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Capitalism and Morality 2019 SeminarJul 16, 2019
Economics: Vocation or Profession?Jul 16, 2019
Should economics be pursued as a profession or a vocation? Below I argue that this choice of subjective orientation is enormously important, and tends to dictate whether an economist will serve the cause of truth and freedom, or waste his or her talents on convenience, ephemera, and statism.
The New Shorter Oxford English Dictionary gives one definition of "vocation" as "The work or function to which a person is called; a mode of life or employment regarded as requiring dedication." The eminent semanticist S.I. Hayakawa also emphasizes "dedication" as the distinctive feature of a vocation which differentiates it from a profession.
In praxeological terms, a vocation involves what Ludwig von Mises called "introversive" labor while a profession involves "extroversive" labor. The essence of introversive labor is work undertaken solely for its own sake and not as a means to a more remote end. Extroversive labor, in contrast, is performed because the individual "prefers the proceeds he can earn by working to the disutility of labor and the pleasure of leisure."
One of the "two most conspicuous examples" of introversive labor, according to Mises, is "the search for truth and knowledge pursued for its own sake and not as a means of improving one's own efficiency and skill in the performance of other kinds of labor aiming at other ends." The second is "genuine sport, practiced without any design for reward and social success."
It is not that the effort expended by the "truth seeker" or "mountain climber" does not involve the disutility of labor, rather "it is precisely overcoming the disutility of labor that satisfies him." Thus genuine truth seeking in any scientific discipline qualifies economically as "consumption" and its pursuit as a vocation.
The pursuit of almost any vocation, says Mises, requires "not only the personal efforts of the individuals concerned, but also the expenditure of material factors of production and the produce of other peoples' extroversive . . . labor that must be bought by the payment of wages."
In other words, the search for new truth in economics, as in any pure science, necessitates, in addition to introversive labor, an institutional framework composed of a structure of complementary goods that has been deliberately and rationally constructed by one or more property owners.
The founding members of the Austrian school pursued economic research neither for pecuniary gain nor because they sought professional recognition or an influence on public policy. According to Mises, "When Menger, Böhm-Bawerk and Wieser began their scientific careers . . . [t]hey considered it as their vocation to put economic theory on a sound basis and they dedicated themselves entirely to this cause [emphases are mine]." These three eminent Austrians, therefore, were not economists by profession but by vocation.
The "vocational" economist takes a position in academia or works in some other profession such as banking, journalism, industry or government in order to obtain the concrete means necessary to sustain and complement his efforts to discover new truths or expound and apply established truths in his economic research and writing.
The "professional" economist, in contrast, aims at earning a livelihood, eliciting acclaim from peers, achieving public fame, shaping political policies or, most likely, a combination of these ends.
Thus the difference between the vocational economist and the professional economist is not their objective method of earning a living but the subjective ends aimed at, which are unobservable. Nonetheless, despite the subjective element involved, the two kinds of economists can be readily distinguished from each other by scrutinizing the disparate views they express toward economic research, particularly its truth content and perceived rewards.
Vocational economists like Murray Rothbard are not allergic to using the unfashionable terms "truth" and "law" when characterizing the science of economics. For Rothbard economics is a substantive body of immutable and universal causal laws that are logically deduced from the incontrovertible fact that people employ means to attain their most desired ends. As such, Rothbard held that "all these elaborated laws [of economics] are absolutely true" and that "economics does furnish . . . existential laws."
Furthermore, in the 1950's and 1960's, Rothbard was working on Austrian economics in obscurity and virtual isolation. He did not obtain a full time academic position until 1966 and, before then, was earning a precarious living on foundation grants while he soldiered on in building up the Austrian theoretical edifice. Yet Rothbard revealed in an interview in 1990 that he had been quite content during this period: "Any chance to write a book or meet new people was terrific." These are the views and the attitudes of the ideal vocational economist.The Problem of the Professional
Paul Samuelson is the exemplar of the modern professional economist. When Samuelson once grandiosely declared, "I can claim in talking about modern economics I am talking about me," he spoke truer than he knew. In his approach to economic research Samuelson is a self-proclaimed follower of the "views of Ernst Mach and the crude logical positivists."
These so-called philosophers of science contended, "good theories are simply economical descriptions of the complex facts of reality that tolerably well replicate those already-observed or still-to-be-observed facts." Of course economic theory formulated as a shorthand summary of a past sequence of observable and non-repeatable historical facts cannot possibly elucidate the immutable causal laws that operate and interact to produce a unique and complex economic phenomenon at a later moment in history. Nonetheless, Samuelson embraces this view of economic theory: "Not for philosophical reasons but purely out of long experience in doing economics that other people will like and that I myself will like. . . . When we are able to give a pleasingly satisfactory 'HOW' for the way of the world, that gives the only approach to 'WHY' that we shall ever attain."
Samuelson and Solow's formulation of the now discredited stable Philip's Curve tradeoff between inflation and unemployment is an example of such Machian theorizing in action. Without doubt, the Philips Curve for a time was well liked by Samuelson, Solow and other professional economists and even used by policymakers, but its truth content in the face of the stagflation that developed in the 1970's was exactly nil.
Ultimately, however, the professional economist need not fret overly much about whether he can harvest a grain of truth from such unrealistic models, because his reward for pursuing economic research lies elsewhere. According to Samuelson , "In the long run the economic scholar works for the only coin worth having—our own applause."
Elsewhere, Samuelson described scientists, including professional economists, as being "as avaricious and competitive as Smithian businessmen. The coin they seek is not apples, nuts, and yachts; nor is it coin itself, or power as that term is ordinarily used. Scholars seek fame. The fame they seek . . . is fame with their peers—the other scientists whom they respect and whose respect they strive for."
Samuelson's account of the extroversive reward sought after by modern professional economists clearly—though perhaps unwittingly—reveals that their research endeavors are not governed primarily by a search for truth.Why We Must Choose
Mises gives a compelling sociological interpretation of why academic researchers in the aprioristic sciences such as economics and philosophy are diverted from seeking truth to striving after other ends. As universities traditionally developed, the professors were not only supposed to teach but also to make original contributions to their science.
Yet, as Mises noted, very few individuals living during any historical epoch are endowed with such ability. In empirical sciences, whether of the natural or historical variety, however, the illusion that all academic researchers contribute something valuable to their science can be plausibly sustained because there is no visible distinction between the scientific methods employed by the creative genius and those resorted to by the inferior researcher.
As Mises explained:
The great innovator and the simple routinist resort in their investigations to the same technical methods of research. They arrange laboratory experiments or collect historical documents. The outward appearance of their work is the same. Their publications refer to the same subjects and problems.
Research in economics is quite different: it requires sustained, rigorous and systematic thinking, a faculty which very few possess and even fewer are willing to exercise. This is true of both the creative genius who constructs a great edifice of economic theory as well as those who seek to refine, extend and apply his system to new problems. His students and followers must also expend many years of their life and a great deal of rigorous mental effort in mastering the entire theoretical system before they can make even minor contributions to economics. Therefore, Mises concluded, in economics:
[T]here is nothing that the routinist can achieve according to a more or less stereotyped pattern. There are no tasks which require the conscientious and painstaking effort of sedulous monographers. There is no empirical research; all must be achieved by the power to reflect, to meditate, and to reason. There is no specialization, as all problems are linked with one another. In dealing with any part of the body of knowledge one deals actually with the whole.
Those aspiring economics professors who lack the intellectual faculties or temperament needed to conduct systematic theoretical research therefore must find another field in which to make their required research contributions. For example, in the German-language universities of the late nineteenth and early twentieth centuries, these men turned to economic history and descriptive economics. Mises's perceptive sociological analysis explains the rise to dominance and entrenchment of the German historical school in the universities as well as its hysterical antipathy toward economic theory. According to Mises:
The fiction that in the sciences all professors are equal does not tolerate the existence of two types of professors in economics: those who work independently in economics [as original theorists]; and those who come from economic history and description. The inferiority complex of these "empiricists" gives them a prejudice against theory.
By the 1920's the German historical school was on its last legs but still ensconced in the professorial chairs. The members of the third generation of the school were a dull and undistinguished lot except for Werner Sombart, who had been a student of Gustav Schmoller's, the leading German historicist of the second generation. Mises, who knew Sombart personally, portrayed him as the quintessential professional economist. It is worthwhile quoting in full Mises's entertaining and eviscerating description of Sombart, because the personality that emerges is the antithesis of the vocational economist:
Werner Sombart was the great master of his set. He was known as a pioneer in economic history, economic theory, and sociology. And he enjoyed a reputation as an independent man, because he had once aroused Kaiser Wilhelm's anger. Professor Sombart really deserved the recognition of his colleagues because to the greatest degree he really combined in his person all their shortcomings. He never knew any ambition other than to draw attention to himself and to make money. His imposing work on modern capitalism is a historical monstrosity. He was always seeking public applause. He wrote paradoxes because he could then count on success. He was highly gifted, but at no time did he endeavor to think and work seriously. Of the occupational disease of German professors—delusions of grandeur—he had acquired an elephantine share. When it was fashionable to be a Marxian, he professed Marxism; when Hitler came to power, he wrote that the Fuehrer receives his orders from God! (Mises 1978, pp. 102–03)
Professionalist aspirations and the culture it engenders are not only inconsistent with truth seeking in economics, however, they are positively antithetical to it. For the professionalization of a scientific discipline, particularly a social science like economics, almost always proceeds hand in hand with the expansion of government interventionism.
As Mises put it "The development of a profession of economists is an offshoot of interventionism." The reason for this inevitable connection rests on two facts. On the one hand, the State requires a class of intellectuals and specialists for designing, implementing, and providing rationalizations for various interventions into the market economy. On the other hand, those intellectuals who seek the regular income and prestige that accompany the professionalization of their discipline are ever ready to oblige, because the ability of an intellectual to earn his living researching and writing in his chosen field on the free market is always precarious at best.
As the interventionist State expands, it reinforces the need for trained experts and the university system obtains increasing subsidies from government to initiate and expand graduate programs that will provide such personnel. The lucrative positions in these programs are naturally bestowed on those economists who spearhead the drive to professionalize and are, therefore, most active and outspoken in their support of government interventionism.
In the U.S. the most extreme and thoroughgoing instances of domestic interventionism occurred during the two World Wars of the twentieth century. It was therefore no surprise that the movement to professionalize American economics, which began in the 1880's, experienced quantum leaps during these war crises. For when the State goes to war it needs professional expertise to plan and direct the massive mobilization of the resources it requires. This translates into a cornucopia of lucrative and prestigious jobs for economic experts and specialists in the bureaus and advisory boards of the political planning apparatus that centrally directs the war economy.
In his brilliant book on the professionalization of American economics, Michael Bernstein identifies the central role played by World War II in the ultimate success of this movement, perceptively observing:
Under the novel and unrelenting demands posed by national mobilization, modern economic theory had proved its worth. . . . Not individualism but rather statism provided the special circumstances within which the high hopes and great expectations of generations of professionalizers could be realized. . . . It is one of the great ironies of this history that a discipline renowned for its systematic portrayals of the benefits of unfettered, competitive markets would first demonstrate its unique operability in the completely regulated and controlled economy of total war.
Of course their wartime experience led economists to recognize the potentially great material benefits that would accrue to them from a permanent alliance between their profession and the centralized American State. They responded by formally reorganizing the discipline and reshaping its educational methods and requirements so as to accommodate the prospective needs of the emerging postwar "national security state." Bernstein gives an incisive account of how the American economics profession finally established itself in service to a centralized and interventionist leviathan State:
World War II provided the first systematic demonstration of the beneficence to be won from the largesse of the central government . . . . As a matter of course, there emerged a determination to evaluate and reconfigure educational programs in the field, more rigorously stipulate its varieties of expertise and methodologies, and pursue consensus about its central principles and policy orientations. That is to say, that out of the crucible of national mobilization came the beginnings of a professional identity and self-confidence that, while resolutely sought after since the late nineteenth century, had, up to that point, been elusive and fleeting.
Bernstein goes on to identify some of the arcane sub-disciplines within professionalized economics that were developed in response to the needs of the emerging American super-state during the Cold War era which helped to maintain it on a permanent war footing.
The "decision-making sciences" such as linear programming and operations research were developed during World War II to solve the logistical problems associated with supplying overseas troops in different theaters of operation. Game theory was reoriented and refined to assist in the solution of strategic military problems associated with the Cold War conflict—with generous funding from the Department of Defense and especially the Office of Naval Research.
And the development of both mathematical growth theory and the practical application of Keynesian macroeconomics embodied in the Kennedy-era New Economics were in large part stimulated by Cold War concerns. As Bernstein (2001, p. 108) notes with regard to the Keynesian New Economics: "American economists found themselves poised to participate in the realization of some of the most significant statist aims of the cold war era . . . a vigorous national economy was essential both to equip the armed forces and to demonstrate the superiority of American capitalism."
The remarkable proliferation of hyper-specialized fields that occurred during and after World War II led to a disintegration of economic theory, signified by the disappearance of the general economic treatise. No longer was there an integrated system of general economic principles that was held in common and applied to the analysis of all policies and problems by those who called themselves economists. Now each sub-field of research had its own special theory which was more or less sealed off from general economic theory. Even general theory itself was now compartmentalized into microeconomics and macroeconomics.
This specialization or, more accurately, disintegration of economics compounded by the postwar trend toward a positivist approach to economic theory, whether of the Samuelsonian or Friedmanite variants, destroyed the formidable barrier that had previously confined professional economists with no faculty or vocation for theoretical research to economic history and descriptive economics. They now began to abandon these peripheral areas and to invade what was once the domain of economics proper in droves. Though failing to master the great praxeological system of economic theory that had taken shape in the interwar years, these postwar economists could now undertake research in the splintered, ultra-specialized areas of growth theory, labor economics, industrial organization, oligopoly theory and so on ad infinitum.
However, the unrealistic theoretical models constructed by professional economists then and now can never elucidate the essential laws governing the actual market phenomena associated with their disjointed fields of research. For as Mises pointed out: "The economist must never be a specialist. In dealing with any problem he must always fix his gaze upon the whole system. . . . Economics does not allow of any breaking up into special branches. It invariably deals with the interconnectedness of all the phenomena of action."A Fiat Profession
Our discussion thus far leads to an important general point. The economics profession is a fiat phenomenon in the same sense as inconvertible paper money. Neither would or could exist on a market free of a specific pattern of government interventions. Government cannot directly command and coerce a newly issued fiat money into circulation in the market economy. Government must first impose a series of interventionist measures such as legal tender laws, repeated suspension of convertibility between paper promissory notes and the underlying gold money, the refusal to enforce gold clauses in private contracts, the banning of the private ownership of gold, etc. These interventions distort market processes and prepare the way for the gradual emergence of fiat money.
The same is true of the emergence of the economics profession. Government has no power to directly design and establish a profession with its peculiar and intricately interwoven customs, conventions, research culture, and institutional infrastructure. Nonetheless, a natural vocation like economics can be transformed into a profession as a result of the distortion of market processes and the disturbing of property arrangements caused by wars, political usurpation and subsidization of higher education, and the establishment of centralized bureaus and agencies to implement and oversee economic interventions.
The medical profession is therefore a natural profession that would exist on a free market because it has a natural clientele; the economics profession, along with most other social science professions, is a fiat profession that has no free market clientele and would exist as a truth seeking vocation in the absence of a particular historical pattern of government interventions.1
To sum up: the vocational economist strives to master the system of economic theory as handed down by the great system builders and innovators of the past. Once this mastery is achieved, then, depending on his ability, he is poised either to expound and apply this theoretical system, to contribute a few important innovations, or to present a thoroughgoing reformulation that embodies a number of major advances.
There are very few individuals who are capable of successfully embarking on even the first of these paths. Moreover, regardless of which path is taken, the vocational economist is driven forward by a thirst for truth which is never slaked. He seeks to know ever more about what Rothbard termed "the structure of reality as embodied in economic law."
Furthermore the extroversive labor he performs for a livelihood, regardless of the field, is merely a means to this and other consumption ends that rank high on his value scale. All other things equal, he is indifferent toward a position in academia except as it provides a more efficient method of pursuing his vocation. Public acclaim and the recognition of his peers, if they come, are not sought after by him but are at most valued byproducts of his activities. Finally, the vocational economist measures progress in his discipline by the quantity and quality of minds that have mastered economic theory, because his own search for truth is facilitated by subjecting his work to the critical evaluation of others pursuing the same calling.
Contrariwise, the professional economist aims, in his research activities, at a number of extroversive ends. These include the approbation of his colleagues, public fame, intellectual influence in shaping government policies, professional advancement and prestige, and, of course, raw power and money. To a great extent, these ends are attainable only with government subsidies and largesse and so he naturally supports an expansive and interventionist state. His natural roosting place, to which he continually returns after his lucrative stints in government service, nonprofit think tanks, and international bureaucracies are the large universities that are subsidized or directly controlled by government. He views progress in economics as a matter of the multiplication of its sub-disciplines and specialized bodies of theory, the increase of the sheer number of bodies in graduate programs, and especially the expansion of opportunities to obtain lucre and positions of power in advising the interventionist, Welfare-Warfare State.
As Mises perceptively noted as early as 1949, professional economists "rival the legal profession in the supreme conduct of political affairs. The eminent role they play is one of the most characteristic features of our age of interventionism."1. I am very grateful to Guido Hülsmann for calling this general implication of my argument to my attention.
An Equity-Based Approach to the Money MultiplierJul 16, 2019
A private graduate seminar, recorded at the Mises Institute in Auburn, Alabama, on 16 July 2019.
The Theory of InterestJul 16, 2019
Recorded at the Mises Institute in Auburn, Alabama, on 16 July 2019.
Calculation and SocialismJul 16, 2019
Recorded at the Mises Institute in Auburn, Alabama, on 16 July 2019.
Austrian Capital TheoryJul 16, 2019
Recorded at the Mises Institute in Auburn, Alabama, on 16 July 2019.
My Mises U Experience: Why Austrian Economics Brought Me to AuburnJul 16, 2019
This is Nathan Moore's first year at Mises University. The Auburn University student shares what he's most excited to learn about.
Without our generous supporters, Mises University would not be possible. Donate today at Mises.org/MisesU2019.
Are India and China Booming as Much as They Claim?Jul 16, 2019
One of the hot topics discussed among many economists in the last month was the anomalies found in the Indian GDP estimates. A working paper published by Arvind Subramanian, the former Chief Economic Advisor to the Government of India exposed how that the GDP estimates of India are overstated. His credentials as the former CEA in the finance ministry for four years — up until 2018 — lend additional credence to his claims.1
Subramaniam's paper points out that the change in the data sources and methodology for the estimation of real Gross Domestic Product since 2011–2012 has led to a significant overestimation of the growth estimates. The actual growth between 2011 and 2017 is estimated at around 7 percent as per the official sources. However, according to Subramanian, the actual growth may have been only around 4.5 percent. A part of this overestimation according to the paper may be attributed to a key methodological change.
Subramaniam also tweeted some of the evidence which was discussed in the study.
Apart from all these econometric calculations, these estimates are also dubious from a layman’s perspective. The official estimates claim that the real GDP growth was 8% in 2016–2017, the period which witnessed a series of reforms including demonetization, new goods and services taxes, implementation of Insolvency and Bankruptcy Code, and new real estate regulation. Rationally speaking, all these should dampen the economic growth in the short term due to uncertainty and change in the behavior of people. However, these were not reflected in the official GDP estimates (although a slight change in the quarterly GDP estimates was seen).Problems with Chinese Data
Earlier this year, a study reported that China’s economy is about 12 percent smaller than the official figures, and also that the real growth has been exaggerated by about 1.7 percent annually from 2008–2016.
The study was published in the Brookings papers of economic activity by a team of economists namely; Wei Chen, Xilu Chen, Chang-Tai Hsieh, and Zheng (Michael) Song: "China’s National Bureau of Statistics (NBS) adjusts the data provided by local governments to calculate GDP at the national level. The adjustments made by the NBS average 5% of GDP since the mid-2000s."
The official GDP estimates and the Brookings adjusted estimates as taken from the study is given below.
Source: BrookingsPotential Implications of Incorrect GDP Estimates
The differences in estimates are significant, especially since these estimates are used to make policy. After all, what happens if the flight instruments inside a cockpit show bad estimates to the pilots? The pilots are misled by wrong data and the journey might end up in a disaster. Although GDP is not considered as a complete measure of well-being, policymakers which follow incorrect GDP estimates are playing with fire.
Arvind states in the paper that
If statistics are potentially misleading about the overall health of the economy, they influence the impetus for reform in serious and perverse ways. For example, if India’s GDP growth had been appropriately measured, the urgency to act on the banking system challenges or agriculture or unemployment could have been very different. It is understandable when policy makers favour the status quo if that status quo is apparently delivering the fastest growth rate of any major economy in the world. But if growth is actually 4.5 percent instead of 7 percent, attitudes to policy action should and would be very different.
In the case of China's data, the Brookings authors place the blame on the local governments. With the introduction of the local economic performance in the evaluation of local officials, the competition among the officials intensified which forced them to inflate the local GDP numbers.
Interestingly, both papers conclude their results by explicitly indicating that increasing political pressure is the primary cause of all this havoc. Unfortunately, economists stand helpless and are left with two options; either be a part of this roguery or resign and flee the country.
I conclude by quoting authors’ own concluding notes from both papers which touched us as researchers and academicians in the field.
Interestingly, although the NBS adjusts downwards local statistics, it does not report the adjusted local statistics, perhaps out of a desire to not confront powerful local leaders. Given the weak position of the NBS and the strong position of local leaders in the Chinese political system, it is not surprising that statistical data are potentially biased
— Wei Chen, Xilu Chen, Chang-Tai Hsieh, and Zheng (Michael) Song
If statistics are sacred enough to require insulation from political pressures, they are perhaps also too important to be left to the statisticians alone. Nothing less than the future of the Indian economy and the lives of 1.4 billion citizens rides on getting numbers and measurement right.
As we measure, so India will go.
— Arvind Subramanian1. A story which should be read along with this new revelation is the series of resignations of economists who held distinguished positions at the Ministry of Finance since 2014. It started with the untimely and abrupt resignation of Raghuram Rajan, the 23rd Governor of Reserve Bank of India (RBI) in 2016, a world renowned economist who predicted the financial crisis of 2008. Later in 2018, the resignation of Arvind Subramanian, the CEA to the Government of India was also a totally unanticipated one. This was followed by the stepping down of Arvind Panagariya, the vice chairman of NITI Aayog (policy think thank) and then Urjit Patel, the 24th RBI governor holding the office for a period of just 2 years. Most recently Viral Acharya, the RBI deputy governor also resigned after having a clash with the government regarding the autonomy of the central bank.
“Raise My Taxes” Really Just Means "Raise Others’ Taxes"Jul 3, 2019
As has happened during every recent presidential campaign that might result in higher taxes on “the rich” (i.e., every one with a Democratic candidate), some of the 1 percent (or the .1 or .01 percent) have come out in favor of “taxing me more,” in the name of paying what they think is their fair share and generating government funds to address poverty, wealth inequality, or the latest in progressive proposals.
While the list of supporters changes, whoever is among the latest “raise our taxes” promoters get widely lauded for their altruism. However, there have always been serious problems with their “sainthood” story.
First we must question how the rich got that way. What if they did so by force, fraud, or deception? If so, they got rich by harming others. In that case, which reveals government failure to do an effective job of protecting their citizens against predatory actions, the appropriate response is to compensate those harmed and prevent similar harms in the future. It is not to pay government more in taxes. That doesn’t make those harmed whole. In fact, it may do nothing for them. And, however utopian the beliefs about how the government would spend the money, in fact, government will spend the resources however it chooses (and remember, the “other” party will also be in charge part of the time). Further, we must take into account the long record of government failure to do anything efficiently and effectively, not to mention the harm its policies often impose on those not at the top (e.g., licensing laws, supply restrictions, and import barriers), which makes it a poor mechanism to actually achieve something more like utopia than dystopia.
Alternatively, what about people who got rich via voluntary arrangements without force, fraud, or deception? They benefited by making others better off, not at their expense. Further, since the market provides a premium reward for finding ways to benefit large numbers of others, to get really rich often means benefiting millions. And the benefits to others can easily dwarf the benefits captured by their creators. Yet while income and wealth data count the market wealth increases of producers, it omits the wealth (or well-being) increases to the benefited consumers, allowing mutual gains to appear as the rich benefiting at the expense of others because their share of measured income or wealth rises (this is also only one of many measurement misdemeanors behind inequality rhetoric and promises to fix it). The core takeaway, though, is that when one earned more because he or she benefited others, there is no harm to society or unfair burden to others that needs to be atoned for with higher taxes in order to pay one’s “fair share.”
In either of the cases above, paying more taxes to government is not a solution, much less an effective or justified one. Therefore, “fair share” rhetoric often reduces to “more for me” desires by those who expect more for themselves from the arrangement (including far-from-poor government employees who will administer the bureaucracies behind the utopia-to-be). In addition, it represents envy on the part of those who wish to punish the successful. But not only is relying on one of the seven deadly sins a poor basis for governing that either defends our unalienable rights or our general welfare, we must remember that punishing the successful means giving them far less of an incentive to use their assets to improve others’ lives as the means to improving their own, which is a highly questionable way to help those others.
The inadequate logic of the “fair share” claim is reinforced by the fact that the group being accused of violating that standard in fact bears far greater tax burdens, in total and as a share of their income, than those accusing them. And those far higher taxes aren’t paying for proportionately greater benefits to them. And there is never a cogent reason provided for why someone who has a lower income—whose market efforts benefitted others less--thereby acquires a greater property right to others’ earnings acquired voluntarily, which is the obverse side of “fair share” complaints. And it is not as if the non-rich get no government assistance now, given the trillions of dollars that have been spent on poverty programs and income redistribution in America.
The “tax me more” saints are also mainly proposing to tax others for their purposes.
The small fraction of the highest earners or the wealthiest who claim to be more noble higher tax volunteers are doing so only if others similarly situated are forced to do the same, whether they agree or not. If there are, say, a couple dozen “tax me more” volunteers out of a top wealth or income tier with 70,000 households, it is clear that the volunteers are actually promising to pay very little of the total cost of what they advocate. The main effect is actually to force others, who need not in any way share their views or evaluations of the programs in question, to pay for their favored causes, by exploiting voters’ envy and desires to get something for nothing.
In fact, when viewed over time, current rich tax volunteers would also pay far less than they propose for future generations. For example, if you are rich today at age 80, proposing higher income and wealth taxes would only affect you for a few years, after decades of being able to keep more of your earnings and compound your investments than now proposed. But going forward, someone aspiring to wealth who had to spend his or her entire life keeping far less of their income and investments would be punished heavily for their entire working and investing life. There would be far fewer who end up rich. Now the envious might consider that a benefit. But the heightened disincentives would lead to far less production for others, harming them, and less wealth in the hands of those who would pursue charitable ends, which is likely to undermine the stated intent to do more for others than to achieve it.
In sum, ”fair share” assertions for higher taxes on higher earners are far from compelling, and those who portray themselves as altruistic secular saints with “tax me more” rhetoric are, in fact, proposing that others finance most of what they want government to do, and impose far more adverse treatment of future generations than they propose for themselves. And unlike those who offer them plaudits for doing so would do better to look to F.A. Harper, in his Liberty: A Path to Its Recovery, who reminded us that:
Assistance given voluntarily … is truly charity; that taken from another by force … is not charity at all, in spite of its use for avowed “charitable purposes.” The virtue of compassion and charity cannot be sired by the vice of thievery. … All told, the process of “political charity” is about as complete a violation of the requisites of charity as can be conceived.
Why One Corporation Can Dictate Measles Policy in America
Scanning the headlines, one might notice that there is now a multitude of articles on the measles virus in most major media outlets. Outbreaks in places like New York City have led to what the AP calls "extraordinary police powers" to mandate vaccinations or quarantine those suspected of the disease.
Proponents of mandatory vaccines defend these measures while contended there is too much resistance to measles vaccination based on a variety of philosophical or religious concerns. They want new state laws eliminating the possibility of opting out of any vaccination for any non-medical reasons.Why So Few Choices in Vaccines?
But why are some people resistant to the measles vaccine? And more importantly, are there any ways that manufacturers of vaccines can address some of these issues?
There are, not surprisingly, a wide variety of reasons given by patients and guardians for choosing to not be vaccinated. Many of these involve debates over the science of vaccines and and their effects and risks.
I'll leave those debates up to the biologists and their critics.
What will interest me in this article is how government regulation — and government-created monopolies — have limited the types and varieties of measles vaccines available, and how these decisions have been made explicitly to limit consumer choice in favor of embracing a certain public-policy agenda. In turn, these policy choices have discouraged some patients and parents from being vaccinated.
