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    The Trump administration’s latest attempts to continue this trade war with China have now reached a level beyond comprehension and will only hurt American and Chinese consumers in the process. The consequences might be much more disastrous for America if China dumps their U.S. Treasuries, causing a devaluation in the U.S. dollar, subsequently forcing the Federal Reserve to raise interest rates to crippling levels.

    During an interview in July with Dr. Murray Sabrin, Professor of Finance at Ramapo College in New Jersey, he states, “Trade is the lifeblood of civilization. Barriers to trade reduce living standards and create international tensions and have led to major conflicts throughout history. Tearing down trade barriers therefore would allow the global economy to flourish and ease tensions around the world.”

    “Mr Trump, tear down these trade barriers,” says Dr. Sabrin who was recently endorsed in July by former congressman and three-time presidential candidate—one of the most respected libertarians—Dr. Ron Paul. Dr. Paul also shares Dr. Sabrin’s sentiments about the damaging effects of Trump’s tariffs and sent a letter to the president in March asking him to withdraw his proposed tariffs.

    It wasn’t enough with Trump’s initial tariffs on Chinese manufactured goods and the retaliatory tariffs imposed by China in return, now the president wants to threaten tariffs on all $500 billion of Chinese imports.

    As reported by Reason in June 2018, this all began during the hype of Trump’s presidential campaign when his constant rhetoric bashing America’s bad trade deals prompted top Republicans such as Marco Rubio and Ted Cruz to place the national dialogue on “fair” trade instead of “free” trade.

    Trump now feels obligated to follow through with his political rhetoric and implement his trade war, while Congress stands down and does nothing, despite the evidence that demonstrates poor economic outcomes through the tariff practices Trump is engaging in.

    Some would hope that Trump’s tariffs talk is nothing more than just a negotiating tactic but a trade war has most certainly begun and the only ones that will be hurt in the end are American and Chinese consumers. Protectionism only begets more protectionism, leading to a race to the bottom, harming only businesses and consumers.

    The Trump administration has thus far imposed $34 billon in tariffs on China, along with tariffs on steel and aluminum imports from the EU, Canada, and Mexico. Trump could fulfill his $500 billion tariff threat and the American citizens that are not necessarily supporting the tariffs, but blindly supporting the president, will have a rude awakening once the reality manifests in the long term for the economy.

    The tariffs presumably would help certain industries like steel but the products that are manufactured using steel would be more expensive so American consumers would turn to foreign imports for cheaper alternatives, which will only hurt our economy.

    China has imposed tariffs mainly on America’s agricultural products such as orange juice, soybeans, fish, pork, dairy, cotton, beef, produce, sorghum, nuts, and rice. However, the goods made in China that Trump wants to impose tariffs are on are everything from industrialized machinery for paper, meats, and glass products to bulldozers to boat motors to helicopters. It’s clear which country has superior manufacturing capabilities.

    “This only demonstrates America is low on the manufacturing totem pole,” says Dr. Sabrin and “what we export to China is much less valuable than what China exports to us because the U.S. has ceased to be a major manufacturing economy.”

    We can’t get cheap manufactured goods anywhere else like we do from China, but China can get agricultural products from anywhere they want from farmers in foreign markets.

    These agricultural tariffs will be less competitive in the Chinese markets as opposed to other global competitors so China will buy fewer agriculture products from the U.S., which will have a negative impact on American farmers and businesses that rely on those farmers’ products.

    U.S. farmers are doubly impacted by these tariffs not only when they take a hit with Chinese tariffs on their agricultural products, but also when their Chinese imported farm equipment comes attached with Trump’s tariffs, which raise additional costs for them to do business.

    The other point of weakness for the US lies in the US’s immense foreign-held debt.

    Currently, the national debt is $21 trillion dollars, of which foreign partners hold $6.2 trillion, and of that $1.18 trillion is held by China alone.

    Dr. Sabrin warns, “This U.S. debt to China could be used in a trade war against the Trump administration.” If so, the Chinese could decide to sell off their Treasury holdings and watch the dollar tank, while other countries could follow along. If this happens, the Federal Reserve would be compelled to raise interest rates, escalating a decline in the American economy. The smart move by the Trump administration and Congress would be to reduce trade barriers immediately and withdraw these detrimental tariffs.


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    The U.S. deep state’s hatred of the Iranian people goes back a long way, at least as far back as 1953. That was the year that the CIA, which was called into existence in 1947 when the U.S. government was being converted to a national-security state, targeted Iran with its first regime-change operation. And guess who paid the price for that operation. Yes, the people of Iran.

    The Iranian Parliament had elected a man named Mohammad Mossadegh to be their prime minister. Mosaddegh would later be named Time magazine’s “Man of the Year.” As many government officials around the world have done, Mosaddegh nationalized the country’s oil industry, arguing that natural resources belonged to the nation.

    The oil companies that bore the brunt of the nationalization were British-owned. Not surprisingly, they, along with British public officials, were livid over having the oil wells nationalized. British officials turned to the CIA for help.

    The CIA asked President Truman for permission to initiate a coup to help the British oil companies, which the CIA knew would destroy the Iranian people’s experiment with democracy. To his everlasting credit, Truman said no. That didn’t stop the CIA however. As soon as President Eisenhower became president in 1952, the CIA renewed its request for a coup, arguing that Mossadegh was a “communist.”

    Why did that make a difference? Because by this time, the U.S. deep state had launched its Cold War against America’s World War II partner and ally, the Soviet Union, which was run by a communist regime. Americans were inculcated with the fear that the communists were coming to get us, take over the federal government, and turn America Red. Thus, anyone labeled a “communist” automatically became a threat to U.S. “national security.”

    Ike gave the go-ahead to the Iranian coup. In a brilliantly cunning plan, the CIA successfully toppled Mosaddegh but, surprisingly, left him alive. The CIA then vested the unelected Shah of Iran with total dictatorial power over the Iranian people. The Shah restored oil rights to the British petroleum countries.

    The Shah’s regime was brutally oppressive, enforced by a national police-military-intelligence force called the SAVAK that was a combination of the Pentagon, CIA, NSA, and FBI. Trained and supported by the CIA, the SAVAK proceeded to subject the Iranian people to one of the most brutal and oppressive totalitarian regimes in the world. The U.S. government reinforced the oppression with money, armaments, and training.

    For 25 years, the Iranian people suffered under the brutal dictatorship of the U.S.-installed and U.S.-supported Shah. That came to a screeching halt in 1979, when the Iranian people finally had had enough and decided to violently revolt against their U.S.-installed dictator.

    While the Iranian people succeeded in their revolution, the problem is that they were unable to restore the democratic system that the CIA destroyed 25 years before. They ended up with another brutal dictatorial regime, this time a theocratic one.

    The U.S. deep state has never forgiven the Iranian people for ousting its dictator, the Shah. As far as the deep staters are concerned, no one has the right to oust a U.S.-installed and U.S.-supported dictator from power, no matter how oppressive his tyranny is.

    That’s what motivated U.S. officials to partner with Saddam Hussein — yes, that Saddam — the Iraqi dictator who they would later turned on and called the “new Hitler.” But this was back in the 1980s, when they were partnering with the “new Hitler” in his war against Iran. Still angry over what the Iranian people had done in 1979, all that U.S. officials wanted was for Saddam to kill as many Iranians as he could and, in the process, even defeat Iran and install another pro-U.S. dictator to run the Iranian government.

    I sometimes wonder how many Americans realize that that’s when the United States furnished Saddam with those infamous weapons of mass destruction — the ones that would later be used as an excuse for turning on Iraq and launching a U.S. regime-change operation there. Back then, U.S. officials hoped that Saddam would use those WMDs to kill Iranians. (See “Where Did Iraq Get Its Weapons of Mass Destruction?” by Jacob G. Hornberger: Part 1 and Part 2.)

    That’s what the economic sanctions on Iran are all about. For years, U.S. officials have targeted the Iranian people by using sanctions to inflict massive economic harm, even death, on them. The aim has been and is: Oust your dictatorship in another revolution and restore a pro-U.S. dictatorship in its stead or we will continue to squeeze the economic lifeblood out of you until you die.

    That’s also why U.S. officials are now beating the war drums against Iran — to get the same type of regime change they got in Iran in 1953 and in Iraq in 2003. They know that there is no way that the Iranian regime could stand up to the U.S. Air Force in a war. The entire country would be bombed, just as Iraq was. They would be killing not only Iranians who serve their government as soldiers but also wedding parties and other “collateral damage.” Killing tens of thousands of Iranians in the process of destroying their country would be considered no bigger deal than killing Iraqis and destroying their country.

    Here is the thing that everyone should keep in mind: Neither Iran nor Iraq has ever attacked the United States. Iran is not over here. It is the U.S. deep state that is over there. The decades-long U.S. war against the Iranian people is just another reflection of what the conversion of the U.S. government to a national-security state has done to the morals and values of the American people.

    This article was originally published at The Future of Freedom Foundation.

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    [Foreword to Mark Thornton's new bookThe Skyscraper Curse: And How Austrian Economists Predicted Every Major Economic Crisis of the Last Century (Auburn, AL: Mises Institute, 2018).]

    In the wake of the financial crisis of 2008, the economics profession suffered a blow to what reputation it had. But unlike most of his colleagues, Mark Thornton was vindicated by 2008. Mark has been a voice of sanity at times when the wild interventions of the Federal Reserve have caused otherwise sensible people to lose their minds.

    One rule of thumb I’ve adopted is: whenever the idea that the business cycle may have been tamed forever starts to become mainstream, the bust is around the corner.

    After reading this book, you’ll see why. Mark discusses the very different records of Irving Fisher and Ludwig von Mises in the 1920s, with the former saying (in late 1929!) that stock prices had reached a “permanently high plateau” and Mises warning that all the artificial credit creation of the world’s central banks meant a reckoning was coming.

    At the end of the 1960s, presidential economic adviser Arthur Okun announced that wise fiscal and monetary policy was making boom and bust a thing of the past. One month after his book on the subject was released, the United States was officially in recession.

    The dot-com bubble of the 1990s continued the pattern. Federal Reserve chairman Alan Greenspan even speculated that we had entered an age in which booms no longer necessarily had to be followed by busts.

    I trust you know what happened next.

    The most recent financial crisis, which was connected to an especially destructive housing bubble, yielded the same kind of crazy commentary: why, real estate prices never fall!

    I trust you know what happened next.

    In fact, Mark Thornton was one of a handful of economists to warn — as early as 2004 — of a housing bubble and its inevitable consequence. That was a lonely position to adopt in those days. Nobody wanted to hear the words “unsustainable” or “bubble” when buying multiple properties and sitting on them seemed to be a path to certain riches. Of course, Mark was the voice that would have done them the most good had they bothered to listen, because they might thereby have limited their exposure to the bust that was surely coming.

    But when all so-called respectable voices are assuring everyone that all is well, it is the wise man who appears to be the crank.

    Now had Mark been known for nothing more than being a conscientious historian of these earlier business cycles and an accurate prognosticator of the housing bust and financial crisis, that would be ample reason to respect him as a scholar worthy of our attention and respect.

    But of course Mark has done much more than this. In this book, for instance, you will encounter Mark’s work on the so-called “skyscraper curse.” I shall not here disclose Mark’s thesis on the matter; the author of a foreword ought to know his place, and stealing the author’s thunder is rather unbecoming.

    For now, I can say this: although a correlation between the setting of new skyscraper records on the one hand and plunges into recession on the other had been noted by certain writers, the connection had been generally dismissed as little more than a curious coincidence. Mark, on the other hand, has shown how the two phenomena are connected — not that tall skyscrapers cause the business cycle, of course, but rather that they embody numerous features of the boom period described by Austrian business cycle theory.

    Austrian business cycle theory, in turn, is probably the most important piece of economic information and understanding for Americans and indeed the world to understand right now. Again I shall leave the full exposition to Mark. For now, what matters is that according to economists of the Austrian school, the familiar pattern of economic boom and bust is not an inherent feature of the market economy, but instead the product of intervention into the economy by the monetary authority. When the central bank lowers interest rates below what they would have reached on the market, it sets in motion a series of responses by investors and consumers that will prove to be incompatible. The result is the recession, which is the economy’s return to health: the economy’s unsustainable configuration is unwound, and resources (including labor) are reallocated to lines of production that make sense in terms of resource availability and consumer preferences.

    In the pages that follow, Mark explains the theory, applies it to various historical (and present) cases, and rebuts the most common objections.

    In short, this collection serves the valuable purpose of defending the market economy against the conventional view that freedom has failed us and we need still more controls. We had plenty of rules and bureaucrats on the eve of the financial crisis. A lot of good that did us. Pretty much none of them saw any problems on the horizon, and the sheafs of rules and regulations were aimed in the wrong direction: while the private sector operated in the equivalent of a Kafka novel, the Federal Reserve was able to carry out its mischief unimpeded.

    Here’s a crazy thought: maybe this time we might consider a real free market, with sound money and market interest rates, and abolish the giant bubble machine once and for all. Read Mark Thornton and you’ll entertain this and other forbidden thoughts.


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  • 08/13/18--10:37: Nonsense on Deflation
  • The Free Market 26, no. 11 (December 2008)

    We are now hearing ominous warnings about imminent deflation. Checking the welcome page at AOL this morning, I see that the lead item in the financial news section heralds “The Looming Threat of Deflation.” This headline encapsulates two highly problematic ideas. The first is that deflation would necessarily be a bad thing. The second is that deflation is likely to occur in the near term.

    That deflation is always and everywhere a bad thing—not simply a bearer of bad news but bad news in itself—is now an almost universal article of faith among mainstream economists and financial commentators. Clicking on the scary headline, I opened an article by Ted Allrich, who is described as “the founder of The Online Investor and author of the book Comfort Zone Investing: Build Wealth and Sleep Well at Night.”

    Allrich’s article, which does nothing to alter my belief that most investment “experts” are simply charlatans, encapsulates virtually every untutored and fallacious idea you’ve ever encountered in regard to deflation.

    As he tells the story, deflation brings on all the horrors in the catalog of economic devastation.

    As prices decline, businesses sell less, then go out of business. Fewer goods and services are offered. Less doesn’t become more. It becomes less.

    As businesses fold, capital dries up because investors don’t believe any business will make it, no matter what the product or service. Investors hang on to their cash. Hoarding becomes synonymous with survival. Wall Street (what’s left of it) can’t find capital for new companies to grow. Investors won’t invest.…

    So with deflation, there is less of everything. Businesses don’t grow. Jobs are fewer. Capital is not available. Everything comes to a slow and grinding halt.

    Allrich concludes his litany of deflation horrors, naturally, by singing the praises of inflation: “Regular inflation, in fact, can be a good thing since it suggests an ever growing economy where jobs are plentiful and goods and services abound." 

    Well, all right, we can’t expect Allrich to have read George Selgin’s splendid little book Less Than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs, 1997), or Guido Hülsmann's Deflation and Liberty (Mises Institute, 2008). After all, investment experts are busy people.

    But why, one wonders, has he not taken to heart what I wrote thirty-seven years ago in my first book, The Transformation of the American Economy, 1865–1914 (New York: Wiley, 1971), on p. 21: “Notably, rapid economic growth occurred both before and after 1897; neither a falling nor a rising general price level was uniquely associated with economic growth.”

