviet Union, the old pre-revolutionary scientists continued to do well, largely because science was not yet under government planning. That came with the Second Five-Year Plan, in 1932. ... Government control of science, government planning of science, is bound to result in the politicization of science, the substitute of political goals and political criteria for scientific ones. Even pro-Soviet scientists have admitted that Soviet research is inferior to American, that basic, as contrasted to applied, research, is neglected; that there is too much red tape; that little fundamentally creative work has been done; and that science is unduly governed by political considerations—such as the political views of the scientist propounding any given theory. Scientists are shot for taking the view that happens to be in political disfavor.
So far as Sputnik is concerned, “American satellites have far superior instrumentation, and are therefore much more important scientifically.”
Given his opposition to governmentally-controlled science, it is no surprise that Rothbard thinks that the best course of action for government is to get out of the way of the creative activities of the free market. It should, for example, reduce taxes to the greatest extent possible. In this connection, Rothbard in a brilliant paragraph exposes a common fallacy:
Contrary to common belief, a tax exemption is not simply equivalent to a government subsidy. For a subsidy mulcts taxpayers in order to give a special grant to the favored party. It thereby adds to the ratio of government activity in the economy, distorts productive resources, and multiplies the dangers of government control and repression. A tax exemption, or any other type of tax reduction, on the one hand, reduces the ratio of government to private action; it frees private energies and allows them to develop unhampered; it reduces the danger of government control and distortion of the economy. It is a step toward the free market and the free society, just as a government subsidy is a step away from the free society.
This essay was found among Rothbard’s papers. But the exact circumstances under which it was written have not yet come to light. As readers will soon discover, it contains an astonishing wealth of insights.
David GordonLos Angeles, July 2015
In all of the problems discussed above, the charge has been that free market activity was deficient in some form of scientific research of development. In the question of automation, the charge is really the reverse: that technological improvement might become so great as to threaten dire consequences, particularly unemployment.
Now the spectre of “technological unemployment” has been with us at least since the early days of the Industrial Revolution, when benighted workers smashed machines which came to create jobs for them and raise their standards of living immeasurably above the subsistence level. Despite all manner of refutation, it recurs continually, the latest manifestation being the fashionable view that the current chronic unemployment during a recovery is caused by “too much” increase in productivity (when it is really caused by excessive union wage rates). It is about time that this absurd notion of technological unemployment be laid to rest once and for all. Who was displaced by the steam shovel? How many millions of ditch diggers are now out of work because of it? Where are the billions of unemployed that are supposed to have been caused by the replacement of the human pack animal by the wagon and the truck? Where are they, if the doctrine of technological unemployment is correct? Where are the millions of unemployed resulting from the Industrial Revolution—when the truth is the other way round, that thousands of beggars had nothing to do until the Industrial Revolution rescued them!
Actually, a technological improvement in an industry has the following result: if the demand for the product is elastic (and approximately half of the products have an elastic demand), then the lower prices, and lower costs, of the product will stimulate increased demand and increased production, expanding employment in the industry. If the demand is inelastic, then the improvement will cause less resources to be devoted to the industry, and lower employment; but since prices have declined, the consumers take the funds that they had formerly spent on this industry and spend them elsewhere, thus generating more employment in the other industries. One of the “other industries” that will be expanded will be the industry of making the new machines or new products. Thus: there is no technological unemployment remaining. Automation will have the same effect as any technological improvement, expanding employment in some industries, contracting them in others—but leaving no residue of technological unemployment.This, indeed, is the effect of any change in the economy, whether of consumer wants, of natural resources, of climate, or technology: employment in some firms and industries will be expanded, and in others will be contracted.
Discussing the problem of technological unemployment, the Earl of Halsbury writes that he knows of no instance where technological progress has caused prolonged unemployment, or, indeed, where technological regression has caused unemployment!The Earl of Halsbury, “Introduction,” in E.M. Hugh-Jones, ed., The Push-Button World (University of Oklahoma Press, 1956).
More specifically on automation, it is expected to increase the demand for skilled workers in industry, and decrease demand for the unskilled, who can shift (thus continuing recent pro-automation trends) into the service trades, which cannot be automated. Halsbury estimated that practically no unemployment, even temporarily, need be involved in such shifting, since there is a 2 percent “natural” turnover in industry per annum, due to retirement of old and recruiting of young workers, and that the redeployment of labor caused by automation will not be nearly as heavy at this rate. The retirement-recruitment process will therefore be a good buffer against even temporary unemployment. Argyle adds that there is even greater room for mobility, for in addition to this process, about 10 percent of workers leave per annum for other reasons and that these too will buffer against forced unemployment.Michael Argyle, “Social Aspects of Automation,” in ibid., p. 113.
Many of the semi-skilled, and even the unskilled, workers will be upgraded from routine, assembly-line type jobs into better paying, more skilled and varied work. It is largely the routine work that will be eliminated. In many instances, automation will not even decrease the workers in the specific jobs affected. Thus, Halsbury estimates that computerized accountancy, which will permit cheaper and more economic calculation of payrolls, and faster inventory and stock control, will also open up and partially solve a range of new problems, which firms couldn’t even have thought of tackling before: such as “production scheduling.” As a result, he predicts that as many accountants will need to be employed a generation hence as now, except that they will need more skills than they require now.
Automation will be largely applicable, and certainly only economically applicable, in the mass production industries, such as manufacturing, electrical goods, office machinery. It will be feasible for small-scale firms (the new “numerical control”) as well as large in these areas. There will still be plenty of room, however, for homemade goods, crafts, services of persons, etc. And Woollard warns against wild overestimation of what automation in manufacturing will amount to:
if by the term “automatic factory” one is tempted to think of a plant in which the materials are loaded at the beginning of the week, then everyone goes home to play golf expecting to come in on Saturday morning to find the work loading itself on trucks for dispatch, the automatic factory is just a pipe-dream. I doubt very much whether we shall ever see anything of the sort.Frank G. Woollard, “Automation in Engineering Production,” in ibid., p. 38.
In addition, such industries as transportation and retailing do not seem to be adapted to automation. And Spencer estimates that office automation, while requiring considerable retraining and upgrading of office staff, will not lead to any overall reduction in clerical labor. Office needs for labor have been steadily increasing, due to increased complexity of industry, and the effect of computers will be to stop or slow down this growth, rather than actually unemploy any large number of clerical staff; it will reduce considerably the drudgery of present clerical work.W.R. Spencer, “Administrative Applications of Automation,” in ibid., p. 107.
Rational optimism about the employment effects of automation has been well expressed by H.R. Nicholas, one of Britain’s most prominent trade union leaders. Nicholas points out that automation creates employment, that our present-day technology has been a boon, rather than a handicap, to employment. Nicholas points out that the numbers employed in our presently most automated industries, such as petroleum, have expanded rather than contracted, because of the prosperity of the industry. There has been more work for tankers, railroads, trucks, etc., to move oil, for shipyards to build these tankers, for managerial, sales, maintenance help in the industry: none of whom will be displaced by automation.H.R. Nicholas, “The Trade Union Approach to Automation,” in ibid.
One point about automation that should not be overlooked: “it will greatly improve the safety of industrial work, many of the unsafe jobs (such as handling atomic, fissionable materials) being automatically accomplished.”See Automation and Technological Change, Report of the Subcommittee on Economic Stabilization to the Joint Committee of the Economic Report (Washington, D.C.: 1955), p. 6.
Let us, therefore, put aside the old Luddite (machine-wrecking) bogeyman of technological unemployment, and hail modern developments of automation for what it is and will be: a superb method of greatly increasing the standards of living and the leisure hours, of all of us. We can therefore, hail the Douglas Subcommittee when it reported as follows:
One highly gratifying thing which appeared throughout the hearings was the evidence that all elements in the American economy accept and welcome progress, change, and increasing productivity. This flexibility of mind and temperament has been a conspicuous characteristic of American industry for generations in well-known contrast to that of many other countries. Not a single witness raised a voice in opposition to automation and advancing technology. This was true of the representatives of organized labor as well as of those who spoke from the side of management. ... Labor, of course, recognizes that automatic machinery lessons the drudgery for the individual worker and contributes greatly to the welfare and standard of living of all.Ibid., pp. 4–5.
We have so far omitted discussion of atomic energy. Our nuclear age has been held up as the chief argument of those who believe that government control and direction of science is necessary in the modern world—at the very least, in the atomic field. The government-directed team effort involved in making the atomic bomb has been glorified as the model to be imitated by science in the years ahead. But, in analyzing this common view, Jewkes, Sawers, and Stillerman point out, first, that the fundamental atomic discoveries had been made by academic scientists working with simple equipment. One of the greatest of these scientists has commented: “we could not afford elaborate equipment, so we had to think.”Jewkes, et al., Sources of Invention, p. 76.
Furthermore, virtually the entire early work on atomic energy, up to the end of 1940, was financed by private foundations and universities.See Compton, Atomic Quest, p. 28. And the development of the bomb was, for peacetime purposes, an extremely wasteful process. The friction on the project between scientists and administrators, the great difficulties of administration, has been pointed out often.Ibid., p. 113. Moreover, Jewkes, Sawers, and Stillerman suggest that government control of research slowed down, rather than speeded up, peacetime atomic development—especially with its excessive secrecy and restrictions. They warn also that latest estimates hold that, even by the year 2000, less than one-half of the total output of electricity will come from atomic energy (the main peacetime use), and that over-optimism about atomic energy has already drained scientists and technologists away from other fields, diminishing the supply of research needed elsewhere. And Professor Bornemann warns that “pressure of exploitation for military purposes has depleted the stock of basic scientific knowledge and in an atmosphere, moreover, which has not been conducive to further discovery in this realm.”Bornemann, "Atomic Energy and Enterprise Economics," p. 196. Also see Department of State, Pub. #2702, The International Control of Atomic Energy (Washington, D.C.: Chemists’ Association), Impact of Peaceful Uses of Atomic Energy on the Chemical Industry (Washington, D.C.: Feb. 1956).
The eminent economic historian John Nef points out that such inventions useful to war as nitroglycerin and dynamite, did not emerge from war, but from developments in the mining industry. Nef finds that recent world wars have not so much stimulated scientific development, as diverted it into purely military tasks—in fact, have slowed down genuine scientific progress. And while the vast sums of the government speeded up the development of the bomb, “it cannot be claimed that war made the general use of this force for the material benefit of humanity more imminent.” And a prominent American engineer has noted that the armed forces, between the wars, were technologically stagnant, and that “little technological progress is possible during a war, except of the ‘hothouse’ variety, which is forced and superficial, and that whatever gains have been made in military technology have come as a consequence of more general scientific and industrial advances.”John U. Nef, War and Human Progress (Cambridge: Harvard University Press, 1950), pp. 375–77, 448.
Bornemann charged further that government monopoly of the atom, and its lack of profit and loss incentives, made atomic power inefficient and over-costly. Government secrecy greatly delayed engineers of the power industry from learning about the modern technology, therefore slowing scientific development.
As we saw earlier, neither is Dr. John R. Baker impressed with such Soviet achievements as the sputnik as a model for science. Engineering development toward a specific given end—in addition to the other evils of government control—also deprives basic research of needed scientific resources.See Baker, Science and the Sputniks.
That modern nuclear science has not rendered obsolete an individual inventor, the free and undirected spirit (see the views of Jewkes et al. discussed above) has recently been shown in dramatic form in the case of the “crazy Greek,” Nicholas Christofilos, who, as an elevator engineer and supervisor for a truck repair depot, taught himself nuclear physics from the ground up, and originated theories so challenging that atomic experts scoffed and ignored him—until they proved successful. Christofilos, Dr. Edward Teller, and others have all indicated that, in his case, lack of training was a positive advantage in preserving his original bent of mind.William Trombley, “Triumph is Space for a ‘Crazy Greek’,” Life (March 30, 1959): 31–34.
If, then, the advent of atomic energy does not change our basic conclusions: that all civilian research and development be done by the free market, and that as much military scientific work as possible be channeled into private rather than government operations, what of the space age? How shall we finance our future explorations in space? The answer is simple: insofar as space explorations are a byproduct of needed military work (such as guided missiles) and only insofar, let the space exploration proceed on the same basis as any other military research. But, to the extent that it is not needed by the military, and is simply a romantic penchant for space exploration, then this penchant must take its chances, like everything, in the free market. It may seem exciting to engage in space exploration, but it is also enormously expensive, and wasteful of resources that could go into needed products to advance life on this earth. To the extent that voluntary funds are used in such endeavors, all well and good; but to tax private funds to engage in such ventures would be just another giant government boondoggle.See Frank S. Meyer, “Principles and Heresies,” National Review (November 8, 1958): 307.
Turning from the general to the particular, we find that in recent years the Federal government has begun to realize the superior efficiency of private enterprise, even in atomic development. The Hoover Task Force found that the Atomic Energy Commission’s nuclear plants were all operated as contract installations, by private industry or by universities. In 1954, the Atomic Energy Commission awarded nearly 18,000 prime contracts to over 5,000 firms, who in turn let more than 375,000 subcontracts. As a result, all the major productive facilities of the atomic energy program have been designed, built, equipped, and operated by private firms.See Council for Technological Advancement, Industrial Participation in Atomic Energy Development (October 18, 1954). Furthermore, the Atomic Energy Act of 1954 significantly relaxed the Federal atomic monopoly, permitting much more private participation in atomic development. As soon as the Act was passed, private industry began moving successfully into the atomic field. Consolidated Edison announced plans for building a 200,000 kilowatt atomic power generating plant at Indian Point, New York—with no help whatever from government except permitting the company to buy atomic fuel. Other companies interested in getting into various phases of an atomic power industry are: electric equipment manufacturers, and companies in other industries (e.g., aircraft, locomotives, machine tools, petroleum, etc.) looking for channels of diversification, and universities, medical and other research organizations, hoping to buy small atomic reactors.
Much, however, remains to be done, and existing restrictions and regulations still keep a large segment of industry from furthering atomic progress. The Atomic Energy Committee of Manufacturing Chemists’ Association urge further liberalizing of security and patent regulations.Impact of Peaceful Uses ..., p. 10. The AEC’s powers of licensing and further regulating should be eliminated. The Atomic Energy Commission should confine its activities to military atomic energy; by subsidizing and regulating peaceful atomic energy; by subsidizing and regulating peaceful atomic power, it distorts market allocation of resources and prevents efficient operations. Federal subsidies to atomic power plants burden competing power plants from competing energy sources, and foster uneconomic use of resources.
Another important way in which the government could encourage peaceful atomic development in a manner consistent with the free market: by freeing it from governmental burdens, to eliminate rate regulation of public utilities (a job for the state governments). Public utilities are main potential users of atomic energy, but they could hardly do the job of which they are capable with their rates, and methods of operation, fixed by government authority. And the Federal government could properly stimulate space exploration, in a manner consistent with the free market, by permitting any private firms or organizations that might land on other planets, to own the land and other resources which they begin to exploit: in the manner of the Homestead law, although without the law’s restrictions on acreage or use of land. Automatic government ownership of any new lands in space acts as an enormous damper on private exploration and development.
There has been much pressure, in recent years, by the firms about to enter the atomic energy industry (specifically the builders of atomic reactors), for Federal subsidies to supplement the third-party liability insurance available from private insurance companies: in cases where accidents at atomic plants injure third parties.Thus see Paul F. Genachte, Moving Ahead With the Atom (New York: Chase Manhattan Bank, January 1957), p. 12. This pressure should be firmly resisted. If private enterprise, using its own funds, is unable to pay the full costs of its own insurance, then it should not enter the business. The promotion of atomic energy for peaceful uses is not an absolute goal, as we have seen; it must compete in use of resources with other power plants and with other industries. Any government subsidization of an enterprise, whether through insurance grants or any other method, weakens the private enterprise system and its basic principle that every firm must stand on its own voluntarily-raised resources, and distorts the efficient allocation of resources to serve consumer wants. The other enterprises in this country must pay for their own full insurance costs, and so should the atomic industry. The wise words of the Hoover Task Force on Lending Agencies should be heeded here:
The risks of ownership are inseparably woven into the concept of private property. When an owner is relieved of his normal risks other than by his own effort and industry, he is beholden to those who assume the risks in his place. This increases the likelihood that he also will be relieved of the other attributes of property ownership—the right, for example, to decide how, when, where, and by whom the property shall be used. In the end he is likely to be relived of the property as well.Task Force Report, Commission on Organization of the Executive Branch of the Government, Lending Agencies (Washington, D.C.: February, 1955), p. 9.
