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Conceived in Liberty, Volume 5: The New Republic: 1784–1791

Tue, 20/10/2020 - 16:30

The fifth volume of Conceived in Liberty highlights the most important battle of the American project — one that continues to this day — the conflict between those who want to centralize power, and those who choose to stand to defend the American heritage of liberty.

This book features a foreword by Judge Andrew Napolitano, a preface by Dr. Thomas E. Woods, and an introduction by Dr. Patrick Newman. Narrated by Millian Quinteros.

Download the complete audiobook (41 MP3 files) in one ZIP file here. This audiobook is also available on Soundcloud, iTunes, Google Play, and via RSS.​
Categories: Current Affairs

Breaking Out of the Walrasian Box: The Cases of Schumpeter and Hansen

Mon, 20/07/2020 - 21:00

      Since World War II, mainstream neoclassical economics has followed the general equilibrium paradigm of Swiss economist Leon Walras (1834-1910).1 Economic analysis now consists of the exegesis and elaboration of the Walrasian concept of general equilibrium, in which the economy pursues an endless and unchanging round of activity—what the Walrasian Joseph Schumpeter aptly referred to as “the circular flow.” Since the equilibrium economy is by definition a changeless and unending round of robotic behavior, everyone on the market has perfect knowledge of the present and the future, and the pervasive uncertainty of the real world drops totally out of the picture. Since there is no more uncertainty, profits and losses disappear, and every business firm finds that its selling price exactly equals its cost of production.

     It is surely no accident that the rise to dominance of Walrasian economics has coincided with the virtual mathematization of the social sciences. Mathematics enjoys the prestige of being truly “scientific,” but it is difficult to mathematize the messy and fuzzy uncertainties and inevitable errors of real world entrepreneurship and human actions. Once one expunges such actions and uncertainties, however, it is easy to employ algebra and the tangencies of geometry in analyzing this unrealistic but readily mathematical equilibrium state.

     Most mainstream economic theorists are content to spend their time elaborating on the general equilibrium state, and simply to assume that this state is an accurate presentation of real world activity. But some economists have not been content with contemplating general equilibrium; they have been eager to apply this theory to the real world of dynamic change. For change clearly exists, and for some Walrasians it has not sufficed to simply translate general equilibrium analysis to the real world and to let the chips fall where they may.

     As someone who has proclaimed that Leon Walras was the greatest economist who ever lived, Joseph A. Schumpeter (1883-1950) faced this very problem. As a Walrasian, Schumpeter believed that general equilibrium is an overriding reality; and yet, since change, entrepreneurship, profits, and losses clearly exist in the real world, Schumpeter set himself the problem of integrating a theoretical explanation of such change into the Walrasian system. It was a formidable problem indeed, since Schumpeter, unlike the Austrians, could not dismiss general equilibrium as a long-run tendency that is never reached in the real world. For Schumpeter, general equilibrium had to be the overriding reality: the realistic starting point as well as the end point of his attempt to explain economic change.2

     To set forth a theory of economic change from a Walrasian perspective, Schumpeter had to begin with the economy in a real state of general equilibrium. He then had to explain change, but that change always had to return to a state of equilibrium, for without such a return, Walrasian equilibrium would only be real at one single point of past time and would not be a recurring reality. But Walrasian equilibrium is a world of unending statis; specifically, it depicts the consequences of a fixed and unchanging set of individual tastes, techniques, and resources in the economy. Schumpeter began, then, with the economy in a Walrasian box; the only way for any change to occur is through a change in one or more of these static givens.

      Furthermore, Schumpeter created even more problems for himself. In the Walrasian model, profits and losses were zero, but a rate of interest continued to be earned by capitalists, in accordance with the alleged marginal productivity of capital. An interest charge became incorporated into costs. But Schumpeter was too much of a student of Böhm-Bawerk to accept a crude productivity explanation of interest. The Austrian approach was to explain interest by a social rate of time preference, of the market’s preference for present goods over future goods. But Schumpeter rejected the concept of time-preference as well, and so he concluded that in a state of general equilibrium, the rate of interest as well as profits and losses are all zero.

      Schumpeter acknowledged that time-preference, and hence interest, exist on consumption loans, but he was interested in the production structure. Here he stressed, as against the crude productivity theory of interest, the Austrian concept of imputation, in which the values of products are imputed back to productive factors, leaving, in equilibrium, no net return. Also, in the Austrian manner, Schumpeter showed that capital goods can be broken down ultimately into the two original factors of production, land and labor.3 But what Schumpeter overlooked, or rather rejected, is the crucial Böhm-Bawerkian concept of time and time-preference in the process of production. Capital goods are not only embodied land and labor; they are embodied land, labor, and time, while interest becomes a payment for “time.” In a productive loan, the creditor of course exchanges a “present good” (money that can be used now) for a “future good” (money that will only be available in the future). And the primordial fact of time-preference dictates that every one will prefer to have wants satisfied now than at some point in the future, so that a present good will always be worth more than the present prospect of the equivalent future good. Hence, at any given time, future goods are discounted on the market by the social rate of time-preference.

     It is clear how this process works in a loan, in an exchange between creditor and debtor. But Böhm-Bawerk’s analysis of time-preference and interest went far deeper, and far beyond the loan market for he showed that time-preference and hence interest return exist apart from or even in the absence of any lending at all. For the capitalist who purchases or hires land and labor factors and employs them in production is buying these factors with money (present good) in the expectation that they will yield a future return of output, of either capital goods or consumer goods. In short, these original factors, land and labor, are future goods to the capitalist. Or, put another way, land and labor produce goods that will only be sold and hence yield a monetary return at some point in the future; yet they are paid wages or rents by the capitalist now, in the present.

      Therefore, in the Böhm-Bawerkian or Austrian insight, factors of production, hence workers or landowners, do not earn, as in neoclassical analysis, their marginal value product in equilibrium. They earn their marginal value product discounted by the rate of time-preference or rate of interest. And the capitalist, for his service of supplying factors with present goods and waiting for future returns, is paid the discount.4 Hence, time-preference and interest income exist in the state of equilibrium, and not simply as a charge on loans but as a return earned by every investing capitalist.

Schumpeter can deny time-preference because he can somehow deny the role of time in production altogether. For Schumpeter, production apparently takes no time in equilibrium, because production and consumption are “synchronized.”5 Time is erased from the picture, even to the extent of assuming away accumulated stocks of capital goods, and therefore of any age structure of distribution of such goods.6 Since production is magically “synchronized,” there is then no necessity for land and labor to receive any advances from capitalists. As Schumpeter writes:

There is no necessity [for workers or landowners] to apply for any “advances” of present consumption goods. . . . The individual need not look beyond the current period. . . . The mechanism of the economic process sees to it that he also provides for the future at the same time. . . . Hence every question of the accumulation of such stocks [of consumer goods to pay laborers] disappears.

     From this bizarre set of assumptions, “it follows”, notes Schumpeter, “that everywhere, even in a trading economy, produced means of production are nothing but transitory items. Nowhere do we find a stock of them fulfilling any functions.” In denying, further, that there is any “accumulated stock of consumer goods” ready to pay laborers and landowners, Schumpeter is also denying the patent fact that wages and rents are always paid out of the accumulated savings of capitalists, savings which could have been spent on consumer goods but which laborers and landowners will instead spend with their current incomes.

     How can Schumpeter come to this conclusion? One reason is that when workers and landowners exchange their services for present money, he denies that these involve “advances” of consumer goods, because “It is simply a matter of exchange, and not of credit transactions. The element of time plays no part.” What Schumpeter overlooks here is the profound Böhm-Bawerkian insight that the time market is not merely the credit market. For when workers and landowners earn money now for products that will only reap a return to capitalists in the future, they are receiving advances on production paid for out of capitalist saving, advances for which they in effect pay the capitalists a discount in the form of an interest return.7

     In most conceptions of final equilibrium, net savings are zero, but interest is high enough to induce gross saving by capitalists to just replace capital equipment. But in Schumpeter’s equilibrium, interest is zero, and this means that gross saving is zero as well. There appear to be neither an incentive for capitalists to maintain their capital equipment in Schumpeterian equilibrium nor the means for them to do so. The Schumpeterian equilibrium is therefore internally inconsistent and cannot be maintained.8

     Lionel Robbins puts the case in his usual pellucid prose:

If there were no yield to the use of capital . . . there would be no reason to refrain from consuming it. If produced means of production are not productive of a net product, why devote resources to maintaining them when these resources might be devoted to providing present enjoyment? One would not have one’s cake rather than eat it, if there were no gain to be derived from having it. It is, in short, an interest rate, which, other things being given, keeps the stationary state—the rate at which it does not pay to turn income into capital or capital into income. If interest were to disappear the stationary state would cease to be stationary. Schumpeter can argue that no accumulation will be made once stationary equilibrium has been attained. But he is not entitled to argue that there will be no decumulation unless he admits the existence of interest.9 (emphasis added)

     To return to Schumpeter’s main problem, if the economy begins in a Walrasian general equilibrium modified by a zero rate of interest, how can any economic change, and specifically how can economic development, take place? In the Austrian-Böhm-Bawerkian view, economic development takes place through greater investment in more roundabout processes of production, and that investment is the result of greater net savings brought about by a general fall in rates of time-preference. Upon such a fall, people are more willing to abstain from consumption and to save a greater proportion of their incomes, and thereby invest in more capital and longer processes of production. In the Walrasian schema, change can only occur through alterations in tastes, techniques, or resources. A change in time-preference would qualify as a very important aspect of a change in consumer “tastes” or values.

     But for Schumpeter, there is no time-preference, and no savings in equilibrium. Consumer tastes are therefore irrelevant to increasing investment, and besides there are no savings or interest income out of which such investment can take place. A change in tastes or time-preferences cannot be an engine for economic change, and neither can investment in change emerge out of savings, profit, or interest.

     As for consumer values or tastes apart from time-preference, Schumpeter was convinced that consumers were passive creatures and he could not envision them as active agents for economic change.10 And even if consumer tastes change actively, how can a mere shift of demand from one product to another bring about economic development?

     Resources for Schumpeter are in no better shape as engines of economic development than are tastes. In the first place, the supplies of land and labor never change very rapidly over time, and furthermore they cannot account for the necessary investment that spurs and embodies economic growth.

      With tastes and resources disposed of, there is only one logically possible instrument of change or development left in Schumpeter’s equilibrium system: technique. “Innovation” (a change in embodied technical knowledge or production functions) is for Schumpeter the only logically possible avenue of economic development. To admire Schumpeter, as many economists have done, for his alleged realistic insight into economic history in seeing technological innovation as the source of development and the business cycle, is to miss the point entirely. For this conclusion is not an empirical insight on Schumpeter’s part; it is logically the only way that he can escape from the Walrasian (or neoWalrasian) box of his own making; it is the only way for any economic change to take place in his system.

     But if innovation is the only way out of the Schumpeterian box, how is this innovation to be financed? For there are no savings, no profits, and no interest returns in Schumpeterian equilibrium. Schumpeter is stuck: for there is no way within his own system for innovation to be financed, and therefore for the economy to get out of his own particularly restrictive variant of the Walrasian box. Hence, Schumpeter has to invent a deus ex machina, an exogenous variable from outside his system that will lift the economy out of the box and serve as the only possible engine of economic change. And that deus ex machina is inflationary bank credit. Banks must be postulated that expand the money supply through fractional reserve credit, and furthermore, that lend that new money exclusively to innovators—to new entrepreneurs who are willing and able to invest in new techniques, new processes, new industries. But they cannot do so because, by definition, there are no savings available for them to invest or borrow.

     Hence, the conclusion that innovation is the instrument of economic change and development, and that the innovations are financed by inflationary bank credit, is not a perceptive empirical generalization discovered by Joseph Schumpeter. It is not an empirical generalization at all; indeed it has no genuine referent to reality. Suggestive though his conclusion may seem, it is solely the logical result of Schumpeter’s fallacious assumptions and his closed system, and the only logical way of breaking out of his Walrasian box.