    To elaborate just a bit, the rate of economic growth from 1866 to 1897, a period of secular deflation, was perhaps the greatest ever experienced by the US economy during a period of comparable length. Real GDP grew by more than 4 percent per year, on average, notwithstanding the persistent deflation.

    So, even if you’ve not mastered the works of Ludwig von Mises and Murray Rothbard, even if you are a confirmed positivist in your methodological bent (as I was in 1971), you can see clearly that the rate of economic growth and the rate of price-level change have been independent, at least within the ranges of these variables in US economic history.

    (Hyperinflation or hyperdeflation would be another matter: either would be devastating by making economic calculation and long-term contracting virtually impossible.)

    Any decent economics teacher makes sure that before the students have gone more than a week or two, they have mastered the difference between absolute (nominal) and relative (real) prices. All of economic analysis hinges on this understanding. Yet practicing politicians, investment gurus, news media hyperventilators, and others who play important roles in influencing public opinion are completely lacking in this basic understanding. The upshot is a destructive bias in favor of secular inflation, with the risk of periodic bouts of rapid inflation.

    Which brings us to the second question: for better or worse, does deflation actually loom at present? If it does, its occurrence will surprise me greatly, because the Fed has been creating base money as if there were no tomorrow, and if the bailouts continue, as seems likely, more of the same is virtually certain.

    So far, the huge spurt in base money has simply been absorbed and held by the banks in the form of (legally) excess reserves, but the likelihood that the banks will sit on $268 billion of excess reserves forever is nil. Once they feel more secure, their loans and investments will go forth in search of a higher yield than the Fed pays them (since a recent change in policy) on their reserves, and at that point the banking system’s money multiplier will kick in with terrific force.

    In short, given the monetary conditions now prevailing, the greater threat by far is inflation, not deflation. And contrary to what the investment “experts,” the politicians, and the mainstream economists believe, inflation is not a benign element in the economy’s operation. It is, as it has always been, the most dangerous and destructive form of taxation.


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    The International Monetary Fund (IMF) has done it again. In an attempt to garner some press, the head of the IMF’s Western Hemisphere Department Alejandro Werner forecasted that Venezuela’s annual inflation rate will reach 1,000,000% by year’s end. By my calculations, this inflation forecast implies that the exchange rate will reach 923 million VEF/USD by December 2018. To put this into context, the exchange rate at the end of July was 3.3 million VEF/USD, and at the end of June it was 3.1 million VEF/USD.

    The IMF’s most recent inflation forecast is, to put it mildly, stunning. It is also bogus. No one can forecast the course or duration of a hyperinflation with any degree of accuracy. Never mind. The IMF just keeps on making forecasts of Venezuela’s inflation. And the press keeps on uncritically reporting the IMF’s bogus numbers as if they were credible. The IMF and the press are clearly unaware of the fact that hyperinflation can be measured, and measured very accurately, but it cannot be forecasted.

    To get a handle on the IMF’s production of bogus forecasts for Venezuela’s inflation, consider that, during the past year and a half, the IMF has reported a variety of numbers for the annual inflation rate in Venezuela. None of the IMF’s numbers can be replicated. This is a problem -- one that renders all of the IMF’s inflation numbers unusable because, among other things, they fail to pass the scientific smell test. The following is a catalogue of the IMF’s inflation numbers for Venezuela that have been reported since September 2016.

    IMF World Economic Outlook, October 2016

    • End of 2015 annual inflation rate (Data Source - BCV): 180.9%
    • End of 2016 annual inflation rate projection: 720.0%
    • End of 2017 annual inflation rate projection: 2,200.0%

    IMF World Economic Outlook, April 2017

    • End of 2016 annual inflation rate (Data Source - BCV): 274.4%
    • End of 2017 annual inflation rate projection: 1,133.8%
    • End of 2018 annual inflation rate projection: 2,529.6%

    IMF World Economic Outlook, October 2017

    • End of 2016 annual inflation rate (Data Source - BCV): 302.6%
    • End of 2017 annual inflation rate IMF projection: 1,133.0%
    • End of 2018 annual inflation rate IMF projection: 2529.6%

    IMF World Economic Outlook, April 2018

    • End of 2017 annual inflation rate: 2,818.4%
    • End of 2018 annual inflation rate IMF projection: 12,874.6%
    • End of 2019 annual inflation rate IMF projection: 12,874.6%

    Until the April 2018 World Economic Outlook (WEO), the IMF wrote the same general disclaimer about its Venezuelan numbers in each issue of its report:

    Projecting the economic outlook in Venezuela, including assessing past and current economic developments as the basis for the projections, is complicated by the lack of discussions with the authorities (the last Article IV consultation took place in 2004), long intervals in receiving data with information gaps, incomplete provision of information, and difficulties in interpreting certain reported economic indicators in line with economic developments.”

    In the April 2018 WEO, the disclaimer was altered. It now includes:

    The effects of hyperinflation and the noted data gaps mean that IMF staff’s projected macroeconomic indicators need to be interpreted with caution.”

    These disclaimers are laughable. No one has ever been able to accurately forecast the course or the duration of an episode of hyperinflation. But, that hasn’t stopped the IMF from offering up inflation forecasts for Venezuela that have proven to be wildly inaccurate. And, for an example of the absurdity of the IMF’s projections, just consider its WEO year-end forecasts for 2018 and 2019. The values for both years are exactly the same: 12,824.6%. These forecasts are blatantly absurd. After all, the current measured annual inflation rate is already by my calculations 33,151%. And the same forecasts for both 2018 and 2019 contain a touch of spurious accuracy to boot: note the decimal point. And now we have a new forecast for 2018, a whopping 1,000,000%.

    So, forget the IMF’s forecasts of Venezuela’s hyperinflation. They are a prime example of junk science. Even though accurate forecasts of hyperinflation are not possible, very accurate measurements of hyperinflation can be made. Just how is this done?

    The most important price in an economy is the exchange rate between the local currency – in this case, the bolivar – and the world’s reserve currency, the U.S. dollar. As long as there is an active black market (read: free market) for currency and the data are available, changes in the black market exchange rate can be reliably transformed into accurate measurements of countrywide inflation rates. The economic principle of purchasing power parity (PPP) allows for this transformation. And the application of PPP to measure elevated inflation rates is rather simple.

    During periods of elevated inflation, PPP is the proper theory to use for measurement. Indeed, PPP holds during episodes of hyperinflation, and it holds very tightly. Beyond the theory of PPP, the intuition of why PPP represents the ‘gold standard’ for measuring inflation during hyperinflation episodes is clear. All items in an economy that is hyperinflating are either priced in a stable foreign currency (the U.S. dollar) or a local currency (the bolivar). If they are bolivar prices, they are determined by referring to the dollar prices of goods, and then converting them to local bolivar prices after checking with the spot black-market exchange rate. Indeed, when the price level is increasing rapidly and erratically on a day-by-day, hour-by-hour, or even minute-by-minute basis, exchange rate quotations are the only source of information on how fast inflation is actually proceeding. That is why PPP holds and why I and my Johns Hopkins-Cato Institute Troubled Currencies Project team can use high-frequency (daily) data to calculate Venezuela’s annual inflation rate.

    Venezuela’s hyperinflation, which has been roaring away since November 2016, is depicted in the chart below. As of July 31st, the annual inflation rate for Venezuela sat at 33,151%. This accurate MEASUREMENT means that Venezuela is now experiencing the 23rd most severe episode of hyperinflation in history.

    https_%2F%2Fblogs-images.forbes.com%2Fstevehanke%2Ffiles%2F2018%2F07%2FAnnual-07.31.18-1200x768.jpg
    Article originally published at Forbes.

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    A strong member of the “second generation of the Austrian school of economics,” Eugen von Böhm-Bawerk (1851–1914) and his works are discussed by Peter Klein. Böhm Bawerk did much to extend and further develop Menger’s theories of value, price, capital, and production. Included in his work of the two volume Capital and Interestis a devastating critique of Marx’s exploitation theory. Böhm Bawerk explained that far from being exploited, the workers are actually accommodated, being paid in advance of the produced goods being sold.

    In the second volume of Capital and Interest, Böhm Bawerk explained the time consuming nature of production and how it relates to interest. Round-about production methods are more productive but come at a cost of forgoing current consumption during the process of accumulating the capital. This became the basis for his time preference theory of interest as well as the foundations for the Austrian theory of the business cycle. Böhm Bawerk also presented a clear example diminishing marginal utility and explained how real prices, as opposed to hypothetical equilibrium prices, are determined.

    The Who Is? podcast is available on iTunesGoogle PlayStitcherSoundcloud, and via RSS.


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    The Turkish Lira collapse should have surprised no one. Yet, in this bubble-justifying market, it did.

    First and foremost, the lira decline has been ongoing for some time, and has nothing to do with the strength of the US dollar in 2018. The collapse of Turkey was an accident waiting to happen and is fully self-inflicted.

    It is yet another evidence of the trainwreck that monetarists cause in economies. Those that say that “a country with monetary sovereignty can issue all the currency it wants without risk of default ” are wrong yet again. Like in Argentina, Brazil, Iran, Venezuela, monetary sovereignty means nothing without strong fundamentals to back the currency.

    Turkey took all the actions that MMT lovers applaud. The Erdogan government seized control of the central bank, and decided to print and keep extremely low rates to “boost the economy” without any measure or control.

    Turkey-Money-supply-currency-600x408.jpg

    Turkey’s Money Supply tripled in seven years, and rates were brought down massively to 4.5%.

    However, the lira depreciation was something that was not just accepted by the government but encouraged.  Handouts in fresh-printed liras were given to pensioners in order to increase votes for the current government, subsidies in rapidly devaluing lira soared by more than 20% (agriculture, fuel, tourism industry) as the government tried to compensate the loss of tourism revenues due to security concerns with subsidies and grants.

    Loss of foreign currency reserves ensued, but the government soldiered on promoting excessive debt and borrowing. Fiscal deficits soared, and the rapidly devaluing lira led to a rising amount of loans in US dollars.

    This is the typical flaw of monetarists, they believe monetary sovereignty shields the country from external shocks and loans in foreign currencies soar because no one wants to lend in a constantly-debased currency at affordable rates. Then the central bank raises rates but the monetary hole keeps rising as the money supply continues to grow to pay for handouts in local currency.

    Now the Risk Is Rising for the Rest of Europe

    On one hand, the exposure of eurozone banks like BBVA, BNP, Unicredit to Turkey is very relevant.  Between 15% and 20% of all assets.

    On the other hand, the rise in non-performing loans is evident.  Turkey’s loans in US dollars account for around 30% of GDP according to the Washington Post, but loans in euro could be as much as another 20%. Turkey’s lenders and governments made the same incorrect bet that Argentina or Brazil made. Betting on a constantly weakening US dollar and that the Federal Reserve would not raise rates as announced. They were obviously wrong. But that erroneous bet only adds to the already existing monetary and fiscal imbalances.

    Money supply continues to grow at almost double-digit rates, the government’s outlays exceed the diminishing reserves and capital flight starts to be evident as savers and investors fear that the Erdogan government prefers to take the option of capital controls in order to seize complete power than to restore economic credibility with sound money policies.

    Like Argentina before, raising rates too late does not calm the market when the risk is capital controls and a bank run. Raising rates to 18% does not encourage anyone in Turkey to keep money in the bank when the risk is to lose all the money. Rates went from 8 to 17.5% and the crisis worsened. It will not stop because of slightly higher rates.

    Because the problem of Turkey is monetary and fiscal. Turkey will need a massive adjustment program and a credible opening of its institutions and markets to attract capital and restore growth. Unfortunately, the route seems to be more government control of institutions, less investment security, and deepening the crisis blaming the inexistent external enemy.

    Erdogan is fighting against a very dangerous economic foe: himself.

    For Europe, this is a devil’s alternative. Bailing out Turkey will give further control to Erdogan and increase the imbalances of the economy while imposing higher restrictions to freedom.

    Not bailing out Turkey, on the other hand, would cause a  much larger crisis than Greece was. Because too many eurozone funds and bank investments have been directed towards Turkey as a way to get access to some growth and inflation. What they got was a risk of capital controls and currency debasement.

    The biggest risk for Europe will be to try to cover this mess with some aid in exchange for refugee and border support. Because what is already a relevant risk, but contained, will likely balloon to unmanageable proportions.


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    In July, the US unemployment rate fell 0.1% from the month before to 3.9%. The number of unemployed individuals fell by 284,000 to 6.280 million. Many commentators have expressed satisfaction with the decline in the unemployment rate. For them this implies a strong economy.

    For most economists the key to economic growth is a strengthening in the labor market. The strength of the labor market is the key behind the strength of the economy – so it is held.

    If this is the case then it is valid to conclude that changes in unemployment are an important causative factor of real economic growth.

    This way of thinking is based on the view that a reduction in the number of unemployed means that more people can now afford to boost their expenditure. As a result, economic growth follows suit, it is held.

    The expanding pool of real wealth not unemployment the key for economic growth

    We suggest that the main driver of economic growth is an expanding pool of real wealth. Fixing unemployment without addressing the issue of wealth is not going to lift economic growth as such.

    It is the pool of real wealth that funds the enhancement and the expansion of the infrastructure. An enhanced and expanded infrastructure permits an expansion in the production of the final goods and services required to maintain and promote individuals’ lives and wellbeing.

    If unemployment were the key driving force of economic growth then it would have made a lot of sense to eradicate unemployment as soon as possible by generating all sorts of employment.

    For instance, policy makers could have followed the advice of Keynes and his followers such as Paul Krugman and employ people in digging ditches, or various other government-sponsored activities. Note that the aim here is just to employ as many people as possible.

    A simple commonsense analysis however quickly establishes that such a policy would amount to depletion in the pool of real wealth. Remember that every activity whether productive or non-productive must be funded.

    Hence, employing individuals in various useless non-wealth generating activities simply leads to a transfer of real wealth from wealth generating activities and this undermines the real wealth generating process.

    Unhampered labor market and unemployment

    Unemployment as such can be relatively easily fixed if the labor market were to be free of tampering by the government.

    In an unhampered labor market, any individual that wants to work will be able to find a job at a going wage for his particular skills.

    Obviously if an individual demands a non-market related salary and is not prepared to move to other locations there is no guarantee that he will find a job.

    For instance, if a market wage for John the baker is $80,000 per year yet he insists on a salary of $ 500,000, obviously he is likely to be unemployed.

    Over time, a free labor market makes sure that every individual earns in accordance to his contribution to the so-called overall “real pie”.

    Any deviation from the value of his true contribution sets in motion corrective competitive forces.

    What matters is not employment as such but people’s real earnings

    Ultimately, what matters for the well-being of individuals is not that they are employed as such, but their purchasing power in terms of the goods and services that they earn.

    It is not going to be of much help to individuals if what they are earning will not allow them to support their life and wellbeing.

    Individuals’ purchasing power is conditioned upon the infrastructure that they operate. The better the infrastructure the more output an individual can generate.

    A higher output means that a worker can now command higher wages in terms of purchasing power.


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    JEFF DEIST: You are German, but not from a big city in Germany.