In addition to complaints of a shortage of scientists, charges abound that scientific research, left to the mercies of the free market, would be insufficient for modern technological needs. The general principles of government policy in this field we have already set forth: (a) leaving the general allocation of resources purely to the free market—the profit and loss incentive and test of the free market being the only efficient way of allocating a country’s resources in the way best calculated to satisfy consumer demand. This principle applies fully as well to scientific research as to any other sphere; and (b) for the military needs of research, acting only as a consumer rather than as a producer using funds to pay for private scientific contractors. In actual practice, the Federal government is already doing a great deal (although, as we shall see below, it can do much more) in this direction, by channeling most of its military research funds into private contractors, whom the military sees to be more efficient than government operation.In 1953–54, the Federal government spent $2.81 billion of its funds on scientific research and development; of this amount, only $970 million was spent on programs within the government itself (and most of this was development rather than research); the remainder was channeled into private hands to pay for privately-conducted research ($1.5 billion in industry, $280 million in colleges).
Let us first turn to the problem of general research, however. Is it really true that such research will be deficient on the free market?
We have, first, been hearing a great deal of how much resources the Soviet Union has been putting into scientific research, and how we must redouble our efforts in order to catch up. But the National Science Foundation has estimated that the Soviet Union has been putting a little over 1 percent of its national product into research and development. The Steelman Report of 1947 called for the United States to place 1 percent of its national product into research and development, in the years ahead. Yet, we now have 2 percent of our product going into “R and D,” and our national income is far, far higher than that of the Soviets.See Basic Research, A National Resource (Washington, D.C.: National Science Foundation, 1957); and John Steelman, Science and Public Policy (Washington, D.C., 1947). In 1953–54, private sources contributed $2.6 billion to R and D; this contrasts to a total of $530 million of private funds in 1941. In fact, with the exception of pure, or basic, research (which we will study further below) the National Science Foundation’s study conceded the sufficiency of private scientific research in American industry.
The flourishing of private research in our modern age has been eloquently hailed by General David Sarnoff, board chairman of RCA:
Today, science and industry are linked by arteries of progress and their lifeblood is technical research. ... The pattern of our industrial progress ... lies in a partnership between those who create good things and those who produce and distribute and service them. It lies in teamwork between research and industry.Brig. Gen. David Sarnoff, Research and Industry: Partners in Progress (Address, Nov. 14, 1951), pp. 6–7.[11]
We have seen that government subsidization or operation of non-military research would distort the efficient allocation of resources of the free market economy. It would do more; as Sarnoff pointed out, government aid would inevitably mean “increased government control of the daily lives of all the people.” Secondly, government control would tragically bureaucratize science and cripple that spirit of free inquiry on which all scientific advance must rest:
government control of research would destroy the very qualities that enable researchers to make such an important contribution to society. For government control means that rigid lines would be set for research; and these lines may not meet changing requirements. Certainly industry is best qualified to define its own research needs. And the partnership between research and industry loses its meaning when government can dictate the subject and objective of research in any competitive system of private enterprise.Sarnoff, Research and Industry, pp. 12 ff.The myth has arisen that government research is made necessary by our technological age, because only planned, directed, large-scale “team” research can produce important inventions or develop them properly. The day of the individual or small-scale inventor is supposedly over and done with. And the strong inference is that government, as potentially the “largest-scale” operator, must play a leading role in even non-military scientific research. This common myth has been completely exploded by the researches of John Jewkes, David Sawers, and Richard Stillerman in their highly important recent work.John Jewkes, David Sawers, and Richard Stillerman, The Sources of Invention (New York: St. Martin’s Press, 1958).,Typical recent expressions of the myth may be found in John Kenneth Galbraith, American Capitalism; W. Rupert Maclaurin, “The Sequence from Invention to Innovation,” Quarterly Journal of Economics (February 1953); Waldemar B. Kaempffert, Invention and Society; A. Coblenz and H.L. Owens, Transistors: Theory and Application. Taking sixty-one of the most important inventions of the twentieth century (excluding atomic energy, which we will discuss below), Jewkes et al. found that more than half of these were the work of individual inventors—with the individuals working at their own directions, and with very limited resources. In this category they place such inventions as: air-conditioning, automatic transmission, bakelite, the ball-point pen, catalytic cracking of petroleum, cellophane, the cotton picker, the cyclotron, gas refrigeration, the electron microscope, the gyro-compass, the helicopter, insulin, the jet engine, Kodachrome, magnetic recording, penicillin, the Polaroid camera, radio, the safety razor, titanium, and the zipper. The jet engine was invented and carried through its early development, practically simultaneously, by Britons and Germans who were individual inventors, either completely unconnected with the aircraft industry or not specialists in engines. The gyro-compass was invented by a young German art historian. The bulk of the basic inventions for radio came from individual inventors unconnected with communications firms, some of whom created new small firms of their own to exploit the invention. The cyclotron was invented and partly developed by a university scientist, using simple equipment in the early stages. Penicillin was invented and partly developed in a university laboratory, and insulin was invented by a general practitioner who used a university laboratory.
Of the inventions studied that were achieved in industrial research laboratories, some arose in small firms, others were more or less accidental by-products of other work rather than preplanned and predirected. Terylene, the synthetic fiber, was discovered by a small research group in a firm not directly interested in fiber production. The process of continuous hot strip rolling of steel sheets was thought up by an individual inventor and then perfected in a small steel company. The LP record was invented by an engineer working on it as an individual sideline, and then was developed by another corporation.
In other cases, inventions in the research laboratories of large companies were made by small research teams, often centered around one outstanding man. Such was the case with Nylon, at the DuPont laboratories.For other experts who believe that a highly important role still remains for the individual independent inventor, see Joseph Rossman, The Psychology of the Inventor; the late Charles F. Kettering, New York Times, March 12, 1950; W.J. Kroll (the inventor of ductile titanium), “How Commercial Titanium and Zirconium Were Born,” Journal of the Franklin Institute, Sept. 1955; and H.S. Hatfield, The Inventor and His World.
The twentieth century has produced some great independent inventors, creators of many important new devises. One of them, the Englishman S.G. Brown (components for telegraphy, telephony, radio, and gyro-compass) declared: “if there were any control over me or my work every idea would stop.” Brown never accepted financial aid for experimental work, or for producing a new device. How would such a man fare under the control of a government-directed research team, or one that was government-controlled? P.T. Farnsworth, great television pioneer, has always preferred to do his research on a small scale and with simple equipment. F.W. Lanchester, great British inventor in aerodynamics and engineering once wrote: “the salient feature of my career ... (is that) ... my work has been almost wholly individual. My scientific and technical work has been almost wholly individual. My scientific and technical work has never been backed by funds from external sources to any material extent.” Lee de Forest, eminent inventor of the radio vacuum tube, always found it difficult to work under any conditions short of complete autonomy. Sir Frank Whittle invented the jet engine with very slim resources.
C.F. Kettering often positively preferred simple equipment. And R.M. Lodge recently warned:
The trend towards more and more complex apparatus should be carefully watched and controlled; otherwise the scientists themselves gradually become specialist machine-minders, and there is a tendency, for example, for an analytical problem to be passed from the microanalytical laboratory to the infra-red laboratory and from there to the mass spectrographic laboratory, whereas all the time all that was needed was a microphone and a keen observer.R.M. Lodge, Economic Factors in Planning of Research, 1954. Quoted in Jewkes, et al., Sources of Invention, p. 133. On other cases of great scientists preferring simple equipment, see: John Randal Baker, The Scientific Life, P. Freedman, The Principles of Scientific Research, J.B.S. Haldane, Science Advances.
The worthy individual inventor is far from helpless in the modern world. He may, in a free enterprise system, become a free-lance consultant to industry, may work on inventions on outside grants, may sell his ideas to corporations, may form or be backed by a research association (both profit and non-profit), or may obtain aid from special private organizations that invest risk capital in small speculative inventions (e.g., the American Research and Development Corporations).
One very important reason for the success of the independent inventor, and his preservation from the dominance of large-scale government-controlled projects, stem from the very nature of invention: “The essential feature of innovation is that the path to it is not known beforehand. The less, therefore, an inventor is pre-committed in his speculation by training or tradition, the better the chance of his escaping from the grooves of accepted thought.”Jewkes, et al., Sources of Invention, p. 116. There are many recorded instances of the inventor winning out despite the scoffing of the recognized experts in the field, perhaps even emboldened because he didn’t know enough to be discouraged. One authority maintains that Farnsworth benefited from his lack of contact with the outside scientific world. Once, a professor gave him four good reasons why his idea—later successful—could not possibility work. Before the discovery of the transistor, many scientists claimed that nothing more could be learned in that field. Eminent mathematicians once claimed to prove logically that short-wave radio was impossible. Government-controlled research would undoubtedly rely on existing authorities, and thus would snuff out the searching of the truly original minds. Many of the great inventors of recent times could not have gotten a research job in the field for lack of expertise: the inventors of Kodachrome were musicians; Eastman, the great inventor in photography, was a bookkeeper at the time; the inventor of the ball-point pen was an artist and journalist; the automatic dialing system was invented by an undertaker; a veterinarian invented the pneumatic tire. Furthermore, there are many inventors who are part-time, or one-shot, inventors, who are clearly more useful on their own than as part of a research team.
As the eminent British zoologist John Baker points out, the life of an independent researcher involves the willingness to bear great risks: “The life is too strenuous for most people, and the timid scientist hankers after the safety of directed teamwork routine. The genuine research worker is altogether different kind of person.”John Randall Baker, Science and the Planned State (New York: Macmillan Co., 1945), p. 42. Darwin once wrote: “I am like a gambler and love a wild experiment.” The importance of self-directed work to great scientists is stressed by the Nobel prize-winning chemical discoverer of vitamins, Szent-Gyorgyi, who wrote: “The real scientist ... is ready to bear privation ... rather than let anyone dictate to him which direction his work must take.”A. Szent-Gyorgyi, “Science Needs Freedom,” World Digest 55 (1943): 50.
Not only inventors, but many types of scientists benefit from the work of independent researchers in their fields. Einstein said that: “I am a horse for single harness, not cut out for team work,” and suggested that refugee scientists take jobs as lighthouse-keepers, so that they could enjoy needed isolation. The fundamental discoveries in valence theory, cytogenetics, embryology, and many other fields of twentieth-century biology, were made by individual scientists.See Baker, Science and the Planned State, pp. 49–52. Baker comments on the lack of originality of research teams, who tend to be better at following up the leads of others than at originating ideas themselves. Scientific discoveries, furthermore, cannot be planned in advance. They grow out of apparently unrelated efforts of previous scientists, often in diverse fields. The radium and X-ray treatments for cancer owe most, not to planned research on cancer cures, but to the discoverers of radium and X-rays, who were working for quite different goals. Baker shows that the discovery of a treatment for cancer of the prostate emerged out of centuries of unrelated research on: the prostate, phosphatase, and on hormones, none of which was aimed toward a cancer cure.“Our modern knowledge of how to control cancer of the prostate is due to the researches of these men—of Hunter, Gruber, Griffiths, Steinach, and Kun on the prostate; of Grosses, Rusler, Davis, Baaman, and Riedell on phosphatase; and of Kutcher and Wolbergs on phosphatase in the prostate. Not one of these men was studying cancer, yet without them, the discovery of the new treatment could not have been made. What central planner, interested in the cure of cancer, would have supported Griffiths in his studies on the seasonal cycle of the hedgehog, or Grosser and Husler in their biochemical work on the lining membrane of the intestine? How could anyone have connected phosphatase with cancer, when the existence of phosphatase was unknown? And while it was yet unknown, how could the man in charge of the cancer funds know to whom to give the money for research? No planner could make the right guesses.” Baker, Science and the Planned State, pp. 59–60.
Apart from individual scientists and inventors, there is also great need for the existence of small research laboratories in small firms as well as in large ones. There is an inevitable clash between practical administrators of research and the scientists themselves, and the evils of bureaucratic administration and crippling of scientific endeavor will be infinitely greater if science is under the control of direction of the Ultimate Bureaucracy of government.On the inevitable clash between research administrators and scientists, see: Jewkes, et al., Sources of Invention, pp. 132 ff.; K. Ziegler, The Indivisibility of Research, 1955, S.C. Harland, “Recent Progress in the Breeding of Cotton for Quality,” Journal of the Textile Institute (Great Britain) (February 1955); R.N. Anthony, Management Controls in Industrial Research Organization.
O.E. Buckley, when president of the Bell Telephone Laboratories, stated: “one sure way to defeat the scientific spirit is to attempt to direct enquiry from above. All successful industrial research directors know this and have learnt by experience that one thing a director of research must never do is to direct research.” Similar views have been expressed by C.E.K. Mees, of Eastman Kodak, and Sir Alexander Fleming, discoverer of penicillin, who said: “certain industrial places ... put up a certain amount of money for research and hire a team. They often direct them on the particular problems they are going to work out. This is a very good way of employing a certain number of people, paying salaries, and not getting very much in return.”From L.J. Ludovivi, Fleming, Discoverer of Penicillin, cited in Jewkes, et al., Sources of Invention. Jewkes and his colleagues, describing the best ways of crippling a research organization, might have had a typical government operation or control in mind:
The chances of success are further reduced where the research group is organized in hierarchical fashion, with ideas and instructions flowing downwards and not upwards ... where the direction to research is ... closely defined ... where men are asked to report at regular intervals ... where achievements are constantly being recorded and assessed; where spurious cooperation is enforced by time-wasting committees and paper work.Jewkes, et al., Sources of Invention, pp. 141–42.
In gauging the effectiveness of large vs. small-scale research, we should remember that whether or not a firm engages in research at all (apart from government contract) depends on the type of industry it is in. The great bulk of manufacturing firms, for example, do not engage in research and development at all The one-tenth that do, are mostly in technologically advanced and advancing industries, where expanding scientific knowledge is needed, and where many scientists must be hired anyway for test and control work. On the other hand, industries that rely more on empirical rather than scientific knowledge do less research. Some large-scale industries, like chemicals, do a great deal of research; while others, such as iron and steel, do much less. Some small-scale industries do little research, while others, like scientific instrument firms, do a relatively great amount. And while the bulk of industrial research is done by the very large firms, we have seen the vital role of the independent inventor (and later we shall see further the crucial role of the university laboratory in basic research). Furthermore, it has been found that in those firms that do conduct research, the number of research workers per 100 employees is higher for the small, and lowest for the large firms.This is borne out in separate studies by the U.S. Department of Labor, Scientific Research and Development in American Industry, Bulletin #1148, Washington, 1953; and the National Association of Manufacturers, Trends in Industrial Research and Patent Practices.
It should be noted that few of the Nobel Prize winners since 1900 came from the large industrial research laboratories. Furthermore, many of the current research labs of the big corporations originated as small firms, which were later bought by the big corporation. This happened with General Motors, and with General Electric. The large corporations also make a great deal of use of outside consultants and independent research organizations (both profit and non-profit making). This certainly must confound the partisan of organized, large-scale government-controlled and directed research: for if organized, large-scale research is invariably more efficient, why do these big corporations bother with small outside firms? Here are some of the reasons given by the big firms themselves:
They may be short of trained people. Or they may be confronted with a task of a non-continuing nature which they prefer to have out to others ... or they may be confronted with a type of technical problem new to them which they feel they cannot handle at all. Or, having been continually defeated by some technical problem, they may hand out the task to others who will come to it with fresh minds and no preconceptions.Jewkes, et al., Sources of Invention, pp. 188–89.
Resistance of an organization to new ideas has occurred significantly even in efficient, alert corporations—how much more would it occur in government, where there is neither the incentive nor the possibility of a profit-and-loss check on its efficiency! Thus: the telephone, cable, and electric manufacturing companies were originally apathetic about the possibilities of wireless telegraphy; RCA resisted Armstrong’s FM ideas; the Edison Company, at the turn of the century, scoffed at the idea of a gas motor for transportation, insisting on the future of the electric motor for that purpose; the established aircraft-engine firms scoffed at the jet engine and at the retractable under-carriage; the British and American chemical firms were highly critical of penicillin, and almost refused to take part in its development; The Marconi Company expressed no interest in television when it was brought to their attention in 1925; the manufacturers of navigational equipment took no part in the invention of the gyro-compass. When the Ford Motor Company sought to introduce automation in their factories, they turned to the small specialized firms in the machine-tool industry, “The small uninhibited firms with no preconceived notions.” And even Henry Ford resisted the thermostat, or hydraulic brakes.
Furthermore, in many of our biggest industries, the critical innovations of the twentieth century have come from outside the big firms. Of the three big inventions in the aluminum industry up to 1937, two came from men outside the industry—despite the fact that ALCOA had an aluminum monopoly during those years. The two significant new ideas in steel-making in this century came from a newcomer and from one of the smaller steel firms (continuous hot strip rolling), and the other from an individual German inventor (continuous casting). The large-scale, progressive automotive industry has benefited a great deal from outside ideas—including automatic transmissions and power steering, and small firms and accessory manufacturers have contributed new systems of suspension. In the progressive, large-scale petroleum industry, which devotes heavy expenditures to research, many leading ideas have come from small firms or outside individuals including catalytic cracking: “Looking back dispassionately we find that (the major oil companies) mainly took up and developed ideas, which were brought to them by men who did not, in the first instance, belong to their own team.”P.H. Frankel, Essentials of Petroleum, 1946, p. 148. Quoted in Jewkes, et al., Sources of Invention.