     One sees, too, why for Schumpeter the entrepreneur is always a disturber of the peace, a disruptive force away from equilibrium, whereas in the Austrian tradition of von Mises and Kirzner, the entrepreneur harmoniously adjusts the economy in the direction of equilibrium. For in the Austrian view the entrepreneur is the main bearer of uncertainty in the real world, and successful entrepreneurs reap profits by bringing resources, costs, and prices further in the direction of equilibrium. But Schumpeter starts, not in the real world, but in the never-never land of general equilibrium which he insists is the fundamental reality. But in the equilibrium world of stasis and certainty there are no entrepreneurs and no profit. The only role for entrepreneurship, by logical deduction, is to innovate, to disrupt a preexisting equilibrium. The entrepreneur cannot adjust, because everything has already been adjusted. In a world of certainty, there is no room for the entrepreneur; only inflationary bank credit and innovation enable him to exist. His only prescribed role, therefore, is to be disruptive and innovative.

     The entrepreneur, then, pays interest to the banks, interest for Schumpeter being a strictly monetary phenomenon. But where does the entrepreneurinnovator get the money to pay interest? Out of profits, profits that he will reap when the fruits of his innovation reach the market, and the new processes or products reap revenue from the consumers. Profits, therefore, are only the consequence of successful innovation, and interest is only a payment to inflationary banks out of profit.

     Inflationary bank credit means, of course, a rise in prices, and also a redirection of resources toward the investment in innovation. Prices rise, followed by increases in the prices of factors, such as wages and land rents. Schumpeter has managed, though not very convincingly, to break out of the Walrasian box. But he has not finished his problem. For it is not enough for him to break out of his box; he must also get back in. As a dedicated Walrasian, he must return the economy to another general equilibrium state, for after all, by definition a real equilibrium is a state to which variables tend to return once they are replaced. How does the return take place?

     For the economy to return to equilibrium, profits and interest must be evanescent. And innovation of course must also come to an end. How can this take place? For one thing, innovations must be discontinuous; they must only appear in discrete clusters. For if innovation were continuous, the economy would never return to the equilibrium state. Given this assumption of discontinuous clusters, Schumpeter found a way: When the innovations are “completed” and the new processes or new products enter the market, they out-compete the old processes and products, thereby reaping the profits out of which interest is paid. But these profits are made at the expense of severe losses for the old, now inefficient, firms or industries, which are driven to the wall. After a while, the innovations are completed, and the inexorable imputation process destroys all profits and therefore all interest, while the sudden losses to the old firms are also ended. The economy returns to the unchanging circular flow, and stays there until another cluster of innovations appears, whereupon the cycle starts all over again.

     “Cycle” is here the operative term, for in working out the logical process of breakout and return, Schumpeter has at the same time seemingly developed a unique theory of the business cycle. Phase I, the breakout, looks very much like the typical boom phase of the business cycle: inflationary bank credit, rise in prices and wages, general euphoria, and redirection of resources to more investment. Then, the events succeeding the “completion” of the innovation look very much like the typical recession or depression: sudden severe losses for the old firms, retrenchment. And finally, the disappearance of both innovation and euphoria, and eventually of losses and disruption—in short, a return to a placid period which can be made to seem like the state of stationary equilibrium.

     But Schumpeter’s doctrine only seems like a challenging business cycle theory worthy of profound investigation. For it is not really a cycle theory at all. It is simply the only logical way that Schumpeter can break out and then return to the Walrasian box. As such, it is certainly an ingenious formulation, but it has no genuine connection with reality at all.

     Even within his own theory, indeed, there are grave flaws. In the Walrasian world of perfect certainty (an assumption which is not relaxed with the coming of the innovator), how is it that the old firms wait until the “completion” of the innovation to find suddenly that they are suffering severe losses? In a world of perfect knowledge and expectations, the old firms would know of their fate from the very beginning, and early take steps to adjust to it. In a world of perfect expectations, therefore, there would be no losses, and therefore no recession or depression phase. There would be no cycle as economists know it.

      Finally, Schumpeter’s constrained model can only work if innovations come in clusters, and the empirical evidence for such clusters is virtually nil.11 In the real world, innovations occur all the time. Therefore, there is no reason to postulate any return to an equilibrium, even if it had ever existed in the past.

     In conclusion, Schumpeter’s theory of development and of business cycles has impressed many economists with his suggestive and seemingly meaningful discussions of innovation, bank credit, and the entrepreneur. He has seemed to offer far more than static Walrasian equilibrium analysis and to provide an economic dynamic, a theoretical explanation of cycles and of economic growth. In fact, however, Schumpeter’s seemingly impressive system has no relation to the real world at all. He has not provided an economic dynamic; he has only found an ingenious but fallacious way of trying to break out of the static Walrasian box. His theory is a mere exercise in equilibrium logic leading nowhere.

     It is undoubtedly at least a partial realization of this unhappy fact that prompted Schumpeter to expand his business cycle theory from his open-cycle model of the Theory of Economic Development of 1912 to his three-cycle schema in his two-volume Business Cycles nearly three decades later.12 More specifically, Schumpeter saw that one of the problems in applying his model to reality was that if the length of the boom period is determined by the length of time required to “complete” the innovation and bring it to market, then how could his model apply to real life, where simultaneous innovations occur, each of which requires a different time for its completion? His later three-cycle theory is a desperate attempt to encompass such real-life problems. Specifically, Schumpeter has now postulated that the economy, instead of unitarily breaking out and returning to equilibrium, consists of three separate hermetically sealed, strictly periodic cycles—the “Kitchin”, the “Juglar,” and the “Kon-dratieff”—each with the same innovation-inflation-depression characteristics. This conjuring up of allegedly separate underlying cycles, each cut off from the other, but all adding to each other to yield the observable results of the real world, can only be considered a desperate lapse into mysticism in order to shore up his original model.

     In the first place, there are far more than three innovations going on at one time in the economy, and there is no reason to assume strict periodicity of each set of disparate changes. Indeed, there is no such clustering of innovations as would be required by the theory. Secondly, in the market economy, all prices and activities interact; there therefore can never be any hermetically sealed cycles. The multicycle scheme is an unnecessary and heedless multiplication of entities in flagrant violation of Occam’s Razor. In an attempt to save the theory, it asserts propositions that cannot be falsifiable, since another cycle can always be conjured up to explain away anomalies.13 In an attempt to salvage his original model, Schumpeter only succeeded in adding new and greater fallacies to the old.

     In the years before and during World War II, the most popular dynamic theory of economic change was the gloomy doctrine of “secular stagnation” (or “economic maturity”) advanced by Professor Alvin H. Hansen.14 The explanation of the Great Depression of the 1930s, for Hansen, was that the United States had become mired in permanent stagnation, from which it could not be lifted by free market capitalism. A year or two after the publication of Keynes’s General Theory, Hansen had leaped on the New Economics to become the leading American Keynesian; but secular stagnation, while giving Keynesianism a left-flavor, was unrelated to Keynesian theory. For Keynes, the key to prosperity or depression was private investment: flourishing private investment means prosperity; weak and fitful investment leads to depression. But Keynes was an agnostic on the investment question, whereas Hansen supplied his own gnosis. Private investment in the United States was doomed to permanent frailty, Hansen opined, because (1) the frontier was now closed; (2) population growth was declining rapidly; and (3) there would be hardly any further inventions, and what few there were would be of the capital-saving rather than labor-saving variety, so that total investment could not increase.

     George Terborgh, in his well-known reputation of the stagnation thesis, The Bogey of Economic Maturity, concentrated on a statistical critique.15 If the frontier had been “closed” since the turn of the century, why then had there been a boom for virtually three decades until the 1930s? Population growth too, had been declining for many decades. It was easy, also, to demolish the rather odd and audacious prediction that few or no further inventions, at least of the labor-saving variety, would ever more be discovered. Predictions of the cessation of invention, which have occurred from time to time through history, are easy targets for ridicule.

     But Terborgh never penetrated to the fundamentals of the Hansen thesis. In an age beset by the constant clamor of population doomsayers and zero-population-growth enthusiasts, it is difficult to conjure up an intellectual climate when it seemed to make sense to worry about the slowing of population growth. But why, indeed, should Hansen have considered population growth as ipso facto a positive factor for the spurring of investment? And why would a slowing down of such growth be an impetus to decay? Schumpeter, in his own critique of the Hansen thesis, sensibly pointed out that population growth could easily lead to a fall in real income per capita.16

     Ironically, however, Schumpeter did not recognize that Hansen, too, in his own way, was trying to break out of the Walrasian box. Hansen began implicitly (not explicitly like Schumpeter) with the circular flow and general equilibrium, and then considered the various possible factors that might change—or, more specifically, might increase. And these were the familiar Walrasian triad: land, labor, and technique. As Terborgh noted, Hansen had a static view of “investment opportunities.” He treated them as if they were a limited physical entity, like a sponge. They were a fixed amount, and when that maximum amount was reached, investment opportunities were “saturated” and disappeared. The implicit Hansen assumption is that these opportunities could be generated only by increases in land, labor, and improved techniques (which Hansen limited to inventions rather than Schumpeterian innovations). And so the closing of the frontier meant the drying up of “land-investment opportunities”, as one might call them, the slowing of population growth, the end of “labor-investment opportunities,” leading to a situation where innovation could not carry the remaining burden. And so Hansen’s curious view of the economic effects of diminishing population growth, as gloomily empirical as it might seem, was not really an empirical generalization at all. Indeed, it said nothing about dynamic change or about the real world at all. The allegedly favorable effect of high population growth was merely the logical spinning out of Hansen’s own unsuccessful variant of trying to escape from the Walrasian box.

     And so Hansen’s curious view of the economic effects of diminishing population growth, as gloomily empirical as it might seem, was not really an empirical generalization at all. Indeed, it said nothing about dynamic change or about the real world at all. The allegedly favorable effect of high population growth was merely the logical spinning out of Hansen’s own unsuccessful variant of trying to escape from the Walrasian box.

The author learned the basic insights of this article many years ago from lectures of Professor Arthur F. Burns at Columbia University.