    GUIDO HÜLSMANN: That’s correct, a small town.

    JD: Did your small-town upbringing influence your career and outlook?

    GH: I think so. The town where I went to high school in those years had the highest communist voter percentage in all of Western Germany. And this presence made itself felt also in the school, not necessarily among the teachers, although there was at least one communist, but especially among the student body. We always had very engaged discussions, sometimes heated discussions about policy issues. I still remember that I actually gave my first public talk at the age of 15, in the context of the rearmament debate. All communists were against it and since the communists were against it, it must have been the default position for any other human beings. So, they didn’t find any older people to stand up to them, and I was ignorant enough and had enough personality to do this. So, I did it at the age of 15 and that was my first experience.

    JD: You didn’t go through a leftwing phase as a young man?

    GH: Not very much. I was flirting with some leftwing ideas when I was at the university.

    JD: You decided to go to Technical University in Berlin, and studied engineering rather than economics.

    GH: After school, I spent one year in the military for mandatory service, so I had a lot of time to give it some thought. There were two options for me at the time. Either I could become an airline pilot or do something with the economy. As far as the economy is concerned, either it would have been business law or engineering with complementary economic instruction. I knew that I was interested in this because I took a class in economics while in the military. In the evening, there were various activities, and one of the things you could do is take classes. And I took a class on macroeconomics. It was Keynesian style macroeconomics, not as technical as what was taught at the university, but it gave me some introduction and I found this very interesting.

    JD: Then you pursued a business degree, at Toulouse in France?

    GH: Yes, that’s because we had an exchange program between the Technical University and the Toulouse Business School. They offered a major in business-related research, which was designed for all those kids whose parents had sent them to the business school and who were unhappy there and were really aiming to do more intellectual sort of work. The professor who was running this program, was an economist and he accepted me as his student and it allowed me to actually spend most of my time in the second semester of that year on economic research.

    JD: After business school you returned to Germany for a PhD in Berlin. Living in France turned you into an aspiring Austro-libertarian?

    GH: Or so it seems. I had joined the Austrians in France, out of all places. My research director in France realized that I was interested in liberal ideas and alternative ideas. So, he had me read Hayek and a book by Rothbard that had just been published in France. This is how I got in touch with the Austrian ideas. I was not immediately won over, but I found this very interesting. What did convert me really was Ludwig von Mises’s Theory of Money and Credit. It was not a religious experience, but it very strongly impressed me and convinced me that this was an approach that was much more realistic, powerful, and pertinent than anything else I had seen in economics and prompted me to take this as a starting point for my own works. That was when I returned to Berlin, at the beginning of my doctoral studies.

    JD: And you returned to France in your professional career. Today you’re at the University of Angers and run the economics program there for both masters and doctoral students. Many of your students know you by reputation and seek out an opportunity to study with you, much like Rothbard at UNLV.

    GH: It’s a great privilege for me to have students who do not just want to get a doctorate with anybody, but who want to study with me, so I can pick those students. Moreover, of the students that I had as undergraduates in Angers, I think there was only a single one who stayed and became my doctoral student and this is a young man who came from Austria to study with me in France. The [undergraduate] students that we have, usually they do not have really a strong interest in economics and if they have an interest in economics, they usually have great emotional difficulties with Austrian economics, not so much on methodological grounds, but because the political conclusions are very libertarian and this is very irritating to most young people in France.

    So, as a consequence, the people who are doing a doctorate with me, they come from all kinds of places, only one quarter are French students. Most others come from abroad.

    JD: Let’s talk about Mises the man. You’re probably best known for having written the definitive biography of him. Tell us how the project came about, and your recollections of struggling with it as an academic economist thrust into the role of biographer.

    GH: It came into being because Lew Rockwell asked me if I would be interested in writing a Mises biography. That was in January 1997. Lew and I had met in Auburn, Alabama, at the Mises University in 1995. He had seen some of my writings that I had published or presented in English. He was convinced that I had sufficient knowledge of Austrian economics and he knew that I, of course, was a German native speaker and also I was speaking French. So, all of this was very helpful to engage in this kind of work.

    Now, why did he seek to commission a Mises biography? Well, because thanks to the collapse of the Soviet empire, the secret archive in which the Mises documents, the prewar Mises documents were hosted, had become known and were available. The news had spread to the US and Richard Ebeling had traveled to Moscow to look at these papers, the first Austrian economist who had his hand on this material, and Lew thought it would be worthwhile to have me also do this kind of research and write a Mises biography.

    JD:  Mises was not a man who liked to talk about himself. And his own memoirs were unsatisfactory in this sense, the sense of getting to know who he was.

    GH: Absolutely not.

    JD: Did that come through to you as his biographer? Was it like pulling teeth?

    GH: Yes. I was fortunate that this prewar material existed. I’m sure if Mises had had a hand on this — if he could have determined what survives into the mix and not — most of the stuff that is interesting that sheds light on Mises as a person, would have been destroyed. I’m absolutely certain about this because you wouldn’t find similar writings in his postwar material. He was very discreet about these social relations. And having that sort of material, it’s not much, but certainly, his correspondence with his mother, his correspondence with Margit, whom he later married, then some exchanges with other people that shed a little light on Mises the person would probably have vanished if he had a choice in this.

    JD: How long did it take you to complete the project?

    GH: From start to finish, about 10 years, a little more than 10 years — from January 1997 to September of 2007.

    JD: Obviously the Mises Institute promotes the work of our namesake. So we were not an impartial publishing house, and you were not an impartial biographer — although certainly honest and thorough in your assessment of him. Did you have to defend the book against reviewers claiming it was hagiographic?

    GH: There were many reviews of the book I think, almost 40 reviews, but only one of them accused me of being a hack, a sycophant who distorted reality in the light or to the benefit of a certain ideology. What is true, of course, is that your own conceptions, methodological conceptions, political conceptions, they color the kind of questions that you ask, they color the selection of material that you present, this is unavoidable. But the scholarship, of course, goes beyond this because the point of scholarship is to assess facts always, all the known facts, and to do justice to the material as far as we can. There are constraints, of course, because your knowledge that allows you to interpret and to assess any material is limited. So, given this, I would say it was an honest effort at scholarship and it was appreciated by most people. I wanted to provide a service, by presenting this material, this quite massive amount of material, I mean there’s more to be seen and more to be investigated about Mises and some people have already started doing this. And there is a service in bringing all of this together and presenting it in a coherent way, relating the scholarship of Mises’s writings to the context of his times and his other activities. And that’s what I’ve tried to do, however imperfect, but it has been done.

    JD: His memoirs are fairly pessimistic, having seen the Habsburg Empire collapse and the rise of both communism and Nazism. He also wasn’t treated well by academia, either in Europe or upon his arrival in the US. Fast forward to 2018, and I wonder if he would think the intellectual atmosphere for his work and for Austrian economics generally is much more favorable than during his lifetime?

    GH: Absolutely. It’s thanks to his courageous stance, which has inspired many others as well, but there are few economists of his standing who have resisted in the way that he did and his own courageous stance has inspired many other economists and intellectuals who were not necessarily Austrians, and who didn’t become Austrians. Think, for example, of somebody like Milton Friedman. Milton Friedman received a Nobel Prize in economics for some of his technical research, which none of his many admirers outside of economics know. He’s best known to the large public for his popular works, Capitalism and Freedom and so on. Now, these works are very strongly inspired by the Austrians. Of course, he had a different methodological take. But his vision of the operation of the market is inconceivable, is incomprehensible, I would say, if you don’t have the knowledge of Austrian economics as a background. And that’s one of the reasons why today I think people have difficulties understanding and appreciating Friedman if they don’t know the Austrians because he appears as somebody who just professes libertarian value judgments. He was quite clever in the way he presented his arguments, but you don’t see the overall edifice on which it stands.

    JD: Do you think Mises’s reputation and work benefitted indirectly from Friedrich Hayek winning the Nobel Prize in ‘74, although Mises died a year earlier?

    GH: Well, I don’t think that this raised much interest in Mises. As you know, very often there is the implicit hypothesis in assessing anybody who is the pupil of anybody else, if the pupil gets a great prize, they’ll say well, the pupil is actually greater than the master, so probably everything that the master has produced is in one way or another in the work of the pupil. Now, that’s certainly not the case with Mises and Hayek and I explained this in my book. I have also stressed that the foundations on which these two men were reasoning was somewhat different, not in all respects, but in multiple respects different. So, you still can gain a lot of insight by studying Mises separately from Hayek. Hayek was never as accomplished an economist as Mises. He turned away from economics relatively early on and focused more on questions of general social philosophy and the transformation of society and of politics and so on, which was a subject that Mises did not touch upon very much. There is if you wish some sort of division of labor as far as economic analysis is concerned. It’s clear that Mises was two or three levels higher than Hayek and the same thing was true for Murray Rothbard. Rothbard was not quite as good an economist as Mises I would say, but certainly much, much better than Hayek. So, you could not dispense with Mises and Rothbard just by reading Hayek.

    JD: Do you think Mises is the most formidable and influential economist who never received a Nobel?

    GH: It’s a difficult question.

    JD: Political, in a sense.

    GH: There is a very strong political dimension to this. One funny fact that I always emphasize when it comes to the Nobel Prize is that no economist has received the Nobel Prize after having expressed himself very strongly against central banks. Hayek opposed central banks vigorously after 1974 with choice in currency and the denationalization of money. So, this alone would have probably made life for Mises very difficult, but then also you have to consider that the Nobel Prize in economics was created in 1969. Mises died in 1973. So, realistically, there was just a five year window in which he could have gotten the prize. He was clearly one of the outstanding economists of his time. The committee in the first few years awarded the prize to privileged people who have made technical contributions and also to the application of mathematical methods in economic analysis, which from an Austrian point of view were, by and large, superfluous and sterile, so that they don’t really help us to increase our knowledge, but this was the hope at the time.

    Allow me this additional comment, even if he had obtained the Nobel Prize, would this have helped his reputation? Would it have helped Austrian economics? Marginally, yes, but Mises stands very much on his own legs, so Mises doesn’t need a prize to attract readers to his works. He has produced works of such outstanding quality and of perennial value, that he doesn’t need a Nobel Prize. How many people today are reading Paul Samuelson [who won the prize in 1970]? Even his textbook is now in an edition that has been so much transformed that it’s completely dissimilar to the initial version published in 1948. Mises, on the other hand, is still read, and actually with the exception of Friedman and one or two others, there are no Nobel Prize winners in economics who are still read today.

    JD: His first full length work is Theory of Money and Credit. This was quite a book for someone so young, just over 30.

    GH: Yes, he was 31.

    JD: He applies the concept of marginal utility to money, and thus improves upon Menger. It’s a bold book, and prescient. Do you think it’s his biggest achievement, in some sense?

    GH: Oh yes, definitely. It’s a book of astonishing quality. Joseph Schumpeter at the time was even younger when he produced something similar. Schumpeter’s book was brilliant in its exposition of complex material, but I would say it was a typical Schumpeter. It was very brilliant and it was clear that this person had comprehensive knowledge of the literature that he was addressing. But, essentially, it’s wrong. Schumpeter’s Theory of Economic Development is wrong in the main assertions. It’s like John Maynard Keynes’s work. It’s intriguing, there’s also new vocabulary and so on, but essentially wrong. As Henry Hazlitt has said once in his discussion of Keynes’s general theory, there’s nothing in this book that is both new and correct. So, there are some new things that are there but they are not correct and there are correct things that are not new. What Mises did was something else. He produced a book that did not just contain new and solid insights on specific questions, such as the nature and origin of business cycles. He produced a great synthesis. Or, to use a metaphor, he did not just add a new top floor to Menger’s edifice. Adding an additional layer would have been a nice contribution, but an ordinary one. Any talented pupil can stand on the shoulders of his teacher and then add a little something on top and these additions then completely depend on the solidity of the grounds on which you build. But, Mises did something else. He not only built on Menger, he integrated his new insights with the entire literature on monetary economics and the debates on monetary policy in the nineteenth century. He used Menger’s edifice as a framework, and then he solidified its foundations and proceeded to build an entire basilica on top of it. It was an enormous achievement.

    JD: When we go back and read it now, about 106 years in hindsight, there are still passages that are absolutely relevant.

    GH: Oh yes, definitely. A classic piece of literature, a classic text, it is a masterful exposition of a subject. This is the first criteria and the second one is, it’s still relevant for us today. And definitely that holds for all of Mises’s texts. The reason why it’s still relevant for us today is not of his own making, it’s especially because the mainstream in economics has so thoroughly decided to neglect it, to not read Mises, to not absorb him, so the major economists of the twentieth century have not done what he had done at the beginning of the twentieth century. Economists have become increasingly moronic, increasingly ignorant, not only of classical economics and all the literature of the nineteenth century, but also of the great contributions that were made by Mises and several others in the 1920s and 30s.

    JD: So let’s jump to the interwar period, he writes and releases Nation, State, and Economy; Liberalism; Bureaucracy; and Socialism during this prolific period in his life. All of these remain foundational, and beyond  pure economics.

    GH: I agree.

    JD: Let’s talk about Liberalism first. He says that we can distill the entire liberal program down to one word: “property.” “Neoliberalism” was still a new concept at the time. What do you think Mises would think about what “liberalism” has become, both conceptually and politically?

    GH: Well, he saw it coming. He saw it coming in the postwar years and all the different strands of neoliberalism were already present. The difference between neo-liberalism and classical liberalism can be defined exactly around this one word that you mentioned — “property.” In classical liberalism, private property is the starting point. And in neoliberalism, it’s something that is a technical option for the arrangement of social affairs in ways that are most conducive to whatever, some other variable, justice or efficiency or whatever you might call it. Mises saw this, how this played out in the aftermath of World War II and he saw where this reasoning eventually leads: to more interventionism. You cannot even define liberty in a social context without reference to private property. And the same thing holds true for economic reasoning. Neoliberalism has abandoned this starting point. It focused on other criteria in the light of which you are trying to justify property. It’s an abortive attempt.

    JD: Fast forward to his biggest book, Human Action. It is really a culmination of a lifetime of work. It’s a synthesis of his entire body of thought and work. Should we give more weight to Human Action than his earlier writings because he evolved and synthesized things into a full treatise?

    GH: Yes, I think so. It’s certainly a combination of a life-time of reflecting on all these questions. Moreover, for Mises himself, economics is the science of relationships, so it’s the science of how all different aspects of human life, all different markets, all different activities, all different spheres in which we are making choices, which we act, and how they relate to one another. So, for this reason alone, Human Action is unavoidable. It’s the embodiment of Mises’s thought and I would also say on virtually all questions of detail, we find his most mature thinking on these pages. You can argue on one or two occasions, it’s not of course, perfection, like no human work can be perfect, but you can raise the question, is it better than how he had put it in previous works? Then you can argue on one or two things.

    JD: You don’t find a lot of gross contradictions in his work over the years.

    GH: No. I mean, usually what you find is that in previous works, he had lacked the necessary nuance or he had given in too much to the opposing argument and so he would set the record straight in Human Action, for example, as far as money is concerned. But then, for example, there are other questions, but these pertain more to discussions of policy issues such as immigration where you might say, well maybe he had a different point of view in previous writings which was more adequate. But, clearly, as I said, in virtually all cases, we find in Human Action, the most mature, the most nuanced statement of his own ideas.