This is illustrated in the response to some parents and patients who have opposed use of the measles vaccine in response to fears the composite MMR vaccine is more dangerous than a "single-antigen" or "monovalent" vaccine. In other words, some people would prefer a measles vaccine that has not been combined with vaccines for mumps and rubella. This concern is apparently widespread enough to show up frequently in "Q and A" publications on measles vaccination.
Government officials and doctors, meanwhile, insist that there is no scientific basis for these fears.
Let's assume they are correct, and there is no additional risk.
But what should be the proper response to continued patient and parent fears in this regard?
It would seem the most productive and efficient response would be to overcome this objection by simply offering a non-composite vaccine. If the need to obtain more measles vaccinations is so urgent, it would make sense to — at least in the short term — circumvent fears over the MMR by meeting consumers where they are. The result would be more people being vaccinated specifically for measles — the disease we're told warrants an immediate response.
This, however, has not been the strategy employed by policymakers. Instead, government officials and doctors has been almost universally united in telling resistant patients and parents to just shut up and get the composite vaccine. The stock response in the Q and As is simply that the separate measles vaccine "is no longer available." No further explanation is ever given. Those who persist in asking questions about other options, it is implied, endanger public health.
Some may remember, though, that up until 2009, a separate measles vaccine was still available in the United States from Merck Corporation, the only company licensed to produce the vaccine in the United States.1
This was discontinued, however, much to the cheers of many pro-vaccination activists. For example, writing for a site called "Science-Based Medicine," physician John Snyder declared Merck's plan "great news," even though Snyder admits that a single-antigen vaccine had has been in continued production "for various reasons." These included the fact "a monovalent measles vaccine has been recommended during measles epidemics to protect infants 6-12 months of age."
So why would it be "great news" that this additional option will no longer be available?
Apparently, the reason was based not on any medical problem with the separate vaccine, but was a public-policy decision pushed by lobbyists — and possibly by Merck itself. Writing for the American Association of Pediatrics (AAP), physicians David Kimberlin and Joseph Bochini write:
[The AAP] was very concerned that availability of monovalent measles, mumps, and rubella vaccines would increase the number of at-risk children by enabling parents to elect to spread out immunization...
In other words, if patients are given choices, lobbyists theorized some of them might receive only partial vaccinations, based on individual assessments of risk. Thus, the AAP has opted to reduce choices — and reduce opportunities to evaluate risk — and embrace an all-or-nothing plan designed to force patients into adopting a certain vaccination schedule.
The general idea being pushed here is that doctors only have access to patients intermittently. Thus, in order to increase "efficiency" in vaccines, the ideal is to pack as many immunizations into a single doctor visit as possible.
Faced with a choice of the composite vaccine or nothing, some people have opted for nothing. This is not surprising since their preferred option has been removed from the menu of choices.
The result has likely been fewer measles vaccinations among those who dislike the composite vaccine. Lobbyists deliberately pushed for the removal of a non-coercive option that could have been used to vaccinate more people. Not surprisingly, many of those same people are now pushing for explicitly coercive laws to force the use of a specific vaccine preferred by a single huge pharmaceutical company.Merck's Government-Created Monopoly
But why should patients be only able to access treatments provided by a single corporation?
In a functioning marketplace — which the US pharmaceutical industry certainly is not — it is highly unlikely this sort of power would be enjoyed by a single firm.
In a functioning marketplace, if there is a demand for other types of vaccines, it is likely other companies would step in to provide those services. Competition could be offered by new startups, or by foreign firms entering the marketplace.
Unfortunately, we find the US government makes this sort of competition extraordinarily difficult.
In Financing Vaccines in the 21st Century: Assuring Access and Availability, (published by the National Academies Press) the authors note the plethora of barriers to entry that preclude the entrance of other firms into the vaccine market.
Some of these are market-based. The cost of producing and delivering vaccines is costly in terms of fixed costs. But many of these costs are government created as well. In an examination of how government-created limitations on vaccine production has led to bottlenecks and fragility in vaccine distribution, the authors write:
Perhaps the most important long-run solution to the fragility of vaccine supplies is to ensure that multiple companies have access to the U.S. market. Although a large number of small domestic R&D firms and foreign companies have applications pending for vaccine licenses in the United States, regulatory and cost barriers may inhibit the entry of many of these producers. For example, a company that has had a successful vaccine product in use for many years in Europe and Canada must conduct full clinical trials as part of its U.S. license application rather than drawing on efficacy and safety data from its current product experience. GAO (2002) has recommended expedited FDA review procedures. Implementing this recommendation would accelerate approval of new and competitive vaccines in the case of shortages and also reduce the total cost of bringing a vaccine to market.2
Defenders of the status quo insist that regulations are necessary to ensure public safety, but experience suggests "the impact of regulation has been costly, without clear evidence of corresponding improvements in quality."
The effect has been to cut off patients and parents from options that might have been available without government policy artificially raising costs to so high an extent. Particularly illustrative is the fact that American consumers do not have the option of accessing foreign vaccines that have already been in wide usage outside the US.
This is especially relevant to the case of the MMR since the Japanese manufacturer Takeda Pharmaceutical company already produces an alternative composite vaccine containing only measles and rubella antigens. (It was specifically produced to provide an alternative to the MMR which some Japanese researches contended led to too many adverse reactions.) Moreover, at least as late as 2007, a single-antigen measles vaccine in the UK was "obtainable on a private basis" (i.e., not through the National Health Service) at least partially through imported vaccines.
These options have been essentially abolished by government regulation in the US.3
Moreover, many medical professionals appear happy to embrace and push these monopolies, since monopoly power can be easily used to force certain politically-popular composite vaccines. Monopolists like Merck are happy to play along since this can help increase revenues by simultaneously reducing administrative costs and marketing only costlier composite vaccines.4
The end result is an excellent illustration of how partnerships between government regulators and private companies can be used to reduce consumer choices, and even, ultimately, to push coercive medical policies which mandate acceptance of what few choices remain.1. See table 5-1 in Financing Vaccines in the 21st Century: Assuring Access and Availability.: https://www.ncbi.nlm.nih.gov/books/NBK221811/ 2. See chapter 5, "Vaccine Supply." Available online through the National Center for Biotechnology Information. Chapter 5 also describes how market concentration toward a small number of providers has been significant in recent decades. https://www.ncbi.nlm.nih.gov/books/NBK221811/ 3. See Caves, Kevin W. and Singer, Hal J., "Bundles in the Pharmaceutical Industry: A Case Study of Pediatric Vaccines" (August 11, 2011). "the FDA’s requirement that vaccines currently sold in other markets undergo costly additional clinical trials before entering the U.S. market (to meet potentially more stringent regulatory requirements) 'often discourages manufacturers from launching vaccines in the U.S.'" https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1908306 4. See Financing Vaccines in the 21st Century: Assuring Access and Availability: "Much current R&D and product testing is directed toward expansion of combination vaccines because they generally reduce the number of doses and the administration costs of vaccination, even though they may be more expensive."
The Sociology of the Development of Austrian Economics
Although this paper was presented as a lecture in 1996, I have chosen to publish it in this volume in nearly its original manuscript form.1 It was never previously published or posted electronically, but the paper achieved a limited circulation in manuscript form via copy and fax machines during the primitive days of the Internet. Despite its relatively restricted exposure, however, it generated a remarkably heated discussion in Austrian economics circles—much of it based on an inaccurate hearsay version of the paper—that lasted for a number of years.2
So the first reason for publishing the paper now without major revision is to set the record straight regarding the actual claims and supporting arguments contained in it. A second reason for proceeding with belated publication of the manuscript is to acquiesce in and thus put a halt to the numerous importunities to publish that I have been subjected to over the years by colleagues and friends who were broadly aware of the prolonged controversy that swirled around the paper but were neither in the audience at its original presentation nor had the opportunity to read it subsequently. The third, and perhaps the most important, of my reasons for complying with the editors’ request to publish the paper is that, despite the fact that the situation in Austrian economics has greatly changed for the better since the paper was originally written and despite my dissatisfaction with its imperfections of style and tone, I think its substantive claims have stood up quite well and bear repeating. In particular, I believe the paper identifies counterproductive attitudes peculiar to proponents of a heterodox intellectual movement. Such attitudes are always liable to recur and must be vigilantly guarded against because they are likely to impede the movement’s further progress, if not threaten its very survival.Austrian Economics Defined
Before we venture to speculate on the future of the Austrian School, we must first define the distinct intellectual paradigm adherence to which characterizes a member of this school.
Specifying a vague methodological attitude or stance, for example “subjectivism” or “methodological individualism,” is not sufficient. These labels arguably apply to a broad array of modern economists—from the late George Shackle to Milton Friedman the price theorist—as well as to the contemporary followers of Carl Menger and Ludwig von Mises. To capture the essence of the distinctively Austrian approach to economics, therefore, we must do much more. Namely, we must define the precise and realistic method utilized by the acknowledged masters of Austrian economics for discovering and explicating what Menger called the “exact” laws of economics.3
For my money, this method is praxeology, which was given its name and first comprehensive explication by Mises. Mises did not conceive praxeology as a metaeconomic discourse unrelated to the workaday concerns of the economic theorist; he himself used it as a tool of research in revolutionizing the theories of money, business cycles, and socialism. Even before Mises, however, this method was actually employed by the great founders of the Austrian school, Menger and Böhm-Bawerk, to discover new economic truths. What Mises calls “the modern theory of value and prices,”4 first systematically expounded by Böhm-Bawerk, is a tangible creation of praxeology. Going back further still, this method was also adumbrated and used by some of the most creative eighteenth- and nineteenth-century economists, namely Cantillon, Say, Senior, and Cairnes.
The essence of Austrian economics may be defined, then, as the structure of economic theorems that is arrived at through the process of praxeological deduction, that is, through logical deduction from the reality-based Action Axiom. In addition to providing a unique and practicable method for developing the science of economics, this definition is useful precisely because it clearly excludes Shackle and Friedman, as well as many other economists, past and present, from being considered as practitioners of Austrian economics. It is childish to seek to define an intellectual paradigm, or even to use a definite term to designate it, while at the same time bemoaning a particular definition because it excludes or is “intolerant of” those whose views are essentially inconsistent with the paradigm so defined. It must not be forgotten that a definition, by definition, is meant to be rigidly essentialist and, hence, exclusivist.
Having given a definition of Austrian economics, I now turn to a discussion of two problems which cloud its future. Both of these problems, I will argue, betray a peculiar reluctance on the part of some of its practitioners to define precisely what is meant by Austrian economics. Perhaps this reluctance is due to a fear that to define a science or the specific method of pursuing it is to peremptorily foreclose the possibility of any future progress in the discipline. The enormous advances that have occurred within the praxeological paradigm since Say and Senior first began to self-consciously articulate its method, I think, render this fear baseless. Indeed, I would argue that it is hardly accidental that Mises, the first economist to deliberately utilize praxeology as a comprehensive research method, was the economist who made the greatest substantive advances in the Austrian theoretical paradigm. However, due to a severe constraint of time, I will not pursue this point any further here.Austro-Punkism
The first problem beclouding the future of the Austrian school I call “Austro-punkism.” My use of this neologism here is not intended to evoke the older, indefinite sense of the term “punk” as anyone, “especially a youngster, regarded as inexperienced, insignificant, etc.”5 Rather, I use it in the more specific and now widely-accepted sense to indicate the harboring of an impious attitude toward the accomplishments of the past and, hence, toward all authority. This attitude is the driving force of the phenomenon of “punk” rock, which from its narrowly musical roots in the late 1970s has grown into a broad cultural movement today. The broad social acceptance of the punk phenomenon is exemplified by the fact that its music, now blandly but significantly entitled “alternative rock,” permeates the airwaves of even mainstream, commercial radio stations. (I must confess I am bitter that the last remaining “classic” rock station in New York City has recently and abruptly converted to the “alternative” rock format.)
Now, I am not trying to suggest here that the roots of Austropunkism lie in popular culture. I will deal with the causes that underlie it shortly. My immediate purpose in the allusion to punk rock is to justify my use of the “Austro-punkism” label as a nonpejorative and meaningfully descriptive term, which contributes precision and clarity to our discussion of the prospects for Austrian economics.
Austro-punkism, as I employ the term, then, identifies a movement within Austrian economics that recognizes no masters of the discipline and that, therefore, calls all received doctrine into question. It views Austrian economics as a discipline in a state of constant and radical flux, devoid of any fundamental and constant principles but rife with a myriad of endlessly debated questions. Indeed, leading proponents of Austro-punkism proudly trumpet that an Austrian economist is one for whom there should eternally exist more questions than answers. To venture a more meaningful definition of Austrian economics than this represents for Austropunks an attempt to intolerantly close off the perpetual and openended conversation that they uphold as the hallmark of scientific inquiry.6
With no acknowledged masters, any self-proclaimed Austrian (whether equipped with formal training in economics or not) is judged fit to try his hand at radically reconstructing the discipline. In other words, Austrian economics can and should be revolutionized on a daily basis, by anyone and everyone. This means that the works of Mises, Hayek, and Rothbard are not treated as authoritative texts to be learned from and built upon in the painstaking labor of systematically adding to the inherited structure of economic theory. Instead these texts provide Austro-punkism with a common vocabulary in which to carry on their incessant and carping metaeconomic discussion about the dire need for radical reconstruction of economic theory. But the plans for reconstruction that issue forth from such metaeconomic griping never amount to more than casual and wildly implausible glosses on the texts of the masters. This explains the centrality of hermeneutics to Austropunkism; it provides a justification for treating the meaning of the texts as infinitely elastic and capable of bearing almost any interpretation, however outlandish. Without recourse to the exercise of deconstructing the texts of the masters, the metaeconomic discourse of Austro-punkism would come to a screeching halt, because it has offered no practical alternative to praxeology as a method for systematically elaborating economic theory.
The treatment meted out by the Austro-punks to Mises and Rothbard sharply contrasts with the pious treatment accorded by these creative geniuses to their own masters. Mises confesses that he felt himself competent to criticize the value and price theory that he learned from Menger and Böhm-Bawerk only after he himself had reached a mature understanding of the issues.7 This occurred only at the age of 52, after he already had published his major treatises on money and socialism and had achieved eminence as one of the leading economists on the Continent. And, despite their substantive and long-standing differences in political economy, the first time Murray Rothbard ever ventured to directly criticize Mises in public was in the classic paper he presented at South Royalton in 1974 on “Praxeology, Value Judgments and Public policy.”8 Murray was then already 48 years old and yet, after his talk had ended, I remember him confiding to a few of us that he was still a “little shaky” from the experience of publically disagreeing with his mentor for the first time. (This of course is precisely the attitude one should have when attempting to advance beyond the acknowledged master of a discipline, even in a minor area.)
Austro-punkism itself, indeed, raises more questions than there are answers for. Most significantly, why Austro-punkism? Why is the neo-Austrian school—of all schools of economics past and present—seemingly the only school ever to be afflicted with the scourge of punkism? Why not Ricardian-punkism or Chicagopunkism? The works of Milton Friedman, George Stigler, and Gary Becker, after all, are never casually derided or subjected to grossly distorted reinterpretations by those professing to be Chicago economists. This is not to deny, of course, that almost all schools spawn radical internal critics. But generally such dissidents, sooner or later, promote a schism among the like-minded in the discipline. One only has to think of Paul Davidson and the Post-Keynesians, Robert Mundell and the Supply-siders, Robert Lucas and the Rational Expectations school, Gregory Mankiw and the other New Keynesians to recognize the pervasiveness of this phenomenon in contemporary economics.
Yet, schismatics differ from punks in three important respects. First, the promoters of schism are generally individuals who have completely absorbed and may even have substantially contributed to the orthodoxy they are now seeking to escape. Second, they are eager to proclaim their apostasy to the world by relabeling themselves. And, third, at least some in the ranks of the schismatic movement are willing and able to embark upon the arduous task of substantively reconstructing the edifice of the orthodox economic theory they object to. Austro-punks, in contrast, tend to be innocent of a profound understanding of the orthodoxy they criticize. Moreover, their interest lies not mainly in theoretical or applied research in economics proper, but in promulgating metanorms for economic theorizing and dawdling glosses on the texts of the masters. Most significantly, rather than seizing the first opportunity to break free of the oppressive orthodoxy they disdain, Austro-punks cling to their proclaimed position within Austrian economics like Leonidas and his Spartans at Thermopylae.
So, I ask again, why the peculiar phenomenon of Austropunkism? I have pondered on this question for a few years and I think I have a few answers. The causes of Austro-punkism are threefold. Briefly, they are the lack of formal graduate training in Austrian economics, the influence of 1970s-style left-libertarianism, and the work (not the person) of Ludwig Lachmann. I will say a few words about each of these causes in turn.
1. Lack of a Graduate School
Lack of formal graduate training in Austrian economics represents the objective or institutional deficiency that has bedeviled Austrian economics from the inception of its modern renascence. Despite several laudable programs in Austrian economics associated with universities in the U.S., there is still not available to the interested young scholar a conventional graduate program in which he or she may obtain comprehensive and rigorous training in Austrian economic theory. But rigorous theoretical training is essential not only to the development of the aspiring Austrian economist but also to the healthy flourishing of the overall discipline. Graduate education is the means of fostering respect for the masters of the science by enforcing a disciplined interpretation of their texts. The chairman of my dissertation committee, an unreconstructed IS/LM Keynesian9, once told me that the first time he read Patinkin’s Money, Interest, and Prices10, William Fellner led him through it by the nose; the second time, Fellner sent him through it on his ear; and by the third reading, humbled and scraped, he had begun to understand it. Needless to say, my advisor neither lacked respect for Patinkin, nor foisted upon me any bizarre reinterpretations of his work. A similar engagement with Human Action or Man, Economy and State11 would work wonders for our metaeconomists.
In fact, it is precisely the inadequacy of their grounding in technical Austrian economic theory that accounts for their absorption in metaeconomics. When pushed to analyze a real-world problem, Austro-punks generally resort to Chicago price theory, Public Choice theory, Game theory, or Transactions-costs economics depending upon the era and institution of their graduate training. Those who have not been relentlessly drilled in the technical aspects of price theory as taught by Böhm-Bawerk, Wicksteed, and Mises or compelled to master the intricacies of Austrian production and capital theory in their intellectually formative years will hardly be inclined to pursue meaningful research in theoretical or applied Austrian economics.
But graduate schools are essential to a flourishing discipline not only for how they teach but also for whom they exclude. There are no other means available for weeding out those who are unsuited by ability or temperament to pursue research in economics and who, therefore, are apt to develop into sterile and punkish malcontents. This all-important exclusionary function is generally performed by rigorous drilling in the fundamentals of the discipline. For example, beginning with what Paul Samuelson calls the “terror” employed by Viner in his theory course in the 1930s, the University of Chicago’s Economics Department has not lacked for a mechanism for screening out unfit candidates for advanced degrees. Thus one rarely encounters individuals proclaiming to be “Chicago economists” who seek to overturn Chicago price theory or, for that matter, “MIT economists” who repeatedly express doubts about the efficacy of mathematical modeling. Would that we could say the same about so-called “Austrian economists” who regard Rothbard as merely a libertarian theorist and ridicule praxeology as a simplistic and intolerant methodology.
This singularly promiscuous use of the label “Austrian economist” cries out for the implementation of an institutionalized exclusionary process in Austrian economics. Of course, this is not a call for anointing a particular person or institution as final arbiter of who does and who does not qualify as an “Austrian economist.”
This would be a ridiculous and less than ingenuous inference from my argument. Rather, the existence of a graduate program in Austrian economics would provide the critical objective test—a “market test,” if you will—to facilitate the natural process of doctrinal self-exclusion, as is the case currently, for example, with Chicago economists. Those individuals who flunk out of the Chicago graduate economics program or whose interests or aptitudes divert them into a graduate philosophy program rarely, if ever, refer to themselves as “Chicago economists.” Why should matters be any different with Austrian economists?
2. 1970s-Style Left-Libertarianism
Many of those interested in pursuing Austrian economics are naturally motivated by ideology. They are intensely interested in learning how to rationally defend a free society. This motivation, in and of itself, should present no difficulties for our science. But many of the ideologically-inclined individuals who found their way into Austrian economics since the beginning of its revival in the 1960s have been proponents of 1970s-style left-libertarianism. This variant of libertarianism fosters a punkish worldview, since its adherents tend to promote atomistic individualism, which neglects the distinction between State power and bureaucracy on the one hand and the necessarily hierarchical and authoritarian structures and institutions of culture, religion, scholarship and business on the other. They do not realize that society and all its institutions are pervasively and inescapably elitist and authoritarian.12 They chafe against the operation of the iron law of oligarchy, which ensures that an elite will always tend to coalesce and predominate in any human endeavor.
Accordingly, as Mises has pointed out, “There never lived at the same time more than a score of men whose work contributed anything to economics.”13 Yet the Austro-punk is not humbled by this insight; from his perch in metaeconomics, he behaves as if literally anyone is competent to prescribe a method of proceeding for the wholesale reconstruction of Austrian economics. The Austropunk is also not chastened by the fact that the great methodologists of our science were each one of the score of those then currently living who made genuine contributions to economic theory. Moreover, it was generally only later in their careers, after prolonged meditation on and practice of economic theory, that men such as Say, Senior, Cairnes, Menger, Hayek, and Mises took up methodological concerns.
3. Ludwig Lachmann
While left-libertarian ideology goes a long way toward explaining the predisposition that many Austro-punks harbor to dismiss the body of theory inherited from the past masters of the science as inconsistent with their prescribed meta-norms, it is the work of Ludwig Lachmann that supplies the content of these norms. Without embarking on a detailed evaluation of Lachmann’s work, or of his position in Austrian economics, suffice it to say that Austropunks have seized upon his well-known assertions that the “future is unknowable” and that “expectations, like human preferences, are autonomous.”14 These propositions are then wielded by Austro-punkism as a rhetorical bludgeon to bash any systematic elaboration of economic theory that employs, in however subsidiary a manner, the equilibrium construct. Thus, for example, the mighty edifice of praxeological economic theory laboriously constructed over the years by economists from Menger to Rothbard is summarily rejected as “too equilibrium” and “failing to meaningfully incorporate expectations.” Of course, the Austro-punk project that seeks to formulate a system of economic theory completely dispensing with any reference to the mental construct of equilibrium has not yet advanced beyond the meta-plane. Nor will it ever, because human action always and everywhere embodies an inherent tendency toward equilibrium. Furthermore, Austro-punkism will never succeed in its program of expanding economic theory to incorporate learning and expectations-formation processes. As Mises has demonstrated, the content of specific individuals’ knowledge and expectations, which renders the economist’s praxeological theorems relevant to real-world analysis, can only be derived from the historical discipline of thymology.15The South Royalton Syndrome
A second problem besetting the contemporary Austrian School of economics and threatening to stunt its future development is what might be called the “South Royalton Syndrome.” It also is attributable to a failure to clearly define a uniquely Austrian paradigm. South Royalton, Vermont was the site in June 1974 of the first conference on Austrian economics held in North America. The main speakers at the conference were Murray Rothbard, Israel Kirzner, and Ludwig Lachmann, and its participants included a surprisingly large number of graduate students who have since gone on to academic careers, while continuing to pursue research in Austrian economics. Together with the wholly unexpected awarding of the Nobel Prize in economics to Hayek later in the same year, it was truly a defining moment in the Austrian revival whose galvanizing effect on the young acolytes is difficult to overestimate.16
Given these circumstances, there is an understandable, although unfortunate, tendency among those who participated in the South Royalton conference to define Austrian economics as a closed network of South Royalton participants and their immediate students. The focus of the definition is thus not on a specific body of truth and the method of advancing it but on a specific group of people, whose work is viewed as the exclusive source of new contributions to the discipline. Those who are afflicted with the South Royalton syndrome, consequently, are inclined to ignore or dismiss the work of those outside the network and treat them as unwanted interlopers into Austrian economics. This is especially the case if the newcomer’s approach is fresh and diverges from the familiar or, even worse, directly challenges the work of a revered insider.
A living science, however, requires the new blood of those who display the vision and drive to diverge from well-worn paths and to venture beyond the boundaries tentatively marked out by the current leaders of the discipline. These young visionaries should be enthusiastically welcomed into the Austrian fold and encouraged and supported in their exploration for new truth. This was always Murray Rothbard’s view of how Austrian economics should progress. He was always urging others, especially the young, to “go beyond” his own work while adhering to the basic praxeological paradigm. He once wrote to me that “I welcome change and advances in Austrian theory provided they are true, i.e., that they work from within the basic Misesian paradigm. So just as I think that I have advanced beyond Mises in developing the Misesian paradigm, [other] people … have advanced the paradigm still further, and great!”Conclusion
It is interesting to note that Austro-punkism and the South Royalton syndrome, although they appear to denote attitudes that are polar opposites, may actually be complementary. After all, given their self-conscious aversion to defining a common intellectual paradigm, the bonds linking the network of Austro-punks tend to be personal rather than purely scientific. And their much-ballyhooed devotion to tolerance as the beau ideal of the scientific method does not seem to be manifested in the treatment accorded those young scholars who are eagerly advancing the frontiers of the praxeological paradigm.
My purpose in making these remarks is not to accuse particular persons of error, and so I have studiously tried to avoid any references to particular persons. Rather my purpose is cautionary; we are all as fallible human beings in a shared intellectual movement confronted with similar temptations to err. I have been moved to speak out because the errors in this case are capable of destroying a recently reborn and still fragile science with a great and glorious tradition and much to offer the human race.Originally published in Property, Freedom, and Society: Essays in Honor of Hans-Hermann Hoppe 1. Footnotes have been added and the title has been changed, but save for the correction of grammatical errors and the insertion of a few clarifying words here and there, the text has remained substantially unaltered. 2. See, for example, David L. Prychitko, “Thoughts on Austrian Economics, ‘Austro-Punkism,’ and Libertarianism,” in idem, Markets, Planning and Democracy: Essays after the Collapse of Communism (Lyme, N.H.: Edward Elgar Publishing,
2002), p. 186, et pass. 3. See Carl Menger, Problems of Economics and Sociology, Louis Schneider, ed. (Urbana: University Illinois Press, 1963), pp. 61, 69; idem, Investigations into the Method of the Social Sciences with Special Reference to Economics, Francis J. Nock, trans. (New York: New York University Press, 1985 ), chaps. 4–5 4. Ludwig von Mises, Human Action: A Treatise on Economics (Chicago: Contemporary Books Inc., 1966), p. 201. 5. Webster’s New Twentieth Century Dictionary of the English Language, unabridged 2nd ed. (New York: Simon & Schuster, 1983), p. 1462. 6. See Murray N. Rothbard, “The Hermeneutical Invasion of Philosophy and Economics,” Review of Austrian Economics 3, no. 1 (1989): 45–59; HansHerman Hoppe, “In Defense of Extreme Rationalism: Thoughts on Donald McCloskey’s The Rhetoric of Economics,” Review of Austrian Economics 3 no. 1 (1989): 179–214; idem, “Comment on Don Lavoie,” Mont Pèlerin Society, General Meeting (1994), available at www.HansHoppe.com. 7. Ludwig von Mises, Notes and Recollections (South Holland, Ill.: Libertarian Press, 1978), p 60. On the moral obligation entailed in pronouncing on a specialized subject, Rothbard stated: “It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a ‘dismal science.’ But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.” Murray N. Rothbard, “Anarcho-Communism,” in Egalitarianism as a Revolt Against Nature and Other Essays, 2nd ed. (Auburn, Ala.: Mises Institute, 2002 ), p. 202; originally published as “Anarcho-Communism,” The Libertarian Forum II, no. 1 (January 1, 1970). 8. Murray N. Rothbard, “Praxeology, Value Judgments, and Public Policy,” in Edwin G. Dolan, ed., The Foundations of Modern Austrian Economics (Kansas City: Sheed and Ward, 1976), pp. 89–111, also published in Murray N. Rothbard, The Logic of Action One (Cheltenham, U.K.: Edward Elgar, 1997), pp. 78–99. 9. IS/LM stands for “Investment Saving/Liquidity preference Money supply.” 10. Don Patinkin, Money, Interest, and Prices, 2nd ed. (New York: Harper & Row, Publishers, 1965). 11. Mises, Human Action; Murray N. Rothbard, Man, Economy, and State: A Treatise on Economic Principles, with Power and Market: Government and the Economy, Scholars edition (Auburn, Ala.: Mises Institute, 2004; Man, Economy
and State originally published 1962). 12.