Another important point is that most industrial research laboratories, even in the large companies, are themselves small; more than one-half of the laboratories in the U.S. employ less than 15 scientists, and most of these are for routine or development work, rather than research. The average operating cost of a laboratory per research scientists is about $25,000—not a prohibitive sum for an average sized firm. Moreover, 49 percent of all firms holding patents, in 1953, had fewer than 5,000 employees all told.
Many laboratories, while remaining at the same size, have fluctuated greatly in their failure or success over time, depending on the qualities of their personnel and, above all, their leadership. The leading inventors in these laboratories themselves stress the virtues of small groups. Fermi has said: “Efficiency does not increase proportionately with numbers. A large group creates complicated administrative problems, and much effort is spent on organization.” And, in a striking anticipation of Parkinson’s Law of Bureaucracy, S.C. Harland wrote this about the large lab:
You see crowds of people milling around with an air of fictitious activity, behind a façade of massive mediocrity. There is a kind of Malthusianism acting on research institutes. Just as a population will breed up to the available food supply, research institutes will enlarge themselves as long as the money holds out.Harland, Recent Progress in the Breeding of Cotton for Quality. Also see Laura Fermi, Atoms in the Family, p. 185. Quoted in Jewkes, et al., Sources of Invention, p. 162.
We may proceed now from research proper to the field of development. It has been argued that, while small scale basic research may continue to be important, the cost of developing already-created inventions is growing ever-greater, and is therefore peculiarly susceptible of large-scale organized and directed effort. Most of the technological work in the industrial laboratories, indeed, is the actual development of new methods and products, while university and other educational laboratories have relatively concentrated on pure research.
Development costs have grown more expensive especially in the chemical industries, where a new idea is taken and run through very large-scale empirical experimentation (e.g., the trial-and-error searching for a better strain of penicillin among a large number of possible molds). Increased caution in developing products, greater testing for quality and safety, a heavy initial advertising campaign to introduce new products—all these factors have increased the costs of development in modern times (although, with technological advance cheapening everything else, we may expect it to lower costs of development as well).
But a crucial point about development has been often overlooked: how much of resources to put into development as against other things, how fast to develop at any given time, is a risky decision on the part of a firm. The decision depends upon the firm’s estimates of future costs, sales, profits, etc. Government, crippling or eliminating the free market signals of prices and costs, would be lost without a guide to efficiency or allocation of resources. Further, the main reason a firm decides to devote its resources in an attempt at speedy development is the spur of competition. And competition means the free, unhampered market. Even in the case of Nylon, the most cited example on behalf of large-scale monopoly research and development, DuPont had the competitive spur of knowing that German scientists were also working on similar synthetic fibers.
Where the competitive spur is weak, or especially non-existent (as in government), development will be slowed down. Furthermore, the existence of many firms, many centers of development, make it far more likely that new ideas will obtain a hearing and a trial somewhere. General Electric, when dominant in lighting, was sluggish in developing fluorescent lighting, but once other firms entered the field, it sprang to life and regained a dominant position through its new-found efficiency. As Jewkes and his associates sum up:
Against the claim that the prerogative in development should always rest with the biggest and the most securely established industrial organizations, may be set, therefore, the advantages of the attack from many angles. The tasks of development are themselves of such diversity and of so varying a scale that it may be a ... dangerous oversimplification to suppose that they can always be best handled by any single type of institution.Jewkes, et al., Sources of Invention, p. 222.
The best condition, they add, is a variety of firms, in size and in outlook—some bold and other cautious, some leading and others following.
Even in the field of development proper, in fact, many important new products have come from small-sized firms, or even individuals. These include: air conditioning, automatic transmissions, bakelite, cellophane tape, magnetic recording, quick freezing, power steering, crease-resistant textiles, and ram-jet aircraft.
Professor Baker has preferred another important refutation of the statist claim that governmental monopoly direction of research would eliminate “wasteful overlapping” of effort. Baker points to the enormous importance for scientists, in having two or more mutually independent scientists or laboratories confirming each other’s conclusions. Only then can the world of science consider the experiment truly confirmed.“There is one occurrence ... which helps the scientist form a valid judgment better than anything else. This is the ... publication of the same result by two entirely independent workers. Central planners are inclined to consider that one of the two independent workers has been wasting his time. The actual research worker knows that this is not so. It is the very fact that the two workers are independent that inclines others to accept their findings. Scarcely a working scientist will deny that two independent papers containing the same result are very much more convincing than a single paper by two collaborators ... (also) each paper has a different outlook, and the reading of the two papers is far more stimulating and suggestive.” Baker, Science and the Planned State, p. 49.
We have now seen that general scientific research should be left to the free market, and that conditions of modern technology do not require government control or planning of science. Quite the contrary. What now about military research? We have already said briefly that the end in view is for government to be only a consumer of military research rather than a producer; that government should contract for scientific research rather than conduct its own. Confirmation for this position comes from the important report of the Hoover Commission Task Force Report on Research Activities.Subcommittee of the Commission on Organization of the Executive Branch of Government, Research Activities in the Department of Defense and Defense-Related Agencies (Washington. D.C.: April, 1955). The report was made by scientists who were mainly advisers to the Department of Defense, and hence not sympathetic to the Department.
The Task Force found that three-fifths of the military funds spent by government in 1955 were on operations in private laboratories. All of the Defense Department’s basic research was carried on in private laboratories—a clear admission that government laboratories are not good places to conduct vital basic research. Most of this basic research is done in college and university labs, its traditional home. The Task Force comments: “Since there is, in general, an inadequate environment and competence for basic research in its (Dept. of Defense) laboratories, the placing of substantially all of this work in the laboratories of the civilian economy is necessary.”Ibid., p. 36. As for applied research, two-thirds was being done in the civilian contract labs, and the Task Force strongly recommended the shift of most of the remaining one-third to private civilian hands: “A large portion of the applied research done in the laboratories of the military could be done more effectively in those of the civilian economy.” As for actual development of products, as compared to research, the Task Force also advocates a larger role for private operation. Development occurs in several steps. There is (a) establishment of the weapon project. This of course must be decided ultimately by the government staff, but here again, technical studies in connection with establishment are being farmed out to private contractors; (b) testing, which of course must be done by government—the consumer; (c) development and design. This category also absorbs two-thirds of all government R and D funds; three-fourths of development and design work was being done in private contract laboratories, and one-fourth in the government, and yet the Hoover Task Force declared: “Perhaps one-half of the work done in the laboratories of the military can readily be placed in the civilian economy.”Ibid., p. 38. (Other development activities are development aids to products, and current development, in which there is considerable activity by government.)
The overall assessment of the Task Force: “a considerable portion of the work now done in installations of the Government should be done in the civilian economy”—especially in applied research, and in development and design. This would be “placing the work where it can be performed with the greatest effectiveness.” And the Task Force expressed concern with the fact that, in recent years, the percentage of R and D work done in the government has been slowly but steadily increasing.
What are the reasons given by the Hoover Task Force for this relative inefficiency of government military scientific research? One reason is the salary problem. We have seen above the “shortage” that comes from not paying the free market price for services. The Task Force found that the pay for civil service scientists in the Defense Department has not been sufficient to meet the competition of the free market, and that there have been too few scientists appointed in the upper levels. Other problems are inherent in military operations in government. The system of military officer-rotation prohibits the emergence of a long-run specialized career for scientific officers. As the Task Forces charges: “the high level of strength of the industrial research and development organization of the nation could not have been attained were the personnel policy for the professional staff the equivalent of that of the military services for their technical officers.”Ibid., p. 44.
Investigating three of the best Naval laboratories, the Task Force found an unfavorable “atmosphere” of friction among mixed civilian and military personnel, problems due to inadequate civil service pay and promotion policies, and to rapid rotation of upper officers. (And here we may emphasize the recommendation made above about scientists in government: that if the armed forces want good scientists, they should pay market wages, remove undue restrictions, and, further, to change the civil service system to allow more merit payment and less fixed bureaucracy.)
But there is more to governmental inefficiency than those matters. The Hoover Task Force asked the question: why is government poor on all research and development and design, but relatively effective in such work as testing and establishment? Because, answers the Task Force, “The operations of research and development are highly creative and imaginative, they require men with a special type of qualification and a high level of ... training. Most of the operations of the establishment, placement, and monitoring of programs, and the tests for evaluation are much less creative and more engineering in their nature.”Ibid., p. 48. But even in these latter tasks, the Task Force adds, there is much room for improvement.
The Task Force found the Air Force with the best record in shunting scientific operations to the civilian private economy, and the Army the poorest. But it called for even the Air Force to do more to shift operations into private hands.
The problem of science and technology in our modern world is really a twofold one, and the two problems should be strictly separated, instead of confused as they now are in the public mind. Problem A is the general allocation of resources into science and technology, as compared to the other sectors of the economy. Problem B is the allocation of needed resources into the military sphere, specifically of military technology. The first problem is a general economic problem, the second a specifically military one. As to the first problem, the solution follows swiftly and easily from our general premises: it is solely the job of the free market economy. Any government meddling with this job can only distort and disrupt the economy, injure the efficient workings and development of science and technology, and substitute unwanted coercion for individual freedom.
What of Problem B, the allocation of resources between the Civilian and the Military? Here we must consider the general function of government in the military sphere. Granting to government the virtual monopoly of force, the American System has been to entrust the use of that force for defense of person and property to the government. Having a virtual monopoly of defense, the government taxes private citizens to the extent needed for their defense against enemies foreign and domestic. In the American System, domestic defense has been the function of states and localities; military defense against foreign countries, the job of the Federal government. The Federal government, therefore, sets its budget to attain a certain level that it desires for military defense, and military research and development is certainly part of that defense.
The allocation of resources to military purposes, then, is under the American System the job of the Federal government. And yet this does not simply end the matter. For the government has the responsibility: (1) of never forgetting that scarce resources are always being allocated, and therefore that what the military gains the civilian sector loses; and (2) of leaving, wherever possible, military matters in the hands of the private economy, both on grounds of maximizing economic freedom and of maximizing economic efficiency. The first is a mode of thinking to which any government bureaucrat, civilian or military, is uncongenial, and which he must learn: learn to realize that more military means less for the private economy, and to remember that the armed forces are a derivative, a dependent upon a strong and healthy civilian economy. Army tanks depend on sound and healthy iron and steel factories, tank manufactures, railroads to move them, etc., unless we are to have complete socialism—which we have seen cannot work either—the military must rely on a myriad of private goods and services in order for it to function (including paper!).
This brings us to the second responsibility; to leave as much of military affairs as possible in private hands. Thus, the government needs planes; who should manufacture them, private industry or government? Not only would government manufacture of aircraft be hopelessly inefficient by its very nature, it would also cut against the basis of American society. Far better, then, for the government to tax or borrow the funds with which to buy the military products of private enterprise, rather than to manufacture the goods itself.
This principle is largely recognized in the field of material production. Why, then, shouldn’t it hold for military scientific research? Private research and development, contracted for with government funds, is a far better policy, from any angle, than direct government research. (See below, on the Hoover Commission Task Force agreement with this view.) This is the principle for the Republican Party to follow in the area of military technology. In short, government, even in the military sphere, should function only as a consumer rather than a producer, purchasing equipment and research produced by private firms. This is the most efficient method, as well as the one most consonant with free enterprise. And note: this applies only to military research and development; all non-military work should be purely in private hands, both as consumers and producers.
Another important consideration: to the extent that the government still considers it militarily vital to employ technicians itself rather than purchase the services of private firms, it should hire these personnel on the free labor market rather than conscript them. Pushing back the frontiers of science, discovering new products and new methods, requires free, untrammeled minds who delight in the work they do and get paid according to their value; the work cannot be done by men who are drafted into forced labor for a sum far below the worth of their product. Slaves might perhaps be useful for sweeping floors or digging ditches; they cannot be successfully used for creative work, requiring ability and originality. And this, of course, raises another question, as pointed out in the Cordiner Report to the Department of Defense: more and more, modern military forces in the nuclear age, depend upon the skills and creativity of trained technicians, rather than on untrained doughboys. Is it not then one of the requirements of the nuclear (and bacteriological) age that we scrap the draft as obsolete and rely on the eager voluntary services of skilled technicians hired at the market prices that they deserve?
In all these problems, there is another basic question that we should not overlook: isn’t freedom, rather than coercion, not only the best way to spur efficiency and scientific advance, but also the way to show the peoples of the world (including the peoples of the Soviet bloc) that the American way of freedom can beat the Soviet way of coercion at any time and on any ground? If, on the contrary, we try to race with the Soviets by employing essentially Soviet methods, which ideology will come to look better to the peoples of the world? The more we stress free and voluntary methods in our competition with the Soviets, the more do we show that we believe our own speeches on the merits and glories of freedom; the more we rely on coercive or statist methods, the more do we undercut our own ideology, appear as hypocrites to the nations of the world, and thus contribute to the ultimate victory of the Soviet ideology.
Preface by David Gordon When Murray Rothbard wrote “Science, Technology, and Government” in 1959, supporters of the free market needed to confront a challenge that remains relevant today. In 1957, the Soviet Union launched its “Sputnik” satellite, thereby defeating the United States in the race between the two countries to be first into space. Did this victory show, or at least suggest, the superiority of Soviet centrally-planned science to the American market economy? Critics of the free enterprise system like John Kenneth Galbraith (one of Rothbard’s least favorite economists) claimed that scientific research and development required government planning and control. The free market, these critics claimed, could not carry out the vast efforts research now required. Could private enterprise have built the atomic bomb? The Soviets have long since departed, but the fallacies in the arguments for centrally-controlled science live on today. Government spending on science and technology has increased far beyond its level in 1959.
In this brilliant monograph, Rothbard deftly turns the tables on the supporters of big government. In doing so, he displays his unique combination of mastery of theoretical principles and commanding knowledge of the empirical evidence and scholarly literature on every subject he addresses. He shows that science best advances under the free market: the claims to the contrary of the centralizers are spurious.
He begins with a fundamental question: how do we decide how much money to spend on research. The more we spend, the less we have to spend on other things. The decision is best left to the free market:
This fact of reality, then, must be faced: if there are to be more scientists, or more scientific research, then there must be less people and less resources available for producing all the other goods and services of the economy. The crucial question, then, is: how much? How many people and how much capital are to be funneled into each of the various occupations, including science and technology? One of the great, if often unsung, merits of the free enterprise economy is that it alone can insure a smooth, rational distribution and allocation of productive resources. Through the free price systems, consumers signal laborers, capitalists, and businessmen on which occupations are most urgently needed, and the intricate, automatic workings of the price system convey these messages to everyone, thereby creating an efficient, smoothly working economy.
If an objector says to this, “But hasn’t the free market, which you praise, resulted in a shortage of scientists?”, Rothbard has a devastating answer; What shortage?
If then, there is a shortage of scientists, market salaries for scientists will significantly rise, relative to other occupations. But since they have not so risen, is there really a shortage for scientists? This question was itself scientifically invested only recently ... since 1939, salaries of engineers relative to earnings of doctors, dentists and lawyers, have declined, and have also declined relative to manufacturing wage earners. Even the salaries of clergymen, pharmacists, and school teachers, rose relative to engineers in this period. How, then, can there be a shortage of engineers?
Even if there is no shortage of scientists, though, does it not remain the case that in current conditions, advances in scientific knowledge require gargantuan efforts beyond the scope of the free market? Rothbard meets this dogma head on:
The myth has arisen that government research is made necessary by our technological age, because only planned, directed, large-scale “team” research can produce important inventions of develop them properly. The day of the individual or small-scale inventor is supposedly over and done with. And the strong inference is that government, as potentially the “largest-scale” operator, must play a leading role in even non-military scientific research. This common myth has been completely exploded by the researches of John Jewkes, David Sawers, and Richard Stillerman in their highly important recent work. Taking sixty-one of the most important inventions of the twentieth century. ... Jewkes et. al. found that more than half of these were the work of individual inventors—with the individuals working at their own directions, and with very limited resources.
Not even the building of the atomic bomb is an exception to the superiority of the free market to governmentally-controlled science.
The fundamental atomic discoveries had been made by academic scientists working with simple equipment. One of the greatest of these scientists has commented: “we could not afford elaborate equipment, so we had to think.” Furthermore, virtually the entire early work on atomic energy, up to the end of 1940, was financed by private foundations and universities. And the development of the bomb was, for peacetime purposes, an extremely wasteful process.