    JD: Especially Part I of Human Action, which is more philosophical. What strikes me about reading the book, and his earlier work, is the fearless approach to philosophy, sociology, and ethics, fields beyond economics. Today the trendy word is intersectionality, where academic disciplines come together, but he certainly felt capable of addressing the bigger picture beyond his academic confines. Today academics are criticized if they wander too far from their chosen specialty.

    GH: Yes, that’s right, it is especially strong in economics. But, the truth is that the way young economists are trained today, they are turned into morons because all that they learn is to mimic the natural sciences. They learn how to apply econometric methods to datasets, and of course in order to do this you don’t really need any training in economics. You can come from any natural science. You can come from engineering, you can come from mathematics, you can come from physics, it doesn’t matter, as long as you know a little bit about mathematics and applied mathematics. You take one or two years of classes in econometrics, you’re there. Anybody can do this. You don’t need any knowledge of economic literature, you don’t need any knowledge of economic history, you don’t need any acquaintance with praxeological analysis, the logical analysis of human action, which we find in classical economics and in Austrian economics.

    You don’t need any of this because all that you do is to look at data and to apply methods that people from all other walks of scientific life would and could apply if they had no idea what economics was all about. This is the work of a moron. Unsurprisingly, these people typically have great difficulties engaging in interdisciplinary or multidisciplinary work with scholars from the social sciences, and also with philosophers and jurists.

    JD: Let’s discuss his cultural outlook. Certainly he viewed himself as a cosmopolitan, someone without a parochial perspective. He certainly was an anti-nationalist and a democrat, especially in the context of national socialism and what was happening in his beloved Vienna. But he also eschewed universalism, and advocated for self-determination and secession as safety valves for democratic overreach and state tyranny. And he did not necessarily accept the left-cultural elements of society often associated with cosmopolitanism. 

    GH: You can get the impression that Mises had a left liberal orientation, if you start from the context of his time, which was in general, much more conservative, much more Christian than the world that we live in today. And of course, relative to that world, in many respects, you could say, he was a progressive. He pushed progressive policy items and for example, in his promotion of women doing research, he was one of I think the first research directors of a female doctoral student in economics at the University of Vienna and, all of this of course, we would associate today with progressive policy. But of course, we need to keep in mind that Mises himself, when he discussed feminism, said feminism is a force of progress to the extent that it’s part of the general classical liberal movement, which tries to give greater precision to the definition of property rights. But as soon as it steps beyond this, it becomes a force of destruction, it joins socialism, a generally destructive movement. So, this is what we cannot sway from for Mises, both the starting point and the conclusion, is always the validity of property rights. If property rights are respected, they lead to social outcomes that are greatly at odds with what present day self-styled progressives or left liberals or whatever you want to call them, would like to see, at least that is my impression.

    JD: You mentioned earlier Mises’s era of “high theory,” and sometimes he is attacked as being too stubbornly laissez-faire, too intransigent and philosophical for his own good. But he spent 25 years in the Vienna Chamber of Commerce, involved in the minute day-to-day workings of Austrian fiscal, monetary tax, and regulatory policy. He didn’t live in an ivory tower at all.

    GH: Exactly. His ideas were not just a kooky conception of somebody who is out of touch with bricks and mortar. He is today very famous as the theoretician of economic science as an a priori science, but that doesn’t mean that he came to learn economics through a series of syllogisms. He learned from the analysis of economic policies, in the brewery, in agriculture, in clothing production and so on. All these fields where Austrian entrepreneurs were very active and very successful in those years and where their endeavors were hampered by government interventions. As Mises relates in his memoirs, at the beginning, he was convinced that interventionism was based on sound reasoning But then he had second thoughts. He said, “how does this square with what I observe in practice” and he was led to question the logic of the basic reasoning behind the interventions. And then he came to realize that in fact the exact opposite was true. It’s not because of government interventionism that the living standard of workers in Austria had increased, it was the exact opposite. It was capital accumulation and the activities of entrepreneurs that created more wealth in the country and thereby increased the living standards of the population. And what the government always did was just to redistribute existing wealth while creating disincentives for the creation of further wealth, so it was actually impoverishing by nature. It was certainly surprising for him at the beginning, but Mises was the sort of fellow who, once he understood something, he would cling to it and he would not give up. If you wanted him to give up, you really had to demonstrate to him where he was wrong. But nobody could demonstrate to him where he went wrong with his reasoning. And he would not give in just because it’s unfashionable, it’s unpalatable, because that doesn’t show that he’s wrong.

    JD: Let me ask you about the Austrian school itself. There were deep divisions within the original Austrians. Some people claim that so-called “American Austrians,” who also have deep divisions, represent a bastardization of the old true Viennese school.

    GH: Well, there’s no doubt that the American Austrians were essentially a Misesian school. Then, especially after Hayek received the Nobel Prize, the Hayekian blend of Austrian economics gained in importance, but during the 1950s and 1960s and even the 1970s, when Austrian economics spread in the US, it was essentially a Misesian movement and it’s true that this is what sets it apart from Austrian economics as it was known in the nineteenth century and then in the early twentieth century. So that is correct, but that of course, doesn’t mean that this Misesian economics is not a pure outgrowth of Austrian economics. It was certainly not the only direction Austrian economics could take. For example, the works of [Friedrich von] Wieser took it into a very different direction. But undoubtedly it is a representative, a very faithful elaboration of the original Mengerian ideas. Of course, it’s not perfect and not complete, and there probably is some truth in all branches of Austrian economics. But then again, we have to state as a matter of fact that no other branch of Austrian economics has produced works of the quality that we find in the Misesian branch, works such as Human Action and Man, Economy, and State. No other branch.

    JD: Let’s talk a bit more about you. You’re probably best known for your work in monetary economics, focused on money and banking. Is this because you’re an Austrian, you naturally gravitated toward money as opposed to other areas of specialization?

    GH: Well, it is what attracted me at the time to Austrian economics and is certainly one of the areas in which Austrians are most different from all other branches of economics. It’s still an area where Austrians need to be heard today, where they need to stress these things that we have inherited from Menger and from Mises on money. So, it’s very important, but also difficult, especially for young academics. If you want to become a professor, then working in monetary economics is an uphill battle because you are so much outside of the mainstream that you cannot get published in any of the mainstream journals.

    JD: Whereas someone like Peter Klein focuses on entrepreneurship, where Austrian views are perhaps less radical than they are when it comes to central banking, for example.

    GH: Correct. But of course, we still need to have people who are thinking and writing on these issues and also developing Austrian economics and money and banking, even though it’s difficult to make a career in that respect. But then also, I consider myself to be a generalist, so I’ve dabbled into various other fields of economic analysis, which, of course, are always related and it’s easier to do this from an Austrian point of view because you see how these different things are related. I’ve written on the methodology of economic analysis, like equilibrium analysis and counterfactual laws, I’ve written on interest theory, on business cycle theory, on capital theory, on financial markets, on uncertainty theory and interest rates, on secession, on Catholic social doctrine, and various other topics.

    JD:  Your book The Ethics of Money Production is really fantastic from my perspective. I enjoyed it very much and think it’s very lay friendly. Why is it dedicated to the late professor Hans Sennholz?

    GH: Hans Sennholz was an important Austrian monetary economist who kept up the flame after Mises. At the time, when I published the German edition in 2007, Sennholz was still alive. So, I wanted to dedicate the book to a living economist. I dedicated my doctoral dissertation to two dead persons and did not want to turn this into a tradition. And then Hans Sennholz best represented the kind of monetary economics which I considered to be foundational for my own analysis. He actually died soon thereafter.

    JD: Well, he died having read it! One of the points that you make is that money has civilizational and cultural elements. Its provision and regulation is not simply a matter for technocratic bankers. Central banks affect every part of life, with enormous ramifications for society. How do we do a better job of making this point to average people?

    GH: I think this point can most easily be made with people of a certain age. It’s very difficult to have this discussion with younger people. It’s not something that they’ve lived through themselves, but if you talk to people who are 50, 60, and older, they have seen the cultural decay and they conceive it to be problematic. There are very few people who are 70 years old who would say, all in all, American society has taken just a great turn in the past 30 years, very few. Most people are unhappy and they would just say, well, that’s just how things are. And some would say that the decay comes from capitalism, there’s too much freedom, so we need to rein people in and we need to pursue a more conservative policy agenda. This is where we can, as Austrian economists, provide genuine service by explaining that the decay is actually a fruit of interventionism and most notably of monetary interventions. It’s crucially important to see that interventionism is not only destructive in material terms, but also the driving force of cultural destruction. Mises himself perfectly understood this and he said so in the concluding pages of Socialism where he stated, as a matter of course, that socialism has turned out to be a force of cultural destruction on a massive scale. But unfortunately, he didn’t go into detail. And so, this is where we can still provide a service today.

    JD: You have a chapter in your book called “The Cultural and Spiritual Legacy of Fiat Inflation.” I love this chapter because you demonstrate how an express policy of inflation makes government grow at home and abroad, by financing welfarism and foreign wars. But you go farther at the end of the chapter, and suggest inflation makes us worse people on an individual level. I sense there’s another book you could write on this idea alone.

    GH: Actually one of my doctoral students is working on this topic. Let’s see how well he does! One big problem with monetary intervention is that it “de-responsibilizes” us, destroys the virtues in us. It destroys morals from within. The whole point of morals is to lead a successful life. This is something that’s often not sufficiently appreciated because you associate morals with a whole item list of constraints that you put on what people would like to.

    JD: Self-sacrifice.

    GH: Self-sacrifice for the mere sake of sacrifice, rather than in the pursuit of a higher end. But this is not the traditional conception of the virtues, as we find it most notably in the Christian canon of cardinal and theological virtues. These are attitudes, mental dispositions that make for success in life, that make us more successful, not only on our personal way to heaven, but also in our social relations. Now, monetary interventionism destroys this because what is virtuous holds true under the premise that you have clearly defined and protected private property rights, that you have something like responsibility, that if you make a wrong choice, there will be negative feedback because it ultimately falls back on you, you’re responsible for the wrong things that you do. You mess up your social relations, you mess up a friendship, you betray your relatives and your wife and so it will ultimately fall back on you. But, in our society, we do all kinds of things and have the government intervene in various ways, to prevent the cost being too high on people who behave recklessly, both in their social relations and as far as their own individual behavior is concerned. Think of drug consumption or sports that are excessively risky, or of divorce. We are socializing many of the risks associated with such behavior, and this of course cannot fail to destroy virtue from within, and at the end of the process, everybody asks themselves, well, first of all, why should I behave virtuously?

    JD: A lot of economists would say I don’t want to talk about virtue and values. I’m not a priest, I want to talk about inverted yield curves. Mises really thought economics was about real life, and reasonably intelligent people ought to think about it.

    GH: Well, certainly Mises himself did not refrain from commenting on this. And I’m not taking up the position of a philosopher and saying, look, these are the virtues. The work has been done, I don’t need to do this. What I do with economic analysis is to show how government interventionism reinforces this particular conception of what values and virtues are all about, and diminishes another; and how it sometimes inverses the traditional  conceptions and sometimes destroys them.

     


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    On August 2nd, the Bank of England announced that its Monetary Policy Committee had unanimously voted to raise interest rates. This recent decision by Britain’s central bank saw its key ‘base rate’ of interest rise for only the second time since the 2007/8 crash. The 25 basis point hike brought the base rate up to 0.75%, its highest level since March 2009.

    This is likely a reflection of the Bank of England’s growing confidence in the strength of Britain’s economy. Despite relatively slow GDP growth, Britain’s present record highs of employment had led to concerns that failure to tighten monetary policy would lead to “domestically generated inflation” through “excess demand”. Simply put, this refers to the widespread concern amongst mainstream analysts that maintaining low interest rates in a full-employment environment would induce employers to raise wages in order to attract scarce labour, which would in turn lead to price inflation when those workers start spending those extra wages. The Bank’s new rate hike is likely also intended to slow the pace of CPI inflation in the British economy, which has been consistently above the Bank’s 2% inflation target since the beginning of 2017.

    The key place of interest rates in the framework of the Austrian business cycle theory lends a special significance to events such as this. This theory, developed by both Ludwig von Mises and F.A. Hayek, highlights the ability of central banks to stimulate unsustainable economic ‘booms’ by pushing down interest rates to artificially low levels. Although Austrians often focus on how low interest rates fuel the boom, the role of interest rate rises in triggering the ‘bust’ is equally important.

    After a period of artificially low interest rates — such as the one the world economy has been experiencing for nearly the past decade — central banks will eventually have to slow down the printing press and raise rates again, to avoid plunging their currencies into severe inflation. When interest rates rise again, the marginal business ventures which had only appeared profitable at the previous, temporarily lowered interest rate, will now no longer find themselves able to remain in business at the new, higher cost of borrowing. While this effect does not always cause an immediate crash, the added strain of newly-raised interest rates will eventually necessitate a painful and widespread reallocation of resources away from the projects which had only been able to survive thanks to the previous period of temporarily low interest rates.

    One of the most illuminating (and most often overlooked) insights of the Austrian business cycle theory is its recognition of the fact that producers’ goods industries — mining, manufacturing, metal refining, and other producers of capital goods — are hit particularly hard by this process. Due to their great temporal distance in the structure of production from the finished consumer goods market, these ‘higher order’ industries are particularly sensitive to changes in interest rates, causing them to swing upward most strongly in the boom, and crash hardest when rising interest rates bring about the eventual bust. If we are indeed coming to the end of the kind of boom described by the Austrian business cycle theory, we should be on the lookout for signs of the stress which this recent rate hike by the Bank of England will inflict on Britain’s higher order industries.

    As it happens, this worrying process has already begun. On Wednesday 1st August, just one day before the Bank of England officially announced that it was raising interest rates, new data emerged which suggested that the British manufacturing sector had experienced a significant slump in July. This new data from the IHS Markit/CIPS UK Manufacturing Purchasing Managers’ Index (PMI) — regarded as amongst the most reliable indicators of business optimism — projects a decidedly downcast outlook for the manufacturing sector, which accounts for around 10% of Britain’s economy. The official PMI figures indicated that manufacturer confidence had sunk to its lowest level in 21 months, while the production of ‘intermediate goods’ used in the production of other goods also fell for the first time in two years. In addition to this, production growth fell to its lowest level in 16 months, and IHS Markit director Rob Dobson remarked that manufacturing had scarcely made any significant contribution to overall British GDP growth so far this year.

    It is strictly speaking true that this July data represents the state of British manufacturing before the Bank of England raised interest rates on 2nd August, which has misled many analysts into pinning the blame on Brexit, Trump’s trade war, and other such contingent factors. However, it has for months been regarded as a near certainty that interest rates would rise in 2018, and financial markets in July were predicting a 90% chance that the Bank would raise rates on 2nd August, reasserting the likelihood that this was primarily a reaction to the imminent rise of interest rates.