  • 1. Before World War II, the dominant paradigm, at least in Anglo-American economics, was the neo-Ricardian partial equilibrium theory of Alfred Marshall. In that era, Walras and his followers, the earliest being the Italian Vilfredo Pareto, were referred to as “the Lausanne school.” With the Walrasian conquest of the mainstream, what was once a mere school has now been transformed into “microeconomics.”
  • 2. In maintaining that Schumpeter was more influenced by the Austrians than by Walras, Mohammed Khan overlooks the fact that Schumpeter’s first book, and the only one still untranslated into English, Das Wesen und der Hauptinhalt der Theoretischen Nationalekonomie (The Essence and Principal Contents of Economic Theory) (Leipzig, 1908), written while he was still a student of Böhm-Bawerk, was an aggressively Walrasian work. Not only is Das Wesen a nonmathematical apologia for the mathematical method, but it is also a study in Walrasian general equilibrium that depicts economic events as the result of mechanistic quantitative interactions of physical entities, rather than as consequences of purposeful human action—the Austrian approach. Thus, Fritz Machlup writes that Schumpeter’s emphasis on the character of economics as a quantitative science, as an equilibrium system whose elements are “quantities of goods,” led him to regard it as unnecessary, and, hence, as methodologically mistaken for economics to deal with “economic conduct” and with “the motives of human conduct” (Fritz Machlup, “Schumpeter’s Economic Methodology,” Review of Economics and Statistics 33 (May 1951: 146-47). Cf. Mohammed Shabbir Khan, Schumpeter’s Theory of Capitalist Development (Aligarh, India: Muslim University of India, 1957). On Das Wesen, see Erich Schneider, Joseph Schumpeter: Life and Work of a Great Social Scientist (Lincoln, Neb.: University of Nebraska Bureau of Business Research, 1975), pp. 5-8. On Schumpeter as Walrasian, also see Schneider, “Schumpeter’s Early German Work, 1906-17,” Review of Economics and Statistics (May 1951): 1-4; and Arthur W. Marget, “The Monetary Aspects of the Schumpeterian System,” ibid. p. 112ff. On Schumpeter as not being an “Austrian,” also see “Haberler on Schumpeter,” in Henry W. Spiegel, ed., The Development of Economic Thought (New York: John Wiley and Sons, 1952), pp. 742-43.
  • 3. Thus, Schumpeter wrote that in the normal circular flow the whole value product must be imputed to the original productive factors, that is to the services of labor and land; hence the whole receipts from production must be divided between workers and landowners and there can be no permanent net income other than wages and rent. Competition on the one hand and imputation on the other must annihilate any surplus of receipts over outlays, any excess of the value of the product over the value of the services of labor and land embodied in it. The value of the original means of production must attach itself with the faithfulness of a shadow to the value of the product, and could not allow the slightest permanent gap between the two to exist. . . . To be sure, produced means of production have the capacity of serving in the production of goods. . . . And these goods also have a higher value than those which could be produced with the produced means of production. But this higher value must also lead to a higher value of the services of labor and land employed. No element of surplus value can remain permanently attached to these intermediate means of production (Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry Into Profits, Capital, Credit, Interest, and the Business Cycle. New York: Oxford University Press, 1961, pp. 160, 162).
  • 4. See the attack on this Austrian view from a Knightian neoclassical perspective in Earl Rolph, “The Discounted Marginal Productivity Doctrine,” in W. Fellner and B. Haley, eds., Readings in the Theory of Income Distribution (Philadelphia: Blakiston, 1946), pp 278-93. For a rebuttal, see Murray N. Rothbard, Man, Economy, and State vol. I (Los Angeles: Nash Publishing Co., 1970), 431-33.
  • 5. On this alleged synchronization, see Khan, Schumpeter’s Theory, pp. 51, 53. The concept of synchronization of production is a most un-Austrian one that Schumpeter took from John Bates Clark, which in turn led to the famous battle in the 1930s between the Clark-Knight concept of capital and the Austrian views of Hayek, Machlup, and Boulding. See ibid., p. 6n. Also see F.A. Hayek, “The Mythology of Capital,” in Fellner and Haley, Readings, pp. 355-83.
  • 6. In Khan’s words, for Schumpeter “capital cannot have any age structure and perishes in the very process of its function of having command over the means of production” (Khan, Schumpeter’s Theory, p. 48). Schumpeter achieves this feat by sundering capital completely from its embodiment in capital goods, and limiting the concept to only a money fund used to purchase those goods. For Schumpeter, then, capital (like interest) becomes a purely monetary phenomenon, not rooted in real goods or real transactions. See Schumpeter, Economic Development, pp. 116-17.
  • 7. See Schumpeter, Economic Development, pp. 43-44.
  • 8. Clemence and Doody attempt to refute this charge, but do so by assuming a zero rate of time-preference. Capitalists would then be interested in maximizing their utility returns over time without regard for when they would be reaped. Hence, capital goods would be maintained indefinitely. But for those who believe that everyone has a positive rate of time-preference, and hence positively discounts future returns, a zero rate of return would quickly cause the depletion of capital and certainly the collapse of stationary equilibrium. Richard V. Clemence and Francis S. Doody, The Schumpeterian System (Cambridge, Mass: Addison-Wesley, 1950), pp. 28-30.
  • 9. In the excellent critique of Schumpeter’s zero-interest equilibrium by Lionel Robbins, “On a Certain Ambiguity in the Conception of Stationary Equilibrium,” Economic Journal 40 (June 1930): pp. 211-14. Also see Gottfried Haberler, “Schumpeter’s Theory of Interest,” Review of Economics and Statistics (May 1951): 122ff.
  • 10. Thus, Schumpeter wrote: “It is not the large mass of consumers which induces production. On the contrary, the crowd is mastered and led by the key personalities in production” (italics are Schumpeter’s) in “Die neuere Wirtschaftstheorie in den Vereinigten Staaten” (“Recent Economic Theory in the United States”) Schmollers Jahrbuch (1910), cited in Schneider, Joseph A. Schumpeter, p. 13.
  • 11. See Simon S. Kuznets, “Schumpeter’s Business Cycles,” American Economic Review (June 1940).
  • 12. Joseph A. Schumpeter, Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, 2 vols. (New York: McGraw-Hill, 1939).
  • 13. This does not mean that all propositions must be falsifiable; they can be selfevident or deduced from self-evident axioms. But no one can claim that the alleged Kitchin, Juglar, and Kondratieff cycles are in any sense self-evident.
  • 14. See Alvin H. Hansen, Fiscal Policy and Business Cycles (New York: W.W. Norton, 1941). For a clear summary statement of his position, see Hansen, “Economic Progress and Declining Population Growth,” in G. Haberler, ed., Readings in Business Cycle Theory (Philadelphia: Blakiston, 1944), pp. 366-84.
  • 15. George Terborgh, The Bogey of Economic Maturity (Chicago: Machinery and Allied Products Institute, 1945).
  • 16. Schumpeter, Business Cycles, p. 74.
Categories: Current Affairs

Entrepreneurship

5 hours 23 min ago

Download the slides from this lecture at Mises.org/MU_PPT_03.

Recorded at the Mises Institute in Auburn, Alabama, on 13 July 2020.

Categories: Current Affairs

How the State Destroys Families

5 hours 23 min ago

The peculiar consequences that result from government intervention are similar in all areas of economic and social life. Problems such as indifference, evaporating solidarity, irresponsibility, and short-term thinking are more than often caused or exacerbated by—sometimes well-intentioned—government interventions. This holds true for interventions in the financial world and in business, and it is no different with family policy. To make this clear, we first want to make a few comments about the economics of the family and then explain how state intervention tends to destroy families from within.

A Power Plant without Equal

According to the Christian definition, the family is a community between a man and a woman, before God, with God, and for God. It is a kind of worship. Of course, this is not the only motivation to start a family at all, but worship is what defines the Christian family.

From this covenant of life before God, with God, and for God, a whole series of further consequences follow with logical necessity, e.g., the formal and public alliance of the spouses, lifelong loyalty, openness to many children, rejection of abortion, and Christian commitment outside of one’s own family. Conversely, where there is no reference to God, there is no logical connection between these elements. They then appear as more or less arbitrary conventions. They become optional in the free design of individual lifestyles. Sometimes they become superfluous and even a hindrance.

In a society that loses the love for God, the family also loses its solid form. The Christian family is then gradually replaced by a patchwork of other forms of being together, which are set up according to one’s taste. This is inevitable and cannot be prevented by any human intervention—not even by the state.

But the traditional dominance of the Christian family is not only threatened by widespread apostasy. It is also, and massively, under siege by state intervention. In order to understand these, however, we first have to consider the economic reasons from which families arise and grow. The very first of these reasons is the division of labor.

The theory of division of labor teaches us that the work of specialists who exchange their surpluses is more profitable than nonspecialized work. The shoemaker naturally produces more shoes, the baker more bread than he himself and his family would need. But the point is that their specialization makes more shoes and breads overall than if everyone had devoted part of their time to shoemaking and another part to baking.

The most important precondition of this little miracle is that the specialists have different talents. The productivity of the division of labor is based on the inequality of the exchange partners. And that is exactly why the Christian family is so efficient. Men and women are different, and they happily complement each other. They complement each other in their intellectual and physical abilities, in their social skills, in their spiritual and aesthetic sensibilities, and in their mental lives. It is therefore possible for them to grow together in all these dimensions of being human beyond what would be possible for them alone and on their own.

The cross-generational division of labor within the family is equally important. The generations are also different; they also complement each other. Young people typically have a large work capacity and creativity, but less experience and money. The cooperation between the generations of a family is also favored by trust and affection that has grown over many years, which still has to be built up in relation to people who are not family members.

From a purely economic perspective, families are probably the most efficient form of human organization. Unfortunately, this is hardly ever properly appreciated, not even by the economists. This is probably due to the fact that the family’s performance has many dimensions, most of which are difficult or impossible to measure, in distinct contrast to the performance of a company or of a sports club.

Families are exceptionally efficient, but not infallible. They usually fail in one of the major areas of conflict: finance, raising children, sexuality. If no common denominator is found here, if there is a lack of hope or openness to the gifts of God, then failure is likely.

But how is this failure promoted by government intervention?

The State and the Family

To answer this question, we first have to consider the nature of the state. According to Max Weber’s well-known definition, the state is a monopoly of legitimate violence. This concept of the state is rooted in the legal concept of the modern state—the state that determines the law at its own discretion. It emerged in the sixteenth and seventeenth centuries from the debates on the natural law conception of objective law, which is beyond human arbitrariness. In the modern conception, the state itself does not only have special rights that correspond to its special obligations. Rather, it is above the law in a strict sense. The state is completely free to decide what is right and wrong.

Once this concept of the law and of the state has gained a foothold, there is a natural tendency toward unlimited state growth. There is no logical brake on this movement, because the powers and tasks of the state are no longer fundamentally limited, but fundamentally open and unlimited. And there is hardly any economic brake on state growth either, because as it grows, so does the income and power of state servants and all other interested parties.

Family policy has become an important area of ​​state growth in recent years. In the past, various state interventions served to protect the family (tax privileges, child benefits, etc.), but today’s politics are almost exclusively harmful to the family.

It should be noted that explicit political harm to families is rather rare. Communists like Friedrich Engels correctly recognized the family as a source of bourgeois morality and therefore fought them. Such fanatics still exist today, but they do not determine what happens.

Tacit damage to the family is a much more important variant. In fact, the family-damaging effects of government intervention are sometimes not even considered. Monetary policy is an important example. Our current monetary system is designed to create constant (moderate) price inflation, which in turn creates irresistible incentives for debt management. The risks are obvious. How many families have been broken because they proved to be unable to handle the debt burden? Monetary politicians have no intention of accepting such consequences or even accepting them knowingly. They simply do not take them into account when making political decisions. And yet these are consequences that result from their decisions.

In other cases, the damage to the family is not pursued as an independent goal, but is accepted as a side effect of a policy. To a lesser extent, this affects the classic welfare state, in particular the supposedly liberal social policy à la John Stuart Mill, which became the dominant factor in Great Britain and the Scandinavian countries after the Second World War and has also been prevalent in Germany for around twenty years.

According to Mill, the state should promote freedom of choice for individuals by removing the stones of life from their path. In particular, the state should liberate them from the constraints and oppressive forces of their social environment. Mill’s followers today have taken this approach to extremes. Ultimately, they understand “constraints” and “oppression” to mean anything that restricts human arbitrariness—anything that could prevent individuals from doing what they would like to do, or from being what they would like to be. Oppression arises not only from laws, taxes, and personal economic circumstances. It also originates in authorities such as the church, fathers, mothers, and company heads. It shows up in border fences and walls. In extreme form, it shows itself in the circumstances of one’s own identity. Your own gender and your own body should also be freely selectable, and the state should also help the individual with this free choice.

When the state intervenes to bring about such “liberation” it damages family life. Indeed, on the one hand, such interventions burden families financially, and, on the other hand, they make families superfluous. The most important example is emancipation policy in the name of feminism. The state-funded all-day schools and all-day kindergartens, which Ursula von der Leyen and our current chancellor introduced in Germany with great determination, expressly aim to alleviate the life constraints of the female existence. Their purpose was to take a heavy load off women’s shoulders so that they could develop freely. All of this fits seamlessly into feminist politics since the 1970s: abortion rights, state-funded reimbursement of contraception and abortion costs, divorce laws, custody laws, etc.

It is clear that this policy does not support the Christian family. In fact, it damages the family by worsening the relationship between the costs and benefits of family life. It reduces the incentives to start a family and keep it alive even under resistance. All-day schools and all-day kindergartens are financed through family taxation, so the returns to family life decrease while the need for additional monetary income increases. The greater economic independence of women then reduces the costs of exiting the family community. There are increased divorces and increased numbers of single mothers. This connection is further reinforced by the fact that the incentives for men to start a family also decrease. For one thing, you have to expect a higher probability of failure from the start. On the other hand, German divorce law very often means economic ruin for men.

From the perspective of economic theory, this creates a destructive “rationality trap.” From a woman’s economic perspective, the family becomes unnecessary and superfluous as a result of government intervention. But as the family withers, the performance of the economy as a whole is weakened, and ultimately taxes are reduced, without which feminist politics is impossible.

In light of these crazy implications, one may yearn for the classic welfare state. The good old welfare state—let us primarily think of the pay-as-you-go pension and healthcare systems—was in no way aimed at enabling individual self-fulfillment at the expense of the taxpayer. Its goal was not to liberate the individual from all life constraints, but only to provide some protection against major economic emergencies.