The alleged great achievements of Soviet science, including the much-vaunted Sputnik, failed to impress Rothbard:
We have heard a great deal recently about the alleged glories of Soviet science, and about the necessity of the United States catching up with such wonders as sputniks. What is the real record of Soviet science? Professor [John R.] Baker, analyzing this record, shows that, at the beginnings of the Soviet Union, the old pre-revolutionary scientists continued to do well, largely because science was not yet under government planning. That came with the Second Five-Year Plan, in 1932. ... Government control of science, government planning of science, is bound to result in the politicization of science, the substitute of political goals and political criteria for scientific ones. Even pro-Soviet scientists have admitted that Soviet research is inferior to American, that basic, as contrasted to applied, research, is neglected; that there is too much red tape; that little fundamentally creative work has been done; and that science is unduly governed by political considerations—such as the political views of the scientist propounding any given theory. Scientists are shot for taking the view that happens to be in political disfavor.
So far as Sputnik is concerned, “American satellites have far superior instrumentation, and are therefore much more important scientifically.”
Given his opposition to governmentally-controlled science, it is no surprise that Rothbard thinks that the best course of action for government is to get out of the way of the creative activities of the free market. It should, for example, reduce taxes to the greatest extent possible. In this connection, Rothbard in a brilliant paragraph exposes a common fallacy:
Contrary to common belief, a tax exemption is not simply equivalent to a government subsidy. For a subsidy mulcts taxpayers in order to give a special grant to the favored party. It thereby adds to the ratio of government activity in the economy, distorts productive resources, and multiplies the dangers of government control and repression. A tax exemption, or any other type of tax reduction, on the one hand, reduces the ratio of government to private action; it frees private energies and allows them to develop unhampered; it reduces the danger of government control and distortion of the economy. It is a step toward the free market and the free society, just as a government subsidy is a step away from the free society.
This essay was found among Rothbard’s papers. But the exact circumstances under which it was written have not yet come to light. As readers will soon discover, it contains an astonishing wealth of insights.
Los Angeles, July 2015
We now have at our command the general principles with which to approach our problems; we may now turn to some specific applications of these principles.
First, let us turn to the widely-trumpeted problem of a grave “shortage” of scientists, researchers, engineers, etc. It is widely asserted that the Federal government should subsidize scientific education in order to relieve this supposed “shortage.” Now let us analyze this question more closely:
In the first place, a “shortage” of scientists is a general, rather than a military problem. The military can purchase the services of as many existing scientists (either as direct employees or as employees of private contractors) as it requires; the burden of shortage will then be felt by the civilian, rather than by the military, sector. Apart from this, if there really is a shortage of scientists, how can it be remedied? Not by government; government cannot manufacture one scientist; the scientists must enter this profession themselves.
Now, there are two sources of supply of scientists: (a) from adults who have left the profession and can be induced to reenter (e.g., ex-lady chemists who are now housewives); and (b) youngsters who are entering the profession for the first time. The (a) category can be induced to reenter in only one way: by paying them higher salaries, and thus attracting an influx. And the second category, in the final analysis, can only be stimulated in the same way: by higher salaries. Youngsters enter the scientific field for a blend of two reasons: a love of the work, and the expected salaries and job opportunities. The former cannot be increased by anyone except the young scientist himself (although more can be done via educational methods to awaken his interest—see below); only the salary factor can be increased by others. The way to increase the supply of scientists, then, is simply to increase the salaries of scientists, relative to other occupations. (If all salaries increase, then obviously there is little or no added incentive to enter science.)
It is already becoming apparent that Federal aid to scientific education, for example, is an improper and unsuccessful method of relieving a shortage of scientists. We have seen that any shortage must stem from the fact that scientific salaries are not higher than other occupations. Suppose, then, that the Federal government spends tax money to subsidize science students. What are the effects? The only thing it may accomplish is to create more students of science, who then find that, because of the increased supply, scientific salaries are not only not raised—they are even lower compared to other fields. The result can only be to drive more and more scientists out of the field and into others, and to discourage any further students from taking advantage of the subsidized program. In short, the ultimate result of Federal subsidies to science study can only be to aggravate the scientist shortage rather than alleviate it, for the crucial problem: salaries, is worsened rather than improved by this intervention. This is one of numerous examples of a government intervention, aiming to solve a certain problem, ending by not solving it but creating new problems needing cure. The original purpose of the intervention is completely frustrated. And, this, if the government then tries to sure the worsened shortage by still heavier doses of Federal aid the shortage will only be aggravated still more.
The key, then, is scientific salaries. And here we come to another important point: there can be no lasting shortage of any occupation on the free market, for if there is a shortage, it will be quickly revealed in higher salaries, and these salaries will do all that is humanly possible to alleviate the shortage rapidly by attracting new people into the field (and bringing back those who left the field). If more scientists are needed, then free-market salaries will rise and induce a greater supply. If they are needed specifically by the military, then the military may increase its salaries for scientists directly, or the private scientific firms on government contract can raise their preferred salaries. Such are the workings of the market. No particular Federal intervention can do anything more to increase the needed supply of scientists. Furthermore, only the free market can decide how much salaries need to be increased to stimulate a sufficient supply. No form of governmental wage-fixing can do the job. (If the military sets its wage, it can use the free-market wage as a guide.)
If then, there is a shortage of scientists, market salaries for scientists will significantly rise, relative to other occupations. But since they have not so risen, is there really a shortage for scientists? This question was itself scientifically investigated only recently, after much loose speculation on the subject, in a highly important study by Blank and Stigler, of the National Bureau of Economic Research.David M. Blank and George J. Stigler, The Demand and Supply of Scientific Personnel (New York: National Bureau of Economic Research, 1957).
The authors found, for example, that, in the last eighty years, the number of chemists and engineers in the United States expanded by considerably more than 17 times as much as the total labor force. Hardly appears like a shortage! But, more important, Blank and Stigler stress the point that the very concept of “shortage” makes little sense except in relation to price—in this case, the price for scientific services. A shortage means that demand for the labor is greater than its supply at current wage rates, so that the wage rate tends to rise. Yet, upon investigating recent earning trends, Blank and Stigler find that, since 1939, salaries of engineers relative to earnings of doctors, dentists and lawyers, have declined, and have also declined relative to manufacturing wage earners.Engineers constitute the vast bulk of the technological professions. In 1950, there were over 540,000 engineers, and 82,000 chemists, with all the rest of the scientists: physicists, mathematicians, biologists, geologists, etc., (excluding medicine) totaling less than the number of chemists. Even the salaries of clergymen, pharmacists, and school teachers, rose relative to engineers in this period. How, then, can there be a shortage of engineers?
Neither can it be said that this relative decline of salaries is due to some sort of “exploitation” of engineers by their employers. For Blank and Stigler found a great deal of mobility between jobs among engineer-employers. Thus, we must conclude that, in recent decades, far from there being a shortage, the supply of engineers has grown more rapidly than the demand for their services. Even in the years since 1950, when demand for scientific services grew suddenly due to the Korean War, increases in scientific salaries have been no larger than in other occupations, and, indeed they have once again been smaller since the end of the spurt of Korean War demand in 1952.
Possibly, a shortage has been felt in recent years in engineers in industries doing military work. A typical reason: the Air Force insists on a formal review of all salaries paid by its private contractors, and on justification given for all salary increases. This downward pressure on salaries had tended to cause a slight shortage of scientists doing war-work. The remedy for this is for the government to be willing to see technologists paid at their full market worth—otherwise it can only bring difficulties for national defense. But, again, this has not caused a general shortage of technologists; just a possible shortage in the defense contract industries.
These findings appear to be contradicted by the enormous growth in newspaper want-ads for engineers, which have seemed to reflect a great engineer shortage. But: (1) newspaper ads have been growing as a method of recruiting; and (2) nine-tenths of the advertising space have been taken by defense contact, rather than civilian, firms. Possible reasons are the lower salaries in war work, and, in particular, the fact that the recruitment costs of advertising are, for the military contract firms, fully reimbursed by the government.
In addition to their crucial studies of engineers and other scientists, Blank and Stigler also investigated the fields of mathematics and physics. These scientists are mostly on college and university facilities: 87 percent of mathematicians and almost 60 percent of physicists are employed in colleges. The authors found that the rapidly rising trend of college enrollments, coupled with the steady fall in faculty-to-student ratios in these subjects, insure a high and expanding demand for physics and mathematics professors far into the future. And as for supply, the growing increase in the relative, as well as absolute, number of Ph.D.'s in the sciences attests to the expanding supply. So there need be no fears of a general shortage of mathematicians or of physicists either.
There is another way in which government has tended to create its own shortage of scientists working on military projects. This is through onerous security and secrecy regulations that make working conditions unpleasant and unattractive to scientists. To be sure, we don’t want to encourage Russian spies to steal our military secrets. And yet we must recognize that scientific invention is the discovery of natural laws, and that these laws are open to all to find, whether Russians or Americans. Throughout history, no important new invention has remained a secret for long, and either espionage or independent discovery would eventually yield the Russians the same technology. It is far more important, therefore, to create a climate of freedom in which scientists can operate creatively. And if scientists are naturally reluctant to work under onerous restrictions, the only way to induce them to give their free creative energies to military work is by relaxing these restrictions. And it must be conceded that, knowing the bureaucratic mind as we do, many military restrictions simply multiply unnecessary red tape rather than protect vital military secrets.
Thus, security investigations have been made of scientists engaged in open, basic research where there was no question of secret material being used; in these cases, the National Science Foundation has warned, “loyalty or security-type investigations are clearly undesirable and unlikely to serve any useful purpose.”National Science Foundation, Fifth Annual Report, 1955. “Security” regulations have suppressed medical research devoted entirely to such non-military problems as high blood pressure and multiple sclerosis. Dr. Fritz Zwicky, eminent professor of astrophysics at California Institute of Technology, was suspended from guided missile work simply because he chose to retain his Swiss citizenship. Such absurd procedures should be altered.See Walter Gellhorn, Individual Freedom and Governmental Restraints (Baton Rouge: L.S.U. Press, 1956), pp. 42–43, 168–68; Medical Research: A Mid-century Survey, vol. 1 (Boston: Little Brown, 1955): 185–89; John T. Edsall, “Government and the Freedom of Science,” Science 121 (1955): 615. Professor Alfred Bornemann has written: “whether or not a policy of secrecy was ever justified, in the past, it can scarcely be justified for security reasons and longer. ... Freedom of thought and enterprise is essential. ... Military success itself has always depended in the past on the effects or products of free thought and private enterprise in inter-war periods.” And Professor Arnold Zurcher has warned that a policy of governmental secrecy threatens to render ineffectual the very basis of democracy: an informed public opinion.Alfred Bornemann, “Atomic Energy and Enterprise Economics,” Land Economics (August, 1954): 202; Arnold J. Zurcher, “Democracy’s Declining Capacity to Govern,” Western Political Quarterly (December, 1955): 536–37. Also see Arthur A. Ekirch, Jr., The Civilian and the Military (New York: Oxford University Press, 1956), p. 276.
What, then, should the government do about the nation’s supply of scientists? We have seen that a program of positive intervention in the free market—such as been true of the Federal aid to over one-fourth of the nation’s graduate science students, amounting to $26 million in 1954—only distorts the allocations of the free enterprise economy, and can only prove self-defeating. We have seen that any shortage that does occur is cured most rapidly and effectively by the rise in salaries for these scarce jobs that occurs swiftly if undramatically on the free market. And we have seen that the best that government can do to sure any shortage of military scientists, is to be willing to pay, or see its private contractors pay, salaries at their free market worth, and to remove unnecessary restrictions and red tape on scientific activity. In short: the government does its best and most constructive job, not by positive intervention into the society, but by repealing its own restrictions on free activity, by lifting its own burdens from the scientific, or indeed any other, sector of society.
If government can cure a shortage of military scientists by these means, should it do anything at all to encourage a general increase of scientists, military and civilian? We have seen that it can only defeat its own purposes, and distort the economy, by positive intervention. But it can do other useful things to encourage science: acts that are not intervention, but are a repealing and loosening of its own policies that have been hampering the supply of scientists.
Thus, in the critical field of education, which is the ultimate source of scientists, the government can remove its own repressions on science education. For example, the entire philosophy of public education in this country needs an overhauling. This has been recently pointed out in ever-growing force, in quarters ranging from Admiral Rickover to Life Magazine. In short, we must abandon the mind-crippling “life adjustment” philosophy of our schools, which rather indoctrinates children in “group adjustment” than equips them with the mental skills and disciplines of science or any other intellectual subject. Our schools must once again regard it as their basic function to teach subjects, to encourage the rapid maturation of bright young minds. The present educational structure drags all the students down to the level of the lowest common denominator, passes all students, teaches rubbish rather than subject disciplines, and allows hooligans to widen their “self-expression” by tormenting and distracting those eager to learn—all in the name of “democracy.” We shall never know how many potentially bright youngsters who could have been able and even great scientists, have been permanently crippled by the “progressive” education philosophy dominant in the public schools. (The Russians, be it said, abandoned the absurdities of “progressive” education many years ago, and to that extent enjoy superior scientific training.) The public schools are the responsibilities of the state governments, and therefore it is up to the states to transform their schools into “halls of learning.”Typical of the recently growing mass of literature on this subject are Admiral Hyman Rickover, Education and Freedom, Arthur Bestor, Restoration of Learning and Educational Wastelands, Augustin Rudd, Bending the Twig, and publications of the Council of Basic Education, and many others.
There are importance corollaries to this task of the states in reforming their own public schools. There is the problem of the uneducable youth—those too dumb or too uninterested to benefit from formal schooling, and who would be much happier at a job or trade. The states should consider reducing the maximum age of compulsory attendance, or even repealing the compulsory attendance law altogether. Another important problem is the recent hullabaloo about teachers’ salaries. Roger Freeman has conclusively shown, in a definite study, that there is no teachers’ shortage whatever, present or future.See Roger A. Freeman, School Needs in the Decade Ahead (Washington, D.C.: The Institute for Social Science Research, 1958). Freeman shows that teachers’ salaries are fully adequate. There is, to be sure, a shortage of high-quality teachers, who are driven out of the profession by the absolutely uniform pay-scales, insisted upon by the teachers’ unions. Robbed of incentives for merit, and frustrated by the red-tape of bureaucracy and civil service and by the absurdities of progressive education, the good teachers—the very ones who are needed to educate the young properly—leave for the better salaries they can obtain elsewhere. This is particularly true for the good science teachers—for industry and government have more job opportunities for ex-science teachers than for other teachers. The public schools, therefore, should (1) pay good teachers more than poor ones; and (2) should pay science teachers more than others, so as not to lose them to other jobs. In short, not overall salaries, but the salary differentials, need overhauling—by officials who must have the courage to battle the entrenched bureaucracy of the NEA and other teachers’ unions. While this is a state and local responsibility, the Federal government should certainly lend more encouragement to the states in this needed reform.
Another important state policy would be to relax the absurd regulations which states now require for hiring school teachers. These rules play into the hand of the professional progressive educationists by requiring a myriad of “method” courses before a man can teach in the schools, in the meanwhile slighting the all-important subject matter. Our greatest physicists are legally debarred from teaching in the public schools because they lack the “qualifications” imposed by state laws. Here, too, the states restrict the supply of teachers, especially the able ones who wish to stress knowledge of subject over progressive methodology.
To sum up, the proper role of government is to confine itself to removing the shackles that it has imposed on the supply and training of scientists. The Federal government could: stop paying lower than free-market salaries to scientists doing military work, and eliminate needless restrictions on the freedom of scientists; the state and local governments could overhaul the public school system by: transforming progressive into real education; relaxing or eliminating compulsory attendance laws; replacing uniform teachers’ pay by merit differentials, and relatively higher salaries for science teachers; and eliminating the restrictions on the supply of teachers not indoctrinated with educationist methodology.
What, then, should the government do, if anything, to encourage research and development? We have repeatedly outlined the recommended principles of government policy: to avoid interfering positively in the free market or in scientific inquiry, and confine itself to changing the provisions of its own rules and laws that hamper free scientific research. The latter category, however, leaves room for far more government action than one might think.
Some of the recommended policies which flow from these basic principles have already been outlined:
(1) Shift military research and development from governments to private contracts.
(2) Pay market wages for scientists used by government or government-contracts.
(3) Relax civil service red tape, to provide merit payment and promotions.
(4) Remove undue security regulations and red tape on government-contracted scientific work.
(5) Remove Atomic Energy Commission regulations and subsidies of the atomic energy industry.
(6) Encourage state governments to shift from truly regressive, “progressive education” in the public schools to solid educations in subject matter, to repeal compulsory attendance, and educationist requirements that restrict the supply of good teachers, and to substitute merit payment for the uniformities of civil service regulation.