The word “authoritarian” is not used here in its usual sense as a description of a political system or an individual psychological trait; rather it is used, for lack of a better term, to refer to a social process in which authority in some area or subject is voluntarily and spontaneously invested in specific individuals, families, and organizations. On the nature and constitution of authority in this sense, see Robert Nisbet, Twilight of Authority (New York: Oxford University Press, 1975). For more on the topic of natural elites and related matters, see Hans-Hermann Hoppe, Democracy—The God That Failed: The Economics and Politics of Monarchy, Democracy, and Natural Order (New Brunswick, N.J.: Transaction Publishers, 2001), p. 71 et pass.
13. Mises, Human Action, p. 873. 14. On this topic see Hans-Hermann Hoppe, “On Certainty and Uncertainty, Or: How Rational Can Our Expectations Be?”, Review of Austrian Economics 10, no. 1 (1997): 49–78; also idem, “In Defense of Extreme Rationalism” and “Comment on Don Lavoie.” 15. Ludwig von Mises, Theory and History: An Interpretation of Social and Economic Evolution (New Rochelle, N.Y.: Arlington House, 1969 ). See also Joseph T. Salerno, “Ludwig von Mises on Inflation and Expectations,” Advances in Austrian Economics, vol. 2B (1995): 297–325. 16. See Murray N. Rothbard, “The Present State of Austrian Economics,”
paper delivered at the Tenth Anniversary Scholars’ Conference of the Ludwig
von Mises Institute, October 9, 1992; published in Journal des Economistes et des
Etudes Humaines 6, no. 1 (March 1995), pp. 43–89 and in The Logic of Action
One: Method, Money, and the Austrian School (Cheltenham, U.K.: Edward Elgar
Publishing, 1997); also Karen I. Vaughn, “The Rebirth of Austrian Economics:
1974–99,” Journal of the Institute of Economic Affairs 20, Issue 1 (March 2000);
Peter Lewin, “Biography of Ludwig Lachmann (1906–1990): Life and Work”
(accessed Jan. 12, 2009)
Billionaires Aren't Quite As Rich as We Think They Are
If the Wal-Mart CEO were to take a $1 salary and the company were to spread that over each of the company's workers, each worker would receive a one-time bonus of $10.
Original Article: "Billionaires Aren't Quite As Rich as We Think They Are".
Billionaires Aren't Quite As Rich as We Think They Are
One of the most enduring justifications for State intervention in an economy is the concept of wealth inequality. As the story goes, just 1% of the population owns roughly half of the wealth in the world. This is used as justification for a long range of programs, such as welfare, the graduated income tax and multiple components of the Green New Deal. However, the problem with this narrative is it fails to address two major questions:
1. What are the components of that wealth?
2. Who are the primary beneficiaries of that wealth?Wealth Isn’t Uniform
To begin, we need to first understand how wealth is defined. Wealth, in investment terms, is defined as “the value of all the assets of worth owned by a person, community, company or country.” The underlying issue of the definition of wealth is within the concept of value. Value is not an objective concept; each individual will value every good or service on the planet differently based on personal interests. This is best defined in the Paradox of Value. Water is objectively more important to survival than a sack of diamonds; a person living by a river would trade truckloads of water for a sack of diamonds while a person stranded in the Sahara would eagerly trade a sack of diamonds for a CamelBak full of water. This is the underlying purpose of trade — to obtain something of relatively low supply locally for something of local abundance.
The problem here is that such valuations are subjective and highly reliant on meeting specific conditions. If we look at the components of wealth, the wealth of the 1% is made up predominantly of business ownership stakes .
Business ownership is typically represented by stock share in the company. How a person’s wealth is defined here is taking the current listed market price of the stock and multiplying it by the ownership stake of that individual. The problem with this definition is how equity is traded. The value of equity you will see on the Dow Jones is not the value of every share in existence. It is, instead, effectively the last marginal transaction for that particular company. So if Amazon is listing at $1,800 per share, all this means is that someone out there sold one or more shares for $1,800 to someone else. This does not mean that if someone waved $920 billion at the market, they’d be the sole owner of Amazon.
The vast majority of the ~500 million outstanding shares of Amazon are valued more than the listed market price by the holder. To get Jeff Bezos to part with his roughly 20 million shares would require a lot more than $37 billion. However, this does not mean Jeff Bezos is richer than advertised. Conversely, people who don’t own Amazon stock value it below the $1,800 market price. If Mr. Bezos were to face a life-or-death situation in which he needed to pay $37 billion in cash, he would be lucky to come up with a small percentage of that as attempting to dump that many shares on the market at once would collapse the market price.
The issue here is that maintaining high levels of wealth requires never trading in the goods. The only way the wealthy can remain wealthy is to never convert their equity into usable liquidity. While a single share of stock is, in accounting terms, classified as a liquid asset, a large block of shares is about as illiquid as owning a skyscraper or NFL stadium. Because of this, the wealth of the 1% is largely illusory since they realistically can’t use it for anything lest they destroy its apparent value.
Conversely, the bottom 99% posses roughly 15% of their assets in some kind of easily liquid form and their stock assets are significantly more liquid than those in the top. A person with $50,000 in assets can easily liquidate their property without causing a blip in the market pricing. In terms of assets that can be used without suffering a value impairment, the top 1% really only owns about 6% of the assets. While this is still unequal, it’s nowhere near the gaudy 50% frequently presented.Who Really Benefits
One can easily counter this to say that those assets still primarily benefit the wealth individual and the rest of us are stuck holding the bag. However, this is also not held up as true. If we use the concept of CEO pay disparity, we can demonstrate who really benefits from that wealth.
Take Wal-Mart, a favorite target of unfair wage practice claims. The company’s CEO, Doug McMillon, is accused of earning 1,180 times more than the median worker with an annual compensation package of $22.8 million. To a single individual, $22.8 million seems like a lot of money. But consider that Wal-Mart also has in the order of 2.2 million employees. If the CEO were to take a $1 salary and the company were to spread that over each worker, the worker would receive a one-time bonus of $10. Mr. McMillon would quickly go bankrupt just trying to buy dinner for each employee just once.
If we look at Wal-Mart’s 2018 10-K report, the company produced revenues of $514 billion. Of that, $385 billion was a direct expense, primarily sent down the product chain to suppliers to pay for their workers and suppliers and so forth. Roughly $50 billion went to store workers. Another $107 billion was on SG&A, which can be assumed to be almost entirely labor related, either direct Wal-Mart employees or outside companies paying their workers.
All-told, an estimated $490 billion of those $514 billion in revenues ended up in the pockets of a direct worker somewhere in the world, supporting untold millions. Just the direct Wal-Mart employees collected an estimated 20-25% of the total revenues. The total C-Suite compensation package doesn’t even register as a rounding error. Investors got a dividend of $6 billion, or just 1% of that. It’s important to note that investors are primarily held in individual investment accounts or pension systems, so that also goes back to the line worker.
The wealthy owners of Wal-Mart, the Waltons, only see 0.2% of the economic activity generated by the company. That's a far cry from the 95% paid to workers and the remainder going to retirement pension accounts for individuals. The workers, or the 99%, are overwhelmingly the beneficiaries of all that wealth the Waltons formally own.Why the Rich Are Good for Us
Ultimately, these extremely on-paper wealthy individuals have been of an immense value to the rest of us. Without someone taking the risk to form a business, to collect all of our disparate skills that, alone, are worthless and combining them into an organization, we would not be living in a world where poverty and hunger continues to collapse and some countries have gotten so wealthy that people with broadband internet and smartphones are classified as impoverished. This is entirely thanks to all those rich people who are only asking to keep a very small portion of the production their assets produce. Attempting to destroy this with redistribution schemes will ultimately be harmful to the 99%.
Europe's Strength Lies In the True Diversity of Its Nations
When Britain decided to leave the European Union on June 23, 2016, shockwaves undoubtedly went through Brussels and Europe in general. The EU has, of course, been going through many crises over the last decades, and especially in the years of the euro crisis, dissatisfaction was high in many member states. But the fact that one of the largest and most important member states decided to leave the project outright was a precedent.
At first, Brussels was in a state of utter shock — for many, it seemed as if the end of the EU was nigh. The crucial question then was how to recover from Brexit. Which direction should continental Europe take without Great Britain, its old love-hate relationship which decided to exit?
For many, it seemed obvious that the time had come to make a U-turn, to do less in the future. After all, the British did not vote to leave because too little integration had taken place at the European level. The euro crisis seemed to be another prime example that the EU had gone too far. In addition, the migration crisis demonstrated the inability of the member states to find a common denominator even in the most urgent crises. Meanwhile, Eurosceptic forces were gaining steam all over the continent.
But in a shocking turn of events, the decision was taken in Brussels, initiated by Commission President Jean Claude Juncker and the newly inaugurated French President Emmanuel Macron, to stand up for the "ever closer union" even more enthusiastically. In times of populism and burgeoning nationalism, the moment would be now, they felt, to defend the European project stronger than ever.
To this day, an endless stream of ideas has been voiced on how this could be done, all of these ideas having been presented in pompous speeches in parliaments, at universities and on debate stages. They all had one aspect in common: there has to be more integration, more centralization in Belgium's capital. Because if Europe does not continue along this path, Europe would return to an era that no one wants to live through again.
How the Brussels elite and some heads of government drew this lesson from Brexit is not quite clear at first glance. Of course, politicians can defend the EU as much as they want by calling it a peace project and success of free trade and liberalism — hardly anyone will disagree.
But the EU was already all of that several decades ago. What Brussels has done since is far from it — and far from the ideals of liberal democracy. To talk about democracy would be hypocritical at this point anyway, ever since multiple referenda in which countries voted against more integration have been ignored since the 1990s. And whether a powerful bureaucracy in a city hundreds of miles away from most citizens is particularly democratic is also questionable.
The argument of economic dynamism has similarly been left behind. Further deepening and strengthening the common market and continuing to dismantle barriers has long been ignored. In the same way, free trade with the outside world has been increasingly forgotten. Instead, protectionist and regulatory aspects have increasingly developed. Successful companies are being penalized nowadays, while the Commission is trying to finance the Brussels apparatus - and of course the billions in agricultural subsidies and redistribution programs to southern and eastern Europe — at the expense of private companies and citizens.
The euro, described by prominent economists like Hans-Werner Sinn as a "historical error," has suffered an enormous loss in value thanks to the monetary policy of the European Central Bank. This has led to economic impoverishment of several countries and the erosion of personal wealth of ordinary citizens, and has created an artificial bubble, which at some point threatens to burst, through the ECB’s zero interest rate policy.
At the same time, the popularity of the EU among Europeans has hardly improved. It may be true that the EU itself as an institution is more popular than ever before. But the same cannot be said about the work of the Brussels elite.
In summary, it can, therefore, be stated that the integration attempts of recent decades have failed, to put it mildly. So why then do federalists, the advocates of a federal, united, Europe, think that all we have to do is to go even further in order to finally reach the turning point?
Listening to the federalists, it quickly turns out that for them, the EU is more than just a supranational organization for the coordination of individual states. For them, the EU is Europe and Europe is the EU. If one disappears, the other does so, too. If you criticize one, you criticize the other. They live for this project; the success of the EU is more important to them than anything else. One could almost say that they feel the "Pulse of Europe" — or at least they believe so.
In this sense, the federalists follow a strongly progressive view on the EU. For them, a united Europe, imitating the United States of America, is the final goal for achieving ultimate peace and prosperity in Europe. The nation-states are mere relics of the past, perhaps even the main reason for the great wars of the twentieth century, which made the EU necessary. Instead of counting on national sovereignty and identity, those concepts would need to make way — similarly to anything else that could prevent bringing about the end state — for something much bigger: a European sovereignty and European identity.
For this reason, obvious problems such as, for example, the euro are simply ignored. For EU fanatics, the euro is not simply a currency that has gone wrong. For them, it is a symbol of the European project and criticizing it would be tantamount to criticizing Europe in general.
Instead, increasing integration is the only way to stay on the "right side of history." The United States of Europe is the final destination — and the fastest way to get there is pursued, regardless of the obstacles.
But federalists have to finally realize — and one would think Brexit would have been a good enough reason — that their progressivist philosophy of the EU will end in chaos. Economic disasters are ignored because of an irrational (self-)infatuation. Opposition of member states and citizens has no meaning whatsoever.
In the case of the latter, fanatics will often bring up the argument that all this would no longer be a problem once a European identity has been created. The citizens of Europe should see themselves as exactly that: citizens of Europe, not of Germany or France.
And the federalists are right about this to a certain extent: for if people were to see themselves primarily as Europeans, centralization in Europe's capital would indeed be much less absurd and more readily accepted. But who in Europe really sees themselves first and foremost as Europeans? It is an incredibly tiny minority and consists largely of the Erasmus generation, i.e. those who, at the expense of their fellow citizens, went on a “study” abroad semester and celebrated for three months on a beach in Spain or Portugal with their new European friends and now believe that this would justify disasters such as the euro or tax harmonization.
Meanwhile, the Brussels elite is considering on a daily basis how to spread European identity among ordinary citizens. But this cannot be done from above - except through coercion. If a European identity ever comes into being, it must come from the citizens themselves. As long as this is not the case, federalists will have to accept the reality that Europeans do not share their enthusiasm for the abolition of their nation-states for a large European apparatus.
And there is nothing wrong with that. After all, one of Europe's strengths has always been its diversity. The former British Prime Minister Margaret Thatcher summed this up in her famous 1988 Bruges speech: "Europe will be stronger precisely because it has France as France, Spain as Spain, Britain as Britain, each with its own customs, traditions and identity. It would be folly to try to fit them into some sort of identikit European personality.”
This decentralization is, after all, a characteristic that has also always made Europe unique. For centuries, the greatest thinkers have wondered why liberalism and capitalism, with its subsequent prosperity, was to first ascend in Europe. There are enough answers and in reality, the right one is probably a mixture of many different ones. However, it is widely agreed that the Kleinstaaterei, i.e. the hundreds upon hundreds of small states in Europe, was an important reason and at the very least a precondition .
One story goes that this pluralism made it possible for people to move quickly from one state to another with borders so close, enabling European citizens to choose where to settle - something that today must sound familiar. This freedom of choice and the simplicity of quickly moving on created competition between states to offer the most attractive place to live. And because a policy that was as free as possible turned out to be particularly successful for people, there was an incentive for states to offer such a policy.
Of course, it is not only the ideas of individual liberty, decentralization, and diversity that existed for the first time in Europe over a longer period of time. Other ideas have also emerged in their present form on this continent and they represent the exact opposite, that of centralism, collectivism, and dehumanization. These ideas would be those which showed their ugly face — and the ugliest face of Europe — in the twentieth century.
Today, the EU has the choice of which side to choose, which element of European history it wants to propagate. It is certainly far from the totalitarian regimes of the previous century. One can assume - and hope - that it will always be this way. And, of course, none of the Brussels elite has any intention of going in this direction.
And yet, the ideas that federalists have today share the same basis, even if accidentally. They want to centralize decisions in Brussels. They increasingly want to prevent free enterprise from being free. They want to seal themselves off from the outside world. They want to create an identity which has never existed before. And anyone who opposes these plans needs to be vilified as a populist, nationalist, or any other empty, nonsensical insult.
The federalists may think that their vision of the "ever closer union" is ground-breaking and innovative. But the idea of creating a mega-state is not new — the fact that this idea is still being considered in the 21st century is a sad example of how quickly one forgets.
Were the European project come — or degenerated — to this, the EU would be doomed to failure. Either it would sooner or later collapse because of its own blindness or, because of ignoring dissenting votes, would cause an even stronger uprising of actual nationalist forces - and would, thus, potentially produce exactly what is most feared and the prevention of which European integration even began in the first place.
However, there is an alternative — and a European alternative anyway. It is a Europe that once again sees the benefits of decentralization and pluralism. It is a European Union in which free and sovereign nation-states come together to cooperate. A European Union in which economic freedom is promoted and trade barriers reduced. A European Union, with which the European countries can come together in order to interact more freely with the rest of the world. And a European Union that can provide security in times of crises, in times of war on its own doorstep and in times of terrorism, instead of failing in nihilism and by being distracted because of another great reform idea.
First and foremost, it should be a European Union in which all citizens have a voice - a Europe in which - as far as possible - decisions are taken locally, not far away in Brussels. Such an EU would produce the best Europe has to offer. It would be an EU that really secures peace and promotes prosperity instead of getting caught up in utopian dreams.
Correlation ≠ Causation
Often we observe that two pieces of data, which are not supposed to have any relationship, appear to have very high visual correlation. For instance, we may discover strong correlation between the intensity of a dog barking and movements in stock prices. One is then tempted to take advantage of this discovery in order to make money in the stock market.
In reality however, both the barking of the dog and the movements of the stock indexes have nothing to do with each other. What may make the apparent good correlation is that they both exhibit an upward long-term trend. In addition, fluctuations of these data do not seem to converge around the trend but just seem to move in an upward direction. These types of data statisticians label non-stationary.
In contrast, data that converges around a fixed value is labeled stationary. Data that is stationary implies an unchanged structure, something that is stable and hence one can make sense of it, whereas non-stationary data is associated with irregular fluctuations, which of course makes it very difficult to make any sense of. Thus if something drifts aimlessly it is not possible to say much about its future course. If one tries to make sense out of the data that is irregular, obviously one will not get very far. This, however, creates a major problem for economists if the data that economists and financial analysts are employing are not stationary. Consequently, incorporating these types of data into economic analyses leads to misleading results.
For instance, an economist wants to establish the importance of changes in production on peoples’ consumption. The common procedure for this is to apply statistical methods on consumption and production data in order to establish their interrelationship.
By means of a statistical technique, also known as regression analysis, one establishes how consumption and production are quantitatively connected to each other.
Let us assume that an economist has found that the relationship between consumption and production is summarized by the following mathematical expression:
Consumption = 10 +0.5*Production
Armed with this finding the economist can now tell us the direction of consumption if there is a change in production. Thus if production is 100 then consumption will be 60 (because 10+0.5*100=60). Economists label the numbers 10 and 0.5 as parameters.
Observe that the information regarding the size of these parameters (i.e. whether they are 10 and 0.5 or something else) is obtained by means of the regression technique. The numbers 10 and 0.5, which were generated by regression method, are the estimates of true parameters in the real world, or so it is held.
It is maintained that on average these estimates are very close to the true parameters. It is also believed that any conclusions derived from the equation regarding the relationship between consumption and production is a reflection of reality, as long as the model performance in terms of its forecasting capability is good.
The Nobel Laureate Clive Granger, however, contests this.1 He argues that no meaningful conclusions can be drawn from the above equation if the data employed in establishing this equation is non-stationary. In fact, according to Granger the data that economists were employing in the past research was likely of non-stationary nature.
The parameters that one obtains from such data are likely to be misleading and hence the outcome of the analysis is likely to be meaningless. So how does one overcome the problem?
If one were to establish a common factor that influences both consumption and production then these two time-series are said to be connected, or co-integrated. Granger and others have shown by means of mathematical and statistical methods that the introduction of a common factor makes the interrelationship between non-stationary time series stationary.
Thus, consumption and production can be observed separately as a non-stationary time series. If one were attempting to establish economic relationships between them, one will get misleading results. However, if one were to establish that both consumption and production have a common factor then one could infer that over time both consumption and production must move together.
This common or co-integrating factor could be that people's wellbeing requires consumption and production. Moreover, that without production there cannot be consumption and without consumption, no production is possible.
Another example is an identical good, which is trading in different locations. The day to day fluctuations in prices may appear to be random in various locations and therefore most likely will not correspond to each other.
However, the existence of arbitrage and the law of supply and demand will make sure that over time prices in various locations will move close to each other.
Instead of trying to find out what the co-integrating factor is, Granger and others have produced a mechanized framework, which enables economists to establish whether the data complies with co-integration i.e. whether the relationship between the data makes sense so to speak. Once it is established that the data is co-integrated it can then be employed by a certain mathematical procedure to establish the correct parameters.2
Various statistical results that are produced by means of the Granger’s framework therefore are regarded as valid since they have been applied on co-integrated data.
Granger’s method raises serious doubts about past conclusions regarding economic interrelationships, which were reached by means of the old techniques. It also provides a criticism of the popular usage of correlations without attempting to make sense of the relationships.
Granger's framework seems to provide economists with a powerful tool that helps to minimize the use of meaningless correlations. For instance, the Granger framework will indicate that movements in the stock market and the intensity of the dog barking cannot be co-integrated and therefore the use of these relationships to make money in the stock market could prove to be a very expensive exercise.
In this respect, it could be regarded as bringing back the validity of fundamental analysis. This must be contrasted with the popular way of thinking that fundamental analysis is of little help because as a rule the data is of a random nature. Therefore, it seems that the Granger's framework is a great tool in furthering our understanding of the economic universe. However, is it?Are there Constants in Economics?
The major issue that Granger has not addressed is not whether the old techniques have been generating valid parameters estimates, but whether such parameters exist at all.
In the natural sciences, the employment of mathematics enables scientists to formulate the essential nature of objects. Consequently, within given conditions, the same response will be obtained repeatedly. The same approach, however, is not valid in economics. For economics is supposed to deal with human beings and not objects. According to Mises,
The experience with which the sciences of human action have to deal is always an experience of complex phenomena. No laboratory experiments can be performed with regard to human action.3
People have the freedom of choice to change their minds and pursue actions that are contrary to what was observed in the past. Because of the unique nature of human beings, analyses in economics can only be qualitative. There are no parameters in the human universe. Thus Mises wrote,
There are, in the field of economics, no constant relations, and consequently no measurement is possible.4
The popular view that human economic activity can be captured by a mathematical formulae expressed through fixed parameters implies that human beings are operating like machines. For instance, contrary to the mathematical way of thinking, individual outlays on goods are not "caused" by income as such. In his own context, every individual decides how much of a given income will be used for consumption and how much for savings.
While it is true that people respond to changes in their incomes, the response is not automatic, and it cannot be captured by a mathematical formula. For instance, an increase in an individual's income does not automatically imply that his consumption expenditure will follow suit. Every individual assesses the increase in income against the goals he wants to achieve. Thus, he might decide that it is more beneficial for him to raise his savings rather than raise his consumption.
At best, mathematical formulations can be seen as a technique to provide a snap shot at a given point in time of various economic data. In this sense, it can be seen as a particular form of presenting historical data. These type of presentations, however, can tell us nothing about the driving causes of human economic activity. What's more, the employment of established historical relations to assess the impact of changes in government policies will produce misleading results notwithstanding Granger’s framework.
After all, to assume that a change in government policy will leave the structure of the equations intact would mean that individuals in the economy ceased to be alive and were, in fact, frozen.
In this regard Mises wrote,
As a method of economic analysis econometrics is a childish play with figures that does not contribute anything to the elucidation of the problems of economic reality.5
We suggest that causality cannot be ascertained by means of mathematical methods but by means of understanding. This in turn can be done once the framework of our thinking is based on a non-refutable axiom such as human beings use means to attain ends. With the help of this approach, one is going to establish that causality emanates from humans themselves and not outside factors.
There are no constant standards for measuring the minds, values, and ideas of men. Valuation is the means by which a conscious purposeful individual assesses the given facts of reality. An individual establishes what the facts are, he then assesses which out of these established facts are the most suitable to attain his various ends.
Individual goals or ends set the standard for valuing the facts of reality. For instance, if the goal of an individual is to improve his health, then he would establish which goods will benefit his health and which will not. Among those that will benefit him, some will be more effective than others. There is no way, however, to quantify the effectiveness. All that one could do is rank these goods in accordance with perceived effectiveness.1. Granger, C.W.J. and Newbold, P. (1974) "Spurious Regressions in Econometrics", Journal of Econometrics, Vol. 2, pp 111-20. 2. Granger, C.W.J. and Weiss, A. A. 1983, "Time series analysis of error-correction models," in S.Karlin, T. Amemiya and L.A. Goodman, Studies in Econometrics, Time series and Multivariate Statistics, in Honor of T.W. Anderson, Academic Press, San Diego, pp 255-278. 3. Ludwig von Mises, Human Action (1963), p 31. 4. Human Action, p 55. 5. Ludwig von Mises, The Ultimate Foundation of Economic Science (1962), p 63.
Fascism Has Always Been An Enemy of Private Property
The Left and mainstream political science identify Italian fascism and German national socialism as a right-wing ideology. Their motivation is clear — they do not want to be associated with regimes that brought civilization the horror and suffering of an unprecedented scale. The Left traditionally substantiates their point of view with two theoretical propositions. First of all, fascism and Nazism do not belong to the Left because those regimes did not institute total collective ownership on means of production as Marx prescribed. Secondly, nationalism and racism have traditionally been features of the Right, whereas the Left is perceived to be internationalist in nature.Private Ownership in Name Only
Let us consider the first postulate about the failure of these regimes to carry out total socialization of private property. Thus, Stalin pointed out in his interview to American journalist Roy Howard, “The foundation of the [socialism] society is public property: state, i.e., national, and co-operative, collective farm property. Neither Italian fascism nor German National-‘socialism’ has anything in common with such a society. Primarily, this is because the private ownership of the factories and works, of the land, the banks, transport, etc. has remained intact, and, therefore, capitalism remains in full force in Germany and Italy.” That has been the notorious argument of Marxian socialists.
The great Ludwig von Mises attacked logical inferences of the Left by pointing out that in non-Marxian socialist regimes the private property was de jure allowed, but de facto the state was the principal owner of the means of production. “If the State takes the power of disposal from the owner piecemeal, by extending its influence over production; if its power to determine what direction production shall be, is increased, then the owner is left at last with nothing except the empty name of ownership, and property has passed into the hands of the State”, wrote Mises in Socialism.
Indisputably, his arguments authentically describe real economic affairs under these regimes. Indeed, entrepreneurs were deprived of the free commodity market, labor market, and international money market; the state established wage and price controls, and overall influenced all stages of production, distribution, and consumption. However, it should be recognized that Mises’s arguments do not find the proper understanding and effect in modern realities.
[RELATED: "How the Nazis Converted German Agriculture to Socialism" by Chris Calton]
The thing is, the twentieth century was cracked by two bloody World Wars and the prolonged Cold War. Only a state can wage World Wars as it can gather and manage the necessary financial, economic, and people resources. Thus, for the last century, the state had been very firmly fixed in the economic sphere of society, and it reluctantly gave up its position. After all, many generations of people live in conditions where the state dictates the conditions of the economy. They do not even suspect that the state and the economy may have different relations. Contemporary industrial countries are guilty of conducting policies that resemble ones from the cookbooks of Italian and German governments. Indeed, the state has put in place various regulations that adversely affect the business and economy as a whole, including, among other things, control over the minimum wage, the establishment of social programs that are fueled by the substantial redistribution of wealth, and many other measures.
Mises pointed out that the state controlled the economic life, conducting various measures of coercion. He is undoubtedly right; however, the socialist regimes have utilized both methods: coercion and persuasion, and the latter occupied even more prominent importance. In contemporary settings, the outright collectivist indoctrinations in educational institutions became a primary form of persuasion.
Humans are the most adaptive species and easily affected by a skillful conviction. The majority of the corresponding population almost effortlessly accepted national ideas of fascists and Nazis. Gotz Aly mentioned in Hitler’s Beneficiaries that The Third Reich was not a dictatorship maintained by force. He gave a vivid example that in 1937, Gestapo had just over 7,000 employees, which sufficed to keep tabs on more than 60 million people. The vast majority of the population voluntarily subdues their thoughts toward ideas of the ruling party. Consequently, the population that underwent collectivization of mind eagerly supported any policies, including economic measures proposed by the government. German entrepreneurs were an integral part of the nationalist movement and did not mind accepting new game rules and enthusiastically took part in the social experiment.
As far as the “de jure-de facto possession” argument put forward by Mises, it is necessary to supplement it with the following propositions. If one owns the property, one should be able to control it. The reverse is also true: if one controls private property, one de facto owns it. It is easier and more effective to manage the property if one also possesses this property. Therefore, it was quite natural, that the fascist and Nazis states developed a tendency to become real owners, not only de facto but also de jure. The property ownership dichotomy “one owns, but deprived of full control – another one controls, but not owns” could not be considered as a stable paradigm. This construct had to collapse and be rested in the stable position – “one owns, one controls.” An ambiguity inherent in the “de facto and de jure possessions” would be inevitably resolved in favor of a stronger counterpart – a state. The history shows that the Fascist state was developing along this path. By 1939, Fascist Italy attained the highest rate of state ownership in the world other than the Soviet Union.