However, a return to such a system would be deceptive, at least with regard to families. The welfare state has also had a lasting impact on the relationship between the costs and benefits of family life. It, too, has weakened the community of solidarity between the spouses—and between parents and children—if not quite as quickly, brutally, and cynically as the more recent feminist politics. It didn’t slaughter the family, but it slowly decomposed them. This tendency is particularly evident in the relationship between the generations. The state pension system turns this relationship upside down in economic terms. Families must continue to bear the costs of bringing up children but must share their children’s future tax payments with all other citizens, including the childless. The benefits of children are socialized, while the cost of raising children remains private. If you wanted to reduce families, you couldn’t think of anything better.

Categories: Current Affairs

Mises University is Happening Now!

6 hours 8 min ago

Mises University is happening now! Not a watered-down online version, but a full-fledged Mises Institute live event. Students from around the country are on our beautiful campus and are devouring the lectures we offer.

Our students are among the best and brightest. Their willingness to read serious books and engage in deep, difficult thought sets them apart from their peers. I am glad they are on our campus this week! We're building relationships and connections that will last for decades.

Mises University is the most important thing we do. Won't you please help us by making your most generous donation today?

Sincerely,

Jeff Deist, President

 

Categories: Current Affairs

Subjective Value and Market Prices

6 hours 23 min ago

Download lectures slides at Mises.org/MU20_PPT_02.

Recorded at the Mises Institute in Auburn, Alabama, on 13 July 2020.

Categories: Current Affairs

The Birth of the Austrian School

7 hours 23 min ago

Download lecture slides at Mises.org/MU20_PPT_01.

Recorded at the Mises Institute in Auburn, Alabama, on 13 July 2020.

Categories: Current Affairs

Private Defense in the History of Genoa

7 hours 53 min ago

The Republic of Genoa provides an example of how a small "state" managed to defend itself against much larger states using military resources that were overwhelmingly owned and controlled by private parties.

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.

Original Article: "Private Defense in the History of Genoa".

Categories: Current Affairs

How Historians Changed the Meaning of "Liberalism"

9 hours 53 min ago

Liberalism was the most popular and influential ideology during the nineteenth and early twentieth century. So, every new socialist and authoritarian movement defined itself as "liberal" to capitalize on liberalism's popularity and importance.

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.

Original Article: "How Historians Changed the Meaning of 'Liberalism'".

Categories: Current Affairs

The First Socialists: The Saint-Simonians and the Utopians

10 hours 23 min ago

At the turn of the nineteenth century, classical economics—as represented by Adam Smith in Britain and Jean-Baptiste Say in France—seemed unassailable. The American Revolution, to many people, demonstrated the failures of the old economic order of mercantilism and colonialism. The flourishing trade after the war proved protective tariffs useless, and the rise of industrial production encouraged the expansion of trade networks. Smith and his acolytes seemed proven right in their calls for free trade and economic competition.

Industrialization ushered in rapid increases in national productivity and, with it, the uncomfortable disruption of traditional ways of life. In 1815, English manufacturers had a surplus of stockpiled goods that they could not export during the War of 1812, forcing them to reduce production and lay off workers. The concept of unemployment was effectively unknown at this time, and displaced workers—following the 1811 example of Ned Lud and his Luddites—rioted and destroyed the industrial machines they blamed for their misery. In 1825, following a period of significant credit expansion, the market crashed, leading to the collapse of dozens of provincial banks. People began to question whether there were yet undiscovered flaws in the new economic system of industrialization and free trade.

Among the thinkers who developed an interest in these “commercial crises,” as he called them, was Simonde de Sismondi, a follower of Smith and Say. After observing the early economic crises in Europe, Sismondi began to question the prevailing economic doctrine. Although he did not become a socialist, strictly speaking, his critiques of laissez-faire laid the foundation for various socialist doctrines that would be developed later.

Sismondi began with a critique of the classical method. He offered the earliest criticism of David Ricardo’s abstract deductive method. Anticipating the German historical school, Sismondi argued that economics should be studied in historical and political context, that the consequences of government policies may vary according to time and place. Rejecting Ricardo’s use of Robinson Crusoe to derive the laws of human nature (a theoretical and pedagogical tool that survives today exclusively in Austrian economics), Sismondi believed that the study of isolated man was inadequate for understanding a complex industrial society.

With his new methodological approach, Sismondi took shots at two sacred concepts of classical theory: individual self-interest and free competition. “It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner,” Adam Smith famously wrote, “but from their regard to their own interest.” Sismondi agreed, but he believed Smith erred in only applying the concept of self-interest to production, without considering the distribution of property. Industrialization produced new economic classes, the proletariat (those who work) and the capitalist (those who possess). Free competition compelled capitalists to produce cheaper goods, but it also required workers to compete with each other for employment. Because lower labor costs meant cheaper goods, the interests of the capitalist and the wage worker were in conflict.

The classical economists celebrated the increase in production that self-interest and competition engendered, but Sismondi argued that the conflict between individual interests and the “general interest” of society yielded overproduction, which was the cause of economic crises. Free competition encouraged constant downward pressure on wages, as workers underbid each other for employment and producers constantly worked to lower the cost of production. As some capitalists drove their competitors out of business, former capitalists would join the ranks of the nonpropertied proletariat, and capital would concentrate in the hands of a dwindling number of property owners. To cure these ills, Sismondi called for state intervention—anathema to advocates of laissez-faire—to constrain competition and regulate labor.

Although Sismondi did not call for the abolition of private property, and therefore was not a socialist, his ideas offer the first expression of several concepts that would prove integral to socialist thinkers later in the century. The first is his notion that society had a collective, or “general,” interest that differed from the individual interests of its members. Second, he is the first expositor of the fallacy eventually named the “iron law of wages”—the idea that free competition will suppress wages to subsistence levels. He also formulated a class theory of the proletariat and the capitalist. Related to this was the “law of concentration” that would prove so integral to Marxism. Finally, Sismondi introduced the idea of labor legislation, which was the first modern reaction against laissez-faire absolutism. Although Sismondi’s proposed interventions were modest by modern standards, he opened the door for new ideas about the state’s function and duties that could logically be extended ad infinitum.

In addition to Sismondi, another thinker working at roughly the same time gave birth to other key elements of socialist theory. Henri de Saint-Simon is often considered the father of socialism, though it was his followers who truly produced the first formal socialist doctrine. One of them, Pierre Leroux, apparently even coined the term “socialism” to describe their system.

Saint-Simon had something of a messiah complex, and what he founded was less of an economic theory than a religious cult. A child of the Enlightenment, he was fascinated by Newton’s law of gravity, which Saint-Simon held as the single “universal law” from which all truths—material and spiritual—could be deduced. If God is the center of the universe, gravity was the “law of God,” that governed all phenomena. Saint-Simon believed that the purpose of religion was to direct the masses toward the improvement of society. Christian leadership had served this function before industrialization, but Saint-Simon—after God spoke to him in a vision—called for replacing the antiquated Christian clergy with a “Council of Newton,” consisting of experts from various fields of science.

If Newton was God’s prophet for physics, Saint-Simon was the prophet for the social sciences. Anticipating the positivists, he thought that the empirical method of physics should be adopted for the study of man. By observing the past, social scientists should be able to anticipate the future, thus allowing them to scientifically derive the best political policies. Saint-Simon also theorized that society would progress through specific stages of development. Although a predictive philosophy of history was nothing new—the Christian philosophy of history had long held such a view in anticipation of the return of Christ—Marx, among other socialists, would adopt a similar stages doctrine of history to argue the inevitability of socialism.

Unlike Sismondi, Saint-Simon was an apologist for industrialization. As industrialization expanded, all classes would disappear until society was left with only workers and idlers. Although this seems similar to Sismondi’s proletariat-capitalist distinction, Saint-Simon’s “idlers” were not the capitalists but the landowners of the feudal past. Eventually, they would disappear, and the world would consist only of workers. Related to this, Saint-Simon criticized property, by which he specifically meant landed property. Society under the new system should be modeled after the factory, operating as a “national association,” and the state’s function should be limited to protecting workers from the indolent and securing the freedom of producers.

The genuine socialism of Saint-Simonianism came from the modified doctrine espoused by his acolytes. Saint-Simon criticized the privilege of feudal landlords—his idlers—but his followers extended this logic to the owners of capital. Private property in capital, even more than land, privileged capitalists at the expense of the workers. Land and capital are both tools of production, so there was no need to distinguish between the landlord and the capitalist; both were idlers, the Saint-Simonians said: the capitalist earned interest just as the landlord earned rent. Thus, the new worker-idler dichotomy more closely resembled the proletariat-capitalist model of Sismondi. With industrialization, workers were exploited by the capitalists just as serfs were exploited by landlords.

The Saint-Simonians thus established the first formal doctrine of socialism (though socialistic ideas have existed since at least the ancient Greeks). They laid the groundwork for important elements of socialist theory. One is their theory of exploitation, in which proprietors live off the labor of their workers. More importantly, though, was the Saint-Simonian critique of private property in both land and capital. They called for the abolition of private ownership by way of private inheritance. If the state were the sole heir, then eventually all property would be controlled by the Council of Newton, who would know best how to manage production and distribution in the national workshop of society. Finally, with Saint-Simon’s philosophy of history, they founded the tradition of preaching the ordained inevitability of socialism according to stages of human development.

While Sismondi was theorizing and Saint-Simon was evangelizing, other early socialists were working to put their ideas into practice. Although they are most often referred to by the label Marx bestowed on them—utopian socialists—they have also been called associative socialists, as their theories were based on collective associations that we would today recognize as communes. The two most influential representatives of this category of socialism are Robert Owen and Charles Fourier.

Most early socialist thinkers were French, but Robert Owen was British. If we looked for the precedents for his ideas, we might turn to William Godwin, whom Murray Rothbard considered (by inference) the first communist anarchist. Godwin called for abolishing the state, law, and property. Like all preindustrial socialists, Godwin was concerned with justice, as he understood it, rather than economics. Owen, although his ideas lacked sophistication, was concerned with both morality and economics.

Owen was a wealthy British industrialist, and it would be wrong to call him anticapitalist. He believed that capitalists should use their wealth to establish better societies. To his credit, Owen put his money where his mouth was. He purchased land in the United States and Great Britain to establish cooperative communities based on the principles of communism. Owen called his communes “parallelograms,” and the basis of his economic system was the equitable exchange of labor via labor notes.

The terms communism and socialism were originally employed interchangeably. In Britain, communism enjoyed greater currency at first, whereas the French preferred socialism. Marx and Engels wrote The Communist Manifesto in Britain, but they used both terms interchangeably in their writings, reflecting their familiarity with continental writers. Robert Owen typically used the word communism, but he was the first person to use the word socialism in the title of a published work—What Is Socialism? —and he likely thought he had coined the term. The first terminological distinction was introduced by Lenin and modified by Stalin.

Charles Fourier had similar ideas that were put into practice by his followers. Instead of Owen’s parallelograms, Fourier had his phalanstére, which resembled a large hotel with private living quarters but communal areas for meals, work, and recreation. One important difference from Owen was that his community was modeled after joint-stock companies, where inhabitants purchased shares of stock that allowed them to enjoy varying standards of living. Owen, with his labor notes, believed that people could specialize in trades according to the division of labor as long as they exchanged equitably. Fourier, by contrast, believed that all members of the phalanx, as he called his community, should equally contribute to all areas of work. In this way, he believed that he could avoid class conflict because everybody would be a member of all classes simultaneously, including the capitalist class.

Unsurprisingly, the utopian communities failed, but the utopians shared two important ideas that survived in later theories. The first is their theory of human nature. Derived from John Locke’s notion of tabula rasa, thinkers increasingly considered the role of the social environment in shaping human behavior. Owen and Fourier represent extreme social determinism. This was an important basis of their society. They held that if they could create the right “social milieu,” pesky elements of human nature such as individual self-interest would disappear.

In contrast to Sismondi’s idea of a conflict between the individual and general interest, Owen and Fourier believed that individual interests would become naturally subordinate to the collective. This is the second important idea that linked the utopians. While collectivism was implied in Sismondi’s idea of a “general interest” and had historical roots in Christian monasteries, Owen and Fourier offered the first formal expression of full socialist collectivization.

Socialism on Life Support – The Revolution of 1848 and the Incentive Problem

Louis Blanc’s ideas started to circulate in France in 1841 with the publication of his treatise on French social organization and the working class. Blanc was greatly influenced by Simonde de Sismondi. He accepted that competition was destructive and resulted in the iron law of wages (a term still not coined). He also believed in the necessity of state intervention. Blanc’s belief in the necessity of a strong state arguably makes him the father of state socialism, though earlier thinkers of lesser influence had already proposed similar ideas. Blanc is also sometimes classified with Owen and Fourier as an associative socialist, and he shared the important similarity of social determinism. He believed, in common with Owen, that human nature could be changed through proper education.