(7) Encourage state governments to repeal rate regulation of the public industry.
But there is another broad category of worthy government action on which we have not touched: tax exemptions. Taxes cripple free energies, productive work and investment. The best way for government to encourage free activity in any area is to remove its own tax burdens on that area. Contrary to common belief, a tax exemption is not simply equivalent to a government subsidy. For a subsidy mulcts taxpayers in order to give a special grant to the favored party. It thereby adds to the ratio of government activity in the economy, distorts productive resources, and multiples the dangers of government control and repression. A tax exemption, or any other type of tax reduction, on the other hand, reduces the ratio of government to private action; it frees private energies and allows them to develop unhampered; it reduces the danger of government control and distortion of the economy. It is a step toward the free market and the free society, just as a government subsidy is a step away from the free society.
Another point about tax exemption: it avoids many of the problems entailed by government subsidy in deciding which particular firms and locations should obtain the grant. Should government concentrate its funds on a few large universities or medical schools, for example, or should tax funds be distributed pro-rata to each of the various states, or should they be used to help the poor states catch up to the wealthy?Thus, see Medical Research: A Mid Century Survey, p. 145. There is no rational way to decide this problem, and thus end aggravating conflicts between different groups in society. These conflicts and problems can be avoided by simply lowering taxes, and allowing free individuals and the free market to decide where and how they will allocate their funds.
Here are some examples of the many constructive things government can do, via tax exemptions and reductions, to encourage scientific progress in America:
(1) Tax Credits to business corporations for contributions to colleges and universities for scientific research. This will stimulate basic research in its proper place: in colleges and universities. (Also recommended by National Science Foundation)
(2) Tax Credits to Individuals on income tax for contributions to scientific research in colleges and universities. (Recommended by National Science Foundation)
(3) Making Tax Deductible, Expenses by Business in training scientists at universities. (Recommended by National Science Foundation)
(4) Making Tax Deductible, Contributions by Business to individual scientific research.
(5) Making Educational Expenses (for science or other higher education) Tax Deductible on Parents’ income taxes.
(6) Permitting individual scientists and investors to Average Their Incomes over many years, for Income tax purposes.
(7) Lowering Corporation Income Tax rates, to permit more investment in research and development.
(8) Lowering Individual Income Taxes, especially in the Upper Brackets, to permit greater investment of private risk capital in new inventions.
(9) Permitting Amortization of Equipment at any time pattern the owner wishes, thus allowing rapid amortization of new, innovatory projects.
(10) Lowering, or Repealing, Federal and State Inheritance Taxes, to permit much more private risk capital in new inventions.
(11) Lowering the Capital Gains Tax on Individuals—to stimulate research and development of inventions, which can be sold as capital assets for capital gains.
(12) Lowering the Capital Gains Tax on Corporations—to permit corporations to try to pile up new inventions in order to increase their assets, and therefore increase the total market value of their securities.
The crucial economic question, and one of the most important social questions, is the allocation of resources: where should the various and numerous productive factors: land, labor, or capital, be allocated, and how much of each type to each use?[Ed: This paper was written by Murray N. Rothbard (1926–1995) on commission in 1959 but was not published until 2004, mises.org. It is part of the Rothbard Archives, the Mises Institute, Auburn, Alabama.] This is the “economic problem,” and all social questions must deal with it.
The important question of American science and technology is also a problem of the allocation of resources. Thus: our expanding technology and productivity require a great many scientists, researchers, engineers, etc. It also requires many different types of resources to be invested in research and development. But our economy also requires many, many other goods and services, and many other types of investment, all of which are essential to its smooth functioning. It requires, for example, transportation to move goods, production lines to manufacture them, telephone operators and repairmen to staff our giant communications network. It even requires paper manufacturers and paper distributors—for how can a modern economy—including a scientific research staff operate without paper? These are just some of the infinite number of goods and services that go to make up a functioning economy.
This fact of reality, then, must be faced: if there are to be more scientists, or more scientific research, then there must be less people and less resources available for producing all the other goods and services of the economy. The crucial question, then, is: how much? How many people and how much capital are to be funneled into each of the various occupations, including science and technology?
One of the great, if often unsung, merits of the free enterprise economy is that it alone can insure a smooth, rational distribution and allocation of productive resources. Through the free price systems, consumers signal laborers, capitalists, and businessmen on which occupations are most urgently needed, and the intricate, automatic workings of the price system convey these messages to everyone, thereby creating an efficient, smoothly working economy. There is one and only one alternative to voluntary directions under a free price system: and that is government dictation. And this dictation is not only bad because it violates the tradition of individual freedom and free enterprise on which American greatness is built; it is also bad because it is inevitably inefficient and self-destructive. For while government intervention can and does hamper the economic system in its job of satisfying consumer demand, it cannot force the economy to follow its own demands efficiently. For piecemeal government intervention can only disrupt an economy and defeat its own ends; while overall central planning, by destroying the price system, robs itself of the possibility of rational economic calculation. Lacking a free price system, it cannot ever satisfy the desires of either consumers or its own planners, for it will not be able to allocate the infinite number and types of labor and capital resources with any degree of efficiency.
There are other considerations: we must recognize, for example, that only a free market is compatible with the free choice by every man of his own occupation. A governmentally-run economy must entail government planning of labor as well as of other resources—which means, ultimately, that people must be told what jobs (and where) they can work and at what they cannot. If the free market is prevented from offering its voluntary inducements of higher wages in those occupations and areas that are most needed by the consumers, and thereby from shifting labor peacefully while permitting every man to work at the job he likes best, then government must dictate every man’s type and place of work, and we must all become slaves of the State.
From a moral, political, constitutional, and economic point of view alike, therefore, the Republican Party is committed to the fostering and maintenance of a free economy in a free society. How is the ever-challenging problem of modern science and technology to be met within this framework?
There is a wing of opinion, here and abroad, that is positively opposed to modern technology and all it stands for, believing that mode and technology brutalizes man, enslaves and “depersonalizes” him, ruins his culture, etc.Thus, see Ralph Ross and Ernest Van den Haag, The Fabric of Society, and Introduction to the Social Sciences (New York: Harcourt, Brace, and Cox, 1957).
Fortunately, this view is overwhelmingly rejected by the bulk of our nation, and therefore there is no need to enter into extended refutation here. But it might be apropos to cite the views of this subject of two social philosophers with very different views on other matter:
Thus, Professor Ernest Nagel, of the Department of Philosophy, of Columbia University:
it is by no means evident that a life of deep satisfaction and dedication to the values of a liberal civilization is enjoyed by a smaller fraction of American society than of other types of culture, whether present or past. Critics of American mass culture tend to forget that only comparatively small elite groups in the great civilizations of the past were privileged to share in the high achievements of those cultures. ... In our own society, on the other hand, modern science and technology have made available to unprecedented numbers the major resources of the great literatures and the arts of the past and present, never accessible before in such variety even to the societies. ... The evidence seems to me overwhelming that the growth of scientific intelligence has helped to bring about not only improvements in the material circumstances of life, but also an enhancement in its quality.Ernest Nagel, “The Place of Science in a Liberal Education,” Daedalus (Winter, 1959): 66–67.
And here Father Bernard W. Dempsey, of the Institute of Social Order:
There are those who see in the mechanization of modern industry an inevitable and devastating anti-personal force. ... First of all, man has been condemned to earn his bread in the sweat of his brow; and yet past ages had more sweat and less bread than typical American industrial workers experience. ... Finally, the industrial discipline can also be challenging, interesting and inspiring, especially when an able mechanic is furnished good tools and materials to work with. We must not forget that the farmer is weather-paced, season-paced and animal-paced with a tyranny that is at least as exacting as the industrial discipline. ... In the day of serfs in Western Europe the horse was the symbol of nobility and knighthood. Many American workers in the course of a day control more horse power than there was on the whole field of Agincourt.Bernard W. Dempsey, S.J., “The Worker As Person,” Review of Social Economy (March, 1954): 19–20.
The National Science Foundation, in its 1957 study of American research and development, concluded that “our overall effort is ample.”Basic Research, A National Resource. It also concluded, however, that we are deficient in basic research, and that this phase of R&D needs encouragement. It recommends a program of Federal encouragement, ranging from tax exemptions (see below) to Federal aid. We have seen, however, that the great bulk of basic research takes place in private university laboratories, and that the Hoover Task Force has found the government incompetent to perform even military research and development, much less civilian. And we have seen in detail the inefficiencies and the grave dangers of science—and direction is bound to follow subsidy. Also, we have seen how Federal aid to scientific education is self-defeating.
“Planned” science sounds impressive; actually it means prohibited science, where no scientist can follow the leads of his own creative ideas. We have heard a great deal recently about the alleged glories of Soviet science, and about the necessity of the United States catching up with such wonders as sputniks. What is the real record of Soviet science? Professor Baker, analyzing this record, shows that, at the beginnings of the Soviet Union, the old pre-revolutionary scientists continued to do well, largely because science was not yet under government planning. That came with the Second Five-Year Plan, in 1932. The Plan set forth very broad subjects for investigation, but, by the nature of such a plan, many important areas were excluded from the required agenda.
Take almost any branch of non-revolutionary biological science in which outstanding discoveries were made in the outside world during the years of the plan, and you are likely to find that the whole subject was excluded from study.Baker, Science and the Planned State, pp. 66 ff.
For example; the study of hormones, and genetics. The Lysenko controversy, the use of the State to eradicate the science of genetics in Soviet Russia, and the compulsory twisting of truth by the Soviet State to fit the ideological myths of its rulers, are well-known, but can hardly be overstressed. It is important to realize that it is not simply because the Soviet or Nazi leaders were particularly perverse men that they reached out to prevent or cripple science’s drive for truth; but because such actions are inherent in the very nature of statism, and central planning. Power, and its promotion, advancement of the ideology of power, become the highest social goal, before which all truth, all integrity must give way.
Government control of science, government planning of science, is bound to result in the politicization of science, the substitution of political goals and political criteria for scientific ones. Even pro-Soviet scientists have admitted that Soviet research is inferior to American, that basic, as contrasted to applied, research, is neglected; that there is too much red tape; that little fundamentally creative work has been done; and that science is unduly governed by political considerations—such as the political views of the scientist propounding any given theory. Scientists are shot for taking the view that happens to be in political disfavor. And, as Baker concludes: “If the selection of scientific personnel is left to the State, the wrong ones are likely to be given important posts, because those who are not themselves scientists will be led astray by ... false claims and pretences ... (and) scientists may exhibit a servile obedience to their political bosses.”Ibid., pp. 75–76. No wonder that in a list, drawn up by seven scientists, of the two dozen most important scientific discoveries made between World Wars I and II, not one came from the U.S.S.R.
In a follow-up to his earlier book, Dr. Baker has recently reaffirmed these conclusions. He further describes the coerced eradication of genetic science in Russia. He also deprecates the much-touted sputniks.John R. Baker, Science and the Sputniks (London: Society for Freedom in Science, December 1958.) Also see Dr. Conway Zirkle, Death of a Science in Russia (Philadelphia, 1949). In the first place, if one starts with a given end, and the knowledge of how to get there has already been attained, one can arrive at the end in proportion to the resources one is willing to throw into the undertaking—all this then becomes a purely engineering and economic problem, rather than a scientific research problem, where ends or means are not yet known.Baker, Science and the Sputniks, p. 1. If, for some military or propagandist purpose, it was desirable to make a very deep hole toward the center of the earth, the deepest holes would probably be made by whichever nation decided to devote the largest amount of money to the project. The same principle applies to the sputniks.Ibid. And, even so, Baker points out, American satellites have far superior instrumentation, and are therefore much more important scientifically.
It’s considered politically incorrect to criticize culture these days, but whether using euros or drachmas, in or out of the European Union, Greece really has to, somehow, sort out its cultural dysfunction. I’m not talking about its customs, traditions, architecture or music, and I’m definitely not talking about its food. I’m talking about its cultural anti-capitalism. The negotiations, deals, counter-deals, referenda, protests and everything in between all mean very little if Greeks, by and large, don’t ditch their statist zeitgeist and rediscover Greek capitalistic exceptionalism.
A perfect example is Argentina. A default and sovereign crisis is supposed to chasten a nation into a sensible, market-oriented direction as the folly of debt-addicted big state crony socialism gets utterly discredited. It’s a nice theory. But Argentina, thirteen years after its 2002 default, and after years of soaring inflation, dollar shortages, and economic malaise, clings to its completely clueless, hyper-interventionist, socialist overlords who continue to run the economy into the ground. The reason is the core culture never changed. When your culture is toxic, up is down, black is white, socialist failure is capitalist failure.
In The Anti-Capitalistic Mentality Ludwig von Mises described this cultural anti-capitalism:
As John Doe sees it, all those new industries that are supplying him with amenities unknown to his father came into being by some mythical agency called progress. Capital accumulation, entrepreneurship and technological ingenuity did not contribute anything to the spontaneous generation of prosperity. If any man has to be credited with what John Doe considers as the rise in the productivity of labor, then it is the man on the assembly line. ...
The authors of this description of capitalistic industry are praised at universities as the greatest philosophers and benefactors of mankind and their teachings are accepted with reverential awe by the millions whose homes, besides other gadgets, are equipped with radio and television sets.
The biggest risk to Greece is not austerity or fauxsterity or default or the euro or the drachma. And it’s certainly not the bogeyman of being frozen out of sovereign credit markets — it’s that Greek culture remains antagonistic to free, unfettered markets and is chronically state-dependent.
Take another Latin American country: Venezuela. After suffering crippling inflation rates throughout the 1980s and 90s, the electorate went on in 1998 to vote in another central planning inflationist in Hugo Chavez. They re-elected him in 2000, 2006 and 2012, and his successor Nicolás Maduro in 2013, even while the country was in a hyperinflationary death spiral and heading toward outright economic collapse. Venezuela’s problem ultimately is not fiscal mismanagement — it’s an anti-capitalist culture.
And so it is with Greece. After already securing debt relief and effectively being allowed to default by restructuring its debts over the next fifty years at subsidized interest rates — and after actually achieving economic growth in 2014 by cutting taxes and slashing the size of its sclerotic, bloated government — this toxic Greek culture prevailed once more and elected a team of socialist die-hards to drag it back into the mire. Of course it doesn’t help that on the other side of the negotiating table is another bunch of central planners in the EU, IMF, and ECB. Nevertheless, Greece sits stuck between two central planning negotiation parties because its people have been too busy demanding goodies instead of freedom.
Most Countries Get Into Trouble — But Some Bounce Back Better Than OthersAny sovereign nation can overspend and get into financial trouble, and most have. It wasn’t that long ago that Britain was forced to go cap in hand to the IMF in 1976 and cede its fiscal sovereignty to that institution. By the latter half of the 70s, Britain was a downright mess. America stealth-defaulted on its international obligations in 1971 and suffered a rolling inflationary economic crisis for the rest of the 1970s. Both these countries bounced back. As did Chile, Uruguay, and the Philippines after their fiscal and financial turmoil of the 70s and 80s.
But some don’t bounce back, and I believe this happens when the national culture is, or has become, fundamentally anti-capitalist and resigned itself pathetically to cradle-to-grave state-dependency. In addition to Argentina and Venezuela, we’ve seen prolonged economic and financial malaise following painful crises in the likes of Zimbabwe, Ghana, Bolivia, Nigeria, Russia, Turkey, and now southern Europe. These countries don’t seem to learn from their mistakes because they don’t seem to want to or can’t locate the lesson amid the intellectual haze of their cultural zeitgeist.
But really the lesson is clear. An economic crisis can jolt a fundamentally pro-capitalist (or mostly pro-capitalist) nation that had lost its way back onto the straight and narrow. But there is no guarantee of recovery when the culture has descended into infantile anti-capitalism, dysfunctional statism, and an antagonism toward entrepreneurial dynamism and self-reliance. For these a crisis may not herald recovery but instead a longer, deeper national decline. Only a culture shift resulting from the spread of sound ideas can make Greece (and other countries) a fertile ground to accept real solutions. The need to spread the good news of liberty and free markets is clearly as urgent as ever.
This month, Portugal celebrates fourteen years of drug decriminalization. The grand experiment is now considered a happy success considering it was adopted out of desperation and in the face of dire warnings from proponents of the global drug war.
What Led to DecriminalizationDuring the mid-twentieth century, Portugal experienced fifty years of military dictatorship, and when leftist democratic control was reestablished in 1974, many expatriate Portuguese returned to Portugal from its colonies. Of course, many of these people were dissidents, outsiders, and outcasts, and many of them used illegal drugs.
Over the next twenty-five years, there was a surge in drug use, drug abuse, addiction, overdoses, and eventually a very substantial prevalence of HIV/AIDS and other dirty-needle-related diseases. At the peak of this drug epidemic the rate of drug addiction and HIV/AIDS infection was “considerably higher” than the rest of Europe according to Dr. João Goulão, the longtime drug czar of Portugal.