Therefore, the first argument put forward by the Left should be rebuffed along with the following reasoning. First of all, Italian Fascism and National Socialism belong to the Left as they are incarnations of the non-Marxian socialism that utilized collectivization of consciousness rather than the socialization of private property as the primary path toward socialism. Secondly, state control over the economy will ultimately lead to the socialization of private property, which will make the state de jure owner.Nationalism Is Not Unique to the Right
The supposed exclusive nationalism and racism of the Right is a political myth propelled by the vicious leftist propaganda. It is known that the founders of Marxism were xenophobes that adhered to the Hegelian division of nations to historical and non-historical. The founder of revolutionary syndicalism Sorel was an ardent anti-Semite. Some currents of socialism preached outright chauvinism; others used internationalist rhetoric in order to gain political benefits. Moreover, nationalism was not a factor that divided the political spectrum into the Left-Right wings at the beginning of the 20th century. Instead, it was the attitude to property rights (or antagonism between capital and labor, in Marxian terms) that divided the political spectrum. Therefore, nationalism might be inherent in various political philosophies, in both the defenders of capital and the proponents of labor. No firm historical facts suggest that nationalism is a particular characteristic of the Right. On the contrary, as proponents of the free market, the Right promote an international division of labor and trade. At the same time, institutionalized regimes of the Left, including Italian Fascism and German National-Socialism, implemented an economy of national autarky.
Italian Fascism and German Nazism constitute anti-materialist, anti-positivist current of the socialist movement, which was extremely hostile toward ideas of Marxism and democratic socialism. Nevertheless, they shared a continuum bench of the socialist team. Communists occupy the extreme left, followed by the Social Democrats; the right flank belongs to fascists and Nazis — they are the right wing of the Left.
Mises on Omnipotent Government
In 1944 Ludwig von Mises published Omnipotent Government, his historical treatment of Nazism and its origins in the collapse of German liberalism. This book expands on earlier works like Nation, State, and Economy and Liberalism, applying their analysis to the terrible events of WWII. Europe was up in flames, but Mises skillfully explains how to defeat the total state and its advocates.
Professor Matt McCaffrey joins the show to consider this vital book and its absolute relevance today. Everyone interested in peace should read it, and send a copy to a politician who needs it.
Why Economics Needs Philosophy
JEFF DEIST: Does economics need philosophy? The idea of a school of economics having a philosophical underpinning might strike some people as odd. Why should economists care about philosophy at all?
DAVID GORDON: Well, that’s a very good question. You see, what Mises held was that economics has a distinct method or way of proceeding, and he felt that way of proceeding was under criticism by many philosophers and social scientists of his time. I think for Mises, what was always primary was to vindicate economic theory against its detractors. He wasn’t trying to construct a philosophical system. But if people criticized economics and said “well, there’s something wrong with Austrian economics because it doesn’t depend on verifying things empirically,” Mises wanted to come up with a reply to that, so that was what really got him into philosophy.
JD: For purposes of this conversation, logic is a critical branch of philosophy. What should we think about rhetoric?
DG: Well, clearly logic is a branch of philosophy. It brings in all the sciences which use logic. Rhetoric is the general study of techniques of persuasion. There are philosophers who have written about rhetoric, Aristotle and others, but that would be a somewhat broader category than they wrote about. To the extent you’re interested in persuading others of the truth, you could consider economics rhetorical, but one point that people miss is when you’re elaborating a structure of argument, it doesn’t involve necessarily arguing in the sense of trying to have an actual debate where you have an adversary you’re trying to win over.
JD: Let’s start with Aristotle then. Can we trace a line from him to Menger, Böhm-Bawerk, and Mises?
DG: I think this is one point Murray Rothbard stressed very much. In the pamphlet I wrote called Philosophical Origins of Austrian Economics, I tried to elaborate upon that. I’m not sure everything I said in that pamphlet was right. What Aristotle thought was that in science we’re really proceeding deductively from first principles. He says this in the Posterior Analytics. So, we start off with a fundamental principle. We’re starting from what Aristotle thought: that there are essences of things and substances which means that the essence is the property something has that makes it that thing. Like “what is a human being?” It’s a rational animal. Aristotle thought we could discern these essences and that’s a theme you get in both Mises and Rothbard who started with the action axiom that human beings act.
Mises didn’t really use an Aristotelian method, but Menger was very influenced by Aristotle. Menger studied philosophy with Franz Brentano, who was one of the great authorities on Aristotle of the nineteenth century. So Menger took a lot of his notion of method from Brentano who was this Aristotelian figure. And I think that Rothbard, in particular, argues that praxeology, the science of human action, could be understood in this Aristotelian way as knowledge of essences. It’s a bit different from Mises, but I think it’s a very valuable way to proceed.
JD: Modern economics, of course, doesn’t start for several hundred more years. Menger doesn’t publish his Principles of Economics until 1871. Talk about some of the interim thinkers of the 1600s and 1700s. What about Locke? What was his influence on the Austrian school?
DG: Locke had a very interesting theory of knowledge that was a bit different from Aristotle’s. Locke thought, like Aristotle, there were essences of things, but he thought we really can’t know what they are. We’re cut off from essences. So, we do have some knowledge. We can prove we exist. We know God exists. He thought we could derive ethics as some kind of deductive system and he also thought we know there is something behind our experience, but we can’t really know what it was. So it’s a much more skeptical view. But Locke certainly had influence on economics. Remember in Human Action, Mises talks about action as the relief of felt uneasiness. I think that comes from Locke. That’s his phrase, “felt uneasiness.” But Locke wasn’t especially influential in Austrian economics. He had the labor theory of value as well as the labor theory of original acquisition, and that wasn’t so influential with Austrians. I would say his influence on Austrians was much more in the area of political philosophy with his views on natural law and his particular defense of a somewhat libertarian view. In some respects, he was close to being an anarchist, with significant differences.
JD: So we fast-forward to the 1700s. Talk about the German Historical school, which in part the Viennese economists rebelled against.
DG: The Austrians thought there are economic laws that are true for everybody. We have the law of supply and demand, which applies regardless of where you are in time. We could apply the law in primitive societies, we can apply it in the Middle Ages. Everywhere. The German Historical school said no, there are different stages of history and each stage would have its own laws that when you’re investigating, economics, you’re interested in the particular. One should amass as many facts as one can and maybe be able to get some inductive generalization about what applies to particular periods. So, it isn’t that you can reason out things before, looking at the empirical facts. You could find, for example, that free trade benefits certain economies at certain periods, but not in others.
The theories of Gustav Schmoller, Adolph Wagner, and various others were important. Schmoller was very influential in scholarship about the history of Prussia. He wrote a great deal on the Prussian economy. Mises’s view of this was very interesting. He said, the real thrust of the Historical school’s views is that they didn’t like the idea that there were economic laws because this might limit what the state could do. Suppose, for example, we know by applying basic economic principles, that if you put into effect minimum wage laws, it’s going to cause unemployment. So then, if you don’t want unemployment, you can’t put in minimum wage laws. You shouldn’t do that, but the German Historical school didn’t like that and they said this is limiting the state. So, in Mises’s view, they were trying to undermine economic theory to promote their ends.
JD: They’re talking about economics as a historical discipline, with no universal laws or independent theory. It can’t be studied independently of history and other fields. Menger and Mises reject this.
DG: Yes, that’s right. Instead of thinking, as Mises did, there is a science that we can get just by thinking about our notion of action — trying to figure out what’s involved in that — they said we have to study the particular. Some of them did very important work on particular historical periods, but they didn’t believe in economic laws. So, they would say, we have to just study what’s going on at the time. We might eventually be able to come up with some kind of generalization that would apply to different periods, but not for now.
JD: And the German Historical school still held sway, in Germany and the Austro-Hungarian Empire, well into the 1800s and even 1900s.
DG: Yes. They lasted through the twentieth century. One of the great figures of the school was Werner Sombart, whom Mises knew. They were on fairly friendly terms. He was teaching until 1930, when they were really dominant. When the German historians named the Austrian school as opposed to the German Historical, the term “Austrian” was coined with the implication that Austria was stuck in the past, the future was really with Germany and Prussia. So, if you say “the Austrian school,” you’re saying “outdated reactionary group,” rather than progressive. They were certainly influential, not only in Germany, but they were very similar to a group in the US called the Institutionalists, who were very influential in the late nineteenth century and early twentieth century. There were even Austrians who were influenced by the Historical school. So, Mises had them very much in mind when he was writing Human Action, this was one of the main groups he wanted to oppose.
JD: Of course, there are two other Germans we need to consider, Hegel and Immanuel Kant. Both lived into the 1800s, but not by much. Talk about both these figures and their influence on Austrian thought.
DG: Kant said that in philosophy people hadn’t agreed on what the correct solution is to the various philosophical problems, like how can we prove that God exists or how we know if there is an external world. So, there are all sorts of disagreements on all of these various philosophical systems. He said the philosophers have so far made a basic mistake. Instead of asking, “what is the nature of the world,” what they should be studying is our knowledge. We should ask, “what are the categories that we use in trying to get knowledge?” And by thinking about that, then we would get some answers to the philosophical questions. For Kant, we can’t know the world as it is in itself. All we can know is the world as we construct it through using our concepts. There is a given element also, which is intuition. You get to space and time through intuition and we apply concepts to that, so that gives us the world that we know, which he called appearance. That’s the only world accessible to us.
JD: No wonder Ayn Rand called him evil. Constructing reality and using intuition certainly sounds very un-Randian.
DG: Oh yes, you know, she called him the machine gunner of the mind. There’s something to be said for that and it does introduce some kind of a skeptical way of looking at things, but Kant didn’t think he was a skeptic. He thought the world of appearances is the one we’re dealing with. So we do have knowledge of that.
But there are various views on what the relation is between the world that we know, which is called the phenomenal world, and then this other noumenal real world. So, he then thought that limits our knowledge. However, we could go beyond that in a certain way because we also know we’re ethical beings. We can recognize through reason that we have certain requirements, certain things we ought to do, just by thinking about them. He thought we could, from the concept of what we ought to do, get a notion of what was ethically required. This is his famous categorical imperative. When he applied this to his political views in practice to a large extent, it was reminiscent of classical liberalism. He believed in property rights and favored some sort of welfare state, but it would have to be very limited. He favored a peaceful foreign policy. He wanted some kind of federation of republics.
Now, Hegel reacted very much to this. He thought Kant was a great philosopher, but he said, “look, Kant is wrong in thinking that we’re limited to our own concepts. We really do know the world as it exists.” The mistake he thought Kant made was that Kant is assuming that there is some kind of separation between reason and the world. In fact, the world is rational, the world is reason developing itself, so there is no separation between the two and our minds are really just reason coming into consciousness. So, Hegel thought, that as the universe develops, rationality is increasingly coming to self-consciousness. And in ethics, in political philosophy, Hegel reacted somewhat against Kant. He said Kant is right that there is a sphere of freedom, but where he made the mistake is trying to come up with these abstract rules that were completely separate from the concrete lives of real people. In Hegel’s view, this concrete life is manifested in the state. A famous sentence from one of his writings is, “The State is the march of God on Earth.” That’s not a very classical liberal state, although if you look at his main work on political philosophy, which is called Philosophy of Right, Hegel says that people are free to make exchanges. But this isn’t freedom fully developed. It develops more when you have the state.
Hegel thought that up to this time, the Prussian state, as a limited monarchy, was the highest development of reason. He didn’t claim this would always be true, but at that time, the Prussian state was the most advanced. Hegel was quite aware of economics. He read Adam Smith and James Steuart, who was an early mercantilist writer. But he didn’t really develop an economic theory.
JD: Kant also discussed the importance of a priori knowledge, which is reflected in Misesian praxeology. How does Kant help us understand economics?
DG: In this way, suppose we get the law of supply and demand, thinking about who has a surplus or a shortage. But we know that minimum wage laws will result in unemployment. So then, if we can figure this out a priori, then we don’t have to say, “well, this is just a hypothesis, let me apply it to the real world and maybe it will turn out that minimum wages don’t cause unemployment.” We will be able to tell because we have this economic law that there will always be some effect from the minimum wage law. It may be that other things will override it, but we’ll know that the law has some effect in the world. It isn’t something that we have to investigate. So, the way it applies to economics is that it enables us to have a theoretical discipline that isn’t subject to further testing. We can be wrong and make mistakes in our deductions, but we can’t be wrong in the sense that it’s open to future investigation whether our reasoning, even if it is correct, arrives at truth or not. If we reason correctly from true premises, then what we come up with is true, then that’s it. That’s unpopular with many philosophers.
JD: Contrast this with the logical positivists of Mises’s time. His own brother, Richard, the mathematician, disagreed with him very strongly on method and logic for example. Give us the context of the time in which Mises developed his views, and the opposition he faced.
DG: There was a group of logical positivists, the Vienna Circle, originally headed by Moritz Schlick, who was a professor of philosophy at Vienna and a lot of the top philosophers of that time attended that group. They said there is a priori knowledge, but this is just really conventional, this is just definitions or parts of definitions. So, what they would say is, suppose I say something like this: “we choose our most highly valued preference.” We have a preference scale, this one is the one that ranks highest, so I’m going to choose that. They said, “that doesn’t tell you anything. That’s a tautology because it’s just saying you’re choosing whatever one you’re choosing. You’re just defining the highest value preference is the one you in fact, choose.”
For the Vienna Circle, if you want to know what’s true in the world, the only way we can find out is by investigating, by doing empirical work. One example they might use: suppose one says, “how many people are going to attend the Austrian Economics Research Conference next month?” The way you would find out is to see how many people show up. We couldn’t figure that out just by thinking about it. They have to find out by using their senses, their empirical senses, what actually is the case. But in the Austrian view — Mises’s view — that isn’t always true. Sometimes you can realize things have to be a certain way just by thinking about them. The positivists say no, if it isn’t empirical knowledge, then it’s a tautology. It doesn’t tell you anything. So, they said, “if you want to know what’s going on in the world, you just have to look at matters, investigate them.” What you would get would not be what has to be the case, but just what is the case. “Laws” developed this way would really not be statements of what’s necessary in this very strong sense that we have in other types of scientific laws like math.
JD: What would you say is Mises’s best rebuttal to this? Where in his writings, whether in Human Action or perhaps in The Ultimate Foundation of Economic Science, does he lay out his best philosophical case for the method of economics? Where do we find his most philosophical work?
DG: Well, I would say probably two. The first, say, 110 or 150 pages of Human Action. The second chapter of the book is titled “The Epistemological Problems of the Sciences of Human Action.”
JD: I noticed to my surprise that Kant is not specifically mentioned in Human Action. Mises mentions him very briefly in Liberalism, but as you point out even when Mises resorts to Kantian language nothing in his argument depends on Kant. Elaborate on this for us.
DG: Suppose you don’t know the game of chess, have never heard of it and then you see people moving these pieces on a board and just see them moving them in various ways. You wouldn’t understand what’s going on unless you had the concept of chess, you wouldn’t be able to figure out what they’re doing. Similarly, we can see people moving their bodies in various ways, but we wouldn’t know what they’re doing. But, once we have Mises’s concept of action we can understand things. So, in that respect, that’s a Kantian idea that you have to have certain concepts in order to understand what’s going on in various activities. But Mises doesn’t depend on particular controversial points in Kant’s theory of knowledge by any means. He’s not adopting a Kantian system at all, I don’t think, even though Mises is a very widely read scholar in philosophy and other disciplines.
Nevertheless, it’s sometimes surprising the range of Mises’s knowledge. For example, in Human Action, when he’s talking about quantum mechanics, he says quantum mechanics has some implications for free will. So, he quotes works on quantum mechanics. He’s up on all sorts of things, but he isn’t adopting a particular school.
I should say also: One thing I see when I talk of Human Action over a great many years at the Mises Institute is that a mistake a lot of people make is, they think well, because Mises discusses philosophical topics, they think he’s trying to solve some philosophical problems. One problem is: how do we know that there is a real world out there? Maybe we just have certain experiences and you could imagine, Descartes’s malicious demon that’s deceiving us, how do we know the world really exists? That isn’t a problem he is addressing, he’s not trying to solve problems of philosophical skepticism. It would be odd if we were saying how to explain the recession of 2008, it would be kind of strange to say, “well look, how can you talk about explaining the recession in 2008 when we haven’t even proved there’s an external world yet.” That wouldn’t make sense. So, we need to get he’s talking about the world we live in and he’s seeing economics as one of the sciences. It’s not part of philosophy. He’s just thinking that there’s a particular method in science, an a priori method that we can use. This is one of his objections to Karl Popper, who was a philosopher also from Vienna, and had some connection with the Vienna Circle but reacted very strongly against them. But Popper had a view that a statement is scientific if it can be falsified. So, they say, well, economics, as Mises conceded, it wouldn’t be falsifiable because if these laws of economics were a priori truths, then nothing can show they’re false. What Mises said is if you’re trying to come up with what is scientific, you should look at the actual sciences in question. You should do that and take that into account in trying to come up with your criteria of what’s a scientific statement.
JD: Let’s talk about the philosophy of Murray Rothbard.
DG: Rothbard was a very systematic thinker. He was interested in a great many things, but Rothbard in his philosophical views, he had been very much influenced by Aristotle and Thomas Aquinas and he made a study of scholastic philosophy. So he adhered to this view where he studied the essences of things in order to gain knowledge of them. He was able to absorb information very rapidly and had tremendous bibliographic knowledge and if you asked him something, he could just give you a bibliography immediately. He knew scholastic material very well and studied it a lot. For a while, his group, which was called The Circle Bastiat, attended sessions of Ayn Rand’s circle. Rand was a remarkable thinker in her own right. Although she hadn’t studied history of philosophy very systematically, she developed views that were in many respects similar to those of Aristotle. So, there was some convergence there. He didn’t really take it from her, but there was some convergence, because he was in his philosophical focus, very much an Aristotelian, like her. He didn’t really write on metaphysics, he wrote on epistemology insofar as it applies to economics, but he was very influenced by Aristotelian and Thomistic ethics and developed that further. He developed natural law thinking on that basis.
JD: We think of Aquinas as a philosopher, as a legal theorist, and of course as a religious thinker. Most people probably think of him more as a religious thinker than a philosopher per se.
DG: The relation between theology and philosophy is one of the most contested topics in the study of Aquinas. I would say he was a philosopher as well as a theologian in that a good many of his works are commentaries on Aristotle. He wrote books on how you could convert people who don’t accept Christianity, not presupposing that theology is true. For him, in fact, there was some knowledge that could be obtained just by reasoning, and there was certain knowledge that couldn’t be obtained by reasoning. This you could get only by faith, which is from revelation. But for him, even some of the knowledge obtained through reasoning could show why we should accept the Church’s teachings.
JD: When Rothbard makes the normative case for laissez-faire in The Ethics of Liberty, he makes that normative case without appeal to higher powers. He relies on a secular morality as the foundation for a free and just society. What’s his biggest influence there?
DG: Well, I think in this he talks about people as self-owners. You could say “why are we self-owners?” I think he would rely on an Aristotelian focus.
JD: Maybe this is my own Protestant upbringing, but when we talk about self-ownership it sounds inherently incompatible with Christianity. If you’re a Christian you believe you were made in the image of God, and thus you’re not some wholly independent being. You don’t “own” yourself as part of God’s creation.
DG: Yes. Well, that’s a very interesting objection. If you look at Locke, Locke did believe that God really owns everybody. He also defends the self-ownership principle.
JD: God owns everybody?
DG: The claim here is God created us so God really owns us. But under that, we’re in charge of our own lives, so it’s something like this: suppose for all practical purposes, unless God is directly trying to tell us something, we’re in charge of our own lives. The fact God owns everything doesn’t mean someone else can go around saying, “I’m God’s representative, so you have to do this, do that.” No one has direct access to God in that way that would justify that person imposing various limits on what a person can do. The notion of God owning us does have some bite to it in the real world. For example, many theologians have thought it’s wrong for you to commit suicide. Because God owns you, you don’t have the right to end your own life because that would be inconsistent with God’s ownership. You could say, you could acquire property in the world because subject to God’s ultimate ownership, you’re really free to homestead land at least under certain conditions.
Rothbard is probably best called agnostic. I think his atheism wasn’t as strong in his later years as earlier. His later position is something like, if there is a God, his actions and his knowledge would be so far different from normal, we wouldn’t really be able to grasp what he was doing. This is more in conformity with Aristotle because Aristotle did believe that God really takes no notice of what’s going on in the world and Aristotle says God is thinking about his own activities, his own being, and is not concerned with human beings.
JD: David, let’s talk about Ayn Rand. Both Mises and Rothbard knew her personally, and both socialized with her at one time. Many people think she was a highly derivative philosopher, that she didn’t exhibit much original thought. Many people disagree, and think she was a brilliant philosopher who developed a fully complete system of original ideas on her own. Tell us about her relationships with Mises and Rothbard, how they may have influenced her, and vice-versa.
DG: It is true that some of her thought certainly resembles Aristotle in many points, but she was able to get a lot of her views independently. I think in some respects, she deviated in an incorrect way from Aristotle. She was certainly a significant thinker in philosophy. I frequently disagree with her, but she’s certainly someone who’s worth reading.
We also know a bit about her thinking on Mises because she used to make notes on books she was reading. We have her notes on Human Action and one note on that always makes me laugh. She said that Mises usually talks about supply and demand, but one place he talks about demand and supply and she thought that there was something suspicious about that, but she didn’t say what it was. So, she thought Mises was extremely good with economic theory, but she thought he didn’t have the right theory of knowledge. She took him to be a Kantian and she didn’t like this. They met a few times in person and Mises liked her Atlas Shrugged. He thought she was portraying the businessman as a hero, she was really doing something very valuable, but apparently they didn’t get along. There’s this story Henry Hazlitt invited both for dinner and they had some big falling out. They both had very strong personalities.
Now, Murray Rothbard, when he first heard about her, he tended not to like her much because he thought she was a very dogmatic thinker and if you disagreed with her, she would exclude you and he thought the tendencies in her personal way of dealing with people, he didn’t like. So, he tended very much to stay away from her and was suspicious of her, but when Atlas Shrugged came out, he really liked it, admired her writing, so for a while, his group met with her group, but they didn’t get along. The thing she most opposed in Murray’s thinking was that Murray did not believe in the need for government, the state would be replaced by competing protection agencies. She was very much against that. She thought that would lead to having no law and order. There were also other issues as well.
JD: There’s a famous conversation, recounted in Nathaniel Branden’s biography of Rand, where she asked Rothbard how police and court services would be provided under anarchy. Rothbard responds with “private, competing defense agencies” and Rand expressed in horror: “You mean as in civil war?” Let’s just say their respective philosophies of governance diverged.
DG: There were other issues as well. One was that Murray’s wife, JoAnn Rothbard, also a great friend of mine, was a quite devout Protestant. So Rand wanted her to listen to some tapes by Nathaniel Branden on why God doesn’t exist and he felt that any rational person after listening to these tapes would be converted to atheism. So, if they listened to them and if she wasn’t converted to atheism, then Murray should divorce her. Of course, he wasn’t having any of that. of Barbara Branden’s master’s thesis where she said that, and used that argument. So then, when the volume came out, for some reason the citations to Branden were taken out, and Rand and Branden and the Rand group got very angry about it. They said, “oh, he’s plagiarized Barbara Branden.” In fact, the argument wasn’t original with her,
it’s a very common argument. So, they were very angry and they protested, and they went to the publisher. And then Murray wrote to Mises, and Mises replied and said, “what’s going on here, everybody knows about this argument, what are they complaining about?” But the Randians never forgot it.
JD: David, one final question. Menger, Mises, Hayek, and the older Austrians all pre-dated the rise of postmodern philosophy in the late twentieth century. Did Rothbard address postmodernism, and what effects do you think it has on economics today?
DG: Rothbard did address postmodernism in his essay “The Hermeneutical Invasion.” There are many different varieties of postmodernism but in general, postmodernists attack the notion of truth as fixed
and unalterable. Rothbard resisted this, relying on his Aristotelian realistic views. Fortunately, postmodernism hasn’t influenced economics as much as it has the humanities.
Economists Have Been "Useful Idiots" for the Green Socialists
In the old Soviet Union, the Communists allegedly used1 the term “useful idiot” to describe Westerners whose naïve political views furthered the Soviet agenda, even though these Westerners didn’t realize that they were being exploited in such fashion. It is in this context that I confidently declare that American economists have been useful idiotsfor the green socialists pushing extreme climate change policies. The radical environmentalists were quite happy to embrace the economic concepts of “Pigovian negative externalities” and a carbon tax in the past, but now that it is impossible for economic science to endorse their desired agenda, the activists have discarded the entire field as hopelessly out of touch. Economists who still support a carbon tax and other climate “mitigation policies” should be aware of the bigger picture.Using the UN’s Own Document to Defeat the Climate Change Agenda
I have been making this case for years. For example, back in 2014 I used the latest (and still most recent) UN Intergovernmental Panel on Climate Change (IPCC) report to show that the then-popular climate change target of 2 degrees Celsius of warming could not be justified by the research summarized in the report. In other words, I used the UN’s own report to show that the popular climate change “cures” would be worse than the disease.
Yet even though they had spent years berating the critics of government action as “climate deniers” who rejected the “consensus science,” in this case — once they realized that the economic models of climate change wouldn’t support aggressive intervention—the environmental activists all of a sudden began pointing out all the things that the UN-endorsed studies left out. Rather than summarizing the cutting edge knowledge on climate science and mitigation policies, the IPCC document turned into a bunch of misleading nonsense that would give ammunition to deniers.Nobel Laureate Inconveniently Blows Up the Paris Agreement
Last fall, we had another demonstration of the chasm between the actual research and the media/political treatment: William Nordhaus won the Nobel Prize for his pioneering work on climate change, on the same weekend that the UN released a “special report” advising governments on how to try to limit global warming to as little as 1.5 degrees Celsius.
There was just one little problem: Nordhaus’ Nobel-winning work clearly showed that the UN’s goal was insane. According to his model, it would literally be better for governments around the world to do nothing about climate change, rather than enact policies limiting warming to 1.5°C. Rather than aiming for a 1.5°C target, Nordhaus’ most recent model runs indicated that the “optimal” amount of warming to allow was closer to 3.5°C. (To an outsider this might not seem like a huge discrepancy, but it is absolutely gigantic in the context of the climate change policy debate. Many activists would confidently predict that even 2.5°C of warming would spell disaster for our grandchildren.)The Guardian’s Slam Dunk
Ah, but I got the best confirmation of my quixotic position just this month, when the Guardian ran an editorial with this subtitle (my highlighting):
Does everybody see that? The people at the Guardian already know what the policy answers are, without needing any help from the economists.Conclusion
My economist colleagues who continue to urge for a “carbon tax swap deal” in order to get rid of “onerous top-down regulations” and enact a simple “price on carbon” are fooling themselves. Whether it’s in a ballot initiative in Washington State—literally designed by an environmental economist, or in the wonky columns of Vox’s climate expert, in the political calculus of Nobel laureate Paul Krugman, or in the FAQ on the Green New Deal itself, the environmental activists in US politics are making it quite clear that they will not settle for such half-measures.
Market-friendly economists chiming in on the American political scene should stop being useful idiots for the green socialists. Whatever the possible merits of a theoretical carbon tax package—in which a regressive hike in energy prices is matched dollar-for-dollar with corporate income tax cuts, and decades of special-interest favoring regulations are thrown out the window in the zeal for efficiency—this is all a moot point. If market-friendly economists succeed in getting their readers to hold their noses and support a carbon tax, they will all learn quite quickly that the deal has been altered.Originally published at the Institute for Energy Research 1. The use of the term “useful idiots” has been attributed to Lenin, but apparently that link is disputed.
This Trade War Won't Make America Great Again
The mercantilists contend that President Donald Trump’s tariffs on imports are to shrink the trade deficit, protect American businesses, and boost exports to the rest of the world. But the latest developments in international commerce show this is not going to plan. Instead, the president’s levies are triggering unintended consequences for several key industries, particularly agriculture and energy. Previously sitting on the throne of global markets, these U.S. sectors are being more harmed by the tariffs than they are being helped, proving that former President Ronald Reagan was right: “The most terrifying words in the English language are: I’m from the government and I’m here to help.”Needless to Soy
Since the U.S.-China conflict started, American soybean farmers have been decimated. Because Beijing was their biggest market for their crops, the Plains have nowhere to sell their supplies. As a result, inventories rotted, storage costs surged, farms went bust, and farmers started to transition into other crops, such as cotton, wheat, and alfalfa. The federal government attempted to rescue the agriculture industry by offering subsidies, giving bailouts, and employing the Depression-era measures of purchasing stockpiles.
With no end in sight to the U.S.-led trade spats, some of the globe’s top consumers of soybean are turning to other foreign markets to satisfy their demand. This, of course, has resulted in dissipating global market share for the U.S., which reigned supreme in this arena for years.
In addition to Brazil surpassing the United States as top dog in soybean output, other countries are attempting to take a bite out of global market share. Soybean prices are beginning to rebound from 12-year lows, so it might be a worthwhile endeavor for these states.
In 2018, China launched a five-year plan to increase domestic production of soybean. Entering into its second year, the world’s second-largest economy anticipates output levels to soar to their best in 14 years. With soy demand sliding amid the African swine fever outbreak, its volumes may be enough to no longer depend on outsiders – at least in the short-term.