But the nature of Blanc’s “association” was very different from that of the utopian commune, and it is here that we find his original significance. Blanc advocated for “social workshops,” in which workers were associated by industry. To prevent the evils of competition, though, the state should regulate production, acting as the sole entrepreneur, and oversee the distribution of profits back to the workshops. The workshops themselves, though, were to be run democratically by the workers. In Blanc’s unique conception of association, we find the seeds of syndicalism and British guild socialism.

Around the same time that Blanc was earning notoriety, Pierre-Joseph Proudhon was making a name for himself with the publication of What Is Property? In this work, he popularized the phrase “property is theft,” and until Marx published Das Kapital, Proudhon was the most influential socialist in France. His system, known as mutualism, did not advocate the abolition of property; Proudhon, instead, wanted to abolish the privilege that he believed property granted to its owners. He thus advocated usufruct, which meant the right for people to use somebody else’s property, so that the proprietor—capitalist or landlord—could not live off the fruits of somebody else’s labor. To later socialists, Proudhon’s influence was marginal; the slogan Property Is Theft! became a nice platitude, but it circulated without the theoretical nuance of usufruct laws. He is instead most famous today as the father of anarchism, and his critiques of the state influenced anarchists throughout Europe and the United States.

The French Revolution of 1848 offered both Blanc and Proudhon an opportunity to try to implement their ideas. In late February, Louis Blanc, on behalf of the revolutionary Provisional government, drafted a “right to work” decree claiming that the first duty of every government was the guarantee of employment for its citizens. The following day, he announced the formation of national workshops according to the theories he had outlined earlier in the decade.

Instead of solving the economic crisis, the national workshops invited unemployed laborers into Paris. The Provisional government grossly underestimated how many workers would enroll in the program—they anticipated ten thousand enrollments, and instead they received nearly a hundred thousand. When they could not find work for all of them, Blanc’s plan effectively turned into unemployment welfare, with the government offering modest pay for idle workers. To worsen matters, the surplus of unemployed men they unwittingly drew into Paris used their spare time for political agitation.

Proudhon saw the revolution as an opportunity to pursue his ideas as well, though he was even less successful than Blanc. In considering the most immediate practical reform for abolishing proprietor privilege, Proudhon came up with the idea of an “exchange bank,” backed by existing commodities, that would provide unlimited interest-free loans. The theory itself was rife with fallacies, but Proudhon believed that it would eliminate the unjust income of capitalists—the interest earned on capital. Instead of workers accepting immediate payment from the capitalist, who later enjoyed the returns on selling the commodity produced, workers could accept loans from the bank that would be paid back without interest. The idea of the exchange bank led to the public debates between Proudhon and Frédéric Bastiat on the ethics of charging interest on loans.

However, Proudhon’s bank never came into existence. The Revolution of 1848 had, to many people, thoroughly discredited socialism. With the exception of Robert Owen in Britain and a handful of other thinkers of marginal influence, socialism had been almost entirely a French product. The decline of socialism in France might have signaled the death knell of socialism everywhere, but there were two men in Britain who, with the publication of a pamphlet in 1848, would resuscitate socialism and give it the most complete (if utterly fallacious) theoretical framework the world had yet seen: Karl Marx and Friedrich Engels.

Categories: Current Affairs

Mises U 2020: Welcome and Opening Remarks

21 hours 23 min ago

Featuring Tho Bishop, Joseph Salerno, Jeff Deist, and the Mises University Faculty.

Recorded at the Mises Institute in Auburn, Alabama, on 12 July 2020.

Categories: Current Affairs

Rohin Francis: Britain, COVID, and Race in Medicine

21 hours 53 min ago

Our guest is Rohin Francis, MD. Dr. Francis is a Cardiologist in London, who also hosts a popular YouTube channel. He recently discussed what COVID may tell us about racism in science and medicine, and comes on the show for a wide ranging discussion on racism in medicine, COVID in Britain, and how minority groups have fared in Britain.

SHOW NOTES
Categories: Current Affairs

The Great Society: A Libertarian Critique

Sat, 11/07/2020 - 20:00

The Great Society is the lineal descendant and the intensification of those other pretentiously named policies of twentieth-century America: the Square Deal, the New Freedom, the New Era, the New Deal, the Fair Deal, and the New Frontier. All of these assorted Deals constituted a basic and fundamental shift in American life—a shift from a relatively laissez-faire economy and minimal state to a society in which the state is unquestionably king.1

In the previous century, the government could safely have been ignored by almost everyone; now we have become a country in which the government is the great and unending source of power and privilege. Once a country in which each man could by and large make the decisions for his own life, we have become a land where the state holds and exercises life-and-death power over every person, group, and institution. The great Moloch government, once confined and cabined, has burst its feeble bonds to dominate us all.

The basic reason for this development is not difficult to fathom. It was best summed up by the great German sociologist Franz Oppenheimer; Oppenheimer wrote that there were fundamentally two, and only two, paths to the acquisition of wealth. One route is the production of a good or service and its voluntary exchange for the goods or services produced by others. This method—the method of the free market—Oppenheimer termed "the economic means" to wealth. The other path, which avoids the necessity for production and exchange, is for one or more persons to seize other people's products by the use of physical force. This method of robbing the fruits of another man's production was shrewdly named by Oppenheimer the "political means." Throughout history, men have been tempted to employ the "political means" of seizing wealth rather than expend effort in production and exchange. It should be clear that while the market process multiplies production, the political, exploitative means is parasitic and, as with all parasitic action, discourages and drains off production and output in society. To regularize and order a permanent system of predatory exploitation, men have created the state, which Oppenheimer brilliantly defined as "the organization of the political means."2

Every act of the state is necessarily an occasion for inflicting burdens and assigning subsidies and privileges. By seizing revenue by means of coercion and assigning rewards as it disburses the funds, the state creates ruling and ruled "classes" or "castes"; for one example, classes of what Calhoun discerned as net "taxpayers" and "tax-consumers," those who live off taxation.3​ And since, by its nature, predation can only be supported out of the surplus of production above subsistence, the ruling class must constitute a minority of the citizenry.

Since the state, nakedly observed, is a mighty engine of organized predation, state rule, throughout its many millennia of recorded history, could be preserved only by persuading the bulk of the public that its rule has not really been exploitative—that, on the contrary, it has been necessary, beneficent, even, as in the Oriental despotisms, divine. Promoting this ideology among the masses has ever been a prime function of intellectuals, a function that has created the basis for co-opting a corps of intellectuals into a secure and permanent berth in the state apparatus. In former centuries, these intellectuals formed a priestly caste that was able to wrap a cloak of mystery and quasi divinity about the actions of the state for a credulous public. Nowadays, the apologia for the state takes on more subtle and seemingly scientific forms. The process remains essentially the same.4

In the United States, a strong libertarian and antistatist tradition prevented the process of statization from taking hold at a very rapid pace. The major force in its propulsion has been that favorite theater of state expansionism, brilliantly identified by Randolph Bourne as "the health of the state," namely, war. For although in wartime various states find themselves in danger from one another, every state has found war a fertile field for spreading the myth among its subjects that they are the ones in deadly danger, from which their state is protecting them. In this way states have been able to dragoon their subjects into fighting and dying to save them under the pretext that the subjects were being saved from the dread foreign enemy. In the United States, the process of statization began in earnest under cover of the Civil War (conscription, military rule, income tax, excise taxes, high tariffs, national banking and credit expansion for favored businesses, paper money, land grants to railroads), and reached full flower as a result of World Wars I and II, to finally culminate in the Great Society.

The recently emerging group of "libertarian conservatives" in the United States have grasped a part of the recent picture of accelerated statism, but their analysis suffers from several fatal blind spots. One is their complete failure to realize that war, culminating in the present garrison state and military-industrial economy, has been the royal road to aggravated statism in America. On the contrary, the surge of reverent patriotism that war always brings to conservative hearts, coupled with their eagerness to don buckler and armor against the "international Communist conspiracy," has made the conservatives the most eager and enthusiastic partisans of the Cold War. Hence their inability to see the enormous distortions and interventions imposed upon the economy by the enormous system of war contracts.5

Another conservative blind spot is their failure to identify which groups have been responsible for the burgeoning of statism in the United States. In the conservative demonology, the responsibility belongs only to liberal intellectuals, aided and abetted by trade unions and farmers. Big businessmen, on the other hand, are curiously exempt from blame (farmers are small enough businessmen, apparently, to be fair game for censure.) How, then, do conservatives deal with the glaringly evident onrush of big businessmen to embrace Lyndon Johnson and the Great Society? Either by mass stupidity (failure to read the works of free-market economists), subversion by liberal intellectuals (e.g., the education of the Rockefeller brothers at Lincoln School), or craven cowardice (the failure to stand foursquare for free-market principles in the face of governmental power).6 Almost never is interest pinpointed as an overriding reason for statism among businessmen. This failure is all the more curious in the light of the fact that the laissez-faire liberals of the eighteenth and nineteenth centuries (e.g., the Philosophical Radicals in England, the Jacksonians in the United States) were never bashful about identifying and attacking the web of special privileges granted to businessmen in the mercantilism of their day.

In fact, one of the main driving forces of the statist dynamic of twentieth-century America has been big businessmen, and this long before the Great Society. Gabriel Kolko, in his path-breaking Triumph of Conservatism,7 has shown that the shift toward statism in the Progressive period was impelled by the very big-business groups who were supposed, in the liberal mythology, to be defeated and regulated by the Progressive and New Freedom measures. Rather than a "people's movement" to check big business; the drive for regulatory measures, Kolko shows, stemmed from big businessmen whose attempts at monopoly had been defeated by the competitive market, and who then turned to the federal government as a device for compulsory cartellization. This drive for cartellization through government accelerated during the New Era of the 1920s and reached its apex in Franklin Roosevelt's NRA [National Recovery Administration]. Significantly, this exercise in cartellizing collectivism was put over by organized big business; after Herbert Hoover, who had done much to organize and cartellize the economy, had balked at an NRA as going too far toward an outright fascist economy, the US Chamber of Commerce won a promise from FDR that he would adopt such a system. The original inspiration was the corporate state of Mussolini's Italy.8

The formal corporatism of the NRA is long gone, but the Great Society retains much of its essence. The locus of social power has been emphatically assumed by the state apparatus. Furthermore, that apparatus is permanently governed by a coalition of big-business and big-labor groupings, groups that use the state to operate and manage the national economy. The usual tripartite rapprochement of big business, big unions, and big government symbolizes the organization of society by blocs, syndics, and corporations, regulated and privileged by the federal, state, and local governments. What this all amounts to in essence is the "corporate state," which, during the 1920s, served as a beacon light for big businessmen, big unions, and many liberal intellectuals as the economic system proper to a twentieth-century industrial society.9

The indispensable intellectual role of engineering popular consent for state rule is played, for the Great Society, by the liberal intelligentsia, who provide the rationale of "general welfare," "humanity," and the "common good" (just as the conservative intellectuals work the other side of the Great Society street by offering the rationale of "national security" and "national interest"). The liberals, in short, push the "welfare" part of our omnipresent welfare-warfare state, while the conservatives stress the warfare side of the pie. This analysis of the role of the liberal intellectuals puts into more sophisticated perspective the seeming "sellout" of these intellectuals as compared to their role during the 1930s. Thus, among numerous other examples, there is the seeming anomaly of A.A. Berle and David Lilienthal, cheered and damned as flaming progressives in the '30s, now writing tomes hailing the new reign of big business. Actually, their basic views have not changed in the least. In the '30s, these theoreticians of the New Deal were concerned with condemning as "reactionaries" those big businessmen who clung to older individualist ideals and failed to understand or adhere to the new monopoly system of the corporate state. But now, in the 1950s and 1960s, this battle has been won; big businessmen are all eager to be privileged monopolists in the new dispensation, and hence they can now be welcomed by such theorists as Berle and Lilienthal as "responsible" and "enlightened," their "selfish" individualism a relic of the past.