Goulão was on the eleven member anti-drug commission that formulated law 30/2000 which decriminalized all drugs starting July 1, 2001.
The “grand experiment” seems to be the result of two factors. The first is that Portugal is a relatively poor European country and was unable to fight the war on drugs on every front.
The second factor is that the commission was relatively non-partisan and simply adopted the common sense notion that drug abuse and addiction are not criminal problems for the police to solve. Drug abuse and addiction are medical and psychological problems that are better solved by the individual with the help of professionals and social pressures.
Baby Steps Away from the Drug WarDecriminalization is just one baby step away from the war on drugs, and drug smugglers and dealers are still sought out and punished. Individuals are only permitted to possess very small amounts of illegal drugs without being punished as a dealer. Under current laws, you can still be arrested and sent to counselors, but you do not face imprisonment unless you are an uncooperative multiple offender.
While certainly not ideal, decriminalization has straightforward benefits over complete prohibition. First, otherwise law-abiding citizens will not be criminalized for possessing illegal drugs. Second, drug addicts will be more likely to seek professional help when government treats addiction as a medical rather than criminal problem. Third, the police will have more resources to address real crimes and possibly to provide subsidies for drug treatment programs. Fourth, drug addicts will turn away from dangerous synthetic drug substitutes and turn more to the natural illegal drugs like marijuana and cocaine. Fifth, if needles are legal too, then you should see fewer cases of diseases such as HIV/AIDS and hepatitis. Sixth, junkie ghettos will shrink in size and visibility. In sum, decriminalization should result in fewer people dying and being sent to prison and more people living “normal” lives.
Of course, the biggest concern prior to decriminalization was the quantity of illegal drugs consumed. That concern is even more dominant when discussing outright legalization of drugs. Back when Portugal was considering decriminalization, I was interviewed by the "Time Magazine of Portugal,” and the reporter stressed that this was the prime concern in Portugal at the time. I responded that you cannot know the answer to that question in advance, that you will never know the answer to that question, and that the question was unimportant.
Too many factors impact the markets for illegal drugs to be able to say definitively that drug consumption will increase or decrease after decriminalization. Factually, statistics on drug consumption are necessarily imprecise. This is true for statistics prior to and after decriminalization. The existing statistics are based either on things like surveys and educated guesswork with the actual facts mired in the secretive world of the black market. Consumption aside, the real question is whether prohibition does more harm than decriminalization and the answer is yes.
When I was pressed by the reporter for a guess, I responded that overall consumption would not change much; it might increase some in the short run and would decrease in the long run, unless the drugs were legalized in the future for medical or recreational uses. However, I stressed that there are undeniable benefits (listed above) and there is no reason that consumption would explode due to decriminalization.
Many Still Refuse to See the SuccessIt is hard to blame the Portuguese for their concerns at that time. Decriminalization was considered a dangerous experiment and a dodge of the United Nations’ rules of the global war on drugs. However, mainstream drug policy experts remained “skeptical” of the Portuguese experiment even after nearly eight years of experience.
Mark Kleiman, director of the drug policy analysis program at UCLA, claims that Portugal was an unrealistic model. Peter Reuter, another leading drug policy expert, claimed that despite achieving its central goal (decreased consumption) it could be explained by the fact that Portugal was a small country and that drug abuse is cyclical in nature.
Remarkably, Dr. Goulão, who helped design and oversee the new law seems uninformed and perplexed at the positive outcomes even to this very day. He was recently quoted as saying: “it’s very difficult to identify a causal link between decriminalization by itself and the positive tendencies we have seen.”
One picture that sums up the Portuguese success story shows that Portugal has the second lowest death rate from illegal drugs in all of Europe after experiencing one of the worst rates with prohibition.
It is also interesting to note that the European Monitoring Center for Drugs and Drug Addiction (EMCDDA) is headquartered in Lisbon. One analyst who works at EMCDDA, Frank Zobel, calls Portugal’s policy "the greatest innovation in this field" and “that the policy is working. Drug consumption has not increased severely. There is no mass chaos. For me as an evaluator, that's a very good outcome."
It is a happy anniversary for the Portuguese, but a scary one for all the drug warriors around the world whose incomes and power depend on continued ignorance about the effects of prohibition.
Unfortunately, Independence Day has become a day for many to celebrate the United States government. The actual historical event behind the day, however — the adoption of the Declaration of Independence — was an illegal act of political defiance that led to secession and the overthrow of an entire system of mercantilist government in North America.
Moreover, it is quite anachronistic to connect the modern unified nation-state known as “the United States” to this event, nor does it make sense to invoke anything having to do with the Constitution of 1787.
Indeed, as Jeffrey Rogers Hummel has pointed out, the Constitution we now labor under represents a counter-revolution against the Spirit of 1776. The Spirit of 1787, in contrast, was about taking what the Declaration of Independence repeatedly refers to in the plural as “free and independent states” and hammering them into one unified state.
Fortunately, the Federalists — the now benighted and so-called “founding fathers” — partially failed and were beaten back by the anti-Federalists who demanded a Bill of Rights — the only laissez-faire portion of the Constitution — which temporarily crippled the centralizing efforts of the Federalists.
But just as the Constitution itself is contrary to what is celebrated on Independence Day, we can also look to several Acts of Congress since 1787 that have perhaps done some of the most damage in undoing what the revolutionaries had intended.
The Judiciary Act of 1789 Unknown to many, the entire federal court system outside the Supreme Court stems from this one law adopted during the first session of Congress. At the time, there was fierce opposition from many in the United States who recognized that a federal system of courts would allow for the extension of federal law into the allegedly independent states themselves. The act created the office of the Attorney General and the appellate system of courts which today allows the Supreme Court to exercise appellate jurisdiction over pretty much every aspect of life inside the United States. Without these courts, the Supreme Court would be limited to its few areas of original jurisdiction. Thus, without the federal court system, there would be no courts through which to regulate things such as drug prohibition, marriage, abortion, wages, and the whole panoply of the modern federal regulatory state.
The Louisiana Purchase Treaty Thomas Jefferson announced the signing of the Louisiana Purchase Treaty on July 4, 1803. Jefferson considered the Purchase to be a great victory for his un-ironically named “Empire of Liberty” scheme in which the United States would spread “liberty” by force across North America.
The Louisiana Purchase would have far reaching effects on the entire nature of the American confederation and on constitutional law. Direct Congressional control over lands in the west had always been a dream of nationalists and centralizers, and the Louisiana Purchase gave the US government access to vast new resources beyond the control of any state. Defense of these federal lands necessitated an expansion of a federal military force, and required a much larger apparatus of federal law to administer the lands.
Moreover, these new federal lands created the impression for many that the states were created out of federal lands, instead of federal powers being granted to the central government by states. The later claim by anti-secessionists that the federal government created the states, and not vice versa, owes much to the Louisiana Purchase, and to this day, the federal government directly controls and owns over 50 percent of the land in most Western states.
The Militia Act of 1903 Prior to the adoption of the Militia Act, the law was ambiguous about how the federal government could seize control of state militias for use in the federal government’s wars. Some states resisted use of their troops in the invasion of Canada during the War of 1812, for example, and federal politicians faced the onerous task of convincing state governments to offer up state militias for national military service.
Political realities meant that state governments were often more than happy to oblige of course, but there nevertheless remained the risk that the states could offer real and meaningful resistance to unpopular wars by withholding military support. Naturally, this was very inconvenient for the federal government, so in the name of repelling foreign bogeymen and enhancing “efficiency,” the armed forces of the United States were unified, allowing presidents to seize control of state militias whenever they liked. Today, the militias have been replaced by the adjuncts of the federal military known as the “National Guard.”
The Revenue Act of 1913 In 1913, the US Constitution was amended to allow Congress to levy personal income taxes. The amendment does not mandate an income tax, however, so later that year, Congress passed enabling legislation creating the income tax we know today. Since then, federal budgets have ballooned, tax burdens have swelled, and it is now simply accepted that the federal government should be able to examine every aspect of your financial life to make sure you’re paying “what you owe.” Financial privacy is now only a distant memory.
The Federal Reserve Act of 1913 While the United States had had central banks before, the Federal Reserve, created in 1913, is by far the most enduring and most powerful. Over the years, the Fed has become a behemoth that does everything from regulating the financial system to monetizing the debt to creating never-ending liquidity for its friends on Wall Street who — thanks to the Fed — never have to face the consequences of their bad investment decisions. In other words, the Fed is a mercantilist’s and crony capitalist’s dream institution, allowing the wealthy and powerful to constantly and silently extract wealth from the powerless many who hold US dollars and are subject to the whims of the too-big-to-fail financial system.
What Are We Celebrating? In 1776, few imagined or looked to a future of central banks, massive national standing armies, or a federal legal system that regulated the daily lives of Americans down to the most minute details. In fact, had the typical Revolutionary War soldier been told that such a future awaited his country, he would have likely gone home immediately, as such a future would likely appear even worse to him than staying subject to the British Crown’s benign neglect.
Yet, in spite of all of this, nothing can change the fact that America’s national holiday is founded on an act of treason and secession, and that the Declaration of Independence was born out of a generation of smugglers and “criminals” who refused to take orders from a far-more-powerful and well-armed government. It’s a reality that may yet prove inconvenient for our government and many others in the future.
To the surprise of many, Bolivia is now Latin America’s fastest growing economy. At a 5 percent growth rate it now outstrips once dominant but now stagnating regional competitors like Brazil and Peru. Furthermore Bolivia boasts some very impressive macrofundametals: its level of international reserves are the highest in all of Latin America, it has slashed its government debt, and its inflation rate stands at a respectable 5 percent. This accompanies a 307 percent increase in average income and a 25 percent reduction in the poverty rate since 2001.
For those who have watched the demise of Venezuela and Argentina — the paragons of Latin American “21st century socialism” — Bolivia’s undeniable economic improvement appears to confound the expectation that socialism inevitably leads a country to ruin. Indeed the socialist policies of Evo Morales, Bolivia’s president since 2006, are based on exerting state control over natural resources and increased welfare spending. But, he’s credited with bringing about the turnaround.
Has the “Third Way” Worked in Bolivia?Should the naysayers therefore reexamine their beliefs, and accede to the possibility of a “third way,” where a managed economy run by nice guys like Evo can bring about a positive outcome in people’s lives? Is Evo’s system superior to that which might prevail in an unregulated market?
Well, there may not be any great mystery to Bolivia’s success, if we take into account the fact that it is actually riding high on the wave of a commodity boom, particularly in natural gas, which alone constitutes around 45 percent of Bolivia’s exports. Such is the reliance of Bolivia on this commodity that when the price falls, as has begun to happen this year, a rehash of the classic plot line of a Latin American government’s gravy train coming to a crunching stop would not be surprising.
Government bureaucrats will be laid off, social programs will be shut down, and civil unrest will ensue. The only question is whether it will play out as a short drama or a long telenovela of the Venezuelan variety, with the government first running down its international reserves and then resorting to creating currency out of thin air ushering in the grand finale of hyperinflation.
For some however, the very fact that Bolivia hasn’t played out like that in Venezuela and doesn’t seem likely to in the near future, would suggest that socialism is viable if it is well managed and trimmed of its more radical excesses.
In fact, Evo’s tenure has undoubtedly been one of pragmatism. It is true that since 2005 he has expropriated just over twenty companies, but the level of expropriations in no way compares to that taking place in the culture of government impunity rife in Venezuela where 1,168 foreign and domestic companies were expropriated between 2002 and 2012. The infamous nationalization of foreign oil and gas fields is not one of complete state control, but is rather about gaining a controlling share of the profits made by foreign companies which can then be diverted into various social programs.
All this would suggest, as the mainstream business press gleefully point out, that Evo is no old-style Latin American socialist. Instead, they claim, what he’s doing in Bolivia is really run-of-the-mill Nordic-style social democracy in a Latin American setting.
The business press narrative however, ignores the genuinely significant and even transformative things that have occurred under Evo’s presidency, which despite the rhetoric they are couched in, have nothing to do with socialism and everything to do with advancing true freedom and enterprise.
Rejecting US Control, the IMF, and the World BankFirst among these is Morales’s rejection of the international financial system and its pillars, the IMF and World Bank. In left-wing lore, this position is consistent with the continent-wide popular struggle against neoliberalism and “free-market fundamentalism” that brought Evo to power. But in reality, the IMF and World Bank interventions are about building an infrastructure of financial control and corporate patronage that is the complete antithesis of the free market.
The modus operandi of these institutions is to go to a developing country already struggling under a mountain of debt and, colluding with its domestic elites, sign it up for a loan, usually to fund a transport or utilities development. This strategy is a win for the lenders, the western corporations given the development contracts, and anyone else who can benefit from this web of state-backed international corporatism. It is a loss for the recipient country (i.e., the taxpayers) who must service the crushing interest payments and make “structural adjustments” to their economy which are stated conditions for providing the loan.
This is precisely what happened in Bolivia when by the early 80s its corrupt elites racked up around $3 billion in debt to foreign banks. The IMF stepped in offering a series of loans to cover the balance of payment crisis and “modernize” its infrastructure. Defenders of the free market might approve the fact that as a condition of the loans, over the next few decades, state enterprises were sold off to foreign corporations and government spending was restricted.
Though we can always expect efficiency benefits from a state-run industry being run as a private concern, morally speaking, the state has no right to sell its stolen property to third parties, especially when they are corporations with state enforced privileges inaccessible to private citizens like limited liability and even guaranteed rates of profit. There is also nothing free market about the way taxes were increased on the poor to meet the demands for deficit reduction, or the way the whole emphasis of the IMF’s plan in Bolivia was to develop it as a commodity exporting country. This meant recommending measures like currency devaluation and creating an artificial export infrastructure dominated by western corporations.
Morales’s Benign Neglect of the Informal EconomyWithout the IMF, Bolivia now has the chance to develop on its own terms instead of under the rule of technocrats. Of course, government control of the commanding heights of the economy is hardly conducive to organic growth. However, we should keep in perspective the fact that there is a division between this higher productivity part of the Bolivian economy and an informal and semi-informal sector that provides the vast majority of economic activity and employment. These latter sectors are also made up of mostly indigenous Indians, and it is in these areas where the true significance of Evo’s presidency can be felt.
As Bolivia’s first indigenous leader, Evo Morales’s presidency has given the marginalized and poor a new found sense of pride. Refusal to cooperate in the US war on drugs and a decidedly laissez-faire attitude to informal and small-to-medium enterprise means that the state’s presence as an antagonistic force in the lives of ordinary people is at a historical low. This, in combination with a banking system flush with savings and low debt has been key to the bursting on to the scene of small enterprises run by indigenous entrepreneurs who have successfully leveraged their culture and trading channels to climb their way into the burgeoning middle class.
In Bolivia, like neighboring Peru, even the poorest of the poor have the means to turn a stall into a small business and a small business into something larger. Where once his ancestors were turfed off their land and forced to work it for their colonial masters, an indigenous Indian can now open a textile factory and attain a level of wealth that surpasses that of the descendants of those who expropriated his forefathers.
All over cities like La Paz, colorful mansions known as cholets (a term combining “cholo” the discriminatory term for someone of Indian descent, with the word chalet) are springing up, constructed in Andean style architecture, often five stories high, with the lower levels turned into businesses: living and breathing monuments to entrepreneurialism that have transformed the urban landscape.
The reaction of the eurocentric elite is one of barely concealed horror: seeing their positions of managers and administrators of an economy based on resource extraction and patronage of western corporations become vulnerable, they instinctively oppose Evo, and collate around a conservative opposition that favors clamping down on the “informal” economy, resumption of the drug war, and alignment with US foreign policy objectives.
Though it is right to oppose nationalization, it is hard to take seriously the argument that were Evo not in power, and Bolivia left in the hands of the “business friendly” opposition, the country would be necessarily better or conducive to genuine free enterprise. A great levelling of the playing field has occurred under Evo, not through forceful redistribution of wealth, but rather through standing back and letting freedom and entrepreneurialism of the people run unchecked. It is this that has made Bolivia a tangibly different country to what it was ten years ago, and it is the hope of all those who care about freedom, that this will be the enduring legacy of the Morales years, long after the commodity boom ends.
Since President Johnson first declared war on poverty in his 1964 State of the Union address, this war has cost US taxpayers $22 trillion. The primary implement of this war has and continues to be public assistance programs. Prior to the war, the poverty rate had fallen steadily from just under 35 percent in 1949 to just over 15 percent in 1965. As expenditures on public assistance programs soared from roughly $50 billion per year in 1965 to just under $1 trillion in 2013, the poverty rate has been stuck between 10 percent and 15 percent. These trends suggest that public assistance programs trap people in poverty.