India has started to plant more land to grow soybeans. In the 2019 crop year, Indian farmers have begun to shift from a diverse array of commodities, primarily cotton, and into soybeans. In the last year, output has climbed about 7%.
Thanks to favorable weather conditions, Argentina will see a 48% jump year on year, up 2% from the previous projection in April. Argentina is the world’s third-largest grower.
Even Europe, which has promised to purchase more soy from the U.S., is anticipated to expand production by more than 14% this year.A Real Steel
China has produced half of the world’s steel for several years. After more than a year of tariffs on its steel, analysts say that they are having “no effect” on the world’s second-largest economy. Why? There is robust domestic demand and the nation is enjoying worldwide tariff exemptions.
While the Trump administration has imposed levies on Chinese steel, the economic powerhouse is enjoying a lot more tariff exemptions from Canada, South Korea, Spain, and the United Kingdom. The Asian juggernaut even increased its total steel production last year, from 831.7 million metric tonnes to 928.3 million.
Exports have tumbled 8%, but these have been offset by rising national sales.
Paul Bartholomew, senior managing editor at S&P Global, told the South China Morning Post:
“Last year when the tariffs first came in, the steel market reacted negatively in China. It’s very sentiment driven, tends to be reactionary to policy announcements.
But it returned to fundamentals within a few days. For the first three quarters, the market was very strong and robust, demand was very robust.
Steel tariffs, the so-called trade war, wasn’t a huge factor. It was playing out in sentiment, but domestic demand was strong enough to save the steel industry.”
Overall, U.S. imports of Chinese steel have slipped from 5% to 2% in the last year.Fuming Over Natural Gas
America’s rise from energy dependent to energy independent has been a remarkable tale. No longer does the U.S. need to bow to the demands of OPEC. Not only is the U.S. keeping its own lights on, but it is also fueling the rest of the world. The natural gas revolution is expected to go on for another decade – perhaps beyond – but it might lose business should the trade war linger.
While the United States is set to surpass Russia as natural gas king in the next couple of years, Washington and Moscow are vying for two key markets: China and Europe.
When Beijing said it would impose retaliatory tariffs on more than 5,000 products, it included U.S. liquefied natural gas (LNG) imports on that list. As of June 1, LNG products will face a 25% levy. This is not good for American energy firms, especially with the trend suggesting diminishing imports. According to Reuters, just 27 LNG vessels ventured from the U.S. to China in 2018, down from 30 in the prior year. And, more than half of those that left U.S. ports did so before the trade war commenced.
Meanwhile, trade negotiations between the U.S. and the European Union seem to have paid off for American natural gas firms. Since 2016, U.S. LNG exports to the E.U. have skyrocketed 272%, with the biggest imports taking place between October 2018 and March 2019.
But Russia was still the biggest supplier of natural gas to the E.U. last year, followed by Norway. It should be noted that Algeria and Qatar are gradually boosting their energy exports to the eurozone. E.U. Commission data show that 11 member states, including Austria, Finland, and Hungary, imported more than 75% of their natural gas needs from Moscow, mainly because of their proximity to the nation.
Moving forward, there are two main factors that could help Russia.
The first is that E.U.-U.S. trade relations could sour, which may be happening right now. U.S. trade representatives have accused the E.U. of not keeping up their part of the temporary arrangement, insisting that the region buying more agriculture be a part of the deal.
E.U. Trade Commissioner Cecilia Malmström told Foreign Policy :
But it’s true, we have a long list of issues in the trade area where we have disagreements with the U.S. administration. So we are not negotiating with a gun to our head. We have very clear red lines, very clear conditions, but we are also determined to say that the EU and U.S. are natural friends and allies—we should have a common agenda.
The second gamechanger are pipelines. Russia has an advantage over the U.S. with cheaper transportation costs and established infrastructure. In addition to an abundance of major pipelines, Russia is in the middle of constructing several important ones, including the Nord Stream 2 that links Russia to Europe through the Baltic Sea. It could explain why the Congress is targeting the project with sanctions.No Trump Card for US Industry
Proponents of the Trump tariffs contend that the rest of the world has been ripping off the United States for far too long. The import levies are an attempt, they say, at reducing the trade deficit, leveling the playing field, and bringing back American jobs. Is the trade war proving to be successful? The trade deficit has increased since President Trump took office, consumer prices are rising, tariffs are having little effect on the roaring labor market, and American industries are losing their competitiveness on the world stage. If this is winning a trade war, then one can only imagine what losing would look like.
Government Laws Are Not Contracts
Despite what you were taught in school, governance is ugly; in all forms, and at all times. Don't believe me? Attend a meeting of a local governing entity. You will find the council — omnipotent by vote, omniscient by delusion — seated before you at the table. All night long, they'll bicker and battle all the while proposing and dissecting plans and schemes with shouts and pounding shoes; Khrushchev moments indeed.
This is the reality of man lording over man, and it's been that way for eons. Ugly, just plain ugly. And it doesn't matter the span or purpose of the governing entity. This ugly reality holds equally true for the fist-fighting Taiwanese legislator as for the insult-hurling band booster. Power corrupts at all levels.
One other aspect of governance appears to be consistent at every level: the broader the scope of the proposed plan or idea, the further they reach beyond the stated bounds of the entity, the more receptive a hearing that the entity's council will give to the idea. Everyone dreams grandiose dreams, whether during solitary reflective moments or while monopolizing the public microphone. But it's the bully at the public mic, entertaining the media and sparse audience, whose dreams we must fear.
Given that these aspects are inherent in the essence of power, the issue is not how to improve systems of governance, but how to control their scope.
Because enforced contract law and full property rights are the foundations of freedom, governance systems should be based on enforceable contracts that defend property rights. The concepts of general welfare and public good have no place in such systems, as the intent of those ideals is to break contracts and trespass on property.
Governance — government — must be limited in a manner that is akin to a legal, binding contract, where rights are understood and unchanging. While a contract-based system will not change the ugly aspects of the lording class, it will limit the effects that the omnipotent and omniscient have on your pursuit of happiness.
The best way to compare the current systems of unbounded authority with that of contract-based systems is to attend meetings of a homeowners association and meetings at a local township hall. Both entities have documents that define the span and purpose of their respective assemblies, yet only the contract-based system shows any real restraint. Certainly, both dream of utopia, but only the homeowners association must accept the inherent realities of signed agreements.
In Ohio, townships can pass comprehensive plans and zoning codes in order to create orderly communities. Zoning codes are supposed to provide hard, fast rules akin to a written contract between community members with township officials acting as enforcers. Yet, zoning codes are perceived by the marginal vote getters and their appointed minions as something else entirely. In the hands of the township officials, zoning codes are, in the words of Barbossa from Pirates of the Caribbean when referring to the concept of parley, "…more what you'd call 'guidelines' than actual rules."
Consider this situation: You moved into an area that is zoned as a conservation district where developments are limited to 1 home per acre, with natural exteriors, and abundant green space. You desired to live in your neighborhood since it is within the conservation district, an area that meets the development standards you prefer. You had assumed that the zoning codes in place would protect you from development based on subjectively lower standards.
After living in your new home for a year or so, you catch a notice in the local paper that your township is considering a proposed development on the fallow farm fields and woods that abut your backyard. So, you attend the zoning hearings to see what will become of your backyard vista. At those meetings you quickly remember the prescient words of Barbossa.
The zoning commissioners are willing to trade homes per acre, natural exteriors, and green space for a donation of an offsite piece of land for a future community park or fire station. Sure, you hold the zoning codes — still in force — in your hands as if it is a contract to be enforced by the township, yet the zoning commissioners and township trustees see that document as the starting point for exactions and extractions; what the developer considers extortion by other means.
You can complain and shout, but the governance system that you have encountered has no consideration for your assumed contract. The commissioners and trustees only care about their grandiose plans for a utopian community. Your long-term vision of your local neighborhood, based on current regulations, just met their long-term vision of posterity; the one where future residents sing praises to the plans and vision of the current ruling elite.
Now, consider the homeowners association (HOA). Certainly, the same taste of power has corrupted the key players. They have dreams too, but their dreams are limited by the restrictive covenant that governs use of the property covered by the association. Sure, they send out a monthly newsletter with words of wisdom regarding how residents should live their lives, but they can't do anything about it. The concepts of general welfare and public good are not defined on the deed filed at the county offices as purposes of the association.
Now, I'm not saying that some residents will not suffer the occasional annoyance as HOA trustees hold the color pallet against your mailbox to verify the hue of the stain which you applied, but they can't change the usage of your neighbor's property from residential to commercial. Nor can they subdivide properties or dig up sidewalks. The HOA members have utopian dreams, but contracts limit their reality to mending fences and mulching entrance ways.
Other than showing excessive exuberance at times, the HOAs are typically indicted in the press when the singular property owner wants to turn his front yard into a memorial for the flag, replete with search lights and a continually repeating sample of Taps. What's worse, the property owner knowingly agreed to such restrictions prior to purchasing the property. The homeowner, attempting to trample on the agreement, is hailed as the last defender of Lady Liberty herself, while the HOA, defending its contract with all homeowners, is perceived as evil incarnate.
Such inconveniences and annoyances are nothing compared to the damaged resulting from unbounded governance. As you move up the governmental food chain, you will find that each subsequent level reaps more damage, more ills. At the federal level, it is as if no bounds exist anymore. Sure, the separate branches mention the Constitution, but only as a means to pervert its moral authority.
Some will claim that the Constitution is our written contract, binding rule of law, and restrictive covenant, yet its perversion would seem to imply that contract governments, whether constitutional public or anarcho-libertarian private, are bound to fail.
But, not so fast. For the private supplier of governance, the entrepreneur across the street offering a similar service is enough of a threat to keep private governing bodies in line.
On the other hand, the political class simply requires rumblings from the masses. Rumble, and they shall fear. Shout, and they shall bend. Scream, and they shall wither.
The ilk that sit at the head of the table, whether local, state, or national, are most concerned about keeping their power and status. These are not men and women of principles. They are simply power seekers. They will wither and do as told once this great nation says, "Stop! Respect the Constitution." They would rather flip and flop than risk the next election.
The ruling elite know this, that's why they utilize a coerced education system to perpetuate their nonsense. Yet, a simple booklet such as the comic version of Hayek's Road to Serfdom can turn enough minds to shake the tables of power. But, just because many have lost sight of "Don't Tread on Me," doesn't mean all is lost. A little more education, a stronger tug on the collar of the elected, and the direction toward socialism could reverse overnight.
So, whether your concept of government is constitutional public or anarcho-libertarian private, contract governments will work. They'll be messy, the public version will take conviction of the governed, but their scope will not creep onto your property and liberty.
[Originally published March 2007.]
Every Law "Legislates Morality" — From Abortion to Minimum Wage
With the heating up of the abortion debate, the phrase "legislate morality" has come back into more frequent use. This week, the Washington Post printed a letter to the editor with the headline "Anti-abortion legislation is Prohibition all over again." The author complains: "Prohibition was an attempt by government to legislate morality."
Similarly, state legislator Kirk Hatcher of Montgomery, Alabama, who opposed the state's legislation that nearly bans abortion, states "We can’t legislate morality ... We can’t legislate hearts."
And last week, DNC activist Marisa Richmond declared the problem with the GOP these days is it's "trying to legislate morality ... That’s not the role of government."
When used, the general formula is this: "that law I don't like amounts to legislating morality! And we all know you shouldn't do that."
The problem with this inane line of argument, of course, is that nearly every law involves legislating morality of some sort.
It doesn't exactly require an outlandish amount of study to see that laws against murder and theft are cases of "legislating morality." Courts, legislators, and lawgivers in most times and places have declared murder and theft (however defined) to be illegal acts precisely because most considered these acts to be immoral. Laws against fraud exist because cheating people is regarded as immoral. Laws against rape exist because its morally repugnant. Certainly, there may be other reasons also given for making these activities illegal. Outlawing theft and fraud are good for economic growth, for example. But if the opposite were shown to be true, it's hard to image many people deciding that swiping a child's bike from his driveway ought to be perfectly legal.
But we don't have to limit our analysis to big and obvious cases like murder. How about laws regulating minimum wages? Is not the argument here that it's somehow immoral to pay people below a certain amount? Certainly, proponents of minimum wage laws are known to denounce opponents as "greedy," "inhumane" and a number of epithets, all of which amount to calling the people in question immoral. If creating a minimum wage is not a matter of legislating morality, then why are the laws' opponents immoral for doing so?
The welfare state is similarly based on calls for legislating morality. The claim, of course, is that it's immoral to leave families without some sort of taxpayer-funded safety net. Opponents of such schemes, of course, " just want people to die! "
Indeed, it's difficult to think of many laws at all that aren't justified in some way on a moral foundation. Consider, for example, a local law on whether or not County X will have three DMV locations or two. This might seem at first like a mere administrative question, but the argument for there being three locations could be this: "Don't the people of Tinyville deserve a DMV location that is convenient? Do the proponents of only two DMV locations think the rural people of this county have all day to drive to Bigsville to register their cars? We rural folk have families and jobs too!"
The retort could be "the people of Tinyville want to steal even more money from the taxpayers of Bigville to fund their unnecessary extra DMV location!"
And so on.
So, when opponents of abortion declare anti-abortion laws to be matters of legislating morality, what they really mean is "these laws are based on a version of morality I don't like."
After all, there's nothing "morality-free" about the pro-abortion position. The position is that it's immoral to restrict a woman's freedom to get a legal abortion. This is so immoral in their minds, that they denounce anti-abortion activists as being hatemongers, enemies of women, or worse.
For them, the answer lies in — you guessed it — legislating morality through federal laws prohibiting state and local governments from enacting abortion restrictions.
Meanwhile, anti-abortion activists think the unborn baby is a person who deserves legal rights. Thus, their version of legislating morality involves prohibiting what they see as the killing of a person.
The fundamental difference between the two sides is not one of one side legislating morality while the other side doesn't. Both sides just want laws that reflect their own moral views.Does the "Crime" Have a Victim?
The abortion debate helps to illustrate that the real issue behind whether or not a law legislates morality is whether or not there is an identifiable victim.
From the pro-abortion point of view, if the unborn baby is not really a person, then the "crime" has no victim. On the other hand, the anti-abortion position is that there is a clear and identifiable victim.
This distinction comes into play in other contexts where the term "legislate morality" is sued. In the case of the Drug War, for example, those who oppose drug prohibitions claim there is no identifiable victim. That is, the drug user is using potentially harmful substances of his own free will. Similarly, opponents of prohibitions on prostitution argue that both the prostitute and his or her client are willing participants in a contractual relationship.
Thus, in these cases, it is argued, there is no victim, and it would be immoral to prevent these people from doing as they please.
The other side, of course, might argue that there are real victims in these cases. They might argue that prostitutes aren't really willing participants, or that drug users aren't making free choices due to ignorance or addiction.
Thus, when the author of the Washington Post letter compares alcohol prohibition to anti-abortion laws, he's missing an important point. Nearly everyone today regards alcohol prohibition as foolish because most regard the drinking of alcohol (in most cases) as a victimless activity. But opponents of abortion maintain that is not the case when it comes to deliberately terminating a pregnancy.
But in all these cases, the argument hinges on whether or not there are victims — and not whether one side is legislating morality.
Skidelsky's Push for Modern Mercantilism
Money and Government: The Past and Future of Economics
Yale University Press, 2018
xiv + 402 pages
The title of Murray Rothbard’s Power and Market provides a useful entry to understanding Robert Skidelsky’s long and learned book. Rothbard drew a contrast between peaceful cooperation through the free market and State coercion. Which do you support, he asks: power or market? Skidelsky, a historian and economist who has written admiring biographies of Keynes and the British fascist Oswald Mosley, is for the most part clear in his answer: power should prevail over the market.
Thus, although he notes that mercantilism rests on economic fallacies, he still thinks this system has much to be said for it. “Rising prices were associated with prosperity; falling prices with dearth. This correlation led a group of seventeenth-century thinkers called mercantilists to identify money with wealth. The more money a kingdom had, the wealthier it was; the less, the poorer.” This view is mistaken: mercantilism was based on the “fallacy that exporting is better than importing and that the object of economic policy should therefore be to secure a favourable balance of trade ... of course, all countries cannot achieve a trade surplus simultaneously, so the pursuit of these policies involved continuing trade wars between the leading European powers.”
But what is wrong with trade wars? “The mercantilists believed that state activity and spending could galvanize the growth of national wealth. War was an investment decision by the state: the state needed sufficient revenue to conquer foreign markets.” Why rely on peaceful exchange when you can take what you want by force?
In addition, war has another benefit: it reduces inequality. “Recently, discussion of distribution has centred on the fact, and meaning, of the sharp rise in inequality since the 1970s, particularly in the United States and Britain. The most notable contributions here are Thomas Piketty’s Capital in the Twenty-First Century (2013) ... and Walter Scheidel’s The Great Leveler (2017). ... Both attribute the great compression of wealth and incomes in the middle years of the last century to the effects of the two world wars and Great Depression.”
Skidelsky is not content to urge the merits of power over market. He wishes to challenge advocates of the free market on their own ground. They take as their standard the welfare of consumers and on that basis argue for voluntary exchange. The fundamental argument of his book is that, in doing so, they fail to realize the disruptive effect of money. In a barter economy, Say’s Law, which Skidelsky wrongly states as “the infamous ... Law that supply creates its own demand” holds true. As W.H. Hutt pointed out in his major study A Rehabilitation of Say’s Law, the law is better stated as “all power to demand is derived from production and supply.” Another way to state the law is “the supply of a good on the market is demand for other goods.” There can be no overproduction that covers all of the economy.
Once money enters the scene, the situation alters. Instead of spending their money on consumption or investment goods, people can hoard money. “Speculators, too, have always known that in disturbed times they can profit from being liquid. Increased propensity to hoard, what Keynes called the ‘speculative demand for money’, thus arises from increased uncertainty. It slows down the economy by slowing down the spending of money on currently produced goods and diverting it into financial operations. Thus money earned in producing goods may be unavailable for spending on those goods, causing unemployment.”
As Skidelsky tells the tale, neoclassical economists who favored the free market attempted to solve this problem through the quantity theory of money. By varying the quantity of money, the monetary authorities could keep the value of money stable. In that way, the fears of speculators would be calmed and hoarding averted or countermanded. Milton Friedman’s monetarism is the best known example of this view, but Knut Wicksell, and even Keynes before the General Theory, supported it. As Keynes came to realize, though Friedman did not, monetarism does not work. The central monetary authority is unable to control the money supply in the way this theory supposes.
Although Skidelsky mentions Austrian economics several times, he never confronts the Austrian criticism of his entire line of reasoning. In the Austrian view, he has gotten wrong both the alleged problem posed by hoarding and the alleged “cure” that the proponents of the free market suggest for it.
As Murray Rothbard has pointed out in Man, Economy, and State, allocation of resources between consumption and investment depends on the rate of time preference. The demand to hold money creates no special problem for this allocation. In assuming otherwise, Keynes and his followers wrongly took the loan rate of interest to be primary, when in fact it is subordinate to the primary determinant of the rate of interest, the aforementioned rate of time preference.
Rothbard explained the basis of the Austrian account of the interest rate in this way: “People, therefore, allocate their money, among consumption, investment, and hoarding. The proportion between consumption and investment reflects individual time preferences. To think of the rate of interest as ‘inducing’ more or less saving or hoarding is to misunderstand the problem completely. ... One grave and fundamental Keynesian error is to persist in regarding the interest rate as a contract rate on loans, instead of the price spreads between stages of production.” In contrast to the Keynesian fear that expectations of falling consumption demand will lead to a cycle of further price falls and lowered expectations, Rothbard says, “The expectation of falling factor prices speeds up the movement toward equilibrium and hence toward the pure interest rate as determined by time preference.”
Moreover, the speculative bubbles that Keynes feared stem not from sudden and mysterious collapses of the “animal spirits” of investors but rather from injections of bank credit in fractional reserve banking, a system unsustainable without state control of the money supply. Skidelsky is well aware of this theory but has little to say about it, perhaps because he does not like its consequences for policy: “The causes of the crash of 1929 have been much disputed. Friedrich Hayek claimed that it was a result of excessive credit creation in the United States. In his account, the price stability of the mid-1920s, so much praised by the monetary reformers, was an indication of inflation, not of equilibrium, since productivity gains would have naturally produced a falling price level. ... ‘Excessive credit creation’ became the standard ‘Austrian’ explanation of the 1929 collapse. It resurfaced to explain the crash in 2008. ... On the Austrian analysis, recessions give a chance to reallocate ‘mal-invested’ productive factors to efficient uses. They should therefore be allowed to run unhindered until they have done their work. Economists whose common sense had not been completely destroyed by their theories rejected the drastic cure of destroying the existing economy in order to rebuild it in the correct proportions.” Skidelsky is sure that allowing prices to fall in a depression would ruin the economy, but as James Grant shows in his outstanding The Forgotten Depression, the US government did exactly that in coping with the downturn in 1920–1921, and the result was a speedy recovery. Skidelsky cites Grant’s book in his bibliography but ignores its relevance to his complaint against the “drastic cure.”
Further, Austrians reject the quantity theory of money. Mises in The Theory of Money and Credit said about it: “There is no justification whatever for the widespread belief that variations in the quantity of money must lead to inversely proportionate variations in the objective exchange value of money, so that, for example, a doubling of the quantity of money must lead to a halving of the purchasing
power of money.” Austrians thus oppose endeavors by the state to stabilize the value of money based on this theory. It is ironic that Skidelsky takes the failure of monetarism, a form of state intervention, to show the defects of the unhampered market economy. It is ironic that Skidelsky takes the failure of monetarism, a form of state intervention, to show the defects of the unhampered market economy.
Our account of Skidelsky’s book now takes a surprising turn. Although he opposes the free market, he is not prepared to dismiss entirely the views of the Austrians. To the contrary, he considers Hayek a great thinker and recognizes that his warnings against government intervention have merit. “Liberalism, or social democracy, unraveled with stagflation and ungovernability in the 1970s. ... Keynesian/social democratic policymakers succumbed to hubris, an intellectual corruption that convinced them they possessed the knowledge and the tools to manage and control the economy and society from the top. This was the malady against which Hayek had inveighed in his classic The Road to Serfdom (1944).”
Skidelsky recognizes that the Keynesians had no adequate answer to the “stagflation” of the 1970s. He also recognizes the force of the “public choice” analysis of government though he by no means commits himself fully to it. “Its main thrust was to emphasize the importance of the private incentives facing politicians and bureaucrats. The Keynesian-social democratic state was modelled as a private interest masquerading as guardian of the public interest. This was back to Adam Smith.” Skidelsky errs, though, when he says that “Public choice theory is simply rational expectations theory applied to government. It takes from REH [rational expectations hypothesis] the methodology of modelling public policies as the solution to individual maximization problems.” This is not correct. The basis of the theory is that politicians are self-interested actors, but this does not commit one to a particular model of how such actors behave.
Even readers who disagree with the thrust of the book will benefit from Skidelsky’s wide learning. The author sometimes makes mistakes. He says, “The French state, which emerged from the war [WWII] as the nation’s chief investor, did not have to learn its statism from Keynes; Colbert had pointed the way in the eighteenth century.” That was a neat trick for Colbert, who died in 1683. He calls the well-known businessman and New Deal financial expert Beardsley Ruml “Rummel.” But the slips are few and minor.
Just as in his earlier book How Much Is Enough? (2012), Skidelsky manifests an inordinate distaste for money and “greed.” Far better in his eyes is the pursuit of power by the State, even at the cost of wars and massive public debt. Some of us will not agree.
Digital Cash: Another Dangerous New Idea in Monetary Policy
While modern monetary theory has provided some distraction for public and commentators alike, the war on cash goes on. In the latest issue of the Cato Journal, the distinguished economic historian Michael Bordo and his co-author Andrew Levin lament the failure of the experiments in unconventional monetary policies of the last decade to stimulate aggregate demand. While they detail these failures at length, they do not draw the conclusion that there is something fundamentally wrong with the dominant approach to monetary policy – rather, the problem is that the effective lower bound (ELB) on nominal interest rates has prevented central banks from providing “sufficient” monetary stimulus. After all, cash is interest-free, so zero or negative interest rates cannot be imposed on the economy, as people will simply shift their savings from bank accounts into cash holdings.
Clearly, something must be done to overcome this problem. It has long been recognized (e.g. by Professor Salerno) that one of the main motives in the war on cash is to overcome the ELB: eliminate cash and there will be no limit to how low the Federal Reserve can go. Professors Bordo and Levin do not wish to go that far – at least initially. Rather, they suggest that “digital cash” be established as the fulcrum of the U. S. monetary system (p. 384).
Their scheme, briefly, is as follows: digital cash should be provided in designated accounts at supervised depository institutions, which in turn would hold part or all of these funds in reserve accounts at the central bank. These digital cash accounts would earn interest and this interest rate would become the central bank's main policy tool: in normal times, it would be positive, but in times of crisis the central bank would be able to cut the rate below zero. We’re assured by the good professors that individuals and firms would still be free to use physical cash. It’s just that digital cash will be so dang convenient that the demand for physical cash will rapidly disappear. But just to make sure, fees should be imposed on transfers from digital to physical cash so there are no incentives to arbitrage in the case of negative interest rates on digital cash.
There is a lot to criticize in this proposal.
In its totalitarian implications, it is similar to Rogoff’s book The Curse of Cash, which they cite approvingly. It is also extremely one-sided. For instance, a token-based system of digital cash (think bitcoin) is portrayed as prone to fraud, but we are lead to believe that no such problems exist when it comes to their favored form of digital cash. Their assurances that private individuals will not have to pay negative interest rates ring hollow; for once everybody is in the system, what is to stop the benevolent central bank from changing the rules on who is and who isn’t exempt from the negative rates? And once the fee on transfers between digital and physical cash is in place, why not make physical cash prohibitively expensive? Ultimately, the public is forced to use the financial system, negative interest rates are imposed as thought necessary by the central bank, and the ability to convert money into physical form is severely curtailed, if not completely abolished.
One is also struck by their curious proposition that physical cash has an opportunity cost in the form of the foregone interest on a risk-free investment while digital cash will earn interest and therefore have no opportunity cost (p. 398).
In other words, cash does not yield anything and is, therefore, an inherently worse form of money than digital cash, which will earn interest comparable to T-bills. (The good professors do not seem to recognize that they are contradicting themselves: digital cash is preferable both because people earn interest on it and because it allows for the imposition of negative interest rates?) They seem to think that money is just another financial asset, albeit a more liquid one. Monetary policy therefore boils down to managing relative interest rates: if only the spread between the interest rates on digital cash and financial assets can be maintained, there is no reason why people should not continue to be fully invested throughout a possible crisis (p. 402).
The problem is that money is not a financial asset and physical cash is not, contra Bordo and Levin, sterile. Rather, holding cash serves an important function: as Hoppe lucidly explains, holding money is an investment in certainty.
Since we can never know with complete certainty when and what we want to buy or at what prices we will be able to sell our goods and services, we always have some money on hand. The more settled and certain conditions are, the less cash reserves a person will think it necessary to keep. But in a financial crisis, uncertainty spikes again and he will, therefore, increase his cash reserves to guard against this increased uncertainty until conditions quiet down again.
Professors Bordo and Levin can perhaps be forgiven for not knowing of Hoppe’s argument — and perhaps even for ignorance of the works of Hutt and Mises on which Hoppe builds — but a recent paper from the Bank for International Settlements makes essentially the same point: despite official hostility to cash and advances in payments technology, demand for cash has risen since the Great Financial Crisis, as people turn to cash as a store of value.
Should their proposal be implemented, it is far from certain that the outcome in the event of a crisis will be what Professors Bordo and Levin desire. Physical cash will have been eliminated as a safe haven, but digital cash will be an inherently bad way of preserving purchasing power when negative interest rates are threatened. A likely outcome will therefore be that savers look for alternatives to cash to preserve their wealth. One such alternative is investing in gold, an asset that has a long track record of maintaining its value in the long term.
Rather than securing the monetary system, the digital system outlined by Professors Bordo and Levin would further empower central bankers at the expense of consumers.
Even An-Caps Sometimes Give the State Too Much Credit
Bob Murphy points out a common fallacy among even self-described anarcho-capitalists, when they blame a social problem on “too little government.” For example, in standard arguments over drug prohibition, sometimes libertarians will argue, “A drug dealer can’t call the cops if he gets robbed, so this leads to more violence in the industry.” Bob explains what’s wrong with this way of thinking.
Will China Reverse Its Trade Surplus with the United States?
The increasingly erratic trade tensions between the United States and China does not appear to be ending anytime soon. The US president affirms that the deficit in the current-account between the two countries will soon come to an end and attributes the deficit to the Chinese competing unfairly.