    Does all of this mean that the next great economic crash will be upon us tomorrow, next week, or even next month? Not necessarily. But it is a warning sign that a decade of near-zero interest rates and monetary expansion will not be without consequence. As central banks around the world continue to slowly raise interest rates, Austrians should pay close attention to the health of the world’s higher-order industries; they may well act as the canary in the coal mine, falling increasingly silent as the current boom draws to a close.


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    The following is an interview conducted in the Summer of 1990 with Murray Rothbard for the Austrian Economics Newsletter. 

    AEN: Any recent thoughts on hermeneutics?

    MNR: That’s a history-of-thought question, since hermeneutics has been crushed by Hans-Hermann Hoppe and David Gordon. Part of their critique is that the hermeneuticists were unable to demonstrate in concrete terms how this new “turn” would improve our understanding of economics. But if they hadn’t been challenged, they could have carried on for years.

    AEN: The initial attraction to hermeneutics was Mises’s link with certain rationalist phenomenologists. What parts of this link do you like and dislike?

    MNR: The link was Alfred Schütz. He was a free-market phenomenologist and an anti-positivist. He did excellent work attacking the positivists for dismissing minds in favor of experiments. He would then point out that you need minds to conduct and verify the experiments. Before this, Brentano was pretty close to Menger and the Austrians. The Brentanoites taught logic, reason, the science of human action, affirmed that values exist, and pursued an objective analysis of subjectivity. The thoughts of Dilthey, Windelbrand, Ricket, and Weber are useful for historical analysis, but not economic theory – Verstehen not Begreifen. In the pursuit of subjectivism, you cannot throw out science and reason. As phenomenology developed, with few exceptions, it became irrationalist and collectivist. Mises was always clear: its proponents don’t understand economics.

    The good parts of phenomenology are already a part of the Austrian tradition, as I pointed out in my article on praxeology for the Natanson volumes, Phenomenology and the Social Sciences. The other economist, John O’Neill, who wrote for the volume produced pure irrationalist gabble. And there was little else useful in those two volumes. Kirzner was also asked to contribute to this volume, but he turned it down, opining that Misesians should have nothing to do with phenomenology. I guess I was trying to be outreachy.

    AEN: What is your view of Hayek’s statement that all progress in economics has been in the direction of subjectivism?

    MNR: It’s true, but it hasn’t been an upward climb. Early economic theory was rooted in the Italian, French, and Spanish traditions, which were subjectivist oriented. Then it shifted onto the terrible path by Smith and Ricardo and the British classical tradition, which is “objectivist” – values are inherent in production. There was a partial shift back to subjectivism, but it was blocked by Marshall. Mises brought back the subjective-value tradition, with time-preference, ordinal marginal utility, and all the rest. That’s fine, but don’t wipe out objective analysis. There is still a real world out there, with laws of cause and effect, and physical products being evaluated by people. Through all this, we’ve discovered that being anti-positivist is not enough. Subjectivism is not an absolute principle; it is a necessary but not sufficient condition for sound methodology.

    AEN: Positivism was linked to socialism and interventionism. Do you now predict its decline?

    MNR: It is difficult to say. It was central to socialism and planning in the same way praxeology is central to the free market. Positivism eliminates any kind of natural law principle – for example, that there are economic laws which can be transgressed only at your peril. With positivism, there is a tendency to leap into ad hoc economic theory.

    By the time Friedman had written his famous article defending positivism, this view had already been rejected in philosophy. But it fastened on economics with an iron grip for about twenty years. This is fairly typical. By the time methods are transferred from one discipline to another, they have often been rejected by the original discipline. It is time for economics to throw out all analogies to the physical sciences.

    AEN: How did Man, Economy, and State come to be?

    MNR: It ended up totally different from the way it started. After Mises had written Human Action, the Volker Fund – which promoted classical liberal and libertarian scholarship – was looking for a college textbook that would boil it down and spell it out. Mises hardly knew me at the time, since I had just started attending his seminar. I wrote a sample chapter, “Money: Free and Unfree.” They showed it to Mises and he gave his endorsement. I then received a many-year grant to work on it. I thought it was going to be a textbook. But it grew and grew. New material kept coming in. As I kept going, I found ideas Mises had left out, or steps that were implicit in Mises that needed to be spelled out.

    I gave periodic reports to the Volker Fund. Finally they asked me: “Look, is this going to be a textbook or a treatise?” When I delivered a 1,900-page manuscript, they knew the answer. Power and Market was the final chapter called “The Economics of Violent Intervention.” They asked me to cut it out because it was too radical. It was published separately years later by the Institute for Humane Studies.

    AEN: Did you write the book in sequence?

    MNR: Yes. I started with page one with methodology and it wrote itself.

    AEN: Did anything get left out of the final book?

    MNR: I took Chapter 5 out of Man, Economy, and State, which included the usual cost-curve analysis. I wrote the whole chapter before I realized that the approach I was taking was nonsense. So I started over.

    AEN: Is there any doubt that Mises was your primary influence?

    MNR: I didn’t think so, but Joseph Salerno once gave a talk in which he said Man, Economy, and State is more Boehm-Bawerk-oriented than Mises’s Human Action. I never thought of it that way, but it may be true. When I was spelling out capital theory, I used Boehm-Bawerk primarily. I didn’t think about it since I thought Mises was a Boehm-Bawerkian and didn’t see any contradiction. I would like to see Professor Salerno explore this. It’s an example of the way a historian of economic thought can show something about a person’s work that he himself didn’t realize.

    AEN: How many years were involved from the time you started working on Man, Economy, and State to the time it was published?

    MNR: This is complicated. I received the grant in 1952, but shortly afterwards I had to finish my doctoral thesis under Arthur Burns. From 1953 to 1956 I was working partly on both. I finally finished Man, Economy, and State in 1960 and it was published in 1962.

    AEN: How was your dissertation, The Panic of 1819, received?

    MNR: Very well. In fact, much better than any other of my books. Maybe that’s because I didn’t analyze the causes. I only wrote about how people wanted to cure it. I could have done much more work on it, and there is still more to say, but I am still pleased with it, Plus, it is still the only book on the subject.

    AEN: Were scholars anticipating the publication of MES?

    MNR: Not really. Very few were even interested, except the Mises-seminar people and FEE-people like Larry Fertig and Henry Hazlitt. Most were non-economists or friends and admirers of Mises. They were caterers, lawyers, clothing manufacturers. Other than Kirzner, Spadaro, Sennholz, Raico, Reisman, and the Greaves, there was no Austrian movement to speak of.

    AEN: Did you ever get discouraged and say, “Why am I doing this?"

    MNR: No. Any chance to write a book or meet new people was terrific, but I was lonely. Mises was in his sixties, Hayek and Machlup were in their fifties, and I was in my twenties. There was nobody in between. With the possible exception of Baldy Harper, who was a libertarian, but whose Austrian knowledge was limited, there was a missing generation. It had been wiped out by the New Deal.

    AEN: If we do an “It’s a Wonderful Life” experiment – the state of Austrian economics without Man, Economy, and State – it looks pretty grim.

    MNR: That’s an interesting point. Of the economists, Sennholz became a real-estate speculator, Spadaro didn’t write much, Reisman became a Ricardian, and Hayek had drifted into murky philosophy and teaching social thought. Kirzner was doing good work on entrepreneurship, but nobody was doing methodology, monetary theory, capital theory, or much else.

    AEN: What were your thoughts on Mises’s review of MES when it appeared in the New Individualist Review?

    MNR: I liked it, but he didn’t say much about the book. I would have preferred him to go into more depth.

    AEN: Was he bothered by some of your corrections of his theories?

    MNR: I don’t know because he never said. Mises and I had only two friendly arguments. One was on monopoly theory where he wound up calling me a Schmollerite. Although nobody else in the seminar realized it, that was the ultimate insult for an Austrian. The other argument was on his utilitarian refutation of government intervention. I argued that government officials can maximize their own well-being through economic interventionism, if not that of the public. He in turn argued that those kind of politicians wouldn’t survive a popular vote, thus changing the terms of the debate.

    AEN: Mrs. Mises seems to think you had foreign policy differences with Mises.

    MNR: In all the years I attended his seminar and was with him, he never talked about foreign policy. If he was an interventionist on foreign affairs, I never knew it. This is a violation of Rothbard’s law, which is that people tend to specialize in what they are worst at. Henry George, for example, is great on everything but land, so therefore he writes about land 90% of the time. Friedman is great except on money, so he concentrates on money. Mises, however, and Kirzner too, always did what they were best at.

    AEN: Did Hayek ever attend Mises’s seminar in the United States?

    MNR: No. They had a very strange relationship. Hayek began making very arcane anti-Misesian comments in his books, but nobody knew it, not even Mises. For example, it turns out that the anti-Walras footnote in Individualism and Economic Order was really an anti-Mises footnote, as Hayek admitted a few years later. When Mises read the article, he called Hayek up and said he liked it as an attack on formalism and equilibrium. He hadn’t realized that some of it was directed against him. Gradually, Hayek became more and more anti-Misesian without actually refuting what he had to say. Yet Mises and Hayek are still linked in academic minds.

    AEN: What happened in the twelve years between MES and the Hayek Noble Prize?

    MNR: Very little. There were various informal meetings, with Walter Block, and R.J, Smith, who went through a period of leftism, but is doing good work again. During the fifties, we had a whole group in New York, but it disbanded when Hamowy, Raico, and Liggio went to graduate school.

    There was another group coming up in the sixties, students of Robert LeFevre’s Freedom School and later Rampart College. At one meeting, Friedman and Tullock were brought in for a week, I had planned to have them lecture on occupational licensing and on ocean privatization, respectively. Unfortunately, they spoke on these subjects for 30 minutes and then rode their hobby horses, monetary theory and public choice, the rest of the time. I immediately clashed with Friedman. He had read my America’s Great Depression and was furious that he was suddenly meeting all these Rothbardians. He didn’t know such things existed.

    AEN: What happened to the Volker Fund?

    MNR: The Volker Fund collapsed in 1972 and destroyed the whole basis of libertarian scholarship. The president was a follower of R.J. Rushdoony, who at the time was a pre-milleniallist Calvinist, later converting to postmillenialism. He had sent me a Rushdoony book, which I blasted. Combined with other reviews, he became convinced that he was surrounded by an atheist, anarchist, pacifist conspiracy to destroy Christianity, so he closed down the Volker Fund in early 1962. It was a great tragedy. IHS was supposed to be established with the $17 million from the Volker Fund to be an endowed think-tank, publishing books, sponsoring students, funding research, and holding conferences. Instead, Baldy had to start it from the bottom.

    AEN: How did Ethics of Liberty come about?

    MNR: I received a Volker Fund grant to write it. It was supposed to be a reconciliation of libertarianism with conservative culture and personal ethics, what is called paleolibertarianism today. But as I worked on it, it turned into an anarcho-libertarian treatise. By the early sixties, conservatives had become pro-war and the whole idea of reconciling us with them had lost its attraction for me.

    AEN: What about Conceived in Liberty?

    MNR: After the Volker Fund collapsed, I got another grant from the Lilly Endowment to do a history of the U.S., which I worked on from 1962-66. The original idea was to take the regular facts and put a libertarian assessment on everything. But once I started to work on it, I found many facts had been left out, like tax rebellions. So it got longer and longer. It turned into the five volume Conceived in Liberty, covering the Colonial period to the Constitution. I don’t chart this stuff in advance. I don’t like to work that way. I go step by step and it keeps getting longer. After Arlington House published volume four, they went out of business. Volume five, on the Constitution, was written in longhand and no one can read my handwriting.

    AEN: What about conferences during the early seventies?

    MNR: The first was conducted at Cornell, the summer of 1973. Forrest McDonald and myself were giving papers. At the 1974 conference, we added Garrison, Rizzo, O’Driscoll, Salerno, Ebeling, Hutt, Grinder, and others. It was held in a tiny town in Vermont, which we called a Walrasian-General-Equilibrium town because there was no action, no competition, no interest rates. In 1976, we had a wonderful conference at Windsor Castle, but after that there was nothing.

    AEN: Just so that we’re clear, between the 1940s and the early 1970s, you were the only one that did serious scholarly work in Austrian economics?

    MNR: Well, Henry Hazlitt did some excellent work. But then he was uncredentialed. Hutt did some, but it wasn’t really Austrian. Kirzner had written some serious articles. But basically the tradition had stagnated. By the late seventies, Austrian economics was considered Hayekian, not Misesian. Without the founding of the Mises Institute, I am convinced the whole Misesian program would have collapsed.

    AEN: How is your history-of-thought book coming?

    MNR: Fine. The first thinker I deal with is Aristotle, but I don’t spend much time on the Greeks. I leap to the early Christians. Economic theory became pretty advanced in the Middle Ages and only started falling apart later. Most history of thought assumes linear growth. But I am trying to show that there is slippage.

    Unfortunately, there is a hole in my book. I got to the English mercantilists and Francis Bacon, which took me to 1620, but then bogged down and leaped ahead. This summer I am going to repair the hole. Aside from the hole, I have just finished the laissez-faire French school. The next step is cover the pre-Austrians of the mid-19th century.

    AEN: There seems to be this lengthening pattern in your projects.

    MNR: Maybe so. What is happening to my history of thought is the same thing that happened to Man, Economy, and State and Conceived in Liberty. It was originally going to be a short book on the history of thought, taking the same people the orthodox people do, reversing the judgment, and giving the Austrian view. Unfortunately I couldn't do that since Smith was not the beginning of economics. I had to start with Aristotle and the Scholastics and work up. I found more and more people that couldn’t be left out.

    AEN: How many volumes have been done so far?

    MNR: I can never estimate things like this, but probably two or more. And I keep underestimating how much work I have to do. I thought I could finish off Marx in one chapter, but it took five. So I cannot give a projected date for finishing.

    AEN: You have apparently taken an interest in religion as it affects the history of thought.

    MNR: Religion was dominant in the history of thought at least through Marshall. The Scholastics emerged out of Catholic doctrine. And John Locke was a Protestant Scholastic. I am convinced that Smith, who came from a Calvinist tradition, skewed the whole theory of value by emphasizing labor pain, typical of a Puritan. The whole objective cost tradition grew out of that.

    AEN: Why has all this been overlooked?

    MNR: Because the 20th century is the century of atheistic, secularist intellectuals. When I was growing up, anyone who was religious was considered slightly wacky or even unintelligent. That was the basic attitude of all intellectuals. This is the opposite of earlier centuries’ attitudes when everyone was religious.

    The anti-religious bias even shows up in the interpretations of the history of art, for example, in the secularist and positivist interpretation of Renaissance painting. When Jesus is painted as a real person, they assume that means it is a secular work, whereas the real point of the Renaissance was to emphasize the Incarnation, when God became flesh. Even if art historians aren’t interested in theology, they should realize that the people they study were. The same is true for economics. In doing history, you cannot read your own values into the past.

    AEN: The anti-socialist revolution seems to be the fulfillment of everything Austrians have worked for.

    MNR: That’s right. We are living through revolutionary times. It’s like living through the French or American revolution and being able to watch it on television every night. Now the difference between the United States and the Eastern Bloc is that the United States still has a communist party.

    AEN: It also seems to be a vindication for your article, “Left, Right, and the Prospects for Liberty.”

    MNR: Damn right. Western conservatives cannot take credit for this. They had always argued that socialist totalitarianism could not reform from within. Only the libertarians considered and gloried in the possibility.