The cruelest myth fostered by the liberals is that the Great Society functions as a great boon and benefit to the poor; in reality, when we cut through the frothy appearances to the cold reality underneath, the poor are the major victims of the welfare state. The poor are the ones to be conscripted to fight and die at literally slave wages in the Great Society's imperial wars. The poor are the ones to lose their homes to the bulldozer of urban renewal, that bulldozer that operates for the benefit of real-estate and construction interests to pulverize available low-cost housing.10

All this, of course, in the name of "clearing the slums" and helping the aesthetics of housing. The poor are the welfare clientele whose homes are unconstitutionally but regularly invaded by government agents to ferret out sin in the middle of the night. The poor (e.g., Negroes in the South) are the ones disemployed by rising minimum-wage floors, put in for the benefit of employers and unions in higher-wage areas (e.g., the North) to prevent industry from moving to the low-wage areas. The poor are cruelly victimized by an income tax that Left and Right alike misconstrue as an egalitarian program to soak the rich; actually, various tricks and exemptions insure that it is the poor and the middle classes who are hit the hardest.

The poor are victimized too by a welfare state of which the cardinal macroeconomic tenet is perpetual if controlled inflation. The inflation and the heavy government spending favor the businesses of the military-industrial complex, while the poor and the retired, those on fixed pensions or Social Security, are hit the hardest. (Liberals have often scoffed at the anti-inflationists' stress on the "widows and orphans" as major victims of inflation, but these remain major victims nevertheless.) And the burgeoning of compulsory mass public education forces millions of unwilling youth off the labor market for many years, and into schools that serve more as houses of detention than as genuine centers of education.12

Farm programs that supposedly aid poor farmers actually serve the large wealthy farmers at the expense of sharecropper and consumer alike; and commissions that regulate industry serve to cartellize it. The mass of workers is forced by governmental measures into trade unions that tame and integrate the labor force into the toils of the accelerating corporate state, there to be subjected to arbitrary wage "guidelines" and ultimate compulsory arbitration.

The role of the liberal intellectual and of liberal rhetoric is even more stark in foreign economic policy. Ostensibly designed to "help the underdeveloped countries," foreign aid has served as a gigantic subsidy by the American taxpayer of American export firms, a similar subsidy to American foreign investment through guarantees and subsidized government loans, an engine of inflation for the recipient country, and a form of massive subsidy to the friends and clients of US imperialism in the recipient country.

The symbiosis between liberal intellectuals and despotic statism at home and abroad is, furthermore, no accident; for at the heart of the welfarist mentality is an enormous desire to "do good to" the mass of other people, and since people don't usually wish to be done good to—since they have their own ideas of what they wish to do—the liberal welfarist inevitably ends by reaching for the big stick with which to push the ungrateful masses around. Hence, the liberal ethos itself provides a powerful stimulant for the intellectuals to seek state power and ally themselves with the other rulers of the corporate state. The liberals thus become what Harry EImer Barnes has aptly termed "totalitarian liberals." Or, as Isabel Paterson put it a generation ago:

The humanitarian wishes to be a prime mover in the lives of others. He cannot admit either the divine or the natural order, by which men have the power to help themselves. The humanitarian puts himself in the place of God.

But he is confronted by two awkward facts; first, that the competent do not need his assistance; and second, that the majority of people…positively do not want to be "done good" by the humanitarian….Of course, what the humanitarian actually proposes is that he shall do what he thinks is good for everybody. It is at this point that the humanitarian sets up the guillotine.13

The rhetorical role of welfarism in pushing people around may be seen clearly in the Vietnam War, where American liberal planning for alleged Vietnamese welfare has been particularly prominent, e.g., in the plans and actions of Wolf Ladejinsky, Joseph Buttinger, and the Michigan State group. And the result has been very much of an American-operated "guillotine" for the Vietnamese people, North and South.14

And even Fortune magazine invokes the spirit of humanitarian "idealism" as the justification for the United States' falling "heir to the onerous task of policing these shattered colonies" of Western Europe, and exerting its might all over the world. The will to make this exertion to the uttermost, especially in Vietnam and perhaps China, constitutes for Fortune, "the unending test of American idealism."15 This liberal-welfarist syndrome may also be seen in the very different area of civil rights, in the terribly pained indignation of white liberals at the recent determination of Negroes to take the lead in helping themselves, rather than to keep deferring to the Lords and Ladies Bountiful of white liberalism.

In sum, the most important fact about the Great Society under which we live is the enormous disparity between rhetoric and content. In rhetoric, America is the land of the free and the generous, enjoying the fused blessings of a free market tempered by and joined to accelerating social welfare, bountifully distributing its unstinting largesse to the less fortunate in the world. In actual practice, the free economy is virtually gone, replaced by an imperial corporate-state Leviathan that organizes, commands, exploits the rest of society and, indeed, the rest of the world, for its own power and pelf. We have experienced, as Garet Garrett keenly pointed out over a decade ago, a "revolution within the form."16 The old limited republic has been replaced by empire, within and without our borders.

[This essay was first published in The Great Society Reader: The Failure of American Liberalism, 1967.]

  • 1. Recent triumphal disclosures by economic historians that pure laissez-faire did not exist in nineteenth-century America are beside the point; no one ever claimed that it did. The point is that state power in society was minimal, relative to other times and countries, and that the general locus of decision making resided therefore in the individuals making up society rather than in the state. Cf. Robert Lively, "The American System," Business History Review, XXIX (1955), pp. 81–96.
  • 2. Franz Oppenheimer, The State (New York, 1926), pp. 24–27. Or, as Albert Jay Nock, heavily influenced by Oppenheimer's analysis, concluded: "The state claims and exercises the monopoly of crime" in its territorial area. Albert Jay Nock, On Doing the Right Thing, and Other Essays (New York, 1928), p. 143.
  • 3. See John C. Calhoun, Disquisition on Government (Columbia, S.C., 1850). On the distinction between this and the Marxian concept of the ruling class, see Ludwig von Mises, Theory and History (New Haven, Conn., 1957), pp. 112 ff. Perhaps the earliest users of this kind of class analysis were the French libertarian writers of the Restoration period of the early nineteenth century, Charles Comte and Charles Dunoyer. Cf. Elie Halevy, The Era of Tyrannies (Garden City. N.Y., 1965), pp. 23–34.
  • 4. On various aspects of the alliance between intellectuals and the state, see George B. de Huszar, ed., The Intellectuals (Glencoe, Ill., 1960); Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York, 1942), pp. 143–55; Karl A. Wittfogel, Oriental Despotism (New Haven, Conn., 1957); Howard K. Beale, "The Professional Historian: His Theory and Practice," The Pacific Historical Review (August, 1953), pp. 227–55; Martin Nicolaus, "The Professor, the Policeman and the Peasant," Viet-Report (June-July, 1966), pp. 15–19.
  • 5. Thus, cf. H.L. Nieburg, In the Name of Science (Chicago, 1966); Seymour Melman, Our Depleted Society (New York, 1965); C. Wright Mills, The Power Elite (New York, 1958).
  • 6. (Note by original editors referring to another essay in the collection.)
  • 7. New York, 1963. Also see Kolko's Railroads and Regulation (Princeton, N.J., 1965). The laudatory review of the latter book by George W. Hilton (American Economic Review) and George W. Wilson (Journal of Political Economy) symbolize a potential alliance between "New Left" and free-market historiography.
  • 8. The National Recovery Administration, one of the most important creations of the early New Deal, was established by the National Industrial Recovery Act of June, 1933. It prescribed and imposed codes of "fair competition" upon industry. It was declared unconstitutional by the Supreme Court in 1935. For an analysis of the inception of the NRA, see my America's Great Depression (Princeton, N. J., 1963).
  • 9. Part of this story has been told in John P. Diggins, "Flirtation with Fascism: American Pragmatic Liberals and Mussolini's Italy," American Historical Review, LXXI (January, 1966), pp. 487–506.
  • 10. See Martin Anderson, The Federal Bulldozer (Cambridge, Mass., 1964).
  • 12. Thus, see Paul Goodman, Compulsory Mis-education and the Community of Scholars (New York, Vintage paperback edition, 1966).
  • 13. Isabel Paterson, The God of the Machine (New York, 1943), p. 241.
  • 14. See John McDermott, "Welfare Imperialism in Vietnam, " The Nation (July 25, 1966), pp. 76–88.
  • 15. Fortune (August, 1965). As the right wing of the Great Society Establishment, Fortune presumably passes the Berle-Lilienthal test as spokesman for "enlightened" as opposed to narrowly "selfish" capitalism.
  • 16. Garet Garrett, The People's Pottage (Caldwell, Idaho, 1953).
Categories: Current Affairs

What the Supreme Court Got Right In Its Indian Tribe Ruling

Sat, 11/07/2020 - 19:15

The US Supreme Court on Thursday ruled that Jimcy McGirt was wrongfully convicted in an Oklahoma state court of of three serious sexual offenses. McGirt had argued that his trial should have taken place in federal court because McGirt is a member of the Seminole Nation, and the crimes in question took place on Indian tribal lands, which are not subject to state law in certain cases.

The court ruled McGirt had indeed been wrongfully tried in state court and that the crimes had taken place on tribal lands. Moreover, the court recognized these tribal lands as constituting much of the eastern half of Oklahoma, including parts of Tulsa. The implications of the ruling are sizable, although not as sizable as the media is making them out to be.

The media is now filled with headlines like "Court Rules That About Half Of Oklahoma Is Native American Land" or "Court rules that large swath of Oklahoma belongs to Indian reservation."

Headlines like these are likely to conjure up images of non-Indians being rounded up and kicked off reservation lands, homes expropriated, and worse.

But Thursday's ruling doesn't even come close to handing over control of private property in eastern Oklahoma to a tribal council. In fact, the court's ruling explicitly states up front that the decision is narrowly applied to matters of jurisdiction in criminal law.

Indian Tribes and the "Major Crimes Act"

The origins of the controversy addressed in  McGirt v. Oklahoma stem largely from the "Major Crimes Act," (MCA) passed in 1885. 

The MCA was designed to restrict Indian tribal sovereignty, and limited the jurisdiction of tribal councils over major crimes such as murder and rape, handing this jurisdiction over the federal government.  Congress passed the law in response to the US Supreme Court's ruling in Ex parte Crow Dog (1883) which had defended tribal jurisdictions and stated federal legal authorities were not authorized to overrule tribal criminal justice proceedings on tribal lands.

The case involved the killing of Spotted Tail, a Lakota man, by another Lakota man named Crow Dog. In response to the killing, a tribal council ruled Crow Dog must pay restitution to the dead man's family. But then federal authorities intervened, charged Crow Dog with murder, and sentenced him to death.

Crow Dog appealed to the Supreme Court, and the Court ruled the federal prosecution had in fact been illegal, and no treaty or federal law allowed for Indians to be tried according to "white man's" law for crimes that take place on tribal lands. As Justice Matthews wrote at the time, to try tribal members in federal court means Indians will be judged "not by their peers, nor by the customs of their people, nor the law of their land, but by superiors of a different race."

Opponents of tribal sovereignty demanded Congress intervene and make it clear that federal officials could in fact intervene to prosecute tribal members on tribal land — at least for certain serious crimes. Thus, the MCA was born.

This continues to be the situation on many Indian reservations today. Even when tribal members are involved, tribal police are only empowered to prosecute minor crimes, and federal authorities (usually the FBI) head up investigations against perpetrators of major crimes on tribal lands. Prosecutions take place in federal court.

Thursday's decision actually expands the jurisdiction of the MCA in Oklahoma, limiting state jurisdiction in the matter and stating, "For MCA purposes, land reserved for the Creek Nation since the 19th century remains 'Indian country.'" That is, on various tribal lands throughout eastern Oklahoma, criminal prosecution of tribal members falls under the federal government, and are outside the jurisdiction of both tribal councils and the State of Oklahoma. 

Why Tribes Are Celebrating the Decision

But if the Major Crimes Act was designed to limit tribal sovereignty, why have many tribal organizations lauded its extension?

There are at least three reasons for this.

One is that the court's new decision clarifies that McGirt's crimes took place on tribal land, and that this tribal land was never eliminated by Congress. In other words, the ruling makes it clear tribal lands in question never ceased to be an Indian reservation, in spite of what the State of Oklahoma has claimed. Thus, in response to the court's decision, the Creek Nation stated

The Supreme Court today kept the United States’ sacred promise to the Muscogee (Creek) Nation of a protected reservation.