Along these lines, supposedly private conversations that have been leaked in recent months suggest that Xi Jinping’s government has a plan, consistent with Trump’s rhetoric, to reallocate the composition and flow of transactions of goods, services, and other components that make up the trade balance between the two countries by the year 2024.
The trade war sent global equities to the steepest losses of the year and just got a lot bigger after both sides announced more tariffs. This exchange of “fire” wiped out more than $1 trillion from stock values this week1.
The obvious question is whether China possesses the flexibility for an undertaking of this magnitude. Apart from the fact that China’s trade surplus with the world is decreasing and the trade surplus with the United States is increasing (according to both countries’ accounting), there is a corporate-debt bomb and a real estate pricing bubble in China. As if that were not enough, the US federal budget deficit for the 2020 fiscal year is $1.1 trillion.2
This amounts to an unfavorable situation in which ever-increasing public debt in both economies and a fruitless exchange of rhetoric between leaders have done nothing but inject a dose of volatility into financial markets. This exchange has also given the impression that the two leaders are ignoring the accounting principles of the accounts that make up a country’s balance of payments.Why Does a Trade Deficit Matter So Much?
A trade deficit is simply an accounting expression that reflects that a country imports more than it exports—nothing more. The opposite is a surplus. Later on, we will analyze the components of the current account and briefly discuss the capital account to explain why surpluses and deficits reflect only the different positions of participants in the global economy. Participants can be either creditors or debtors. Being a creditor does not imply economic growth, nor does being a debtor imply economic contraction.
According to the United States, the US trade deficit with China is $382 billion.3 To put this in context, this deficit is almost five times greater than the United States’ second-largest deficit, which is with Mexico.Source: Prepared by the author with data from the US Census Bureau
Although Trump emphasized his “desire” to reduce the trade gap with China in his 2019 State of the Union speech, it does not seem that it will shrink in the short term. It increased 10.9 percent in the first eleven months of 2018 compared with the same period in 2017 ($37.6 billion in total). During the first year of the Trump administration (2017), the deficit increased by $28.6 billion—a record amount and especially striking if compared with the $20.3 billion reduction in the gap in 2016. The annual deficit has almost doubled since 2011. However, this figure does not include data from December 2018, which the Department of Commerce has yet to publish.
The question is how to correct the deficit. There are two options for China, neither of which is viable in the short term. One is less senseless than the other. The first option is for China to increase imports from the US by a factor of almost three on the condition that the flow of exports remains constant. The second is to increase the imports even more so that exports can continue at the current growth rate.Source: Prepared by the author with data from the US Census Bureau
Chinese sources claim China has promised $600 billion in annual imports from the US in 2024. This figure is not trivial and reversing a trend that has lasted years is not a simple matter. The previous graph demonstrates how volatile the movement of the current account’s components can be from month to month, particularly with a trade war that affects the timetable and quantity of imports and exports between both nations.
Although the increase in imports is technically possible, the level of implicit sacrifices renders the proposal less feasible. If we closely analyze the most recent public data, it is evident that the US deficit is reaching historic proportions.4 The imposition of tariffs on imported washing machines and solar panels in January of last year was the first evidence that China’s dominance over the global supply chain is a problem for President Trump’s agenda.5Source: Prepared by the author with data from the US Census Bureau
This was only the prelude to the approval of a new tax on March 9 of last year, this time on steel and aluminum coming from any country6, days after the deficit began to expand at a fast pace. On March 23, 2018, China responded with a tax on $3 billion of US imports including fruit, wine, dried fruit, and pork; later, on April 4 it introduced an additional 25 percent to the existing tax on 106 imported US products (soy, automobiles, chemical compounds, aircraft, and others). Besides, Beijing had offered only days earlier to cut the bilateral trade deficit by $50 billion. The reality is that China has a much narrower negotiating margin than the United States.Figures in Context and Trade Instability
The possibility of new sanctions and the general uncertainty surrounding Trump’s apparently erratic decisions are affecting the negotiating climate of both countries. This is most striking in China. The general level of revenues from consumption taxes rapidly deteriorated throughout 2018. In November, they reached a historic low of 17 billion yuan ($2.5 billion).Source: Prepared by the author with data from Bloomberg
Of course, not all of this is due to Trump. Other factors have contributed to the trends. For example, China’s household savings rate peaked in 2018, at a remarkable 31.8 percent.Source: Prepared by the author with data from Bloomberg
China has a trade surplus with the world. The Asian country reported a surplus with the US of approximately $93 billion less than what the US has reported. Although the Chinese surplus is growing in both reports, it has contracted slightly since the end of the first quarter of 2018. It does not seem that this practice of ceding to Trump’s geopolitical pressure is likely to last long, as it undermines the Chinese growth policy of promoting exports. It ignores the premise of comparative advantage in the production of goods and the provision of services, repatriation of income, and the trend of both countries regarding unilateral transfers.Source: Prepared by the author with data from Bloomberg and the US Census Bureau
The reality is that US consumers and companies continue purchasing Chinese goods; in fact, US imports grew by 7 percent in the first eleven months of 2018 compared to the same period in 2017. The pressure in the markets has also led to an accumulation of inventories, which in turn is another cause of increases in purchases from China.China’s Current-Account Balance
We can examine China’s current account (which, along with the capital account, forms a country’s balance of payments) to form a more accurate idea of the country’s economic activity in its industries and capital markets. The current account is defined as net exports plus the sum of net income and net current transfers.
The current account includes four basic components: goods, services, returns on capital, and current transfers. The first two elements usually command almost all of the attention in discussions of the state of this account, but the other two components deserve the same consideration if we want to understand where the trade deficits or surpluses come from and how they are related to direct foreign investment and other forms of investment from abroad, which are recorded in the capital account.
A country’s return on capital is its incoming flows (credits) and outgoing flows (debits) in the form of dividend payments, salaries, direct investments, and other forms of investment. The reality is that although this topic has been absent from the zigzagging speeches of the US president, the yields on capital investments are as important as transactions of goods and services (the trade balance) because they are real resources that are transferred from one country to another.Source: Prepared by the author with data from Bloomberg
Analyzing these components is key to understanding why, in practice, the current account is not equal to zero. Surpluses and deficits do not by definition imply that a country is doing well or not, despite what Trump and those who echo his mercantilist rhetoric may argue. An analysis of the Chinese current account only suggests that in the years prior to the 2008 crisis, the Asian country was strengthening its position as a net creditor to the rest of the world. China, in effect, provided an abundance of resources and accumulated a large amount of accounts receivable.China and Its Attempt to Open Itself to the World
Trump also seems to forget that China has financed a large part of the US deficit. China’s current account has continued to approach zero since 2015, so it has stopped strengthening its position as creditor to the rest of the world. The fact that the current account is approaching zero can be explained by the continuous increases of foreign investment in China, which are recorded in the capital account.
The capital balance includes foreign investment, both direct and indirect incoming and outgoing financing. The fruits of this invested capital are the repatriation of capital gains, which are accounted for in the primary balance of the current account. China’s famous deficit in the current account in the first quarter of 2018 was due more to a fall in the level of exports of goods ($51.7 billion) compared to the same period in the previous year ($82.31 billion) than to the repatriation of capital (−$9.7 billion in Q1 in 2018 and −$400 million in Q1 of 2017).
However, the Chinese congress recently approved a law to promote foreign investment, which will take effect, in theory, on January 1, 2020. It will guarantee an adequate economic environment for attracting foreign capital.
The other main reason for the end of China’s positive current-account balance is the decline in its stock of foreign currency reserves. The reasons are varied, ranging from the expectation of greater outflows of capital to the depreciation of the yuan. In 2018, the volume of reserves fell many times. However, none were especially significant (the largest was a fall of $22.69 billion in September, according to the People’s Bank of China). The outflows are relatively small, especially if you consider that the total volume of reserves of the Asian giant ($3.09 trillion in March 2019) is the largest in the world and that the general level of reserves has remained relatively stable since the last quarter of 2015.Source: Prepared by the author with data from Bloomberg
Approximately one-fifth of total US imports come from China. The US deficit has widened in aerospace technology and electronic products. Purchases of these capital goods increased by almost $6 billion during the first eleven months of 2018, reaching a total of $160.1 billion. This phenomenon has been one of Trump’s arguments when talking about an “assault on American technology and IP,” in addition to other ruminations that are improper for a position that demands ever more diplomacy and restraint in all forms.Conclusion
If China wants to reverse the natural commercial order of a balance of payments that reflects the perspicacity of thousands of entrepreneurs, it will have to not only divert its purchases from other countries, but also assume the risk of becoming a captive to US producers. For example, it will have to reallocate almost the entirety of the $160 billion that the US imports in petroleum or the almost $80 billion in agricultural products (less than a quarter comes from the US). In addition, it will have to increase the purchase of aircrafts from the US ($16 billion) as well as industrial machinery, vehicles, grain, and seeds ($13 billion), among other items. Would China be inclined to compromise its growth rate by assigning greater importance to imports from the United States? Are US producers ready to confront this artificial reconfiguration of the allocation of scarce resources?Originally published by UFM's Market Trends 1. This paragraph was added on May 14. 2. The 2020 fiscal year runs from October 1, 2019, to September 30, 2020. The deficit reflects that US government spending reached $4.7 trillion and revenues totaled $3.6 trillion. This is 1 percent more than the deficit of the previous period. 3. This figure is the amount accumulated in the first eleven months of 2018, updated at the beginning of February according to data from the Department of Commerce. 4. Small contractions in the trade deficit are due to mere seasonal situations. 5. It is important to note that the majority of imports to the US of these durable consumer goods did not come from (nor do they currently come from) China. 6. China included.
The Irrelevance of “Worker Need” and “Employer Greed” in the Determination of Wages
While Adam Smith originated the doctrine that profits are a deduction from what is naturally and rightfully wages, Marx carried that doctrine to its ultimate limit, in the claim that the greed of the capitalists drives them to deduct so much from what rightfully belongs to the wage earners that the latter are left only with minimum subsistence. This is Marx’s version of the so-called “iron law of wages.” Its essential claim is that employers have the power arbitrarily to set wages at minimum subsistence, irrespective of the state of capital accumulation, technology, and the productivity of labor.1
What makes Marx’s doctrine of the alleged arbitrary power of employers over wages appear plausible is that there are two obvious facts which do not actually support it but which appear to support it. These facts can be described as “worker need” and “employer greed.”
The average worker must work in order to live, and he must find work fairly quickly, because his savings cannot sustain him for long. And if necessary—if he had no alternative—he would be willing to work for as little as minimum physical subsistence. At the same time, self-interest makes employers, like any other buyers, prefer to pay less rather than more—to pay lower wages rather than higher wages. People put these two facts together and conclude that if employers were free, wages would be driven down by the force of the employers’ self-interest—as though by a giant plunger pushing down in an empty cylinder—and that no resistance to the fall in wages would be encountered until the point of minimum subsistence was reached. At that point, it is held, workers would refuse to work because starvation without the strain of labor would be preferable to starvation with the strain of labor. Thus, if the capitalist is to find workers, he must pay them at least minimum subsistence and no less.
What must be realized is that while it is true that workers would be willing to work for minimum subsistence if necessary and that self-interest makes employers prefer to pay less rather than more, both of these facts are irrelevant to the wages the workers actually have to accept in the labor market.
Let us start with “worker need.” To understand why a worker’s willingness to work for subsistence if necessary is irrelevant to the wages he actually has to work for, consider the case of the owner of a late-model car who decides to accept a job offer, and to live, in the heart of New York City. If this car owner cannot afford several hundred dollars a month to pay the cost of keeping his car in a garage, and if he cannot devote several prime working hours every week to driving around, hunting for places to park his car on the street, he will be willing, if he can find no better offer, to give his car away for free—indeed, to pay someone to come and take it off his hands. Yet the fact that he is willing to do this is absolutely irrelevant to the price he actually must accept for his car. That price is determined on the basis of the utility and scarcity of used cars—by the demand for and supply of such cars. Indeed, so long as the number of used cars offered for sale remained the same, and the demand for used cars remained the same, it would not matter even if every seller of such a car were willing to give his car away for free, or willing even to pay to have it taken off his hands. None of them would have to accept a zero or negative price or any price that is significantly different from the price he presently can receive.
This point is illustrated in terms of the simple supply and demand diagram presented in Figure 1. On the vertical axis, I depict the price of used cars, designated by P. On the horizontal axis, I depict the quantity of used cars, designated by Q, that sellers are prepared to sell and the buyers to buy at any given price. The willingness of sellers to sell some definite, given quantity of used cars at any price from zero on up (or, indeed, from less than zero by the cost of having the cars taken off their hands) is depicted by a vertical line drawn through that quantity. The vertical line SS denotes the fact that sellers are willing to sell the specific quantity A of used cars at any price from something less than zero on up to as much as they can get for their cars.
The fact that the sellers are willing to sell for zero or a negative price has nothing whatever to do with the actual price they receive, which in this case is the very positive price P1. The actual price they receive in a case of this kind is determined by the limitation of the supply of used cars, together with the demand for used cars. In Figure 1, it is determined at point E, which represents the intersection of the vertical supply line with the downward sloping demand line.2
The price that corresponds to that juncture of supply and demand is P1. The fact that the sellers are all willing if necessary to accept a price less than P1 is, as I say, simply irrelevant to the price they actually must accept. The price the sellers receive in a case of this kind is not determined by the terms on which they are willing to sell. Rather, it is determined by the competition of the buyers for the limited supply offered for sale. This, of course, is the kind of case that the great Austrian-school economist Böhm-Bawerk had in mind when he declared that “price is actually limited and determined by the valuations on the part of the buyers exclusively.”3
Essentially the same diagram, Figure 2, depicts the case of labor. Instead of showing price on the vertical axis, I show wages, designated by W. Instead of the supply line being vertical to the point of the sellers being willing to pay to have their good taken off their hands, I assume that no supply whatever is offered below the point of “minimum subsistence,” M. This is depicted by a horizontal line drawn from M and parallel to the horizontal axis. Thus, the supply “curve” in this case has a horizontal portion at “minimum subsistence” before becoming vertical. These are the only differences between Figures 1 and 2.
Figure 2 makes clear that the fact that the workers are willing to work for as little as minimum subsistence is no more relevant to the wages they actually have to accept than was the fact in the previous example that the sellers of used cars were willing to give them away for free or pay to have them taken off their hands. For even though the workers are willing to work for as little as minimum subsistence, the wage they actually obtain in the conditions of the market is the incomparably higher wage W1, which is shown by the intersection—once again at point E—of the demand for labor with the limited supply of labor,noted by point A on the horizontal axis. Exactly like the value of used cars, or anything else that exists in a given, limited supply, the value of labor is determined on a foundation of its utility and scarcity, by demand and supply—more specifically, by the competition of buyers for the limited supply—not by any form of cost of production, least of all by any “cost of production of labor.”
It also quickly becomes clear that “employer greed” is fully as irrelevant to the determination of wage rates as “worker need.” This becomes apparent as soon as the case of the art auction is considered that I originally presented in Capitalism4 in order to demonstrate the actual self-interest of buyers. There I assumed that there are two people at an art auction, both of whom want the same painting. One of these people, let us now call him Mr. Smith, is willing and able to bid as high as $2,000 for the painting. The other, let us now call him Mr. Jones, is willing and able to go no higher than $1,000. Of course, Mr. Smith does not want to spend $2,000 for the painting. This figure is merely the limit of how high he will go if he has to. He would much prefer to obtain the painting for only $200, or better still, for only $20, or, best of all, for nothing at all. What we must consider here is precisely how low a bid Mr. Smith’s rational self-interest allows him to persist in. Would it, for example, actually be to Mr. Smith’s self-interest to persist in a bid of only $20, or $200?
It should be obvious that the answer to this question is decidedly no! This is because if Mr. Smith persists in such a low bid, the effect will be that he loses the painting to Mr. Jones, who is willing and able to bid more than $20 and more than $200. In fact, in the conditions of this case, Mr. Smith must lose the painting to the higher bidding of Mr. Jones, if he persists in bidding any sum under $1,000! If Mr. Smith is to obtain the painting, the conditions of the case require him to bid more than $1,000, because that is the sum required to exceed the maximum potential bid of Mr. Jones.
This case contains the fundamental principle that names the actual self-interest of buyers. That principle is that a buyer rationally desires to pay not the lowest price he would like or can imagine, but the lowest price that is simultaneously too high for any other potential buyer of the good, who would otherwise obtain the good in his place. Here that minimum price is $1,001.
This identical principle, of course, applies to the determination of wage rates. The only difference between the labor market and the auction of a painting is the number of units involved. Instead of one painting with two potential buyers for it, there are many millions of workers who must sell their services, together with potential employers of all those workers and of untold millions more workers. This is because just as in the example of the art auction, the essential fact that is present in the labor market is that the potential quantity demanded exceeds the supply available. The potential quantity of labor demanded always far exceeds the quantity of labor that the workers are able, let alone willing, to perform.
For labor, it should be realized, is scarce. It is the most fundamentally useful and scarce thing in the economic system: virtually everything else that is useful is its product and is limited in supply only by virtue of our lack of ability or willingness to expend more labor to produce a larger quantity of it. (This, of course, includes raw materials, which can almost always be produced in larger quantity by devoting more labor to the more intensive exploitation of land and mineral deposits that are already used in production, or by devoting labor to the exploitation of land and mineral deposits that are known but not presently exploited.)5
For all practical purposes there is no limit to our need and desire for goods or, therefore, for the performance of the labor required to produce them. In having, for example, a need and desire to be able to spend incomes five or ten times the incomes we presently spend, we have an implicit need and desire for the performance of five or ten times the labor we presently perform, for that is what would be required in the present state of technology and the productivity of labor to supply us with such increases in the supply of goods. Moreover, almost all of us would welcome the full-time personal services of at least several other people. Thus, on both grounds labor is scarce, for the maximum amount of labor available to satisfy the needs and desires of the average member of the economic system can never exceed the labor of just one person. Indeed, in actual practice, it falls far short of that amount, because of the existence of large numbers of people, such as infants, small children, the elderly, and the sick, who are unable to work.
The consequence of the scarcity of labor is that wage rates in a free market can fall no lower than corresponds to the point of full employment . At that point the scarcity of labor is felt, and any further fall in wage rates would be against the self-interests of employers, because then a labor shortage would exist. Thus, if somehow wage rates did fall below the point corresponding to full employment, it would be to the self-interest of employers to bid them back up again.6
These facts can be shown in the same supply and demand diagram I used to show the irrelevance to wage determination of workers being willing to work for subsistence. Thus, Figure 3 shows that if wage rates were below their market equilibrium of W1, which takes place at the point of full employment, denoted by E—if, for example, they were at the lower level of W2—a labor shortage would exist. The quantity of labor demanded at the wage rate of W2 is B. But the quantity of labor available—whose employment constitutes full employment—is the smaller amount A. Thus, at the lower wage, the quantity of labor demanded exceeds the supply available by the horizontal distance AB.
The shortage exists because the lower wage of W2 enables employers to afford labor who would not have been able to afford it at the wage of W1, or it enables employers who would have been able to afford some labor at the wage of W1 to now afford a larger quantity of labor. To whatever extent such employers employ labor that they otherwise could not have employed, that much less labor remains to be employed by other employers, who are willing and able to pay the higher wage of W1.
At the artificially low wage of W2 the quantity AB of labor is employed by employers who otherwise could not have afforded to employ that labor. The effect of this is to leave an equivalently reduced quantity of labor available for those employers who could have afforded the market wage of W1. The labor available to those employers is reduced by AC, which is precisely equal to AB. This is the inescapable result of the existence of a given quantity of labor and some of it being taken off the market by some employers at the expense of other employers. What the one set gains, the other must lose. Thus, because the wage is W2 rather than W1, the employers who could have afforded the market wage of W1 and obtained the full quantity of labor A are now able to employ only the smaller quantity of labor C, because labor has been taken off the market by employers who depend on the artificially low wage of W2.
The employers who could have afforded the market wage of W1are in identically the same position as the bidder at the art auction who is about to see the painting he wants go to another bidder not able or willing to pay as much. The way to think of the situation is that there are two groups of bidders for quantity AB of labor: those willing and able to pay the market wage ofW1, or an even higher wage—one as high as W3—and those willing and able to pay only a wage that is below W1—a wage that must be as low as W2. In Figure 3, the position of these two groups is indicated by two zones on the demand line (or demand “curve”): an upper zone HE and a lower zone EL. The wage of W1is required for the employers in the upper zone to be able to outbid the employers in the lower zone.
The question is: Is it to the rational self-interest of the employers willing and able to pay a wage of W1, or higher, to lose the labor they want to other employers not able or willing to pay a wage as high as W1? The obvious answer is no. And the consequence is that if, somehow, the wage were to fall below W1, the self-interest of employers who are willing and able to pay W1or more, and who stood to lose some of their workers if they did not do so, would lead them to bid wage rates back up to W1. The rational self-interest of employers, like the rational self-interest of any other buyers, does not lead them to pay the lowest wage (price) they can imagine or desire, but the lowest wage that is simultaneously too high for other potential employers of the same labor who are not able or willing to pay as much and who would otherwise be enabled to employ that labor in their place.
The principle that it is against the self-interest of employers to allow wage rates to fall to the point of creating a labor shortage is illustrated by the conditions which prevail when the government imposes such a shortage by virtue of a policy of price and wage controls. In such conditions, employers actually conspire with the wage earners to evade the controls and to raise wage rates. They do so by such means as awarding artificial promotions, which allow them to pay higher wages within the framework of the wage controls.
The payment of higher wages in the face of a labor shortage is to the self-interest of employers because it is the necessary means of gaining and keeping the labor they want to employ. In overbidding the competition of other potential employers for labor, it attracts workers to come to work for them and it removes any incentive for their present workers to leave their employ. This is because it eliminates the artificial demand for labor by the employers who depend on a below-market wage in order to be able to afford labor. It is, as I say, identically the same in principle as the bidder who wants the painting at an auction raising his bid to prevent the loss of the painting to another bidder not able or willing to pay as much. The higher bid is to his self-interest because it knocks out the competition. In the conditions of a labor shortage, which necessarily materializes if wage rates go below the point corresponding to full employment, the payment of higher wages provides exactly the same benefit to employers.1. In contrast to Marx, the “iron law of wages” propounded by the classical economists was not based on any claim of an arbitrary power of employers to set wages at minimum subsistence. Wages at minimum subsistence was held to be the result of population growth, which, to feed the larger number of people, would require resort to the cultivation of progressively inferior lands and the more intensive cultivation of lands already under cultivation, either of which would result in a falling output of agricultural commodities relative to the number of workers. The same was held to be true in mining. This was held to reduce the buying power of wages as population increased and would go on until real wages were so low that workers could not afford to raise more children than were sufficient to prevent depopulation. This belief was descriptive of events prior to the nineteenth century, and from the perspective of the early nineteenth century appeared to be proved by economic history. Even so, Ricardo, the greatest of the classical economists could observe in 1821 that the operation of this “law” could be counteracted by continued capital accumulation. (David Ricardo, Principles of Political Economy and Taxation, 3d ed. (London, 1821), chap. V.) 2. The convention in economics is to talk of supply and demand “curves” and to refer even to straight lines as “curves.” 3. See Eugen von Böhm-Bawerk, Capital and Interest, 3 vols., trans. George D. Huncke and Hans F. Sennholz (South Holland,Ill.: Libertarian Press, 1959), 2:245. See also Capitalism, pp. 162–163 4. See Capitalism, p. 204. 5. See ibid., p. 59 and pp. 63–70. 6. Full employment, it should be realized, is consistent with many workers voluntarily choosing to remain unemployed while they search for particular job opportunities. In addition, full employment need not mean full employment throughout the economic system. The principle applies occupation by occupation, location by location. Thus, for example, the wage rates of house painters in Indianapolis cannot fall below the point of full employment of house painters in Indianapolis, irrespective of the state of employment in other locations or occupations.
Alienated America: Why Some Places Thrive While Others Collapse
Timothy P. Carney
Haper Collins, 2019
xiv + 348 pages
Timothy Carney, a researcher at the American Enterprise Institute and editor at the Washington Examiner, has a message of vital importance for supporters of the free market. This message is not, though, the only theme of his book. He pursues two other projects as well, also of interest, but for readers of The Austrian it is the first theme that demands our attention.
Supporters of the free market rightly stress that it promotes the interests of individuals better than any alternative system, but emphasis on this point risks falling into a fallacy. We tend to think only of individuals, seeing them as battling against the state. This ignores both families and civil society, “the stuff bigger than the individual or the family, but smaller than the central government.”
Carney quotes with evident approval the great sociologist Robert Nisbet, who in The Quest for Community wrote that the conflict “between central political government and the authorities of guild, community, class, and religious body has been, of all the conflicts in history, the most fateful.”
Why should we care about this conflict? People lacking strong bonds of family and association are likely to be alienated. “Alienation” was a term much in favor decades ago among Marxists, but Carney means something different from them in his use of the term. Again quoting Nisbet, he says that the alienated individual “not only does not feel a part of the social order; he has lost interest in being a part of it.”
Carney blames a strong state for this trend. “When you strengthen the vertical bonds between the state and the individual, you tend to weaken the bonds between individuals.” The great nineteenth-century French historian Alexis de Tocqueville described this process: “as in centuries of equality no one is obliged to lend his force to those like him and no one has the right to expect great support from those like him, each is at once independent and weak. … His independence fills him with confidence and pride among his equals, and his debility makes him feel, from time to time, the need of the outside help that he cannot expect from any of them, since they are all impotent and cold. … In this extremity he naturally turns his regard to the immense being that rises alone in the midst of universal debasement.” (quoting Tocqueville) “The centralizing state,” says Carney, “is the first step in this. The atomized individual is the end result: There’s a government agency to feed the hungry. Why should I do that?” (emphasis omitted)
In one of the book’s strongest sections, Carney shows that some supporters of a powerful central state favor exactly that process. They want the state to replace private charitable institutions. Readers will not be surprised to find that Theodore Roosevelt led the way to centralization: “Roosevelt seized on the spirit of the age, which professed that science enabled great solutions to society’s problems — if only people of goodwill were given enough power. Armed with this confidence, TR moved to increase government’s role in daily life and in industry, and to consolidate that power in the federal government. … The progressives believed that things previously left to happenstance and the uncoordinated decision making of millions of individuals could now intelligently and rationally be planned, to the betterment of everyone.”
Distrust of private charitable organizations is by no means a thing of the past. Bernie Sanders has been explicit in his desire to end private charity. “In 1981, the Chittenden County [Vermont] chapter of the United Way hosted a star-studded banquet for the organization’s fortieth anniversary. Vermont’s governor, Richard Snelling, was there, as was the local mayor, a self-proclaimed socialist named Bernie Sanders … ‘I don’t believe in charities,’ Mayor Sanders told the assembled fundraisers and philanthropists. Sanders … rejected ‘the fundamental concepts on which charities are based,’ the New York Times reported at the time, ‘and contended that government, rather than charity organizations, should take over responsibility for social programs.’”
Carney merits great praise for his treatment of civil society, but unfortunately he is not altogether convinced of the merits of his own case. Private organizations help overcome alienation and we ought to fear the powerful state, but against this must be set the intrusiveness of private organizations. A balance between government welfare programs and private charity, Carney thinks, is called for: “Centralized safety-net programs need to be reconsidered, too, through the lens of subsidiarity. Which programs can be done better by states than by Washington? Which programs currently administered by state or local governments are more fit-tingly done by non-profits, by voluntary groups and by churches? Can the central government shift to being a safety net for safety nets, letting civil society be the front line in the effort, with government as the auxiliary safety net, or the reinsurance program?”
Carney, it is apparent, lacks a robust concept of property rights. He asks, in effect, ‘what type of institutional arrangements will best promote the sort of community values I [Carney] favor?” rather than ‘what natural rights to property do people have?’ He would dismiss this question as reflecting too much weight on the value of “autonomy,” for him an overly individualistic concept. In line with this, he dismisses Locke: “Thomas Hobbes and John Locke have convinced Europeans and Americans that the point of politics is to preserve the autonomy of the individual from any claims by others.” Here he has wrongly relied on the political theorist Patrick Deneen, who takes the free market to be the embodiment of greed. Contrary to Deneen, Locke valued civil society highly. Precisely his point was that, except for limited purposes, no state was necessary. Owing to his failure to consider the possibility of a society along Lockean lines, Carney finds himself in the uncomfortable position of having to say, in effect, “the state is dangerous and bad, so let’s just take a little of this poison.”