    AEN: Did you see the seeds of anti-socialist revolt when you visited Poland several years ago?

    MNR: Yes. In the first year I attended, several dissident Marxists were there. But the next year, the organizers said they didn’t need them. We went expecting dissident socialists and we found followers of Hayek, Friedman, Mises, and Rothbard. The economists and journalists that I met with had read many of my books and were publishing underground books on free markets.

    AEN: Now that Marxism is dead where it has been tried, is there anything that is useful and important that should be remembered or kept?

    MNR: There is one good thing about Marx: he was not a Keynesian. I recently asked Yuri Maltsev, former Soviet economist, why is it that things seem to have fallen apart so rapidly in the Soviet Union in the last twenty years. He said in the last twenty years, the leaders of the Soviet Union have relaxed the money supply and have used inflation to solve short-term problems. That spelled doom for the system.

    AEN: What about the prospects for liberty and a freer economy in this country?

    MNR: Everything is getting worse, and very rapidly. Few favor central planning, but the battleground has shifted to interventionism. There are three areas of interventionism which are the big issues, now and in the future. First, prohibitionism and the attempt to eliminate all risk. If, for example, automobiles cause accidents, they should be eliminated. Second, egalitarianism and the idea that victim groups should get special treatment for the next 2,000 years for previous oppression. Third, environmentalism or antihumanism. The implicit idea is that man is the lowest creature and every creature or inanimate thing has rights.

    AEN: How are things in Vegas?

    MNR: Great. Every semester we get more students, and the Austrians are at the top of their classes. We have a Human Action study group. I’m teaching a graduate seminar in Austrian economics this term and Hoppe will be teaching a seminar in the spring.

    AEN: What area of Austrian economics is most and least advanced?

    MNR: Methodologically, we are pretty advanced, thanks to the work of Hoppe. But we can always use more since that is what sets us apart from the rest of the profession. And Salerno is doing great work on calculation.

    Banking theory, however, has taken a very bad turn with free banking. We have to show that this is the Currency and Banking school argument rehashed. They have adopted the Banking school doctrine, that the needs of business require an expansion of the money supply and credit. Moreover, the free banking people violate the basic Ricardian doctrine that every supply of money is optimal. Once a market in a money is established, there is no longer a need for more money. That is really the key point.

    AEN: What about the argument that 100% reserves requires government intervention?

    MNR: I regard fractional-reserve banking as an intervention in the free market, just as any crime against person and property is intervention. In the case of banking, the government is allowing the crime to be committed.

    But how do we address the needs of trade argument, those who say that business has a demand for credit? Well, there are many things demanded on the market that are also crimes. There may be a demand for killing redheads. And there is certainly a demand for government loot. What’s so great about market demand? If it is not within a framework of nonaggression, there will always be a demand for fraud and theft.

    The free bankers accept a kind of David Friedmanite anarchism, where there is no law, only people engaging in exchange and buying people out. If you have a group that wants to kill redheads, the redheads will have to buy them off if they value their hair. I think this is monstrous; that kind of anarchism would indeed be chaos. Just because there is a demand for something doesn’t mean it should be fulfilled.

    AEN: One of the criticisms of this position is that it is normative and not economic.

    MNR: Yes, but the response to 100% reserves is that bank entrepreneurs have the right to offer whatever fraction of deposits they want, which is also a normative position. Any discussion of policy is inherently normative. You can’t have free markets unless you have property rights.

    AEN: Why isn’t private deposit insurance viable?

    MNR: The same reason insuring any bankrupt industry isn’t viable. You cannot insure entrepreneurs because they engage in uninsurable risk. You can reasonably predict how many fires there will be in New York; the unlucky few who get burned can dip into the pool of resources. But entrepreneurship is heterogeneous; it is completely unpredictable, and each attempt is nonrandom. The entrepreneurs assume the risk. If an insurance company insures it, it becomes the entrepreneur. Who then insures the insurer? In the case of banks, either they don’t need insurance, since they are 100% covered, or they are uninsurable because they are taking entrepreneurial risk.

    AEN: You have been critical of White’s book on free banking.

    MNR: The White book says the Scottish banking system was more successful than the English system. But he doesn’t say one word about prices, inflation, or business cycles. His only statistic is that there were fewer bank failures in Scotland than Britain. But what’s so great about not having failures? An industry that doesn’t have failures might be doing poorly. What if we applied this test to the Soviet Union, where no industries fail?

    When you say one banking system is more successful than another, it seems the test should be less inflation and fewer business cycles. Yet this is never mentioned.

    AEN: What role do you think RAE is playing?

    MNR: It is finding and gathering Austrian economists, getting them to write, and developing economic doctrine. Kluwer Academic Publishers is very excited about it. They wanted to bring the journal out three times a year. Now that we are coming out twice a year, many more people are interested. It is already the only Austrian academic journal in the history of thought and it has become the most important publishing medium. Kluwer is also publishing a series of books in Austrian economics, for which we are the general editors.

    AEN: What should young Austrians be concentrating on?

    MNR: Adding to the theoretical edifice. Rent theory is underdeveloped. And the theory of the transition from socialism to capitalism is crying out for more work. Most importantly, we should never stop refuting mainstream economics.


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    "Higher order" industries like manufacturing and mining are particularly sensitive to changes in interest rates. And it doesn't look like anything's different this time around.

    Original article: British Manufacturing Slumps as Bank of England Raises Interest Rates


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    [From the Quarterly Journal of Austrian Economics.]

    The Scandinavian countries, and primary among them Sweden, are commonly referred to as anomalies or inspirations, depending on one’s political point of view. The reason is that the countries do not appear to fit the general pattern: they are enormously successful whereas they “shouldn’t” be. Indeed, Scandinavians enjoy very high living standards despite having very large, progressive welfare states for which they pay the world’s highest taxes.

    As a result, a large and growing literature, both propagandist and scholarly, has emerged that tries to identify the reasons for this Scandinavian exceptionalism—especially as pertains to their welfare states. I have myself contributed to this literature1 and have previously reviewed others’ contributions to it in this journal.2 But what has been missing is a summary analysis that is accessible to non-scholars. It was therefore a delight to read Nima Sanandaji’s Scandinavian Unexceptionalism: Culture, Markets, and the Failure of Third-Way Socialism, published by British Institute for Economic Affairs.

    Dr. Sanandaji is a political-economy analyst and writer, well known in both Sweden and Europe, and as expected does an excellent job summarizing the state of scholarship. He also uses examples and quotes from articles published in Scandinavian news media to illustrate the narrative. The result is a short and informative but easy to read answer to both how and why the Scandinavian welfare states seem to work so well.

    The short book provides the reader with insight into Scandinavian culture, an explanation of the causes of the nations’ exceptional rise from poverty, an overview of their recent political-economic history, the distinct structure and evolution of the Scandinavian welfare state, the origins of their egalitarianism and gender equality, and the effect of immigration. I will briefly touch on three of these areas.

    First, Sanandaji makes clear that the rosy story of the Scandinavian welfare state, as it is usually told, is at best incomplete. The Scandinavian countries were among the European continent’s poorest by the end of the 19th century and were largely unaffected by the industrialization that had started centuries earlier in the United Kingdom. A combination of classical liberal reform and the adoption of industrialized production created a century-long “golden age,” as Bergh (2014) denotes the period approximately 1870–1970 in Sweden, of economic growth and rapidly rising standards of living.

    This growth was partly also made possible by a distinct Scandinavian culture, which is characterized by the “[h]igh levels of trust, a strong work ethic and social cohesion [that] are the perfect starting point for successful economies” (p. 7). As Sanandaji points out, the market-aligned virtues of Scandinavian culture also explain the limited impact of the welfare state as it was erected and ballooned in the 1930s and beyond. Cultural change takes time, and thus old values lag in the face of political change. So it took time for the Scandinavian virtues to give way to the destructive incentives of the welfare state.

    It should also be noted, though Sanandaji fails to make this point clearly, that after the welfare state was established, and during its several decades of expansion, it’s growth rate tended to be lower than that of the overall economy. The increasing burden was therefore, in relative terms, marginal. That is, until the radical 1960s and 1970s when Scandinavian governments, and the Swedish government in particular, adopted very expansionist welfare policies. (This political shift is analyzed in detail in, e.g., Bergh.)3

    Sanandaji also presents interesting data with respect to Scandinavian gender equality. His discussion begins with the internationally enviable women’s labor market participation rate in Scandinavian countries, and especially Sweden. The background, however, is that Sweden’s government had adopted a radical agenda for population control formulated by Gunnar and Alva Myrdal (yes, the same Gunnar Myrdal who shared the 1974 economics prize with Hayek). The gist of this reform was to enforce a shared responsibility between parents and “the community” for children’s upbringing. By raising taxes on income while offering government-run daycare services, families were incentivized (if not “forced,” economically speaking) to secure two full-time incomes.

    Interestingly, while this indeed rapidly increased women’s participation in the labor market, Sanandaji notes that “few women in the Nordic nations reach the position of business leaders, and even fewer manage to climb to the very top positions of directors and chief executives” (p. 102). Part of the reason is that jobs that women typically choose, including education and healthcare, are monopolized in the vast public sectors. As a result, women at trapped in careers where employers do not compete for their competence and many leadership positions are political.

    This development is indirectly illustrated in a terrifying statistic from Sweden’s labor market: “Between 1950 and 2000, the Swedish population grew from seven to almost nine million. But astonishingly the net job creation in the private sector was close to zero” (p. 33).

    Finally, Sanandaji addresses the issue of immigration and shows that the Scandinavian nations were exceptionally good at integration, with greater labor participation for immigrants than other Western nations, prior to the radicalization of the welfare state. Thereafter, due to rigid labor regulations and vast welfare benefits, immigrants were more or less kept out of Scandinavian job markets.

    The literature identifies two potential explanations. First, the anti-business and job-protection policies practically exclude anyone with a lack of work experience, highly sought-after skills, or those with lacking proficiency in the language or limited network. This keeps immigrants as well as young people unemployed (the very high youth unemployment rates in Scandinavia illustrate this problem). Second, the promises of the universal welfare state tend to attract people who are less interested in working their way to the top and thus have a lacking work ethic.

    This explains the recent problems in Scandinavia with respect to immigration, which is essentially an integration and policy problem — not a foreign-people problem.

    Overall, Sanandaji’s book provides plenty of insights and a coherent explanation for the rise of the Scandinavian nations and their welfare states. Their impressive standard of living is a free-market story, which is rooted in an economically sound culture. This culture also supported the welfare state, until decades of destructive incentives eroded the nations’ sound values. The welfare state, after its radicalization, was soon crushed under its own weight, and Scandinavia has since undergone vast free-market reforms that again have contributed to economic growth and prosperity.

    Considering the full story, Sanandaji summarizes the example of the Northern European welfare states simply and bluntly: “Scandinavia is entirely unexceptional.”

    • 1. Bylund, Per L. 2010. “The Modern Welfare State: Leading the Way on the Road to Serfdom.” In Thomas E. Woods, ed., Back on the Road to Serfdom: The Resurgence of Statism. Wilmington, Del.: ISI Books.
    • 2. 2015. “Book Review: Sweden and the Revival of the Capitalist Welfare State by Andreas Bergh,” Quarterly Journal of Austrian Economics 18, no. 1: 75–81.
    • 3. Bergh, Andreas. 2014. Sweden and the Revival of the Capitalist Welfare State. Cheltenham, U.K.: Edward Elgar.

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    After the “Walnut Street Massacre” in St. Louis, more people shift their support to the Confederacy. In response, Nathaniel Lyon declares war on the state of Missouri, and wages the first small, but significant, battle of the state in Booneville.


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    Radical Markets: Uprooting Capitalism and Democracy for a Just Society
    Eric A. Posner and E. Glen Weyl
    Princeton University Press, 2018
    xii + 337 pages

    Radical Markets has at least one virtue. The book contains many unusual proposals, and I propose to concentrate on one of the strangest of these. Eric Posner, a legal scholar, and Glen Weyl, a principal researcher at Microsoft, call for speculative boldness, and they have given us that; but sound argument is another matter.

    The authors agree with prevailing leftist dogma on one matter, but differ with it on another. They accept the conventional wisdom that inequality in the world economy is extreme. “Together, the trends of rising inequality and stagnating growth mean that typical citizens in wealthy countries are no longer living much better than their parents did. ... These trends pose the same problem for the neoliberal economic consensus that stagflation posed for the Keynesian consensus before it. We were promised economic dynamism in exchange for inequality. We got the inequality, but dynamism is actually declining.”

    Posner and Weyl do not discuss skeptics about the rise of inequality, such as Thomas Sowell and the authors of Anti-Piketty. Let us leave that point, vital as it is, to one side. They also fail to address this question: why is inequality bad? Like almost all egalitarians, they just assume that it is and proceed from there. Though they continually call for fresh thinking, they never question this prevailing shibboleth of our age.

    They differ with the left, though, in their view of markets. For Posner and Weyl, the market deserves praise: “Our premise is that markets are, and for the medium term will remain, the best way of arranging a society.”

    Posner and Weyl support markets and favor equality. The free market does make the poor, along with everyone else, better off; but this does not for our demanding authors suffice. The market allows too much inequality.

    What then is to be done? The authors have detected a crucial flaw in markets as they are now constituted. Markets are not perfectly competitive, “meaning that there are a small number of homogeneous commodities, and no individual holds or buys a large fraction of them.” Because of this, most buyers and sellers have “bargaining power.” This wastes time and resources. “Each party works hard to ascertain what the other would be willing to pay or accept and jockeys for the best price possible. Such strategic behavior often causes trades to fail. Even when they succeed, huge amounts of time and effort have been wasted in the process. These problems are magnified in complex business transactions.” In other words: bargaining power withholds vast amounts of resources from the market.

    Just as the authors never pose the question, why is inequality bad, they never provide an argument that all resources should at all times be available for sale. Why is it bad to withhold resources in the hope of better terms later? We are never told.

    The best the authors manage is this: “How can we measure ‘the greatest happiness for the greatest number’? How is it possible to compare the happiness of one individual to that of another? Many economists have argued that this task is impractical. They suggest that all we can hope for is ensure that no one’s happiness can be increased without decreasing anyone else’s, a condition called Pareto efficiency, and that the total happiness is distributed fairly.”

    Now the cat is out of the bag. If an increase in the monetary value of resources is taken as roughly equal to an increase in utility, then bringing withheld resources into the market generates efficiency gains. It is Pareto superior, as neoclassical economists phrase it.

    This merely pushes back our question: why should Pareto efficiency be the criterion by which economic

    policies are assessed? Murray Rothbard has trenchantly remarked: “there are several layers of grave fallacy involved in the very concept of efficiency as applied to social institutions or policies: (1) the problem is not only in specifying ends but also in deciding whose ends are to be pursued; (2) individual ends are bound to conflict, and therefore any additive concept of social efficiency is meaningless; and (3) even each individual’s actions cannot be assumed to be ‘efficient’; indeed, they undoubtedly will not be. Hence, efficiency is an erroneous concept even when applied to each individual’s actions directed toward his ends; it is a fortiori a meaningless concept when it includes more than one individual, let alone an entire society.”