Second, the new ruling states that the State of Oklahoma does not have jurisdiction over tribal members in these areas in respect to the MCA. For some, this may be seen as a victory in itself, as conflicts between the tribes of eastern Oklahoma and the state government have long been acrimonious. The ruling  provides some level of vindication to the tribes which have long sought to distance themselves from encroachments by the state government.  Now,

[G]oing forward, certain major crimes committed within the boundaries of reservations must be prosecuted in federal court rather than state court, if a Native American is involved. So if a Native American is accused of a major crime in downtown Tulsa, the federal government rather than the state government will prosecute it.

Third, the ruling increases the potential for tribes to increase real tribal sovereignty in one fell swoop by overturning the Major Crimes Act. While McGirt may seem to many to be just a matter of transferring prosecutions from state court to federal court, the ruling possibly paves the way for a true reclamation of tribal sovereignty in this regard. Now that the tribes have been freed from state control of criminal prosecutions of tribal members, the next step lies in ending federal control through repeal or modification of the MCA.

If this can be done, then tribal members would be guaranteed their day in tribal court, rather that in a state or federal court. The ruling of Ex parte Crow Dog would again be recognized in spirit: namely that tribal members should be tried by their tribal peers.

No, Eastern Oklahoma Is Not Now "Owned" by the Tribes

Claims that the the Court's new ruling means the Court "gave away" half of Oklahoma (as US Senator Ted Cruz now claims ), or that eastern Oklahoma now "belongs to" the tribes rather overstate the matter.

Although many non-Indians imagine all property on Indian reservations is communally owned or directly controlled by a tribal council, this is not at all necessarily the case. Some tribes do this. Most do not. Indian reservations commonly include "fee simple land" owned by non-tribal members and which is "owned outright without a restriction on alienation" and "subject to state regulatory authority." 

For now, at least, the change remains centered only on criminal prosecutions. Non-tribal members who commit crimes on tribal lands — and if no tribal member is involved — are still subject to the laws of the states in which tribal lands are located.

On the other hand, McGirt v. Oklahoma opens to door to potential future changes in how taxes are collected in Oklahoma. It may be in the medium and long term, tax revenue collected by the state of Oklahoma will decline as tax revenue to tribal entities increases. In fact, this is one reason given by Justice Roberts in his dissent:

The decision today creates significant uncertainty for the State’s continuing authority over any area that touches Indian affairs, ranging from zoning and taxation to family and environmental law.

These issues, however, were not sufficient to convince the court's majority, lead by Neil Gorsuch, to agree with Oklahoma and the State Department whose arguments, Gorsuch concluded, were little more than a "wish" that "an inconvenient reservation would simply disappear." That is, the fact tribal sovereignty is inconvenient for Oklahoma's tax collectors is not reason enough to pretend tribal lands don't exist. 

Implications for Decentralization in the United States

All in all, McGirt v. Oklahoma may prove to be a good thing for those who favor greater decentralization of state power in the United States. Tribal sovereignty has long been a neglected tool in the battle to limit federal power. 

In terms of truly protecting tribal sovereignty, however, this week's ruling is really quite limited. It still sanctions far too much power for Congress in unilaterally abrogating and changing treaties with tribes. Tribal lands should be treated as at least as sovereign as US states. Just as US states cannot be abolished or their borders changed by Congress without state permission, tribal entities ought to enjoy similar protections.  Nonetheless, the ruling does strengthen the current legal environment in which tribal lands, laws, and boundaries are not something that state legislatures can change whenever they feel like it.  One can hope that Congress too will be eventually similarly limited. 

Now that it has been established tribes of eastern Oklahoma actually have a sizable reservation, the next important step is in affirming what should have been recognized long ago: that tribal members ought to be able to administer criminal justice for their own members on their own lands in accordance with their own laws and customs. 

Categories: Current Affairs

Other Reasons to Remove Wilson’s Name at Princeton

Sat, 11/07/2020 - 17:00

Princeton University’s board of trustees has voted to remove Woodrow Wilson’s name from its public policy school and one of its residential colleges. Wilson is not only a former US president but also served as Princeton’s president from 1902–1910.

The reason for the board’s action is Wilson’s racism. He didn’t want blacks applying to Princeton. He segregated the civil service, which previously had been integrated. In an economic downturn, he laid off postal workers, who were predominantly black.

There is another good reason, though, for removing Wilson’s name from Princeton, one that most everyone simply ignores. He embroiled the United States in World War I, which led to the meaningless deaths of more than one hundred thousand US soldiers. Another half a million Americans died from the Spanish flu that the war helped spread.

Wilson’s interventionism was contrary to America’s founding principle of noninterventionism, which was summarized in John Quincy Adams’s Fourth of July address to Congress in 1821. Adams pointed out that America did not “go abroad in search of monsters to destroy” with an interventionist foreign policy. Adams stated that if America were ever to abandon that founding foreign policy, she would become a “dictatress” of the world.

One thing is for sure: Wilson’s war made him one of the dictators of the world. When less than one hundred thousand American men volunteered to fight in his war, Congress authorized Wilson to conscript 10 million Americans. Conscription, of course, is based on force. Wilson forced American men to fight his foreign war, on pain of harsh punishment if they refused to do so.

Unfortunately, that was not the end of Wilson’s dictatorial actions. He also made it a federal felony offense for any American to challenge his conscription system. Those who dared to exercise freedom of speech by doing so incurred Wilson’s wrath. He went after them with a vengeance, sending innocent Americans into federal penitentiaries with long jail sentences. One example was the socialist leader Eugene Debs, who received a ten-year jail sentence for delivering an antiwar speech in Ohio (and who received almost a million votes for president while serving his sentence in a federal prison).

Wilson’s reign of terror didn’t end there. As a result of the fierce anti-German fervor that he encouraged through government propaganda, bans were enacted on sauerkraut, beer, and teaching German in public schools.

Wilson entered the war, because he felt that his intervention would bring the total defeat of Germany, thereby making this the war that would “end all wars” as well as the war that would make the world “safe for democracy.”

Alas, Wilson’s intervention achieved the exact opposite. By subjecting the defeated Germany to the harsh provisions of the Treaty of Versailles, Wilson’s intervention gave rise to the conditions that Adolph Hitler seized upon to rise to power. Within twenty years, the European powers were back at war, which then led to America’s involvement in World War II, which was then followed by forty-five years of a cold war against the communist Soviet Union (which had been Wilson’s wartime partner and ally and Hitler’s wartime enemy), the Korean War, and the Vietnam War.

In other words, Wilson’s war did not “end all wars” and it did not make the world “safe for democracy.” Those 116,516 American men whom Wilson sacrificed in World War I died for nothing.

It’s probably worth mentioning that the Wilson regime also established the Federal Reserve System in 1913, which not only financed his war but also ended up destroying the finest monetary system in history, one based on gold and silver coins, which had been established by the Constitution and had been the official monetary system of the United States for more a century.

And, of course, we shouldn’t forget that it was Wilson who enacted the federal income tax, which also helped finance his war. It also overturned America’s founding system that had lasted for more than a century, one in which Americans were free to keep everything they earned.

There are at least four good reasons for removing Wilson’s name from Princeton University buildings—his racial bigotry, his embroiling the United States in World War I, his founding of the Fed, and his enactment of the federal income tax.

Categories: Current Affairs

Collecting Old Coins Taught Me to Never Trust the Government

Sat, 11/07/2020 - 12:30

Old coins vaccinated me against trusting politicians long before I grew my first scruffy beard. I began collecting coins when I was eight years old in 1965, the year President Lyndon Johnson began removing all the silver from American coins.

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.

Original Article: "Collecting Old Coins Taught Me to Never Trust the Government".

Categories: Current Affairs

You Don't Have to "Cultivate Poverty" to Pursue Truth, Contrary to Thoreau

Sat, 11/07/2020 - 12:00

Henry David Thoreau has inspired generation of Americans to live fuller, freer lives. From his story of spending a night in jail as a tax protestor in “Civil Disobedience” to his chronicle of solitary living in Walden, Thoreau reached higher ground by going against the herd.

I was enthralled when I first read Thoreau when I was eighteen, and his prescriptions for simplicity and frugal living quickly became my lodestars. Thoreau wrote, “The cost of a thing is the amount of life which is required to be exchanged for it, immediately or in the long run.” The fewer things I purchased, the more time I controlled. Thoreau helped me recognize that personal independence depends more on how you live and what you value than on your income. Thoreau also seemed to incarnate the doctrine of self-reliance that his friend, Ralph Waldo Emerson, preached.

After I decided to become a writer, my enthusiasm for Thoreau and Emerson helped sway me to move to Boston, where I expected to find endless intellectual stimulation. As a 21-year-old college dropout from the mountains of Virginia who had just sold his first article to a political magazine, I assumed I could easily rack up more sales living in the big city. No such luck: my submissions struck out everywhere.

But I still had Thoreau’s great admonitions, right? Alas, philosophical gems were not legal tender when rent was due.

In his final essay, “Life without Principle,” Thoreau gravely warned: “The ways by which you may get money almost without exception lead downward….A man had better starve at once than lose his innocence in the process of getting his bread.”

I took a less dogmatic view on the value of innocence. When the financial wolves howled at my door, I enlisted to serve as a Santa Claus at a Filene’s Department Store. If wearing a gaudy red suit and fake whiskers harmed my character, the damage was hidden by the padded pillow I wore on my belly. Likewise for the giant rabbit costume I wore as part of a Beatrix Potter promotion. Admittedly, that outfit terrified some children but it wasn’t my fault that the rabbit’s bulging, bloodshot eyes and canine grimace made me look like the cottontail from hell. (Maybe the artist who crafted the visage was disgruntled.)

Thoreau proclaimed, “You cannot raise money enough to hire a man who is minding his own business.” I found it easier to “mind my own business” with a few portraits of Andrew Jackson and Alexander Hamilton in my pocket. I worked one day at the Boston freight yards unloading a railcar of Idaho potatoes. I enjoyed heaving fifty-pound boxes onto pallets but couldn’t get regular predawn transit to the rail yards.

Thoreau utterly disdained labor markets: “To have done anything by which you earned money merely is to have been truly idle or worse. If the laborer gets no more than the wages which his employer pays him, he is cheated, he cheats himself.” I never felt cheated because I made sure I always I got paid. After Boston got walloped by three feet of snow in the Great Blizzard of 1978, I heard that a nearby campus was paying $4 an hour (equivalent to $16 an hour now) for snow shovelers. I hustled through snowdrifts, got the gig, and spent almost two days around the clock excavating the white stuff. I finally caught up on rent plus I could brag about doing “pathbreaking work at the Harvard Business School.”

I failed to get the one Boston job that my soul craved: carrying a sandwich board down city sidewalks—just like in the 1930s Three Stooges reels. (OK, so I didn’t want to be a surveyor like Thoreau.) The employment agency had already filled that position, but the boss lady cajoled me into taking a typing test. My words-per-minute score assured me plenty of assignments, including a brief stint at WGBH, a public TV station that petulantly refused to credit temp typists in television production credits. But at least I could add “Kelly Girl” to my resume.

In Walden, Thoreau proclaimed that “trade curses everything it handles” and later derided “the immorality of trade.” Thoreau never appreciated how an economy based on private ownership and voluntary exchange creates vast opportunities for anyone with goods or labor to sell to carve their own space and follow their own values. If I had waited for Bostonians to recognize and reward my intrinsic worth, I would have missed even more meals than I did. But I could find enough folks who appreciated my ability to shovel and to type and to guffaw that I survived Beantown. (It probably helped that I didn’t show employers any of my seditious writings.)

Perhaps Thoreau was unable to appreciate economic freedom because he believed daily life should be a fervent, hallowed pursuit of truth. Thoreau lamented people who lacked a “high and earnest purpose” and proclaimed: “Our whole life is startlingly moral. There is never an instant's truce between virtue and vice.” Personally, I called a truce when it was time for a beer or bantering with Bostonian women who weren’t too wacky. I had no trouble partitioning my life between what I did to earn a buck and other times spent reading, writing, and rabble-rousing. Regardless of Thoreau’s prescriptions, bowing five times a day to a philosophical mecca wasn’t enough for a happy life. And I learned early in life to prefer cash on the barrelhead over promises of uplift.