Carney not only believes in the importance of social institutions but also has definite ideas on the values they ought to promote; and this brings us to the second of the book’s projects distinguished above. He strongly supports the traditional family: “Marriage is good for the kids. … About 8 percent of children born to married parents end up in poverty as adults, while about 27 percent of children born to unmarried parents do. … There’s tons of hard data showing that kids who grow up in intact families do better as adults.”
Carney is a devout Catholic and favors the promotion of religion. He contends that doing this can be defended on secular grounds; even atheists and agnostics should recognize the benefits of widespread church attendance. What interests Carney is religion as a social institution rather than private belief. It is participating in public worship and in social networks sponsored by churches that carry with them social benefits. “[The sociologist Robert] Putnam, a decade after writing Bowling Alone, published an exhaustively researched follow-up called American Grace, along with Notre Dame government scholar David Campbell. This volume reaffirmed that church was the most important institution of civil society in America, and that it provided great benefit to its members and the broader community. … One-third of all volunteering in America is for religious organizations. … Churchgoers give more, as well.”
Public support for religion, Carney contends, does not violate the Constitution. To the contrary, aggressive proponents of secularization try to drive religion out of the “public square”: “To understand this brand of secularism, you need to combine the phrase ‘separation of church and state’ with Barney Frank’s definition of government. If ‘government’ is the name for everything we do together, as Frank says, then the entire public sphere of daily life must be seen as belonging to the ‘state.’ Thus religious entities must be seen as inherently ‘private,’ and if they try to open their doors — say by opening a hospital that takes all comers — then they have stepped their unworthy religious foot on the sacred grounds of state.”
Carney pursues yet one more project in his book, and here we can be brief. When Donald Trump, to widespread surprise, was elected president in 2016, he campaigned on the slogan ”Make America Great Again.” America was no longer great, he suggested because for many, the American Dream was dead, and it was the despair of these people he proposed to remedy. Trump’s claim appealed to a large number of voters in the Republican primaries, and it is this group that Carney at great length investigates. He finds that many of them are alienated in the sense he has set forward. He defends his analysis at various points in the book, stressing in particular the importance of counties, towns, and rural areas in which patterns of alienation prevail.
Readers of Alienated America will gain much from Carney’s account of civil society. The free market rests on a stable civil society, not on isolated individuals.
Rothbard's Editor on the Mentor He Never Met
JEFF DEIST: Patrick Newman, I’ll start with the same question I asked Joe Salerno in his interview: how does a kid from New Jersey end up deciding to get a PhD in economics?
PATRICK NEWMAN: That’s a great question. I got interested in Austrian economics and libertarianism around the time of the Ron Paul Revolution. During the fall of 2008 and the financial crisis, I was a senior in high school and everything really clicked. I started going on mises.org. Immediately, I ordered Human Action, and Man, Economy, and State and began reading them. By my second year of college, I transferred to Rutgers University in New Jersey where ironically, Joe Salerno got his PhD. I actually had one of his professors in class. I decided that I wanted to become an economics professor. I was really interested in reading and writing, and once I found out that you could make a living doing that, I said “yeah, that sounds great for me. I’d love to do that.” I was really wanting to continue reading Austrian economics, economic history, libertarianism as much as I could and if you can get paid for that, then so much the better.
JD: You read Human Action and Man Economy, and State in your teens?
PN: Yes. I was 18 and I was reading those my freshman year. As a freshman I went to Loyola Maryland. Ron Paul came to speak in February of 2010. He was promoting his End the Fed book. Naturally, I went. There were about 400 people there and afterward, Dr. Paul was signing books. I went up to him and he signed my book. I still have the book with the ticket. I told him “hi, I’m very interested, I’ve read all these books, Human Action and Man, Economy, and State.” And he says, “well, you’re ahead of everyone else at your age.” I think “great, I’m off to a good start.” I was reading those books, my freshman year of college and senior year of high school, and they really clicked.
JD: Pretty rigorous stuff for a young person! At some point you decided to pursue an academic career and obtain a PhD from George Mason University. Tell us about your experience. Was Rothbard part of your focus? What was the topic of your thesis?
PN: I wrote on monetary history, continuing some stuff that I worked on as a Mises Institute Research Fellow. I was a Fellow at the Mises Institute during the summers of 2012–2013 and that was when I was an undergrad. Rothbard was always a big part of my time at GMU. I always took the Rothbardian line and tried to argue it as forcefully and eloquently as I could. I was grateful to have Larry White as my dissertation advisor, and I worked on a lot of Austrian business cycle theory. The papers I worked on included one paper on the Panic of 1873, another paper on the Depression of 1920 to ‘21 and then a third paper on 1920s monetary policy. On all three of those I took the Rothbardian position.
In the 1920s paper, I defended Rothbard against Friedman as sort of the Austrian view of how the Federal Reserve was expansionary in the 1920s. This was against the monetarist view of Milton Friedman and Anna Schwartz. And yes, I continued my studies of Rothbard at George Mason. One day they had a Rothbard Reading Day and I argued forcefully for Rothbard and even on the other reading days we had, I still argued forcefully for Rothbard’s position.
JD: Not too many PhD programs or candidates have a Rothbardian focus.
PN: Yes, you can count them on one hand and, you know, depending on how you go, you can count them on one finger, a few fingers, at least in the United States.
JD: In correspondence with Dr. Salerno you used the term “meta-mentor” to describe your view of Rothbard. Please explain.
PN: Well, I never met Murray Rothbard. I was born in 1991. He died in early 1995. So, I wasn’t quite up there with my intellectual development yet.
JD: So you didn’t meet him as a toddler (laughs).
PN: No, he never responded to my letters. By far, he’s the biggest intellectual influence on my life. I read all his stuff. I’m very interested in how he approaches both theory and history and I’ve always sort of viewed him as a meta-mentor because one, I view Joe Salerno as a mentor and he mentored Joe Salerno, in that case, he’s a meta-mentor.
Rothbard died when I was a kid, so he’s almost like an Obi-Wan Kenobi-like mentor. He’s over my shoulder, especially because I was working in the archive, either with Man Economy, and State, the fifth chapter, The Progressive Era, and Conceived in Liberty. I was literally having to read his handwriting and sort of proceed there. So, you can naturally develop a feel for the guy that especially is unique because you never met him and you know you’re very influenced by him. Basically, all the research I’ve ever done has really been taking something that Rothbard spoke about and then trying to explore it further. I use it in my research topics or how to approach something through Murray Rothbard.
JD: You’ve spent quite a bit of time here at the Mises Institute going through Rothbard’s personal papers, his letters, his correspondence, his notes, his marginalia, even some of his audio recordings. Did it ever seem voyeuristic? Do you think he would mind having his private thoughts examined decades later?
PN: Yes, definitely. You’re in the archives reading his draft papers. You’re reading letters. You definitely get a feel from his personal correspondence of what he’s thinking, what he intends for someone, in particular. It’s kind of hard especially for younger people such as myself to comprehend, I mean, he never used a computer. He never used the internet, so back in the day when you used to send things through snail mail, you would write to someone and then two weeks later, they get back to you and then you keep the letter. So what I was doing was the equivalent of if you died and someone was reading your emails or your text messages or your Facebook messages. Granted, those are much shorter, but you definitely get a perspective of the person that you might not get through other means. You think “oh, this is how Rothbard is viewing this problem,” or “this is how he’s approaching that.” And especially when, in his letters, he talks about academic and intellectual matters, I thought “wow, he never even discussed this anywhere else.” And I end up thinking, “oh, this is what he thinks about this. I was always wondering if he ever spoke about that. Thank goodness he wrote this little letter and that it survived.” Unless you knew him and you spoke to him personally, you never would have ever figured that out. You never would have gotten that from him.
JD: You spent many hours inside his head, almost like a biographer.
PN: Exactly, definitely.
JD: You know where I’m going with this leading question! Have you ever thought about writing a comprehensive Rothbard biography?
PN: Yes, I have. I’ve thought about that, definitely. I’ve even thought about a preliminary title and how I would approach it. Yes, I’ve definitely thought about that.
JD: You might want to talk to Guido Hülsmann first! What did all this time spent with Rothbard’s letters and papers tell you about the man himself, apart from his work?
PN: Well, that’s a good question. He’s definitely the radical libertarian. He always took the radical view and he always viewed it as “well, no one else is doing it, so I have to do it.” He kind of viewed himself as taking the radical position. You can clearly see that in his theoretical work, but you also see how he writes. He’s radical, and he’s also very knowledgeable, the attention to detail is quite astounding. If you look at Conceived in Liberty, the first four volumes, and then you’re working on volume five — and this is especially true of The Progressive Era — he just names names and he had such a tremendous ability to sort and collect information and then process it. It’s one thing to take his Rothbardian story or approach and build off of it, but it’s another thing to construct it, entirely, which is quite remarkable. So, the first thing I would say, he’s always radical and the second thing, he’s very knowledgeable, and the third thing is — and this is one of the things that attracted me to his writing: he was always a very good writer and he could always be funny. His writing is interesting. It isn’t dry. In his personal letters and his rough drafts, even with Conceived in Liberty, there were times that I was chuckling or — with Rothbard — cackling, kind of, because you could just tell he knew how to grind gears and he knew how to get his point across. And always with joy, you could tell that he had fun with what he did.
JD: Was he the intransigent prickly guy some of his critics allege, or the sweet generous guy underneath it all?
PN: He could be both. I think, as someone who has enormous respect and even agrees with him: he could be very kind and helpful to people, but he could also — when he disagrees with you — sometimes do a demolition job on you. He could do it in writing or in an argument, he would just be exhaustive in taking someone down. He definitely had a wide and broad vision but he was always helpful — extremely helpful — and friendly to people who wanted to help that vision. But you also have definitely a “my way or the highway” type of deal, which is just part of the man. He had his system and he seemed to think “I don’t want imperfection in the system and I want to do it my way,” and thank goodness he did that.
JD: You edited The Progressive Era, another of Rothbard’s posthumous books. One goal was to disabuse us that progressivism was rooted in benevolent, well-meaning reforms. We needed a clear-eyed, Rothbardian understanding of the period, marked in fact by a very unholy marriage of big business and big government. Are you happy with the book? Do you think it poked a hole in the progressive mythology?
PN: Yes, absolutely. One of the things that actually led me to decide I wanted to become a professor and do all of that was, in the summer of 2010 and 2011, I was working at various manual labor jobs that showed me how fortunate I was to be in college. I was getting a college degree. While working I would always listen to Rothbard’s audio lectures on the Progressive Era. Just the way he would go through everything and he would name names and he had this whole grand story. I thought, “wow, that would be great if he wrote something on that.” With The Progressive Era book, that was certainly what I tried to do. He wrote this manuscript in the late 70s and then he wrote later essays and then he also used the manuscript in class in the 80s and he kept building on it. That was what I tried to do when I combined everything and tied the story together through editorial footnotes. There’s only so much you can do, obviously.
I wish he’d finished the full book because that would help with the narrative, but yes, I’m happy with The Progressive Era, with what I did and in terms of that project. Certainly, the goal was to make the book showcase Rothbard’s skills as an historian. This was not only his thesis on the Progressive Era, but also sort of a jumping off point for researchers, such as myself, to use it and to build off of it, which is something I’ve already done, particularly regarding Sherman Antitrust or the 1906 Meat Inspection Act, or the Federal Trade Commission. Would I have changed some things about the finished book? Yes, maybe some things, but overall, I’m very happy with it, with what I did and how I did it — with the approach, the style, the editorial style. I think it’s a great book.
JD: Boy, did he name names! And dates. Rothbard’s a real historian, giving us granular detail. But he also wanted to be a synthesizer, and present a systematic method of thinking about history. No economist would dare do that today, especially in another field.
PN: He wanted to do that with everything and not just with the Progressive Era. With American history, including the Progressive Era, he had a whole narrative, a whole range of economic analysis. This included the Austrian critique of competition, political parties and ethno-religious historians and all of this stuff. He definitely had in mind a sweeping narrative and I think it’s remarkable. Hans-Hermann Hoppe has remarked on this: when you look at Rothbard’s writing, it can be very systematic and it’s almost like it flows from this whole overarching story. And you read it and then when you talk to him or in my case, when you listen to his lecture, say on the Progressive Era, he’s all over the place. And it’s funny because that’s how I wanted to become a professor. I thought, “I want to be like that.” You can’t, unfortunately, do that any-more, but I still want to be like that. But yes, you could tell that he had this whole theory in his head, this whole story, not just for the Progressive Era, but for American history. The term is “gestalt,” totality, and he definitely had that in his work.
JD: Conceived in Liberty, including the long lost 5th volume you recently edited, could serve as the overarching narrative of colonial America. Instead, we’re stuck with books like Howard Zinn’s People’s History, which unfortunately is assigned widely in schools.
PN: Yes, I agree completely. I think this book coming out makes it timely, given the change in how people view history, the whole lens of political correctness. The book is a product of the 60s and 70s, and you realize this is how American history used to be. I find it a more convincing narrative. It might not be the most politically correct or the least offensive narrative, but at the end of the day, it’s just the most correct, period. So yes, I think a book coming out on the Constitution that was written in the 60s, is like a type of time machine. It’s very important. It’s very interesting, too.
JD: We should mention Rothbard’s other historical works too. The Betrayal of the American Right, The Panic of 1819, America’s Great Depression, A History of Money and Banking in the United States, and his unfinished An Austrian Perspective on the History of Economic Thought were all very serious historical works. He was a bona fide historian with a résumé longer than many fulltime academics.
PN: Yes. For his dissertation, Rothbard wrote on the Panic of 1819 and was influenced by Joseph Dorfman. The resulting book, called The Panic of 1819, is something that’s cited to this day by mainstream authors. It’s actually just incredible that someone’s dissertation written in the 1950s is still cited. I can’t get people to even read my own dissertation and mine was published a couple of years ago. He was a true American, he was a true historian, especially an American historian, and he could be very theoretical.
He would write these enormous theoretical works, treatises like Man, Economy, and State, and at the same time write a multi-volume history of early America. And like you said, if you were to ask someone, “oh, prominent historian, what did you do?” You’d maybe find out they were known for writing a five-volume history from Jamestown to the Constitution — and that’s it. You can put a period. Yes, they might have published some book reviews, and maybe a couple of other papers.
But with Rothbard you’d say “oh yeah, by the way, he also wrote numerous other books and countless articles. He’s definitely an historian.” And something else that should be emphasized: out of all the Austrian economists — out of Mises’s students as well as some of the people like Hayek or Lachmann or Kirzner and so on — Rothbard, he was also one of the most empirical. We see this in the massive amount of history he did and that’s something that’s very important. He not only knew how to develop the theory, but also apply it and I actually think that’s quite a unique gift, especially at the beginning when you have to actually develop the edifice, so to speak.
JD: You mentioned the late Joseph Dorfman, who was a mentor to Rothbard at Columbia, a Russian immigrant, and an expert on the history of economic thought. Was Dorfman almost as large an influence on Rothbard as Mises?
PN: That’s a good question. I thought about that and I definitely think he was very influential with Rothbard. One thing is that Rothbard was always very grateful to Dorfman because of all the details and historical facts Dorfman provided. In Rothbard’s historical work, you see this, especially regarding certain American periods. As with the Jacksonian period, Rothbard was influenced by Dorfman in work on other eras. Actually, in the 60s when Rothbard was writing Conceived in Liberty, he attended a conference and he spoke about economic thought. He had to comment on Joseph Dorfman, and he was an invited speaker to that event. I don’t know too much about their personal relationship and how that continued, but I think he was very influenced by him. He applied, basically, Mises’s theory of history and then used Dorfman’s intense attention to details and facts.
JD: Dorfman presumably influenced Rothbard to examine the power elite’s motiva-tions and reject sanitized versions of history?
PN: That was something Dorfman was big on and Rothbard definitely took that from him. I actually think — I have to dig back into that — in his lecture on the Progressive Era, I know he mentioned that. He says people have a life and you’ve got to look at how that influences their work. He might have mentioned Dorfman’s name, but I’d have to look into that. Dorfman’s big book The Economic Mind in American Civilization was a five-volume series published in the 40s and 50s and Rothbard is influenced by that, particularly with his American history regarding the ideas on people. You can see this in Rothbard’s History of Economic Thought. The style of Dorfman, definitely that was visi-ble, in my opinion. He explicitly gave thanks to Dorfman in the introduction to those books.
JD: This project, resurrecting the final 5th volume of Conceived in Liberty, was a doozy. It’s subtitled The New Republic, and covers 1784 to 1791. I understand Rothbard wrote the book longhand, on yellow pads, and then used a dictating machine to record it. The tapes were destroyed, so you faced the task of deciphering his handwriting—something even Joey Rothbard and Lew Rockwell couldn’t do. Describe how this project developed.
PN: That’s a good question. I was a Mises Institute Research Fellow during the summer of 2013 and this is right around when the archives are starting to take shape, and one afternoon I asked Dr. Salerno if I could look in there. Barbara Pickard, the archivist, was there. I thought “hey, there would be good paper ideas in there, some history stuff.” So, I started to go in there, started to work in there, sifting through boxes. The only way I can describe it is when you’re a kid in a candy store, this is like the same thing, it’s the closest you can get to meeting your Mark Maguire, your Barry Bonds. And you’re going to see all this stuff that no one else has seen and you could spend all day in there, all night. I’ve done that.
I first saw some pages developing the unpublished fifth chapter of Man Economy, and State on production theory and developed that over the next couple of years. Some of the other things I saw in 2013 were some chapters of The Progressive Era, as well as the fifth volume of Conceived in Liberty. When I looked at the fifth volume of Conceived in Liberty, I thought, “whoa, what is this hieroglyphics stuff going on here?” But I had an idea. I thought, “okay, I think there’s definitely something there for each of those big projects.” So, you first work on the Man, Economy, and State chapter. Then you go to The Progressive Era, then you go to Conceived in Liberty, so it’s kind of like each step of the way, you’re going to a harder and harder project. Most of The Progressive Era was typed. He did have some marginalia I had to add in, if I could figure out how to read that. But the fifth volume of Conceived in Liberty, that was something with which you had to try to figure out the handwriting. There were some typed pages, but when you get to Shays’ Rebellion, it was only handwriting and I just hit an immediate wall. I thought “this is not going to work.” And I was ready to throw in the towel because I wasn’t making any headway. I remember even talking to the Mises Institute book editor Judy Thommesen about this saying, “hey, this might not work out.” But, she said “don’t give up yet.”
In the beginning it was rough going. Barbara was even helping me with the first part of the handwritten manuscript. I had to go back and forth and look at what I was reading. There were times I just worked through the night. Finally I thought, “alright, I’m starting to get into this, highlight each word and then write it out.” And then I’d have to go back and say “alright, now what do the other words say?” I’d go over the context and finally see what it said and I just started to get a better feel for how he was writing. Then I could read whole sentences. The biggest thing is, not only do you not necessarily know what he’s writing, but you also have to figure out his point of view. And as you’re reading you’re having his-tory unfold and then you read it better and you don’t need to write out as much. By the end, it was like “translating” a book. It was about a solid four weeks of just hell. I mean, I loved every minute of it. It was great, but it was tough work. I would go to sleep and I would literally see the words in my sleep — the hieroglyphics — and trying to figure out what he meant. At the end of it, you did it and you’re thinking, “wow, I did it.” And now, at least with the writing, I can look at it. I can still look at it and I’m very comfortable reading it, but it was definitely a process. It was a fun struggle, I think that’s the way I’d put it.
JD: Did you ever have to construct a sentence and hope it was right?
PN: You had to, definitely. There were times I’d have to go back and look at the words and have to construct a sentence or revise it. In some of the places, he actually wrote his ands as plusses. There was lots of shorthand. But I don’t know how his hand could take it. We’re talking literally 600 pages of front-and-back handwriting. I don’t know if he ever developed carpal tunnel syndrome. He must have used an icepack when he was doing this. But, sometimes you have to edit sentences or kind of reconstruct them a little bit. Obviously you couldn’t do it as much as he did it because it’s his work. What’s remarkable was how little of it, in the structure, I had to edit. He handwrote a book with footnotes and block quotes. He would have, “see this article.” Some of the pages, parts of it were torn, so you had to stitch it in. It wasn’t just purely like transcribing. There was some editorial work involved.
JD: Can you give us a teaser or a surprise, something people might find interesting about the book, to whet our appetite for its release?
PN: Definitely. Rothbard takes a view of the Constitution that, ironically, some Founding Fathers — some neglected ones — took. Namely, that it was basically a conspiracy and sort of a bloodless coup. That was the word he used, the phrase he used, where he moved from the Articles of Confederation to the US Constitution. A lot of times this is just presented as: “Well, the Articles didn’t work, so these well-intentioned Founding Fathers write up a new Constitution and then this all takes us naturally to the Washington Administration.” But Rothbard definitely takes a view where he says “no, it was a kind of conspiracy, a sort of coup, where you’re having these people trying to institute a stronger government to enhance their own power and privilege, at least for themselves and the various sorts of factions they represent.” He goes through that and it’s a really a fascinating view of how a state forms and how one state takes over another. He definitely goes with the conquest theory of the state as opposed to the contract theory, as if it were all a voluntary formation of the new state. Some of the stuff he goes through was new to me. I had to look through all the books that he used. I bought and I read them just to try to get the context that he was going through and even some more recent books, just trying to look at the larger context of what he was talking about. I think the best part of the book is when he goes through the ratification. I believe it’s the fifth part of the book, and it’s fascinating. He breaks down all the states and who he’s rooting for, like Patrick Henry of Virginia, who is definitely a neglected Founding Father. He also covers George Clinton of New York and the anti-Federalists associated with him and the Clinton political machine, particularly Abraham Yates. Rothbard goes through it all and it’s really a fascinating part. It’s a topic that no one else has written about or very few people have written about.
JD: In Rothbardian history there are still heroes and villains, just not who we thought.
PN: Yes, exactly. He has heroes and villains and he tries to give people their just due. He definitely tries to provide a new look at people who have been overlooked by history and he thought that was an important thing to do. He was always very humble, but I think he knew in his writing, like he was himself getting overlooked. That was probably why he has somewhat of a harsh view of academics. He might have thought, “these people, I could have done what they did, but I decided not to do it.” So, he may have been thinking about some of these neglected historical figures, thinking, “these people, they made the right choices, at least back in the day. They weren’t perfect, but they made the good choices and they’ve kind of gotten overlooked.” He definitely has that view of bad people and a lot of times, the bad people are the bad people who we were taught, are actually the good people.
JD: Does the 5th volume of Conceived in Liberty work as a standalone book, for those who haven’t read the earlier volumes?
PN: Right. It can definitely be a standalone. The main reason why I say that — and certainly not to give myself too much credit — in the introduction, I go through an overview of the first four volumes. So, to someone picking it up, they’re certainly not going to get all of the detail, but you can read the introduction and you can say “oh, okay, this is where we are.” You definitely don’t need to read the first four volumes. Now you certainly want people to read the first four volumes. But, you don’t need to read the first four volumes. I certainly would like people to, but you get brought up to speed, so to speak. It was one of my initial goals to make sure it could be read as a standalone volume. The last volume was published in 1979, and 40 years later a lot of the original readers are dead. To get people back into the series, you’d want to at least read the introduction in the beginning.
JD: We’re minting PhDs in economics, even Ivy League PhDs, who know nothing about the history of economics. Rothbard knew so much about both the history of economic thought and American history. How did his historical knowledge manifest itself in his economics?
PN: That’s a great point. Hyper-specialization is a huge issue where you only concentrate on a certain field. Academics especially sort of shun synthesizing. Academia pooh-poohs it. It’s really unfortunate and, ironically, I also think that’s why most people don’t read. Most academics don’t read most academic papers because in order for them to get published, they have to be writing on increasingly minute and specialized things where you can get some sort of new data or new source for research. But, Rothbard in his history writings, was able to switch between theory and history and he was able to apply it to, like you said, the economic thought regarding his economics. He was able to — when drawing on the Austrian edifice — remark on things like the Marshallians or Chicago school or Keynesians. He drew on that history, as well. He also could just draw on his massive array of historical knowledge when developing theory, he always had that in the back of his mind. I’m not saying you need to use the empirical analysis to develop the theory, but he definitely had that — at least I imagine that’s how it was — in his mind. He really was like a political economist. He built off of philosophy, political science, economics, history, you name it. And that shined through all this work. He’s combining all sorts of disciplines together.
JD: Like Hayek, Rothbard is arguably not best known as an economist. He refused to stay in his lane, and wrote on history, political philosophy, ethics, you name it. Do you think spending so much time writing outside economics injured his reputation as an economist?
PN: Oh, absolutely. He knew that, and I’ve seen some great letters where he talked about it. He says, “sure, I could have had a better career by just sticking to certain things or sticking to my discipline, or sticking to non-controversial topics. I could have worked at the Hoover Institution or Heritage.” But then he concluded, “I don’t want to do that. That wasn’t what I thought was right and no one else is naming names and criticizing certain people. So, I took it upon myself to do that.” It definitely hurt him, and I think this is what some of his detractors necessarily don’t appreciate that he had to lay a lot of ground for the initial Austrian movement. This was also true for libertarianism in which people were able to jump on later. But just imagine a world with no Man, Economy, and State, no America’s Great Depression. Austrian economics and libertarianism would have taken a very different turn. I don’t think there would have really been any Austrian revival. Libertarianism, I don’t think would have been as big. He took a lot of bullets, but it was for the long run, so to speak, instead of short-term gain.
Republics in History
[From The Decline of the American Republic (1955)]
During the last 20 years America has suffered a succession of social and economic dislocations, including a great depression and a great war. We have been so absorbed in these difficulties that we have lost sight of a few simple, elementary principles upon which the free society of America was based. These principles mark the difference between our government and all others in history. And the essential feature of our government, which distinguished it from every other, was the formula we had discovered for creating a government of great powers but so arranged that while they were adequate to protect us in all our rights they could not be used to exploit or enslave us.
Our first task, therefore, must be to understand clearly the precise nature of our Republic, which existed in its original form for 148 years. There have been other republics. But we must understand clearly that those other republics of history were utterly different from ours. We may see this readily enough by contrasting ours with other so-called republican governments.Athens
Athens is the classic example of the ancient republic. Its authority was deposited in some of the people but not all. That authority was all embodied in a unitary state — a single governmental apparatus — known as the Republic of Athens. Whoever could get possession of the central republic would have in his, or their hands the total power of government.
There was a citizen body in which reposed the authority of the state. The people were divided into three classes — citizens, metics, and slaves. The citizen was one born in Athens of native parents. The metic was a mere inhabitant — one born in another country or born of metic parents. The slave was one captured in war and brought to Athens as a piece of property. Neither metics nor slaves had the right of suffrage. The citizens comprised less than half of the population.
The governing body was the Agora, a legislative institution with no limit upon its powers. It could deprive an Athenian of his citizenship and even reduce him to the condition of a slave. There were no limitations upon the power of a state in which half the population was disfranchised. The Agora was subject utterly to the rule of the majority. But this was in fact far less than the majority of the citizens. The citizen, to vote, had to be present in the Agora in Athens, which, as a practical matter, was not possible to great numbers of citizens who lived at a distance.
There was, indeed, freedom on a scale unknown in any other part of the ancient world — including Rome at a later date. And there was a kind of humane tolerance not common in that age. But we must not forget that Socrates, the first great philosopher of Athens, was compelled to drink the hemlock cup because his teachings ran counter to the prevailing ideas of the society.Rome
Much is made in history and drama of the Roman Republic. But in fact that institution, such as it was, endured for but a brief period. And of course it never came to grips with the dangerous power of the state as the guardian or enemy of freedom. There was for a time a sort of parliamentary mechanism and always there were men in Rome who dreamed of or sought for freedom. During most of its early life Rome was a monarchy. There was a Senate; and a Comitia which was purely advisory. After the famous plebeian revolt the kingship was abolished. It was succeeded by a consulate with the Comitia as an advisory body elected by patricians only. In time the plebs were admitted to certain limited political rights, but only those who owned land were represented. There were grades of citizenship. There were first-class citizens and below them four inferior classes. In any locality they were arranged in five groups — in "centuries." In the top century a few large landowners cast a single vote. In the second century, one vote was shared by a greater number of middle-sized landowners, and so on down to the lowest century where several hundred shared a single vote. Thus the largest landowners exercised a power wholly out of proportion to their numbers. But while the plebs thus gained a foothold in the electorate they were excluded from the administration. Marriage between a plebeian and a patrician was forbidden. Moreover, even this highly diluted share in government was limited to the city of Rome.
In the Italian peninsula outside Rome the people had no votes, though in time they were ceded some limited rights. There was the Civis Romanus — citizen of Rome — who owned an estate outside the City and who had to go to the City to exercise his franchise. The Nomen Latium — a sort of second-class citizen — had some part in local government but none in the nation, and Rome, as a result of her wars, was filling up with slaves who had no part at all in government. The rudimentary germs of a republic were there. But actually anything moderately resembling a republic appeared only in the last century before Christ, lasted for but a brief space during which time the enemies of freedom came upon the scene to make a mockery of liberty, culminating in that Caesar who brought the turbulent farce to an end.