    How do Posner and Weyl propose to curtail bargaining power? Their solution is a “common ownership self-assessed tax (COST) on wealth.” In this proposal, everyone would set a price for each of his assets, and that assessment would be the basis for taxes. If you object that people would set this assessment absurdly low to avoid taxation, here the ingenuity of the scheme emerges. Once someone makes his self-assessment, anyone could purchase the asset at that price. In this way, efficiency goes up, because the purchaser would not buy the asset unless he thought he could generate a greater return than he paid for it. Wealth, our proxy for efficiency, rises, and bargaining power has been curtailed.

    To this there is an obvious objection, and the authors have a response to it. The objection is that an investor would not buy an asset he wanted to develop over a number of years if he thought someone else could purchase it from him by paying his assessment price. They answer by lowering the tax rate; people who had to surrender less of their gain to the state would invest more. That is indeed so, but would this not defeat the purpose of the efficiency plan? With lower taxes, people would, in order to deter buyers, raise their self-assessment prices for assets they wanted to keep. You would no longer find it so easy to snatch someone’s assets out from under him. Posner and Weyl respond: “When the tax is reduced incrementally to improve investment efficiency, the loss in allocative efficiency is less than the gain in investment efficiency.” “A fully implemented COST,” they suggest, “could increase social wealth by trillions of dollars every year.” Further, the vast revenue generated by taxes on the added wealth could be used to reduce inequality.

    The authors admit a drawback to their plan. What if you have assets that you do not wish to sell at any price? Is the only way to avert the chance someone will purchase your asset to set a price on it that will subject you to crushing taxation? They suggest averting this through exemptions; but they have a more fundamental response: “The COST could also make us think about property in a different and healthier way. A COST taxes objects, not personal relationships. Wouldn’t it be better if people invested less of their emotional energy in objects and more in their personal relationships? ... Fetishistic attachment to a privately owned automobile — an extremely expensive durable asset ... is, thankfully, becoming a thing of the past. Increasing economic evidence suggests that excessive attachment to homes is inhibiting employment and dynamism in the US economy, a problem a COST would greatly reduce.”

    Here the difference between the position of Mises and Rothbard and the “radicalism” of Posner and Weyl emerges with complete clarity.  Mises and Rothbard accept people as they are: from that starting point, they argue that the free market permits mutually beneficial trades. Posner and Weyl are “Progressives” who want to remold people in their own image.

    When I read the authors’ account of COST, I wondered: if the authors are so concerned to increase social wealth, why allow individuals to choose their occupations? What if you could generate more revenue in a different occupation from the one you prefer? Suppose that a writer could earn vastly more money as a stockbroker. Should he be free to deprive society of all the taxable wealth he would earn in the higher paying job?

    Sure enough, the authors head in this direction, though they draw back from its implications. “Consider a very radical extension of the COST: to human capital ...  imagine that individuals were to self-assess a value of their time, pay a tax on this self-assessed value, and stand ready to work for any employer willing to pay this wage ... in principle, A COST on human capital would be immensely valuable.”

    Unfortunately, society is not yet ready for this proposal. “A COST on human capital might be perceived as a kind of slavery — incorrectly in our view, at least if the COST were properly designed. Still, we can see the problem.” For now, the proposal is premature.

    Whatever the defects of their ideas, though, do not Posner and Weyl deserve credit on one score? They do, after all, say that markets “are ... the best way of arranging a society.” Alert readers will have noticed, though, a qualification in the passage where they say this, quoted earlier in this review: “and for the medium term will remain.”

    What do they mean by this? They pay generous tribute to Mises’s socialist calculation argument, but unfortunately they misunderstand it: “The brilliant economist Ludwig von Mises argued that the fundamental problem facing socialism was not incentives or knowledge in the abstract but communication and computation.” Mises’s socialist critics argued that there was “no difficulty in principle with solving a (very large) system of equations relating the supply and demand of various goods, resources, and services.”

    Mises was right. “Yet the later development of the theory of computational and communications complexity vindicated Mises’s insights. What computational scientists later realized is that even if managing the economy were ‘merely’ a problem of solving a large system of equations, finding such solutions is far from the easy task that socialist economists believed.” New developments in parallel and distributed processing, though, may enable these problems to be solved, and the market as we know it may be superseded. Mises is thus a pioneer in computer science. One can only quote, on Mises’s behalf, Eliot’s lines in “The Love Song of J. Alfred Prufrock”: “That is not what I meant at all;/ That is not it, at all.


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    When it comes to the immigration debate, very few people advocate for either totally closed borders or totally open borders. However, as soon as it is admitted that at least some movement across borders ought to be allowed — or that at least some of the migrants are to be regulated — the question quickly arises: which migrants are to be allowed, and which are to be prevented entry?

    Rhetorically, this problem is often dealt with today by an appeal to government authority. Namely, it is often stated that "legal" immigrants are fine, but "illegal" immigrants are bad.

    This, of course, misses the point. The question still remains: which immigrants ought to be considered legal and which illegal? What ought to be the standard of determining legality?

    The History of "Undesirable" Migrants

    In the nineteenth century, immigrants were said to be either desirable or undesirable based on specific traits. Immigrants that were determined to be unable to work, mentally ill, prone to criminality, or likely to become dependent on state assistance were deemed undesirable. This was — at least in theory — applied across the board, regardless of country of origin. Prior to the 1880s, this determination was usually made by state or local authorities. And those who were deemed undesirable could also be deported.

    These sorts of laws go back to pre-Revolution times and even back to England in some cases, where "poor laws" were introduced to regulate vagrants and what we would today call "welfare recipients." Local governments were empowered to prevent the local poverty-relief funds from being overwhelmed by new residents looking for what we'd today call "social benefits."

    State-based restrictions on movement, for example, were written into the Articles of Confederation which noted interstate movement was not guaranteed to "paupers, vagabonds and fugitives from justice."

    Later, states that received large numbers of foreign migrants, such as Massachusetts and New York, focused on refusing entry to people suspected of being mentally ill, physically disabled, potential paupers, or criminals.

    Note, however, that these laws set out specific criteria for individual persons. Those who were deemed able to support themselves and be no burden on the public purse were allowed to stay.

    Even national policy — most of which failed to gain passage in Congress — directed federal officials to ensure that new immigrants "were not paupers, nor convicts."

    Thus, it is not surprising that Gerald Neuman concludes in his survey of nineteenth-century immigration policy: "Neither Congress nor the states attempted to impose quantitative limits on immigration" [emphasis in the original].

    Later Attempts at Quotas

    The Chinese Exclusion Act of 1882 signaled the first attempt by the federal government to enact general peacetime exclusions of people based on group membership.

    But even that idea did not work its way into the first broad national policy found in the Immigration Act of 1891. The 1891 legislation continued to stick to the policy of excluding people based on undesirable traits found in individuals. Historian Hidetaka Hirota lists the criteria:

    The 1891 law also expanded the excludable category to cover people with mental defects and insanity, paupers and people "likely to become a public charge," people with contagious diseases, people convicted of a felony of other crime involving "moral turpitude, polygamists, and assisted emigrants"— making all of them deportable.

    It was only in the twentieth century that federal policies then turned toward quota systems.

    The Immigration Act of 1917 expanded bans on immigrants from Asia, above and beyond the Chinese exclusion. Sticking to the policy of individual litmus tests, however, the new legislation also required literacy tests of new immigrants.

    With the 1924 Immigration Act, however, true quotas were introduced for the first time. The quota was

    set at three percent of the total population of the foreign-born of each nationality in the United States as recorded in the 1910 census. This put the total number of visas available each year to new immigrants at 350,000.

    The restrictions did not apply to migrants from the western hemisphere.

    But why set the quota as a percentage of foreign born as recorded in the census? Is this based on any objective standard?

    Of course not. It's a number pulled out of thin air by politicians. Moreover, adopting an arbitrary number for the "correct" number of immigrants from a certain country is akin to declaring a quota for the "correct" number of shoes to be imported into the country. Nor are government agents qualified to determine the "correct" number of tons of steel or pounds of sugar allowed into the country.

    [RELATED: "Only the Private Sector Can Determine the 'Correct' Number of Immigrants" by Ryan McMaken]

    Those who support such quotas will nevertheless often attempt to mask their arbitrary nature by claiming anyone who opposes quotas is for totally open borders.

    But, as Neuman noted, the border-control scheme that prevailed during the nineteenth century — one that refused entry to presumed paupers and criminals — was anything but an open-borders situation.

    There is no denying that the border controls were difficult to enforce. Much of this was due, however, to the technological limitations of the time.The tools available to states and towns in identifying those who were ill or disabled were extremely limited. Moreover, it was difficult to determine ahead of time if new migrants were likely to become dependent on state services.

    To deal with this state governments began to require bonding from those involved in the importation of migrants. Neuman writes:

    Beginning in 1820 ... Massachusetts returned to the colonial system of demanding security from masters of vessels when their passengers seemed likely to become paupers. The 1820 statute required a bond to indemnify the town and the Commonwelath for expenses arising within three years with respect to any passenger lacking a settlement in the Commonwealth who was considered liable to become a public charge.

    This law was later modified in 1837, including new provisions under which

    the master was forbidden to land without bond any alien passenger found upon examination to be within a group of categories of persons presenting a high risk of becoming a public charge, including those with mental or physical disabilities.

    The bonding requirement went even further in 1852 when:

    the state authorized officials to demand bond or a higher commutation payment to cover passengers whom they judge to present an intermediate risk of future indigence ... [after the bonding requirement for intermediate-risk migrants was abolished in 1872] Bonding of high risk passengers continued ... as did a newer requirement of bonding by corporations importing labor into the state.

    Similar laws were adopted in other port cities, especially New York, and applied in attempts to minimize costs associated with new migrants turned paupers.

    The focus, of course, was not on overall numbers, but on avoiding costs associated with new migrants who were unable or unwilling to support themselves.

    Unlike a blanket quota system, the targeted approach is more rational, non-arbitrary, and attempts to get at the true heart of most political objections to immigration — namely, that new migrants will become a drain on public amenities or engage in criminal behavior.

    Given the problems and expense of general enforcement, however, it's easy to see why the Massachusetts legislature turned to bonding as shifting the burden of pauper immigrants to those who "sponsored" them in some way.

    The Individual Approach Is Better

    Indeed, a system of sponsoring migrants through bonding has potential as a far more reasonable means of insuring that new migrants are actually being invited into the destination country, and will not become public charges.

    Tho Bishop, for example, has examined this issue in light of refugees, but it can be applied to all sorts of migrants. Ryan Khurana has also written on the potential for sponsorship-based migration policies.

    After all, if an employer, family members, or church organization wishes to invite a new migrant into the country to work or live, a basic respect for the rights of private property and free contracting would prohibit the state from interfering. However, if there remains a concern that the new migrants might live off the public purse, the strategy of bonding would be far less disruptive and arbitrary than government-invented quotas on how many migrants are to be allowed entry.

    If migrants go on the public dole, or engage in criminal behavior, bonding would allow for the taxpayers to recover their costs from the sponsors. The migrant in question would presumably be deported for breaking the bonding agreement.

    The superiority of this system over the general quota system is evident since it would allow for private organizations to freely engage with employees, contractors, and family members who would be arbitrarily excluded under a quota system — even if they did not engage in criminal behavior or fail to support themselves financially.

    Some anti-immigration hardliners might nevertheless take exception to this, claiming that it is administratively too costly. By arguing this, however, they would essentially be making the collectivist claim that private property rights can be voided for entire groups of people based on assumptions about one small portion of the group. We hear similar arguments when opponents of physical cash claim cash ought to be abolished because some people use cash for criminal enterprises. There's no denying that some criminals use cash. Is this therefore justification for destroying the property rights of all users of cash? Clearly not. Nevertheless, arguments in favor of broad quotas or outright bans on migrants based on group membership employ this essential logic.


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    Nineteenth-century European liberalism stemmed from two main sources. First, John Locke developed traditional natural law theory in a new direction. In his Second Treatise on Government, he argued that everyone has a property in his own person; this is exactly the self-ownership principle of Murray Rothbard’s libertarianism. On this basis, individuals could acquire property through appropriation.

    Given self-ownership and property rights, there is very little scope left in Locke’s system of thought for the state. Though the interpretation of Locke has aroused fierce controversy, A. John Simmons has in Onthe Edge of Anarchy made a strong argument that a Lockean political order would be close to anarchy.

    Of course, the Lockean regime was never fully implemented, but arguments for individual rights of the sort he advanced had great influence on nineteenth-century liberalism. The great French economist Frédéric Bastiat argued in The Law that “Each of us has a natural right — from God — to defend his person, his liberty, and his property.” The state can acquire no new rights that individuals do not possess.

    Besides arguments based on natural rights, another source led to nineteenth-century liberalism. The new science of economics conclusively demonstrated that social cooperation through the free market enabled people to achieve peace and prosperity. As Ludwig von Mises explained matters in his great 1927 classic Liberalism: “Liberalism has always had in view the good of the whole, not that of any special group. It was this that the English utilitarians meant to express — although, it is true, not very aptly — in their famous formula, ‘the greatest happiness of the greatest number.’ Historically, liberalism was the first political movement that aimed at promoting the welfare of all, not that of special groups. Liberalism is distinguished from socialism, which likewise professes to strive for the good of all, not by the goal at which it aims, but by the means that it chooses to attain that goal. ... Antiliberal policy is a policy of capital consumption. It recommends that the present be more abundantly provided for at the expense of the future.”

    Unfortunately, stress on this second strand of thought led to a problem in English classical liberalism. The classical economists like Smith and Ricardo had no general argument that ruled out altogether government intervention in the economy. Rather, they examined matters on a case-by-case basis, usually concluding that a free market policy was best. But this was not always true; Adam Smith, for example, accepted some restrictions on free trade and supported government provision of public goods. John Stuart Mill’s Principles ofPolitical Economy , the culminating work of the British classical economists, weakened support for a free economy still further.

    Even in its weakened state, though, classical political economy still rested on an individualistic basis. A new sort of liberalism challenged individualism head on. The Oxford political philosopher Thomas Hill Green denied that individuals have rights apart from their participation in a collective entity, the State. True enough, individuals did have a right to self-realization; but Green meant by this not real, flesh-and-blood individuals as they actually exist, but the “real” self, governed by correct principles of rationality. In this view, you are not “really” choosing if you act against what Green took to be the dictates of reason. As he said, “[W]e shall see that freedom of contract, freedom in all the forms of doing what one will with one’s own, is valuable only as a means to an end. That end is what I call freedom in the positive sense: in other words, the liberation of the powers of all men equally for contributions to a common good. No one has a right to do what he will with his own in such a way to contravene this end.”

    Another philosopher who championed the “new liberalism”, Leonard Hobhouse, did not go as far as Green. He challenged what he termed the “metaphysical theory of the state” found in Green’s idealist successor Bernard Bosanquet, but he did not favor a return to the older tradition of individualism. He rejected the individualist conception of property rights, holding instead that property exists to promote a collective purpose. Social legislation, of a sort the older liberalism would have rejected, was required.

    The new liberalism transformed liberalism into its opposite, and “classical liberalism” came into use as a term to designate the position of those, such as Herbert Spencer and his disciple Auberon Herbert, who rejected the welfare state.