The minimum wage is another major implement in the war on poverty. In 2009, it was raised to $7.25 per hour, its highest level (in real terms) since 1981. Thereafter, the poverty rate inched up to 15 percent in 2010, and remained near that rate through 2013. Despite this, President Obama, in his 2014 State of the Union address, called for the federal minimum wage to be raised to $10.10. Later that year, his sales pitch for this proposal included: “One of the simplest and fastest ways to start helping folks get ahead is by raising the minimum wage. Ask yourself: could you live on $14,500 a year? That’s what someone working full-time on the minimum wage makes. If they’re raising kids, that’s below the poverty line. And that’s not right. A hard day’s work deserves a fair day’s pay.”
The president’s argument above, however, is based on a false narrative. The typical person earning the minimum wage is not raising a family on $7.25 an hour, and working forty hours a week. Only 2.6 percent of US workers earn the minimum wage, and most of them work part time, and are between the ages of sixteen and twenty-four.
Problem “Solved”: Just Raise the Minimum Wage a Little at a TimeRecognizing the consequences of a sharp increase in the minimum wage, former President Clinton argued for a phased-in increase last fall on John Stewart’s The Daily Show. In Clinton’s segment, he told the show’s millions of viewers that “If you [raise it] in a phased way, it always creates jobs. Why? Because people who make the minimum wage or near it are struggling to get by, they spend every penny they make, they turn it over in the economy, they create jobs, they create opportunity, and they take better care of their children. It’s just the right thing to do, but it’s also very good economics.”
Increasing the minimum wage, whether it is a sharp or modest change, is not the right thing to do, nor is it good economics. Those who disagree will point to the fact that modest phased-in increases to the minimum wage have not been associated with a sharp rise in unemployment. This argument, however, glosses over the fact that the minimum wage is generally raised during economic expansions, when low-skilled wages are higher than the legislated minimum. If true, the consequences of hiking the minimum wage are not felt until after the economy has entered a recession. Since we only observe the economy entering a recession at the new higher minimum wage, it is difficult to determine how much of a rise in unemployment is attributable to the higher rate.
Has It Worked In Baltimore?Let us now turn to a case study that is particularly timely. The recent violence in Baltimore has led for calls that we “do something” about poverty in Baltimore. And yet, the city has been subject to wage legislation for years, with little result.
Low-skilled wage intervention is substantial in Maryland where the state’s minimum wage is set to rise to $8.25 this July. Since 2007, the state has required certain employers to pay a “living wage,” which is $13.39 in Baltimore County and Baltimore City. In addition to the state minimum and living wage rates imposed on residents of Baltimore City, said city has legislated a minimum wage that applies to all businesses in the City with more than one employee, a living wage that applies to all service workers who are employed by city service contractors or their subcontractors, and over one hundred prevailing wage rates.
If former President Clinton is correct in saying that legislating pay raises for low-skilled workers “always creates jobs,” then Baltimore’s economy should be a robust engine of job growth. The argument is correct — provided the marginal businesses that employ low-skilled labor remain in business, they do not lay off employees or cut their employees’ hours, and said employees spend every cent of the legislated pay raise. In such a world, a higher wage means more money, more money means more consumption, more consumption means more jobs, more jobs means more money, and so on in the infinite Keynesian spending cycle.
Since 37 percent of young black male Baltimoreans (twenty to twenty-four) are unemployed, however, it’s fairly clear that things aren’t working out as the Keynesians have planned.
Recognizing that it hasn’t worked, lawmakers have attempted to make workers more desirable by spending more on education. That has also failed.
Despite Baltimore public schools’ per pupil expenditure being second only to that of New York City and low student-to-teacher ratio of 15.75, less than 15 percent of black Baltimore eighth graders are proficient in math and reading. Thus, it appears that these schools are graduating workers who have skills that are valued well below the legislated wage rates. Since these wage rates make it illegal to hire anyone whose job skills are valued below the legal wage, unemployment remains rampant.
So what do poorly trained young Baltimoreans do if they want to work?
The federal prohibition on narcotics drives the prices of illicit drugs up, and does little to tamp down consumption in Baltimore. Combined, these make the distribution and sale of narcotics very profitable. This allows the producers to pay their sales forces a wage that is not subject to federal, state, and local minimum wage rates. Hence, low-skilled, unemployed high school graduates and dropouts seek and find sales jobs in an illegal industry, which helps explain why a majority of the Maryland prison population is from Baltimore.
The release of the encyclical Laudato Si by Pope Francis last week had the predictable result of winning the Pontiff plaudits and huzzahs in the world’s press, and another round of bewildered head-shaking among observant Catholics. Whether in his formal remarks or his off-the-cuff observations, Pope Francis repeats many of the common objections to (and caricatures of) the market economy, objections we might encounter in the writings of any of the leftist thinkers who dominate the Pope’s Jesuit order.
Meanwhile, so-called progressives in the Church, not normally so deferential to authority, triumphantly proclaim that matters of economics have been definitively settled and that the faithful ought to shut up and obey.
The antidote to all this, released just this year, is the tenth anniversary edition of Tom Woods’s book The Church and the Market: A Catholic Defense of the Free Economy, which won first prize in the books division of the Templeton Enterprise Awards shortly after its release a decade ago.
Tom’s thesis and its rapid spread have put Church liberals almost hysterically on the defensive — be sure to read Tom’s entertaining and relentless takedown of a left-wing Catholic conference warning the faithful of the terrible dangers of libertarianism — and has blasted open a discussion that progressives have been so eager to insist is closed. Before I explain what makes this book especially original, unique, and valuable, let me note that what it contains is of the greatest interest and importance no matter what, if any, religious convictions the reader may hold. It is the perfect book to read between Henry Hazlitt’s Economics in One Lesson on the one hand and advanced Austrian treatises like Mises’s Human Action and Rothbard’s Man, Economy and State, on the other.
Tom begins by explaining praxeology, the Austrian method of economics, and shows how Austrians derive the concept of costs, value scales, supply and demand schedules, and the law of diminishing marginal utility, all from the simple proposition that human beings act, and that they use scarce means to substitute a more preferable for a less preferable state of affairs. If you’ve ever wondered exactly how Austrians employ the “action axiom” to arrive at robust economic conclusions, you’ll understand after reading this chapter.
The rest of the book covers a vast array of topics, the misunderstanding of which has led to gross moral confusion: labor unions, wage rates, the “just price,” banking, money, inflation, business cycles, interest, monopoly, foreign aid, the welfare state, distributism, and a great deal more. The tenth anniversary edition contains a new introduction and an extra chapter. That extra chapter amounts to an overall defense of the book’s thesis, and takes the form of a systematic reply to a critic you almost feel sorry for.
In other words, the book makes an extremely vigorous and persuasive case for Austrian economics as a science and the market economy as an economic system. I guarantee you will be better able to defend both after reading it, and that you’ll enjoy every page of Tom’s unrelenting presentation.
When the book came out, it caused instant controversy. Catholic leftists and even some traditionalists denounced it. But Tom had plenty of supporters, among them Fr. Martin Rhonheimer of the Pontifical University of the Holy Cross in Rome; Crisis magazine; Fordham University’s James Lothian (writing in Homiletic and Pastoral Review); Sam Bostaph, chairman of the department of economics at the (conservative Catholic) University of Dallas; and even a scholar who had a hand in drafting a previous papal encyclical.
The key thesis of the book that caused controversy among Catholics, the majority of whom never read the book and caricatured its argument, was as follows. A Catholic looks to the Church on matters of faith and morals. The technical details of particular academic disciplines, on the other hand, lie beyond the Church’s competence.
For example, whether a particular medicine works or has side effects of varying degrees of intensity is a matter for physicians and medical researchers to say. If this medicine can be produced only by tearing the hearts out of living human beings, the Church may of course say that the use of the medicine is morally unacceptable.
The Church may say that church architecture ought to draw the mind toward the contemplation of God, and be built in such a way as to stand the test of time. But churchmen would be going beyond their competence to describe the technical methods that are most suitable for this purpose.
Likewise, it is all well and good to say that the welfare of the family, the building block of society, is of great importance. It is quite another to take sides regarding the precise, technical means of securing that welfare, as if the edifice of economic reasoning of the past 200 years did not exist. Demands for a “living wage” would of course be destructive to the family.
Tom’s uncomprehending critics pounced. How dare Woods insist that the Church may not speak on economic matters! But Tom was not saying that at all, as we’ve already seen. There’s no reason Church authorities cannot make general statements about moral issues that happen to intersect with economics. What Tom did say — quite correctly, of course — was that the qualitative propositions of economic science, being facts of reality, lie conceptually beyond moral critique.
In other words, if wage rates rise in a particular way, no amount of moral exhortation can make them rise another way. If the constraints of a finite world mean we can enjoy A only at the expense of B, no amount of pious mockery of the market system can eliminate this brute fact. We don’t condemn Avogadro’s number, or set down moral exhortations to change it.
Some of the traditional Catholics who now object to Pope Francis’s encyclical Laudato Si were first in line to condemn The Church and the Market for its alleged dissent from other papal encyclicals. But the grounds on which these Catholics object to Laudato Si are in good measure the ones on which Tom pointed out difficulties with earlier documents. If we begin with faulty presuppositions drawn from misunderstandings of secular disciplines, any subsequent moral reasoning based on them is sure to be equally distorted. Quadragesimo Anno (1931) of Pius XI could look at the Great Depression and blame it on greed, and even the otherwise conservative Benedict XVI responded to more recent economic problems with what Tom has called “platitudinous warnings about materialism and greed.” As Tom wonders in the book, why is there no room in all this moral reckoning for even one mention of the moral problems of central banking?
Developed thoroughly in The Church and the Market, Tom applied this analysis to Pope Paul VI’s Populorum Progressio (1967), which highlighted poor living conditions in the developing world. He jumped from a perfectly natural desire to improve those conditions to the wild non sequitur that state-led development aid programs, funded by the West, were the solution. He further expressed his belief in the Singer-Prebisch thesis, that a secular decline in the terms of trade — e.g., that the prices of commodities, which Third World countries tended to produce, were moving downward, while manufactured goods, produced by more advanced countries, saw their prices on the rise — meant that a liberalization of international trade couldn’t solve the developing world’s problems.
At the time, economist Peter Bauer was warning in vain against development-aid programs. First, he said, they are unnecessary: if poverty were really a vicious circle, every country would still be in the Stone Age. When the right cultural attitudes and political and economic conditions are in place, funding for domestic projects will freely flow from abroad. Second, these programs would lead to bloodshed, as antagonistic groups clawed at each other for a share of the grant money. Such violence did indeed occur in about a dozen countries. Third, these programs subsidize evil, by allowing vicious government thugs to continue their destructive predations without having to face their full economic consequences.
All of these predictions by Bauer came true as spectacularly as one could ask for. Even the New York Times, international agencies, and the Clinton administration were at last forced, albeit reluctantly, to admit that the programs had been a grotesque failure. But who, they pleaded — as if Peter Bauer had never existed — could have known?
Even the empirical grounding of Paul VI’s case crumbled in the face of closer examination. Subsequent research found that there had been no secular decline in the terms of trade after all, so the major basis on which Paul VI proceeded to base his moral judgments was simply incorrect — a perfect illustration of Tom’s warning about the fate of moral judgments with which potentially faulty empirical claims or scientific understanding are intertwined.
Tom notes that this embarrassment could have been avoided easily enough, had Paul VI enunciated general principles, as opposed to trying to pinpoint precise technical solutions on a matter on which he personally possessed no expertise, and to which the authority Catholics ascribe to the pope did not extend.
Tom first explored this topic all the way back in 2002, in a paper for the Mises Institute. When the feedback was enthusiastic, he decided to write a whole book on the subject. We invited him to deliver our Lou Church Lecture in Religion and Economics in 2004, and his book was published the following year.
Now Tom has written a dozen books, to be sure, ranging from The Politically Incorrect Guide to American History, which spent a dozen weeks on the New York Times bestseller list and sent both the neocons and the establishment into a frenzy — Tom’s book was the subject of a signed editorial on the New York Times editorial page — and Meltdown, Tom’s 2009 bestseller, featuring a foreword by Ron Paul, that diagnosed the financial crisis from an Austrian, free-market perspective.
But in terms of his most lasting contributions to Austrian or libertarian thought, The Church and the Market is Tom’s masterpiece. It has forever changed the nature of the discussion of Catholic social teaching, and it ranks among the most compelling and effective short presentations of the ideas of Austrian economics I have encountered. Treat yourself to a copy of this vigorous polemic.
But can the debate really be as one-sided as I portray it? Well, look at the results: again and again, people on the opposite side prove to have used bad logic, bad data, the wrong historical analogies, or all of the above. I’m Krugtron the Invincible!
Thus wrote the great Paul Krugman. A man so modest as to proclaim that “I think I can say without false modesty, a huge win; I (and those of like mind) have been right about everything.”
Quite a claim. Indeed, predictions are extraordinarily difficult. Even to an expert in a subject who has dedicated his life to a field of study, predicting the future proves elusive. Daniel Kahneman referenced a study of 284 political and economic “experts” and their predictions and found that “The results were devastating. The experts performed worse than they would have if they had simply assigned equal probabilities to each of three potential outcomes.”
A whole book of such wildly inaccurate predictions by experts was compiled into the very humorous The Experts Speak with such prescient predictions as Dr. Alfred Velpeau’s “The abolishment of pain in surgery is a chimera. It is absurd to go on seeking it” and Arthur Reynolds belief that “This crash [of 1929] is not going to have much effect on business.” Indeed, a foundational block of Austrian economics (that some Austrians unfortunately forgot regarding premature predictions of hyperinflation) is that the sheer number of variables in the world at large makes accurate forecasting extraordinarily difficult.
So it must be a rare man indeed that can be right about everything. And this man, Paul Krugman is not.
Predicting a Bubble He RecommendedPaul Krugman likes to reference the fact that he predicted the housing bubble. Of course, he also sort of recommended it. From a 2002 column of his,
To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.
In 2009, when this came out, he denied its obvious implication and wrote, “It wasn’t a piece of policy advocacy, it was just economic analysis. What I said was that the only way the Fed could get traction would be if it could inflate a housing bubble. And that’s just what happened.” So that doesn’t count as a recommendation? It certainly sounded like he was agreeing with Paul McCulley on inflating a housing bubble. And he verified that that’s exactly what he meant in a 2006 interview where he said,
As Paul McCulley of PIMCO remarked when the tech boom crashed, Greenspan needed to create a housing bubble to replace the technology bubble. So within limits he may have done the right thing. But by late 2004 he should have seen the danger signs and warned against what was happening; such a warning could have taken the place of rising interest rates. He didn’t, and he left a terrible mess for Ben Bernanke.
The best Krugman can possibly say is that he thought Greenspan went too far with the housing bubble he recommended.
Deflation is Around the CornerWhile running victory laps because the United States hasn’t seen massive price inflation, Krugman seems to have forgotten what his prediction actually was. In 2010 he wrote, “And what these measures show is an ongoing process of disinflation that could, in not too long, turn into outright deflation ... Japan, here we come.”
Robert Murphy called him on this and noted Krugman’s response,
... Krugman himself ... said of his 2010 analysis: “(In that post, I worried about deflation, which hasn’t happened; I’ve written a lot since about why).”
Note the parenthetical aside, and the timing: Krugman in April 2013 is mentioning in parentheses to his reader that oh yes, as of February 2010 he was “worried about deflation, which hasn’t happened.” In other words, Krugman entered this crisis with a model that predicted how prices would move in response to the economic situation, and chose his policies of government stimulus accordingly. He was wrong, and yet maintains the same policy recommendations.
But of course to Krugman, anyone who predicted price inflation can’t explain why that hasn’t happened. Such people are just those “... who take a position and refuse to alter that position no matter how strongly the evidence refutes it.” Krugman is different.
Europe Will Do Better Than the United StatesIn 2008, Krugman wrote:
... tales of a moribund Europe are greatly exaggerated. ... The fact is that Europe’s economy looks a lot better now — both in absolute terms and compared with our economy.”
Later he noted that “Americans will face increasingly strong incentives to start living like Europeans” and that “he has seen the future and it works.” (I should probably note that that is a quote he borrowed from Lincoln Steffens about the Soviet Union.)
Then Greece went bankrupt and the international consensus is unquestionably that the crisis hit Europe harder.
The Euro Will CollapseNiall Ferguson counted eleven different times between April of 2010 and July 2012 that Krugman wrote about the imminent breakup of the euro. For example, on May 17th, 2012, Krugman wrote,
Apocalypse Fairly Soon. ... Suddenly, it has become easy to see how the euro — that grand, flawed experiment in monetary union without political union — could come apart at the seams. We’re not talking about a distant prospect, either. Things could fall apart with stunning speed, in a matter of months, not years. And the costs — both economic and, arguably even more important, political — could be huge.