However, the important fact is that throughout the world and for more than a thousand years after Christ the apparatus of government remained in states possessing unlimited or almost unlimited power, held in the hands of despots. The apparatus of power was vast. Those who chose the administration were a small fraction of the people, and the administration when installed possessed an instrument of authority so great no citizen could cope with it save, perhaps, by violence or revolution.
There were, of course, men who yearned for freedom. But I have been unable to find in these ancient states any general understanding of the principle we are considering here. People hoped only for generous champions. It is a fact of some interest that the Roman state began to sink into the arms of its darkest absolutism more swiftly after the fortunate upper levels of the plebeians had attained the largest measure of freedom in their history.France
In all these stages of organized society it is important, I repeat, to keep our attention fixed clearly upon the fact that they present a record of governments possessing absolute power and of monarchs, prime ministers and military dictators using this apparatus of power to exploit or oppress society. This is the story of nearly two thousand years of organized societies under the dominion, in varying degrees, of absolute or nearly absolute rulers, relieved here and there by violent and heroic struggles of men to gain small patches of freedom.
In France, up to the time of the Revolution in 1789, the government was absolute, all power residing in a monarch. There were no rights in the citizen save by a grant from the monarch. The French Revolution merely substituted for a brief interval a more frightful and convulsive tyranny until it was liquidated by Napoleon, who made the despotism more intelligent and more efficient and, at least, more orderly. After nearly 2,000 years of history in France, the first attempt at a free government was the constitution of the Third Republic following the downfall of Napoleon. But a majority of the men who framed that constitution were for a limited monarchy. They did not, indeed, reestablish the kingship, but only because they could not agree upon the king. The Assembly remained in session for five years before it adopted a constitution. But this constitution created a government which bore no resemblance to our own system. The parliament set up was authorized to alter the constitution at will. It defined no constitutional rights of the citizen. It created a Senate and a Chamber of Deputies to govern, but these two chambers could, by a simple majority, adjourn as a parliament in Paris and move to Versailles, reassemble as a national assembly and by a simple majority vote completely alter the structure of government. It was the supreme judge of its own rights. Under our form of government no alteration can be made in the Constitution save by going back to the source of its power — the people of the sovereign states.
Under our system, each state is a small republic, supreme over its internal affairs save where specifically restrained by the Constitution. The federal government is a severely restricted government. There is nothing in France resembling one of our states. There the national government is supreme. The parliament names the president and his ministers. It is the depository of all power, national, provincial and local. The nation is divided into departments, cantons, and communes — roughly paralleling our states, counties and cities. But they are completely dominated by the central government. The department — corresponding to our state — is a mere administrative division. It is headed by a prefect named by the national government. And his every act can be vetoed by the national government. It has a legislature deriving its powers from parliament; its sessions and powers are drastically limited and it can be dissolved at any time by the President of the republic. The mayor of a city is elected by a council, but he is responsible to the prefect of the department. The supreme power is in the national government of the republic, and that power reaches down to the affairs of the smallest village. Once elected, its authority is supreme. The powers it possesses, therefore, are such that they might well be used to oppress the people.
The only protection against this is to be found in a peculiar defect of French politics. There are a large number of parties none of which is able to elect a majority. The party which claims power must depend on a coalition with some other party or, for that matter, with several — often parties of opposite creeds united for the moment on some transient issue. The government of France, however, is such that if a revolutionary party could manage to obtain a solid working majority, the political power in its hands would be so great that it could be used for a swift and drastic alteration in the very nature and structure of the society. There is no effort, as in the United States, to distribute power between the federal government and the provinces — and within the federal government among the executive, legislative, and judicial branches with a series of constitutional limitations upon those powers.Great Britain
After these commentaries on older or other republics, it is now possible, with Great Britain as an example, to make clear the idea at which we have been aiming. The great problem of men concerned with human freedom throughout the ages was the conquest of the state. Nowhere is this made clearer than in the history of England. The state, which had been established to protect men in a society, came to be the instrument used to oppress them. The vast powers of the state deposited in the hands of kings and their ministers were used to exploit society. It is only when we realize this that we can understand the curious cult which came into vogue in the late 18th and middle 19th century generally known as anarchism. It is only when we try to recapture life under those 18th-century monarchies that we can understand how otherwise intelligent men like William Godwin and Pierre Joseph Proudhon could reach the conclusion that government itself was the supreme evil. Godwin held that all evils in society stemmed from the state and its immense mechanisms for repression. After Godwin and Proudhon came writers like Kropotkin and Mikhail Bakunin, the foremost of those philosophers who attributed to the state all the evils of society and who saw no hope for man's redemption from its tyrannies save in anarchy.
Even in the England of 1776 there were men who nursed this fear of the state. There, men had made the greatest advances in the art of social order. The Englishman had, by 1776, come under the protection of Magna Carta and a whole series of established rights, all of which were later embedded in our own Bill of Rights. But the British subject was very far from having an effective voice in the government of himself. Until the 19th century, Britain's government was a class government, with a monarch and with one branch of the Parliament representing the aristocracy. Gradually, however, in the last 50 years, the power of ultimate representative government was lodged in the people, but with a large measure remaining in the aristocracy.
But all the sovereignty possessed by the people of England is entrusted to one central state. It is in one vast pool of power controlled by one central administration. There are county and local governments, but these are mere agencies of the central government; are created by and can be altered by the central government. The Lords can still interpose delays in action, but the ultimate power is in the Commons as the immediate agency of the people. There is, of course, a great inheritance of fundamental ideas embedded in the affections, the habits and the mores of the people, many defined in statutes and court decisions. These exercise a powerful influence over the conduct of the government. But they are not embedded in a written charter which is free from change save in the manner set out in the charter.
The British constitution is in no wise comparable to the American Constitution. Every right the Englishman has is at the mercy of a mere majority. When, 50 years ago, the socialists set out to alter completely the base of British economic life there was no barrier that stood in the way but a majority of the Parliament. The socialists have since woven over the British people a complexity of laws and controls, backed by authoritarian compulsions, which would startle the Englishman of Edward VII's day if he could revisit the halls of Westminster. All this has been possible only because of the immense and definitive power of the Commons, subject only to a majority of the electorate.
However, at the time of the American Revolution, the Commons was not the real organ of power. Its members were chosen by an electorate, but no person could vote who did not have a prescribed income and only those towns chartered by the king could send representatives to the Commons. The Tudor kings had created borough constituencies in which the members were named by the king. By 1776 many such boroughs had ceased to exist but were still represented in Parliament, while great cities like Birmingham and Manchester had no representatives in the Commons. In some of these ancient boroughs the bailiffs and a dozen burgesses were the only voters. In Edinburgh and Glasgow there were but a dozen citizens who could vote. There were 75 members of Parliament elected from 35 places literally without inhabitants, go from places with less than 50 votes each. These "rotten boroughs" were in fact the property of individual members of the House of Lords, who as patrons designated the members sent to the Commons. In a population of 8 million, there were no more than 200,000 persons who could vote for members of Parliament. The monarch was head of the established church and the bishops of that church sat, as they still do, among the Lords.
When our Constitution was adopted, men in every land were ruled by a small fraction of the population grouped around a monarch who held his place by inheritance or conquest and who headed a government which knew no effective restraints save such as proceeded from the good will of a humane ruler or the fears of a timid one. Everywhere the great enemy of man's freedom was government. It is essential to understand clearly that the long struggle of men in the Western world to have an effective part in shaping their own lives has been the struggle against Big Government.
It is of the first importance for the American to grasp the full seriousness of this fact — that the great boon of human freedom has, in the long record of thousands of years, been enjoyed by a mere fraction of the people and for only a brief moment in history. And this great boon attained its furthest advance here on this continent. That advance must be described as the victory of the people over the dread power of Big Government.
An institution such as our Republic, of such recent vintage and on only a small patch of the earth, cannot be taken for granted. Particularly is this true when all over Europe we see the limited gains made there disappearing before our eyes. Europe seems to be fatigued by the sacrifices needed to remain free. Even before the final goal is reached, she sinks again behind the dark curtain of government power, her frustrated people forsaking liberty and seeking for security in tyranny.
The EU, Not Brexit, Killed British Steel
On 22 May 2019, British Steel announced that they had become insolvent and the company entered receivership with the UK. The explanation provided for this failure is that British Steel is a victim of the UK’s decision to exit the European Union’s bureaucratic fold . On the surface, this appears to be true, as the company stated that orders from the continent have declined due to uncertainty over the exit process that the UK Parliament has dragged out over the past three years. However, if we dig deeper, we find that it was the EU, not the Brexit decision, which killed the company.European Overregulation
If we look at the company’s latest annual report, we find that the company went from a profit of £92 million in FY ending 2017 to a £19 million loss in FY ending 2018. To douse water on the Brexit claims, the company’s revenues actually increased 11% year-over-year. The real problem was the company’s expenses bloated by a tremendous 25% over the same period. The steel production process is energy intensive, so a significant portion of this price increase is related to a sharp spike in energy prices in the UK over late 2017 to early 2018. The second major cost driver is British Steel was no longer able to delay paying for the EU’s mandatory cap-and-trade policy. Under the cap-and-trade system, companies were able to pull forward future credits to pay for current years. British Steel’s future credits ran out in 2018 and were facing a £100 million bill to cover their 2018 charges. This amount represents a full 10% of the company’s annual revenue base and was so large that the company requested the British Government to provide a loan to cover the costs as the company only has around £5 million in cash to make such a payment. A good deal of the aforementioned energy price spike is also related to the EU’s cap-and-trade regime becoming more aggressive as it moves into the 2021-2030 phase of the program .
British Steel would have become financially insolvent on 22 May 2019 even had the UK voted to remain in the EU.
Had British Steel not been handed an insane £100 million bill for carbon emissions and who knows how much passed through via the utility bill, the company would be in good shape right now. And people don’t even get to enjoy the feeling that a polluting industry is held in check as the steel purchases will only shift to countries like China, Russia and India, which occupy three of the top four places in global emissions, where there is little concern for emission levels and EU emissions credits have no legal authority. The Brexit excuse is just a convenient way to latch onto a more visible event as pointing out that EU environmental policy destroyed British Steel would be politically embarrassing to the EU Parliament and UK politicians that would see a domestic cap-and-trade program created after Brexit.This is Just a Microcosm
This event is just one of many real world examples of the EU’s destructive centralization policies. The cap-and-trade program and a host of other micromanagement regulatory impositions are a key driver behind the EU’s poor economic performance and terrible employment conditions. Given how onerous the EU’s regulatory regime is, the UK ultimately made the right choice to exit the union. If the company didn’t have to pay the absurd £100 million cap-and-trade tax, British Steel would be able to more nimbly adjust pricing to factor in any punitive tariff backlash the EU would impose on the UK for daring to exit their political sphere of control. Imagine how many other millions of Pounds in wasted bureaucratic overhead British companies could shed should the UK elect to engage in a no-deal exit and refuse to impose those same rules and regulations the British public voted to abandon.
Two Reasons Why Socialism Repeatedly Fails
Socialism will always encounter two big problems when regimes attempt to implement it: 1) the impossibility of economic calculation without true market prices, and 2) the lack of an incentive to produce only what consumers actually want.
The following simple example helps to illustrate the impossibility of economic calculation without market prices: a Cuban restaurant in Miami Beach sells a picadillo dish (ground beef, plantains, rice) for $8. Prices in general and thus the $8 price provide vital information. Perhaps $1, might be profit, and $7 will be spent in costs, in other words, in the necessary consumption of wealth needed to produce the meal/wealth, things like equipment/electricity/food/supplies, and everything employees and their families will consume at home (food, energy) thanks to their paychecks that came from the $7/meal. The businessman discovered two things that are impossible for a central planning body to discover regardless of the good intentions of its members or their intelligence, 1) that there are enough customers nearby willing to patronize the restaurant at the $8/meal price thus making their lives better, and 2) how to reorder $7 worth of stuff(labor/supplies/etc.) to profitably produce the meal.
If he sets prices too high, customers will choose other superior competing options. If he sets prices too low, He won't be able to cover costs and will go out of business. In other words, if he can't entice consumers to buy at a profitable price, the entrepreneur is failing to reorder the world in a way desired by the hundreds/thousands of people nearby who each value things differently. Therefore, Socialism/Communism can’t work because only businessmen dispersed throughout society are at the right time and place needed to discover people’s desires(1) and (2) how to properly set prices and thus create a profitable and competitive order ( i.e., one that produces more than it consumes while also providing a superior alternative to customers/society).
Nikita Khrushchev, who followed Stalin as head of the centrally planned (Socialist/Communist) Soviet Union, is credited with saying “When all the world is socialist, Switzerland will have to remain capitalist, so that it can tell us the price of everything." Unfortunately for Khrushchev, and the billions who suffered economic chaos and an inevitable decline in production under Socialist/Communist regimes all over the world, prices in Switzerland (or anywhere else) embody information about the costs/consumption of those particular places at specific times and are no good elsewhere.
With the Internet, pricing information all over the world can help customers find/nourish cheaper/better products/orders/companies and also help producers likewise thus greatly accelerating competitive knowledge/order-spreading but it will NEVER lead to the success of central economy-wide planning because no computers/system can get in the brains of entrepreneurs to predict what products/businesses they will create and thus alter society, and similarly, no computers can get in the minds of consumers and predict how they will choose to spend their money/wealth thus once again altering the social order’s numerous cycles of production and consumption. As Mises so eloquently explains:The consumers, by their buying or abstention from buying, ultimately determine what should be produced and in what quantity and quality. They render profitable the affairs of those businessmen who best comply with their wishes and unprofitable the affairs of those who do not produce what they are asking for most urgently. Profits convey control of the factors of production into the hands of those who are employing them for the best possible satisfaction of the most urgent needs of the consumers, and losses withdraw them from the control of the inefficient businessmen. In a market economy not sabotaged by the government the owners of property are mandataries of the consumers as it were. On the market a daily repeated plebiscite determines who should own what and how much. It is the consumers who make some people rich and other people penniless.
But who is in a position to determine what it is the consumers want and need? Only private entrepreneurs who daily are either rewarded or punished by the needs of consumers in the marketplace. Socialism, lacking a price system has no means of knowing the needs of consumers.Incentives
Socialist regimes in general also face an "incentive problem." In free societies, or the private sector in general, each entrepreneur is incentivized to be as productive as possible and keep inefficiencies to a minimum since he owns/keeps the additional wealth or losses. On the other hand, the government employee or bureaucrat gets the same pay (ability to then consume) whether his department did a good job (produced a lot) or not, and is also not risking his own wealth since that comes from the taxpayers. In other words, regimes are national monopolies that lack the innovative/competitive incentives in competitive systems.Inefficiency Requires Coercion
Central plans, of course, can’t work if people are free to not go along with them — so they inevitably require compulsion/slavery. For example, it is a criminal act in Communist countries to start a business. It is also a criminal act everywhere to not pay taxes that sustain public sector bureaucracies like "public education." So there is little incentive or wealth to sustain other, more desirable competitors when taxpayers are forced to sustain certain government "enterprises." For example, the NYC public(monopolistic) school bureaucracy consumes over 24,000 per year to “educate” a K-12 student. Refusing to pay a single dollar that goes to this bureaucracy comes with heavy sanctions from the state itself.
In his essay "Overlegislation" Herbert Spencer beautifully comments on the differences between governmental(law-made) orders and private/competitive ones:
How invariably officialism becomes corrupt every one knows. Exposed to no such antiseptic as free competition — not dependent for existence, as private unendowed organizations are, upon the maintenance of a vigorous vitality; all law-made agencies fall into an inert, over-fed state, from which to disease is a short step. Salaries flow in irrespective of the activity with which duty is performed; continue after duty wholly ceases; becomes rich prizes for the idle well born; and prompt to perjury, to bribery, to simony. ... Officialism is habitually slow. When non-governmental agencies are dilatory, the public has its remedy: it ceases to employ them, and soon finds quicker ones. Under this discipline all private bodies are taught promptness. But for delays in State-departments there is no such easy cure. ...
Consider first how immediately every private enterprise is dependent upon the need for it; and how impossible it is for it to continue if there be no need. Daily are new trades and new companies established. If they subserve some existing public want, they take root and grow. If they do not, they die of inanition. It needs no act of Parliament, to put them down. As with all natural organizations, if there is no function to them, no nutrient comes to them, and they dwindle away. Moreover, not only do the new agencies disappear if they are superfluous, but the old ones cease to be when they have done their work. Unlike law-made instrumentalities…these private instrumentalities dissolve when they become needless. ...
Again, officialism is stupid. Under the natural course of things each citizen tends towards his fittest function. Those who are competent to the kind of work they undertake, succeed, and, in the average of cases, are advanced in proportion to their efficiency; while the incompetent, society soon finds out, ceases to employ, forces to try something easier, and eventually turns to use. But it is quite otherwise in State-organizations. Here, as everyone knows, birth, age, back-stairs intrigue, and sycophancy, determine the selections, rather than merit. The “fool of the family” readily finds a place in the Church, if “the family” have good connections. A youth, too ill-educated for any active profession, does very well for an officer in the Army. Gray hair or a title, is a far better guarantee of naval promotion than genius is. Nay, indeed, the man of capacity often finds that, in government offices, superiority is a hindrance — that his chiefs hate to be pestered with his proposed improvements, and are offended by his implied criticism. Not only, therefore, is legislative machinery complex, but it is made of inferior materials.
The US Supreme Court Is Right to Rule In Favor of Tribal Sovereignty
Last week, the Supreme Court ruled the legal rights of members of the Crow tribe are not void simply because a US state tries to legislate them away.
In the case of Herrera v. Wyoming, the US Supreme court overturned the lower courts' findings that tribal rights (established in an 1868 treaty with the United States government) in Wyoming had ceased when Wyoming became a state in 1890.
According to the case summary:
In 2014, Wyoming charged petitioner Clayvin Herrera with off-season hunting in Bighorn National Forest and being an accessory to the same. The state trial court rejected Herrera’s argument that he had a protected right to hunt in the forest pursuant to the 1868 Treaty, and a jury convicted him.
The right to hunt was limited to "unoccupied" lands, and Herrera contended both that the National Forest lands in which he was hunting was unoccupied, and that he had a right to hunt there due to treaty stipulations.
The court did not rule on whether or not the specific place Herrera was hunting was "occupied," but focused instead on whether or not tribal-members' rights continued to exist in accordance with an extant treaty. The court found these rights do still exist, but Herrera may still be found guilty if it is established the land on which he was hunting is not unoccupied.
Whether or not Herrera is ultimately found guilty, the court's findings are important because they potentially establish a higher standard of sovereignty for tribal governments than had been previously admitted by the courts.
After all, the basic premise of treaties between the tribes and US government — at least as communicated to the tribes themselves — was that the tribes were sovereign entities entering intro treaties with another sovereign entity (i.e., the US government.) Over time, the US government took advantage of the tribes' lack of de facto independence to reinterpret treaties as documents subject to unilateral amendment and abrogation by the US Congress.
Even worse, state governments began to assert their own authority over tribes, even though the tribes were not parties to any sort of agreement with the state governments.
In recent decades, courts have slowly begun to limit state jurisdiction over tribes with the effect of providing more autonomy to tribes. Perhaps most famous among these decisions is the 1987 case California v. Cabazon Band of Mission Indians in which the court determined state governments could not prevent tribes from offering legal gambling within their own borders (in most cases). The result was political decentralization and greater access to legal gambling for non-tribal members. The subsequent rise the Indian gaming industry has greatly improved the standard of living for many Indians.
In Herrera vs. Wyoming, the court has now further established that state governments cannot simply override treaty-established tribal law whenever it suits state legislatures.
But this isn't the only case this year which has strengthened tribal independence.
In March, the Supreme Court decided in favor of the Yakama tribe in Washington State Dept. of Licensing v. Cougar Den, Inc. The Court held that the Yakama Nation Treaty of 1855 preempts state attempts to tax fuel purchased by a tribal corporation for sale to tribal members. The State of Washington insisted it could tax tribal fuel transported on state highways. The Supreme Court disagreed and took a relatively broad interpretation of the treaty's provisions guaranteeing free use of the state's highways.
In both cases, the cases were decided by a 5-4 vote with Neil Gorsuch siding with the so-called liberal wing of the Court in upholding tribal rights.
In his concurring opinion on the Yakama case, Gorsuch wrote:
Really, this case just tells an old and familiar story. The State of Washington includes millions of acres that the Yakamas ceded to the United States under significant pressure. In return, the government supplied a handful of modest promises. The state is now dissatisfied with the consequences of one of those promises. It is a new day, and now it wants more. But today and to its credit, the court holds the parties to the terms of their deal. It is the least we can do.
Many left-wing publications have expressed surprise that the Gorsuch sided with the "liberals" in these two cases, although more astute observers should not be confused. After all, Gorsuch, unlike the conservative wing of the court, has tended to side frequently with arguments in favor of decentralization and limitations on both state and federal power. His position in these two cases appears consistent with these general leanings.
Moreover, it is likely not a coincidence that Gorsuch is the only Supreme Court justice with extensive legal experience outside of the eastern United States. Gorsuch served as an appellate judge for the Tenth Circuit, which means he heard cases for states significantly impacted by conflicts between states and tribes, including New Mexico, Oklahoma, Wyoming, and Utah. Meanwhile, nearly all other members of the court spent their appellate careers along the East Coast of the United States. For these members, as for most Americans outside a few Western states, experience with the realities of tribes and tribal lands is extremely limited.Decentralization and Local Sovereignty Matters
These two cases, of course, are just very small steps in the right direction. For the most part, Congress can still abrogate and amend treaties on its own with precious little input from the tribes themselves. These recent cases help to establish greater tribal sovereignty in the face of state law, but do little — on their own — to enhance tribal sovereignty when it comes to federal legislation.
Some conservatives, of course, might wrongly interpret these decisions as attacks on state-level sovereignty by lessening state control over its own territory. This, however, misses the point.
Correctly imagined, both state governments and tribal governments ought to have far greater independence both from federal control, and from each other. In practice, for example, the entire northeast corner of Arizona, which is mostly Navajo tribal land, ought to not be considered Arizona territory at all. Nor should it be considered US territory. As Kevin Bourgault, a member of the Skokomish tribe, has (correctly) noted:
Tribes are the sole entities in our society with established treaty rights... As sovereign nations, tribes are equivalent political entities to the states in which they are located.
This is not the de facto reality today, but it should be. And it ought to be recognized as the legal standard in conflicts between tribes and government bodies in the United States. Moreover, as I have noted here, tribal sovereiegnty is an important limiting factor on federal power. If we are to take decentralization seriously, the sovereignty of locally-controlled tribal lands should be a priority, and be seen as one key factor in developing meaningful checks on federal power through local sovereignty, nullification, and secession.
In the US, Rich States Spend Less on Welfare
As I've noted in the past , when it comes to government spending on social welfare programs, the United States is hardly the free-market, libertarian "paradise" many social democrats suppose it to be. When we look at social spending as a percentage of GDP, the US is similar to Switzerland, and the US spends more on social benefits than Australia and Canada.
The US's welfare spending totals nearly one-fifth of the nation's GDP, and is hardly far outside the norm when compared to the "welfare states" of Western Europe and the Anglosphere.
When it comes to the United States, however, it is often problematic to reduce the nation to any single statistics because the United States is so huge. After all, when comparing the US to European nations, the US — with more than 320 million people — is many times larger than the next largest country, Germany, which has only 82 million people.
Because of its enormous size, sizable variations across different states and regions. And many of these US states are themselves larger than numerous European countries.
So, in order to provide a little more insight into how large the welfare state is in the United States, I've broken out social spending by state, and then compared it to each state's total GDP — so as to be more comparable to the OECD's measure.State and Local Social Spending
In the United States, social spending is complicated by the fact so much of it comes from both federal spending and from state and local spending. In terms of sheer dollar amounts, federal spending predominates because the amount of taxpayer money spent on Social Security, Medicare, and Medicaid is so enormous.
State governments, however, have very limited control over most of this federal spending. So, in order to get a sense of how different state governments view social spending, it is first helpful to look at just the state and local social spending over which state and local policymakers have actual control. At the local level, most of this is public school spending, and at the state level, state governments spend on a variety of health and poverty-relief programs above and beyond federal spending.
When calculated as a percentage of GDP, we find that social spending ranges from seven percent (in Nevada) to 16 percent (in Mississippi)1:
In this case, I'm adding together state spending on k-12 education, higher education, "public welfare" and "health and hospitals." This does not include state spending on roads, police, etc.State, Local + Federal Social Spending
State and local spending, however, are just a fraction of total welfare spending that occurs in each state. If we add in federal transfer payments, such as Social Security and Medicare, the percentages are naturally much higher2:
By this measure, spending on social programs ranges from 35 percent to 16 percent.
What we find is that some of the nation's lowest-income states also have some of the highest levels of social spending by government.
"Well, that makes sense," some might say. "States with more poverty naturally tend to have more social spending on poverty relief." Other observers might also note — correctly — that states with lower welfare-spending levels also tend to be states with larger urban centers where more productive workers contribute to higher GDP numbers. Thus, GDP levels are higher meaning social spending ends up being a smaller percentage of total GDP.
I am inclined to agree with all of this. But this line of reasoning also contradicts what we are repeatedly told when politicians like Bernie Sanders compare the US welfare state to foreign welfare states.Does More Social Spending Lead to a Higher Quality of Life?
For example, Americans are repeatedly told that the key to a high "quality of life" is to have high levels of social spending. After all, Scandinavian countries like Sweden, Denmark, and Finland have some of Europe's highest levels of spending on social benefits. We're also told these countries are the happiest places on earth.
While the US and Canada spend "only" 19 percent and 17 percent, respectively, on social benefits, Finland and Denmark spend 30 percent and 29 percent, respectively. All of these countries are fairly high income countries. But when politicians talk about Scandinavian countries' sizable welfare states, they often jump to the conclusion that these large welfare states are the reason for the countries' high quality of life.
Declaring a cause-and-effect relationship from this correlation, however, is quite unwarranted. We can see this when we compare US states, and it is apparent that states with more social spending can hardly be declared to be examples of astounding economic success. In fact, the opposite appears to be true. In the US, some of the richest states — including states with some of the lowest poverty rates such as Utah and Minnesota — have relatively low levels of social spending.
Moreover, many of the states with lower levels of social spending perform better in terms of so-called "quality of life" measures. That is, low-spending states like Washington, Massachusetts, Utah, and Colorado tend to have lower crime rates, and higher life expectancy.
Yet, in the international context, we're told that the key to a high "quality of life" is an ever-more robust welfare state.
The truth, though, is that high levels of spending on social benefits have precious little connection to rising standards of living, high life expectancy, or any other quality of life measure.
The real key to health and happiness, whether we're talking about American states or European countries, is an open economy that fosters trade, capital accumulation, entrepreneurship, and basic protections of private property. Moreover, wealthier states and wealthier countries are usually just places that have been doing this longer. Sweden, for example, is a relatively rich country because it has enthusiastically embraced markets and market-based reforms at various intervals over the past century. Sweden's huge welfare state has been an impediment to this, but not enough of an impediment to erase the gains made by markets. Western Europe is wealthier than Eastern Europe because it has been fostering capital accumulation for much longer than Eastern Europe has. Moreover, much of the capital in Eastern Europe was destroyed by the soviet-era communists, and countries that have experienced this sort of thing tend to never catch up to the rich countries who did not have similarly damaging regimes.
Similarly, states like New Mexico and Mississippi — which have high social spending but low incomes and high poverty — are poorer either because they tended to have low-productivity rural economies, or their economies were devastated by the American Civil War. The effects are still apparent today.1. State spending data is provided by the Tax Policy Center for fiscal year 2015. The spending categories used here are a total of the categories "elementary and secondary education," "higher education," "public welfare," and "health and hospitals." This information is then calculated as a proportion of statewide GDP as provided by the US Bureau of Economic Analysis. GDP data is from 2017. See: https://www.taxpolicycenter.org/statistics/state-and-local-general-expenditures-capita and https://www.bea.gov/data/gdp/gdp-state 2. The added fedeal spending totals are provided by Pewtrusts.org in the report "Federal Spending in the States 2004 to 2013," Table 1, "How Much Did the Federal Government Spend in Your State?" I have included the categories, "retirement benefits" and "non-retirement benefits." These total are then added to the state and local totals, and calculated as a proportion of the BEA's statewide GDP numbers. See: https://www.pewtrusts.org/en/research-and-analysis/issue-briefs/2014/12/federal-spending-in-the-states and download "state-by-state distrubution."