    Concerning the new liberalism, Mises mordantly observed in Liberalism, “Nor can the programs and actions of those parties that today call themselves liberal provide us with any enlightenment concerning the nature of true liberalism. It has already been mentioned that even in England what is understood as liberalism today bears a much greater resemblance to Toryism and socialism than to the old program of the freetraders. If there are liberals who find it compatible with their liberalism to endorse the nationalization of railroads, of mines, and of other enterprises, and even to support protective tariffs, one can easily see that nowadays nothing is left of liberalism but the name.”


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    It turns out the best book on Bitcoin was written by someone who thinks the cryptocurrency is not a particularly good form of payment, not particularly anonymous, and not a good investment for most people. Saifedean Ammous, professor of economics at Lebanese American University, wrote The Bitcoin Standard to cut through the hype and examine crypto technology through a rigorous Austrian lens. The result is a phenomenal book: pro-gold, pro-Mises, and optimistic about the crypto revolution's goal of creating truly private money.

    This is the guy you should listen to when it comes to Bitcoin. He sits down with Jeff Deist for a thorough and entertaining interview.


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    ABC News reports that “Toxic red tide blooms are creeping up Florida's west coast, killing marine life and irritating humans.” The red (or maroonish) tide is truly a nasty problem that I have experienced first-hand in the form of a ruined vacation.

    It is a potentially toxic algae to wildlife when it occurs in high concentrations. The Karenia brevis algae can be a threat to fish, birds, and even manatee. At least 92 manatees have been killed so far and at least one whale shark! This creates conditions at the beach of discolored water, dead fish, and a horrible smell. Tourists are adversely affected as well as local businesses.

    The algae are a natural phenomenon that has been known of for almost two centuries. However, the harmful “blooms” have occurred much more often and in more places in recent decades. More recently, it has been plaguing southwest Florida beaches since November 2017 and is now particularly bad over a larger area.

    I was recently attacked on Facebook for explaining all the benefits we would receive if we reduced the number of regulators and their budgets, i.e., fewer unnecessary regulatory restrictions on businesses and resource owners, less spending and taxes, more resources in the productive economy, and more entrepreneurship to name the primary ones.

    My “friend” wrote that if we reduced the number of regulators, who would protect him from all the various perceived evils, including the red tide at the Florida coast. I replied to him, in part, that we pay for over 100,000 regulators for financial markets and they did not protect us from the financial crisis, that BP’s deep-water oil rigs are extremely highly regulated (in fact they would not be drilling in deep water at all if not for regulations!), and in fact, EPA rules and regulators are there to protect the interests of polluters and to block citizens from protecting themselves in court. That was the end of the conversation.

    Back to the story. Actually, this is an old story that I most recently wrote about 4 ½ years ago. There is an easy answer to why this red tide problem is growing increasingly worse, as well as having an easy solution. There is no need to create a Red Tide Project to do declare a War on Red Tide.

    The Red Tide starts as natural growth of the “bad algae” dozens of miles off shore near the continental shelf. That algae can then drift toward shore and enter brackish water inlets. The blooms are not stimulated in open circulating waters. However, they are stimulated to grow and get bigger in the presence of manmade nutrients, such as fertilizers that have run into water sources from agricultural production all over the Gulf of Mexico.

    In contrast, if the water in the Gulf is circulating well, then it brings more natural nutrients to the coastline. These nutrients feed other types of green “good algae” which keeps the Red Tide in check. In other words, mother nature can keep the problem in check.

    However, when water circulation is down and fertilizer runoff is in play, you have a problem. A multi-billion-dollar problem.

    Though other factors play a role in the algae bloom crises, one of the most significant involves the sugar industry. A combination of federal sugar subsidies, federal regulations on pollution, and federal control of Lake Okeechobee (a giant lake in southern Florida) runoff guidelines has created a recipe for disaster.

    The federal sugar subsidy prevents Americans from buying sugar from Cuba and other sources. This means that we have to produce our own sugar and that we pay the world’s highest price for sugar. It also means that we grow sugar and sugar substitutes in a high-cost fashion using a lot of fertilizer!

    According to ABC News:

    Once the red tide is inshore, the algae can grow even more using man-made nutrients, such as fertilizer.

    "The increase in runoff may likely exacerbate an existing bloom," Weisberg said.

    Earlier this week, Florida Gov. Rick Scott called for the FWC and FDEP to "mobilize all available resources" to address the impacts of the red tide.

    On Friday, Scott blamed the cause of the blooms on "the federal government releasing water from Lake Okeechobee."

    "For too long, Floridians have had to deal with harmful algal blooms caused by the federal government releasing water from Lake Okeechobee into our rivers and coastal estuaries," Scott said in a press release.

    So, there you have it. Federal rules, regulations, and regulators are the cause. The federal sugar subsidy has created a massive increase in fertilizer use in agriculture in southern Florida and in other states, such as Louisiana. The EPA protects farmers and others who dump chemicals into the water by setting protection “limits,” and then federal officials dump excessive pollutants into our water ways and we have no recourse against them.

    I think the solutions are simple and straightforward. End the sugar subsidies and the EPA and its protection limits. Restore the right of the people to sue polluters that cause demonstrable harm.


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    Neo-banking authors devote strong efforts to historical studies which they intend to support the thesis that a free-banking system would protect economies from cycles of boom and depression, owing to the “monetary equilibrium” mechanism. Nevertheless the empirical studies produced thus far have not focused on whether free-banking systems have prevented credit expansion, artificial booms and economic recessions. Instead they have centered on whether bank crises and runs have been more or less frequent and severe in this type of system than in a central-banking system (which is obviously quite a different issue).1

    In fact, in one study George A. Selgin looks at the occurrence of bank runs in different historical free-banking systems versus certain systems controlled by a central bank and reaches the conclusion that bank crises were more numerous and acute in the second case.2 Moreover the main thesis of the main neo-banking book on free banking in Scotland consists entirely of the argument that the Scottish banking system, which was “freer” than the English one, was more “stable” and subject to fewer financial disturbances.3

    However, as Murray N. Rothbard has indicated, the fact that, in relative terms, fewer banks failed in the Scottish free-banking system than in the English system does not necessarily mean the former was superior.4 Indeed bank failures have been practically eliminated from current central-banking systems, and this does not make such systems better than a free-banking system subject to legal principles. It actually makes them worse. For bank failures in no way indicate that a system functions poorly, but rather that a healthy, spontaneous reversion process has begun to operate in response to fractional-reserve banking, which is a legal privilege and an attack on the market.

    Therefore whenever a fractional-reserve free-banking system is not regularly accompanied by bank failures and suspensions of payments, we must suspect the existence of institutional factors which shield banks from the normal consequences of fractional-reserve banking and fulfill a role similar to the one the central bank currently fulfills as lender of last resort. In the case of Scotland, banks had so encouraged the use of their notes in economic transactions that practically no one demanded payment of them in gold, and those who occasionally requested specie at the window of their banks met with general disapproval and enormous pressure from their bankers, who accused them of “disloyalty” and threatened to make it difficult for them to obtain loans in the future. 

    Furthermore, as Professor Sidney G. Checkland has shown5, the Scottish fractional-reserve free-banking system still went through frequent, successive stages of credit expansion and contraction, which gave rise to economic cycles of boom and recession in 1770, 1772, 1778, 1793, 1797, 1802–1803, 1809–1810, 1810–1811, 1818–1819, 1825–1826, 1836–1837, 1839, and 1845–1847. In other words, even though in relative terms fewer bank runs occurred in Scotland than in England, the successive stages of boom and depression were equally severe, and despite its highly praised free-banking system, Scotland was not free from credit expansion, artificial booms and the subsequent stages of serious economic recession.6

    The nineteenth-century Chilean financial system provides another historical illustration of the inadequacy of fractional reserve free-banking systems to prevent artificial expansion and economic recessions. In fact during the first half of the nineteenth century, Chile had no central bank and implemented a 100-percent reserve requirement in banking. For several decades its citizens firmly resisted attempts to introduce a fractional-reserve banking system, and during those years they enjoyed great economic and financial stability. The situation began to change in 1853, when the Chilean government hired Jean-Gustav Courcelle-Seneuil (1813–1892), one of the most prominent French fractional-reserve free-banking theorists, as one of the most prominent French fractional-reserve free-banking theorists, as professor of economics at the University of Santiago de Chile.

    Courcelle-Seneuil’s influence in Chile during the ten years he taught there was so great that in 1860 a law permitting the establishment of fractional-reserve free banking (with no central bank) was enacted. At this point the traditional financial stability of the Chilean system gave way to stages of artificial expansion (based on the concession of new loans), followed by bank failures and economic crises. The convertibility of the paper currency was suspended on several occasions (1865, 1867, and 1879), and a period of inflation and serious economic, financial and social maladjustment began. This period resides in the collective memory of Chileans and explains why they continue to mistakenly associate financial disturbances with the doctrinal economic liberalism of Courcelle-Seneuil.7

    Moreover the fact that various historical studies appear to indicate that fewer bank runs and crises arose in free-banking systems than in central-banking systems does not mean the former were completely free of such episodes. Selgin himself mentions at least three instances in which acute bank crises devastated free-banking systems: Scotland in 1797, Canada in 1837, and Australia in 1893.8If Rothbard is correct, and in the rest of the cases institutional restrictions played the role of central bank to at least some extent, then the number of bank crises might have been much larger in the absence of these restrictions.9 At any rate we must not consider the elimination of bank crises to be the definitive criterion for determining which banking system is the best. If this were the case, even the most radical fractional-reserve free-banking theorists would be obliged to admit that the best banking system is that which requires the maintenance of a 100 percent reserve, since by definition this is the only system which in all circumstances prevents bank crises and runs.10

    In short, historical experience does not appear to support the thesis of modern fractional-reserve free-banking theorists. Bank credit expansion gave rise to cycles of boom and depression in even the least controlled free-banking systems, which were not free from bank runs and failures. The recognition of this fact has led certain neo-banking authors, such as Stephen Horwitz, to insist that though historical evidence against their views is of some significance, it does not serve to refute the theory that fractional-reserve free banking produces only professor of economics at the University of Santiago de Chile. benign effects, since strictly theoretical procedures must be used to refute this theory.11

    Excerpted from Money, Bank Credit, and Economic Cycles
    • 1. 145To date, theorists have carefully examined around sixty free-banking systems from the past. The conclusion they have generally drawn follows:

      Bank failure rates were lower in systems free of restrictions on capital, branching and diversification (e.g., Scotland and Canada) than in systems restricted in these respects (England and the United States). However this matter is irrelevant from the standpoint of our thesis, since the above studies do not specify whether cycles of expansion and economic recession were set in motion.

      See The Experience of Free Banking, Kevin Dowd, ed., pp. 39–46. See also Kurt Schuler and Lawrence H. White, “Free Banking History,” The New Palgrave Dictionary of Money and Finance, Peter Newman, Murray Milgate and John Eatwell, eds. (London: Macmillan, 1992), vol. 2, pp. 198–200. The above excerpt appears on p. 108 of this last article
    • 2. George A. Selgin, “Are Banking Crises a Free-Market Phenomenon?” a manuscript presented at the regional meeting of the Mont Pèlerin Society, Rio de Janeiro, September 5–8, 1993, pp. 26–27.
    • 3. White, Free Banking in Britain
    • 4. Rothbard, “The Myth of Free Banking in Scotland,” Review of Austrian Economics 2 (1988): 229–45, esp. p. 232.
    • 5. Sidney G. Checkland, Scottish Banking: A History, 1695–1973 (Glasgow: Collins, 1975). White himself recognizes in his book that Checkland’s is the definitive work on the history of the Scottish banking system.
    • 6. Though much work remains to be done, historical studies on fractional-reserve free-banking systems with very few (if any) legal restrictions and no central bank appear to confirm that these systems were capable of triggering significant credit expansion and provoking economic recessions. This is what took place, for instance, in Italian and Spanish financial markets in the fourteenth and sixteenth centuries (see chapter 2, section 3), as Carlo M. Cipolla and others have revealed, as well as in Scotland and Chile, as we indicate in the text.
    • 7. Albert O. Hirschman, in his article, “Courcelle-Seneuil, Jean-Gustav,” The New Palgrave: A Dictionary of Economics, John Eatwell, Murray Milgate, and Peter Newman (London: Macmillan, 1992), vol. 1, pp. 706–07, states that Chileans have even come to demonize Courcelle-Seneuil and to blame him for all the economic and financial evils which befell Chile in the nineteenth century. Murray N. Rothbard believes this demonization is unjust and stems from the fact that the poor functioning of the free-banking system Courcelle-Seneuil introduced in Chile also discredited the deregulating initiatives he launched in other areas (such as mining), when these efforts had a positive effect. See Murray N. Rothbard, “The Other Side of the Coin: Free Banking in Chile,” Austrian Economics Newsletter (Winter, 1989): 1–4. George Selgin responds to Rothbard’s article on free banking in Chile in his paper, “Short-Changed in Chile: The Truth about the Free-Banking Episode,” Austrian Economics Newsletter (Spring–Winter, 1990): 5ff. Selgin himself acknowledges that the period of free banking in Chile from 1866 to 1874 was an “era of remarkable growth and progress,” during which “Chile’s railroad and telegraph systems were developed, the port of Valparaiso was enlarged and improved, and fiscal reserves increased by one-quarter.” According to the Austrian theory, all of these phenomena are actually symptoms of the substantial credit expansion which took place during those years and was ultimately bound to reverse in the form of a recession (as, in fact, occurred). However Selgin attributes the subsequent bank crises (but not the recessions) to the Chilean government’s maintenance of an artificial parity between gold and silver. When gold rose in value, this parity resulted in the massive outflow of gold reserves from the country (see Selgin, “Short-Changed in Chile,” pp. 5, 6 and footnote 3 on p. 7).
    • 8. Selgin, “Are Banking Crises a Free-Market Phenomenon?” Table 1(b), p. 27.
    • 9. Raymond Bogaert appears to confirm Rothbard’s thesis. According to Bogaert, we have documented proof that of 163 banks created in Venice starting at the end of the Middle Ages, at least 93 failed. Raymond Bogaert, Banques et banquiers dans les cités grecques, p. 392 footnote 513.
    • 10. Thus Selgin himself recognizes: “A 100-percent reserve banking crisis is an impossibility.” See George A. Selgin, “Are Banking Crises a Free-Market Phenomenon?” p. 2.
    • 11. With respect to methodology, we fully concur with Horwitz’s position (see his “Misreading the ‘Myth’, p. 167). However it is curious that an entire school which emerged with the analysis of the supposedly beneficial results of the Scottish free-banking system has been forced to stop relying on historical studies of the free-banking system. Stephen Horwitz, commenting on Rothbard’s review of free-banking history, concludes:

      If Rothbard is correct about them, we should look more sceptically at Scotland as an example. But noting the existence of government interference cannot by itself defeat the theoretical argument. The Scottish banks were neither perfectly free nor a conclusive test case. The theory of free banking still stands, and its opponents need to tackle it on both the historical and the theoretical level to refute it. (p. 168)

      This is precisely what we have attempted in this book.

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