Most of these predictions are laced with weasel words such as “might,” “probably,” and “could” (more on that shortly). Still, while I’m no fan of the euro, and it might still collapse, as of today, three years later, it has not. If the word “imminent” means anything at all, Krugman was wrong.
The Sequester Will Doom Us AllPaul Krugman at least admitted the sequester was “relatively small potatoes.” But for “relatively small potatoes” he makes a big deal about it, referring to it as “one of the worst policy ideas in our nation’s history.” And it “will probably cost ‘only’ around 700,000 jobs.” (Note the word “probably” again.)
Then later, he decided that these were actually quite large potatoes, stating,
And, somehow, both sides decided that the way to buy time was to create a fiscal doomsday machine that would inflict gratuitous damage on the nation through spending cuts unless a grand bargain was reached. Sure enough, there is no bargain, and the doomsday machine will go off at the end of next week.
The economy has done quite well since then actually. Indeed, how $85.4 billion dollars in “cuts” (from the next year’s budget not the previous year’s spending) could affect anything in a $17 trillion dollar economy is simply beyond me. And of course, it didn’t.
Interest Rates Can’t Go Below ZeroIn March of this year, Krugman wrote in regard to some European bonds with negative nominal yields,
We now know that interest rates can, in fact, go negative; those of us who dismissed the possibility by saying that people could simply hold currency were clearly too casual about it.”
But as Robert Murphy points out, “The foundation for the Keynesian case for fiscal stimulus rests on an assumption that interest rates can’t go negative.” Murphy also points out that Krugman should admit he was wrong again because back in 2009, Krugman wrote,
And the reason we’re all turning to fiscal policy is that the standard rule, which is that monetary policy plus automatic stabilizers should do the work of smoothing the business cycle, can’t be applied when we’re hard up against the zero lower bound. [i.e. zero percent interest]
“Inflation Will be Back”In 1998, Paul Krugman predicted “Inflation will be back.”
Nope.
“The Rate of Technological Change in Computing Slows”Same article as the last one, “... the number of jobs for IT specialists will decelerate, then actually turn down.”
Aside from a short dip after the 2001 recession, the answer would be nope again.
Weasel Words and “Accurate Predictions”Let’s take a look at Paul Krugman’s “accurate prediction” of the financial crisis. On March 2nd, 2007, he predicted the following explanation would be given a year from then for the financial crisis he was sort of predicting,
The great market meltdown of 2007 began exactly a year ago, with a 9 percent fall in the Shanghai market, followed by a 416-point slide in the Dow. But as in the previous global financial crisis, which began with the devaluation of Thailand’s currency in the summer of 1997, it took many months before people realized how far the damage would spread.
So the crisis would begin in China? Almost.
He concluded that column by saying, “I’m not saying that things will actually play out this way. But if we’re going to have a crisis, here’s how.”
That’s a good hedge, just like with the euro. He can say he got the financial crisis right (albeit happening in a different way than he expected), but then say he didn’t get the euro wrong because he added “probably” before any prediction about it.
Normally, there would be nothing wrong with these weasel words. Given the nature of predictions, any prediction that is made should have a qualifier in front of it. It’s simply an admission that you aren’t omniscient. But you can’t eat your cake and have it too. Either Krugman was right about the crisis (sort of) and wrong about the euro (and many other things) or neither should count at all.
Or course, this doesn’t refute Krugman’s theories. But then again, Krugman may want to slow down on his victory laps.
Brendan Nyhan at The New York Times seems to be under the impression that the Trans Pacific Partnership (TPP) has something to do with free trade. Nyhan writes that the TPP
is the latest step in a decades-long trend toward liberalizing trade — a somewhat mysterious development given that many Americans are skeptical of freer trade.
But Americans with higher incomes are not so skeptical. They — along with businesses and interest groups that tend to be affiliated with them — are much more likely to support trade liberalization.
Nyhan is probably correct that much of the population — especially the part that’s never studied economics — is against the lowering of trade barriers. After all, much of the population is wed to ancient ideas of mercantilism which views trade with foreign countries as a zero-sum game in which anything that benefits foreigners must be harmful to “us.” As Henry Hazlitt wrote with exasperation in Economics in One Lesson, “popular thought ... in everything connected to international relations, [has] not yet caught up with Adam Smith ...”
Nyhan is apparently deeply confused, however, since he equates the Trans Pacific Partnership with “trade liberalization.” In fact, the TPP is not about any type of liberalization, but is about centralizing political power. The TPP will further transfer the negotiation and implementation of trade policy into the hands of a small number of global regulators and bureaucrats, while further reducing the prerogatives of Congress and state legislators in the US. Indeed, citizens of all twelve member nations of the TPP will see trade policy become more remote and unknowable thanks to the TPP. And, since trade is but one small part of the agreement, we can expect a further shift toward opaque and authoritarian global decision making on everything from environmental policy to the internet to immigration.
There is no denying that the secret negotiations among unelected elites appointed by TPP members may result in the lowering of trade barriers for selected friends of the global regulators. This cronyist system of rewards and punishments for global favorites, however, should most certainly not be confused with free trade.
Real Free Trade is About Decentralization of PowerFull-blown free trade is about total decentralization in trade policy. In a country that enjoys free trade — that is, a country that has implemented unilateral free trade — it is fully up to the individual consumer and entrepreneur as to whether or not he wishes to do business with foreign suppliers. Under such a system, a baker who must buy delivery trucks and flour for his business can choose whether or not he will obtain his supplies from foreign or domestic suppliers. In most cases, he will choose the most economical option, and the marketplace will reflect this reality.
Trade agreements like the TPP and NAFTA, on the other hand, leave these decisions not up to individual citizens, but to government regulators and negotiators who make decisions in the interest of the state and its favored special interests.
Because of this, any agreement that threatened to implement true free trade would pose a significant threat to the status quo which greatly favors powerful special interests over the interests of small business owners and ordinary consumers. As Murray Rothbard pointed out:
If authentic free trade ever looms on the policy horizon, there’ll be one sure way to tell. The government/media/big-business complex will oppose it tooth and nail. We’ll see a string of op-eds “warning" about the imminent return of the nineteenth century. Media pundits and academics will raise all the old canards against the free market, that it’s exploitative and anarchic without government “coordination.” The establishment would react to instituting true free trade about as enthusiastically as it would to repealing the income tax.
In truth, the bipartisan establishment’s trumpeting of “free trade” since World War II fosters the opposite of genuine freedom of exchange. The establishment’s goals and tactics have been consistently those of free trade’s traditional enemy, “mercantilism” — the system imposed by the nation-states of sixteenth to eighteenth century Europe.
Capitalizing on Fear of Freedom in TradeUnfortunately, it would likely be very easy for the media and business and political elites to turn the population against any move toward genuine free trade.
Concerned only with what they see in their own industries and not with the unseen benefits to others, special interest groups such as workers and owners in domestic industries will seek to use the coercive power of government to their own benefit.
By resorting to the violence of the state to control trade and crush the competition, what these groups are saying is people should not be able to freely choose what products and services they want. “We reserve the right to dictate to others what their choices should be,” is the position of the protectionist.
They are no different from taxi drivers who seek to crush Uber or native workers who seek to increase their own wages by legally sanctioning employers who hire immigrant labor.
For an illustration of the real effects of protectionist trade policy, we could look to the plight of any small business person who seeks to lesson his costs in the pursuit of making a living. Take an entrepreneur, for example, who finds there is a need in his city for more lawn and garden maintenance services. He or she then seeks to find the lowest-priced and most-reliable lawn mowing machines he can. He knows that the lower he can keep his costs, the lower his own prices will be. Or, if competition is light, he will be able to make more profit and hire more employees.
Ready to stand in the way of all of this are the workers at a domestic lawn mower factory who are quite happy producing lawn mowers that are both more expensive and less reliable than the mowers produced in a neighboring country.
The workers succeed in pressuring the government to slap a tariff on foreign lawn mowing machines which raises costs for the entrepreneur. The entrepreneur then sees his own profits drop which leads to layoffs and even to unemployment to the small business owner himself.
Protecting One Domestic Industry at the Expense of AnotherNow, supporters of protectionism would no doubt come back with their own tale of woe about how, if the lawn business has been able to buy cheap mowers, the workers at the domestic lawn mowing factory would be laid off and destitute.
But, implied in the protectionist position is that it is good for the government to make a purely arbitrary decision to support one industry over another. For the protectionist, the freely-made decision of homeowners and gardeners is not to be tolerated and must be quashed by government. Moreover, to make sure that none of those sneaky gardeners gains access to any of these “cheap” foreign-made machines, a small army of customs workers must be hired to ensure compliance and that anyone who dares furnish any business owner with the “wrong” kind of machine will be punished, fined, and possibly imprisoned under federal law.
For the protectionist, this is all a perfectly good and legitimate function of government. The act of buying an economical machine becomes a crime, and the workers at the factory are able to go on producing their second-rate product.
Truly Free Markets Don’t Need a TPPObviously, to simply let Americans be free to buy what they want, we don’t need a NAFTA, or TPP, or global junkets of trade bureaucrats to decide what will or will not be allowed to cross over international borders. Certainly, the growth of the TPP moves member states further from the possibility of true free trade since trade policy will become increasingly enmeshed within a multilayered international bureaucracy that only inhibits a nation-state’s ability to unilaterally reduce trade barriers.
When not prevented by international treaties, however, all that need happen for freedom in trade to appear is for the government to refrain from punishing private citizens who seek to do business with foreign suppliers of desirable goods. That would be real “trade liberalization.”
The standard narrative floating about the mainstream press is that the developing world is held back by a quagmire of free market fundamentalism. Sure, there are a few exceptions to this narrative, such as Peter Bauer and William Easterly. But pretty much all we hear is a chorus from the likes of Jeffrey Sachs; that in order for these poor countries to become wealthy, they must receive aid from wealthy countries and rein in the free market.
Salon even had the audacity to refer to Honduras as a “modern day libertarian dystopia.” As the author states, “Eliminate all taxes, privatize everything, load a country up with guns and oppose all public expenditures, you end up with Honduras.” A country where “the police ride around in pickup trucks with machine guns, but they aren’t there to protect most people. ... For individual protection there’s an army of private, armed security guards.”
And then there’s Naomi Klein, whose popular book The Shock Doctrine claimed those who support free markets actually use crises to enact their free-market reforms on poor countries and ensure such poverty continues.
There is so much wrong with all of this that it’s hard to know where to start. First of all, Klein gets things backward. While corporations have certainly done their share of wrong (usually with the help of the government), Robert Higgs showed quite clearly in Crisis and Leviathan that it is the state that uses crises to grow. In the United States, the government grew vastly during World War I, the Great Depression, World War II, and even the Cold War. It is now using the War on Terror to grow once again.
Economic Freedom Is Still Too Rare In the Developing WorldAs Johan Norberg noted in his critique of Klein’s book,
If we look at the Fraser Institute’s Economic Freedom of the World statistics (EFW), we find only four economies about which we have data that haven’t liberalized at all since 1980. All the others have. Obviously this also means that we will see economic liberalization even in brutal dictatorships, just as in peaceful democracies. ... Klein relies on her personal interpretation of anecdotes and examples and never tries to supply broad, statistical evidence for her case. It’s an understandable omission, because the data don’t support her argument. There is a very strong correlation between economic freedom on the one hand and political rights and civil liberties on the other.
Indeed, while these reforms leave much to be desired and the world has taken a massive step backward since the financial crisis, there has still been a decent amount of liberalization. And the world’s economic progress, while again leaving much to be desired, has been undeniable.
One must merely glance over the Economic Freedom of the World rankings to see that the developing world ranks by far the lowest. The index takes into account the following,
Size of Government: Expenditures, Taxes, and Enterprises;Legal Structure and Security of Property Rights;Access to Sound Money;Freedom to Trade Internationally;Regulation of Credit, Labor, and Business.Western countries in North America and Europe rank the most free followed by countries in Eastern Europe and Asia, then comes the Middle East and Latin American with Africa at the bottom. Hong Kong ranks first with an 8.98 rating, the United States comes in 12th at 7.81 (behind Canada at 7th). Even “socialist” countries such as Norway and Sweden come in high at 30th and 32nd respectively. Yes, they may have a large government welfare system, but they also have (relatively speaking) sound property rights and free trade.
On the other hand, El Salvador comes in 60th, Brazil 103rd, Mali 133rd, and Chad at 146th. Venezuela — which just happens to be going through a major economic crisis — comes in dead last. (There is no data on North Korea.)
Remember the “free market dystopia” of Honduras that “eliminated taxes” and “privatized everything”? Well, it ranks 116th on the 2015 Index of Economic Freedom and 104th by the World Bank Group on the ease of doing business. The same group ranked Honduras 153rd on how cumbersome the tax burden is. Apparently, eliminating taxes actually means having a 25 percent top personal tax rate, 30 percent corporate tax, and a brutal 15 percent national sales tax. It’s almost as if Ludwig von Mises himself had come up with Honduras’s economic policies.
On the contrary, the developing world is thoroughly interventionist. Property rights are scarce so raising capital is extremely difficult. Local police can and do harass business owners into bribes and without strong property rights and fair courts to settle disputes, much of these economies are little more than a black market. It’s like the illicit drug market in the United States writ large. The government’s themselves, far from laissez-faire, could often best be described as kleptocracies. Indeed, the reason Honduras needs “private security guards” is because the state police do little more than harass their own citizenry.
Another example of Latin American interventionism is Peru. While researching his book The Mystery of Capital, Hernando de Soto decided to try and start a small clothing factory in Peru. He hired a lawyer and a few students and set them on their way. The result?
They had to do a lot. They had to get 11 different permits from seven different ministries. They were asked for bribes 10 times, had to actually pay bribes twice, there were lots of delays. ... In total, it would take you at least 278 days working eight hours a day to do business with a small, little factory.
A friend of mine who had a business in Ecuador, told me of similar experiences to that of Hernando de Soto. And it’s certainly not just Latin America either. The documentary Commanding Heights describes “the Permit Raj” in India that came to being after the British Raj was removed in 1947. As Narayana Murthy, the chairman of Infosys Technologies put it, “It used to take us about 12 to 24 months and about 50 visits to Delhi to get a license to import a computer worth $1500 dollar.”
Because of this, “Businessmen found it almost impossible to get things done.” India’s Finance Minister P. Chidambaram noted that “Every permit was procured by corrupt means.” In other words, a bribe. This giant, corrupt bureaucracy is the primary factor in keeping the underdeveloped world underdeveloped. Fortunately, in India’s case, it has liberalized somewhat and seen robust economic growth.
How Rich Countries Get RichOverall, the wealthiest countries generally have freer markets. As noted above, Hong Kong is ranked as the world’s freest economy and has had some of the most remarkable growth in world history. In fact, John Stossel tried the same experiment as Hernando de Soto in Hong Kong. He filled out a one page form and opened his business the following day.
As a paper from the National Center for Policy Analysis noted, “Per capita income is seven times higher in the economically freest economies compared with the least free countries.” In the top quintile in 2002, the per capita income was $26,106 per year. In the bottom quintile, it was a mere $2,828.
These countries are also freer. Freedom House releases a report ranking countries by political rights and civil liberties. The colored map they provide looks almost identical to the one released by the Fraser Institute. And the same National Center for Policy Analysis report found an almost perfect correlation between economic freedom and political freedom.
How Foreign Aid Perpetuates Corruption and Human Rights AbusesMany might concede this point, but argue that foreign aid is still needed as a stop gap measure. But foreign aid just locks in corrupt leaders and their bad economic systems by allowing the corrupt elites in those countries to linger on with their failed policies. A report from The Center for Strategic and International Studies observed that “The history of U.S. assistance is littered with tales of corrupt foreign officials using aid to line their own pockets, support military buildups, and pursue vanity projects.” Or as one snarky pundit put it, “foreign aid is taking money from poor people in rich countries to give to rich people in poor countries.” Tom Woods puts this all in perspective,
Not long ago Parade magazine published a ranking of the twenty worst dictators currently in power. The U.S. government had contributed aid to all but one of them.
How exactly is this supposed to break the cycle of poverty?
Not surprisingly, it doesn’t. A study by Raghuram G. Rajan and Arvind Subramanian for the World Bank noted,
we find little robust evidence of a positive (or negative) relationship between aid inflows into a country and its economic growth. We also find no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.
Instead of foreign aid, what these countries need is freedom; economically and politically. And unfortunately, the developing world is sorely lacking in both.
Communities like Baltimore and Ferguson have been crippled by government regulations and the American nanny state. Now is the time to allow local residents to break free of government wage controls, government schooling, and government prohibitions, writes Mark Thornton.
This audio Mises Daily is narrated by Robert Hale.