But Thoreau did provide the benchmark for getting the hell out of Massachusetts. In his final essay, Thoreau declared: “There is no more fatal blunderer than he who consumes the greater part of his life getting a living.” I was blundering big time in Boston. I had not found a way to support my literary habit that did not consume far too much of my time. Rent alone routinely required more than a week’s work and everything else seemed to cost more than it should. I moved back south to a college town and set up a typing business that enabled me to earn enough money in a grueling sixteen-hour workday to cover a month’s rent—which was barely half as much. Ironically, the last article I submitted before exiting was accepted and published by the Boston Globe after I left town.

In the final chapter of Walden, Thoreau implores readers: “Cultivate poverty like a garden herb, like sage. Sell your clothes and keep your thoughts.” I treasured my thoughts but I knew that I’d think better if I wasn’t bare assed. Philosophy is no substitute for protein. Regardless of Thoreau’s adoration of rice, I needed red meat to feed whatever muse I might have. Rather than “cultivating poverty,” I recognized that “cashflow” can be the most important verb for a struggling writer.

Categories: Current Affairs

Man, Economy, and State: Exchange and Prices

Fri, 10/07/2020 - 22:15

Professor Jonathan Newman joins the show to discuss exchange and prices through the lens of Rothbard's Man, Economy, and State (chapters 2–4). This is vintage Rothbard: precise definitions; hardcore explanations of property, prices, and exchange; the problems of "hegemonic" state violence;  and a "beautiful" (per Dr. Newman) conception of social cooperation. Menger and Mises are important in this discussion too, as Rothbard elaborates on the origins of money and the Regression Theorem. Don't miss this great show!  

Read the book free of charge in searchable HTML format here.

Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES

Additional Resources

Dr. Joe Salerno's introduction to Man, Economy, and State: Mises.org/SalernoMES

Man, Economy, and State: Mises.org/MES

 

Categories: Current Affairs

Keynes vs. Say

Fri, 10/07/2020 - 20:00

Keynes's "greatest achievement," according to his admirers, was his famous "refutation" of Say's law of markets. All that it is necessary to say about this "refutation" has already been said by Benjamin M. Anderson, Jr.,1 and Ludwig von Mises.2 Keynes himself takes the matter so cavalierly that all he requires to "refute" Say's law to his own satisfaction is less than four pages.

Yet some of his admirers regard this as alone securing his title to fame:

Historians fifty years from now may record that Keynes' greatest achievement was the liberation of Anglo-American economics from a tyrannical dogma, and they may even conclude that this was essentially a work of negation unmatched by comparable positive achievements. Even, however, if Keynes were to receive credit for nothing else…his title to fame would be secure…[Yet] the Keynesian attacks, though they appear to be directed against a variety of specific theories, all fall to the ground if the validity of Say's Law is assumed.3

It is important to realize, to begin with, as Mises4 has pointed out, that what is called Say's law was not originally designed as an integral part of classical economics but as a preliminary—as a refutation of a fallacy that long preceded the development of economics as a recognized special branch of knowledge. Whenever business was bad, the average merchant had two explanations at hand: the evil was caused by a scarcity of money and by general overproduction. Adam Smith, in a famous passage in The Wealth of Nations,5 exploded the first of these myths. Say devoted himself to a refutation of the second.

For a modern statement of Say's law, I turn to B.M. Anderson:

The central theoretical issue involved in the problem of postwar economic adjustment, and in the problem of full employment in the postwar period, is the issue between the equilibrium doctrine and the purchasing power doctrine.

Those who advocate vast governmental expenditures and deficit financing after the war as the only means of getting full employment, separate production and purchasing power sharply. Purchasing power must be kept above production if production is to expand, in their view. If purchasing power falls off, production will fall off.

The prevailing view among economists, on the other hand, has long been that purchasing power grows out of production. The great producing countries are the great consuming countries. The twentieth-century world consumes vastly more than the eighteenth-century world because it produces vastly more. Supply of wheat gives rise to demand for automobiles, silks, shoes, cotton goods, and other things that the wheat producer wants. Supply of shoes gives rise to demand for wheat, for silks, for automobiles, and for other things that the shoe producer wants. Supply and demand in the aggregate are thus not merely equal, but they are identical, since every commodity may be looked upon either as supply of its own kind or as demand for other things. But this doctrine is subject to the great qualification that the proportions must be right; that there must be equilibrium.6

Keynes's "refutation" of Say's law consists in simply ignoring this qualification.

He takes as his first target a passage from John Stuart Mill:

What constitutes the means of payment for commodities is simply commodities. Each person's means of paying for the production of other people consist of those which he himself possesses. All sellers are inevitably, and by the meaning of the word, buyers. Could we suddenly double the productive powers of the country, we should double the supply of commodities in every market; but we should, by the same stroke, double the purchasing power. Everybody would bring a double demand as well as supply; everybody would be able to buy twice as much, because every one would have twice as much to offer in exchange.7

By itself, this passage from Mill, as B.M. Anderson8 has pointed out, does not present the essentials of the modern version of Say's law:

If we doubled the productive power of the country, we should not double the supply of commodities in every market, and if we did, we should not clear the markets of the double supply in every market. If we doubled the supply in the salt market, for example, we should have an appalling glut of salt. The great increases would come in the items where demand is elastic. We should change very radically the proportions in which we produced commodities.

But as Anderson goes on to point out, it is unfair to Mill to take this brief passage out of its context and present it as if it were the heart of Say's law. If Keynes had quoted only the three sentences immediately following, he would have introduced us to the conception of balance and proportion and equilibrium which is the heart of the doctrine—a conception which Keynes nowhere considers in his General Theory.

Mill's next few lines, immediately following the passage torn from its context, quoted above, are as follows:

It is probable, indeed, that there would now be a superfluity of certain things. Although the community would willingly double its aggregate consumption, it may already have as much as it desires of some commodities, and it may prefer to do more than double its consumption of others, or to exercise its increased purchasing power on some new thing. If so, the supply will adapt itself accordingly, and the values of things will continue to conform to their cost of production.

The doctrine that supply creates its own demand, in other words, is based on the assumption that a proper equilibrium exists among the different kinds of production, and among prices of different products and services. And it of course assumes proper relationships between prices and costs, between prices and wage-rates. It assumes the existence of competition and free and fluid markets by which these proportions, price relations, and other equilibria will be brought about.

No important economist, to my knowledge, ever made the absurd assumption (of which Keynes by implication accuses the whole classical school) that thanks to Say's law depressions and unemployment were impossible, and that everything produced would automatically find a ready market at a profitable price. Say's law, to repeat, was, contrary to the assertions of the Keynesians, not the cornerstone on which the great edifice of the positive doctrines of the classical economists was based. It was itself merely a refutation of an absurd belief prevailing prior to its formulation.

To resume the quotation from Mill:

At any rate, it is a sheer absurdity that all things should fall in value, and that all producers should, in consequence, be insufficiently remunerated. If values remain the same, what becomes of prices is immaterial, since the remuneration of producers does not depend on how much money, but on how much of consumable articles, they obtain for their goods. Besides, money is a commodity; and if all commodities are supposed to be doubled in quantity, we must suppose money to be doubled too, and then prices would no more fall than values would.

In sum, Say's law was merely the denial of the possibility of a general overproduction of all goods and services.

If you had presented the classical economists with "the Keynesian case"—if you had asked them, in other words, what they thought would happen in the event of a fall in the price of commodities, if money wage-rates, as a result of union monopoly protected and insured by law, remained rigid or rising—they would have undoubtedly replied that sufficient markets could not be found for goods produced at such economically unjustified costs of production and that great and prolonged unemployment would result. Certainly this is what any modern subjective-value theorist would reply.

Ricardo's Statement

We might rest the case here. But such a hullabaloo has been raised about Keynes's alleged "refutation" of Say's law that it seems desirable to pursue the subject further. One writer9 has distinguished "the four essential meanings of Say's law, as developed by Say and, more fully, by [James] Mill and Ricardo." It may be profitable to take her formulation as a basis of discussion. The four meanings as she phrases them are:

(1) Supply creates its own demand; hence, aggregate overproduction or a "general glut" is impossible.

(2) Since goods exchange against goods, money is but a "veil" and plays no independent role.

(3) In the case of partial overproduction, which necessarily implies a balancing underproduction elsewhere, equilibrium is restored by competition, that is, by the price mechanism and the mobility of capital.

(4) Because aggregate demand and supply are necessarily equal, and because of the equilibrating mechanism, output can be increased indefinitely and the accumulation of capital proceed without limit.

I shall contend that of these four versions, 1, 3, and 4 are correct, properly interpreted and understood; that only version 2 is false as stated, and that even this is capable of being stated in a form that is correct.

Now Ricardo clearly stated the doctrine in versions 1, 3, and 4; and though he implied it also in version 2, his statement even of this can be interpreted in a sense that would be correct:

M. Say has…most satisfactorily shown that there is no amount of capital which may not be employed in a country, because a demand is only limited by production. No man produces but with a view to consume or sell, and he never sells but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person. It is not to be supposed that he should, for any length of time, be ill-informed of the commodities which he can most advantageously produce, to attain the object which he has in view, namely, the possession of other goods; and, therefore, it is not probable that he will continually produce a commodity for which there is no demand.

There cannot, then, be accumulated in a country any amount of capital which cannot be employed productively until wages rise so high in consequence of the rise of necessaries, and so little consequently remains for the profits of stock, that the motive for accumulation ceases. While the profits of stock are high, men will have a motive to accumulate. Whilst a man has any wished-for gratification unsupplied, he will have a demand for more commodities; and it will be an effectual demand while he has any new value to offer in exchange for them….

Productions are always bought by productions, or by services; money is only the medium by which the exchange is effected. Too much of a particular commodity may be produced, of which there may be such a glut in the market as not to repay the capital expended on it; but this cannot be the case with respect to all commodities.10

The italics above are my own, intended to bring out the fact that Ricardo by no means denied the possibility of gluts, but merely of their indefinite prolongation.11 In his Notes on Malthus, in fact, Ricardo wrote: "Mistakes may be made, and commodities not suited to the demand may be produced—of these there may be a glut; they may not sell at their usual price; but then this is owing to the mistake, and not to the want of demand for productions."12

The whole of Ricardo's comment on this phase of Malthus's thought will repay study. "I have been thus particular in examining this question [Say's law]," wrote Ricardo, "as it forms by far the most important topic of discussion in Mr. Malthus' work"13—i.e., Malthus's Principles of Political Economy.

It was Malthus who, in 1820, more than a century before Keynes, set himself to "refuting" Say's law. Ricardo's answer (most of which was not discovered or available until recent years) is devastating. If it had been earlier available in full, it would have buried Malthus's fallacious "refutation" forever. Even as it was, it prevented its exhumation until Keynes's time.

Ricardo's answer was, it is true, weak or incomplete at certain points. Thus he did not address himself to the problem of what happens in a crisis of confidence, when for a time even the commodities that are relatively underproduced may not sell at existing price levels, because consumers, even though they have the purchasing power and the desire to buy those commodities, do not trust existing prices and expect them to go still lower. But the basic truth of Say's law (and Say's law was only intended as a basic or ultimate truth) is not invalidated but merely concealed by a temporary abnormal situation of this kind. This situation is possible only in those periods when a substantial number of consumers and businessmen remain unconvinced that "bottom" has been reached in wages and prices, or feel that their job or solvency may still be in danger. And this is likely to happen precisely when wage-rates are artificially forced or held above the equilibrium level of marginal labor productivity.

Again, it is true that Ricardo declares at one point (already quoted) that "Money is only the medium by which the exchange is effected." If this is interpreted to mean, as Bernice Shoul interprets it, that money "plays no independent role," then of course it is not true. But if it is interpreted to mean: "If we, for the moment, abstract from money, we can see that in the ultimate analysis goods exchange against goods," then it is both true and methodologically valid.

Having recognized this truth, of course, we must in the solution of any dynamic problem put money back into our equation or "model" and recognize that in the modern world the exchange of goods is practically always through the medium of money, and that the interrelationship of goods and money-prices must be right for Say's law to be valid. But this is merely to return to the qualification of correct price relationships and equilibrium that has always been implicit in the statement of Say's law by the leading classical economists.

The Answer of Haberler

Before leaving this subject it may be important to address ourselves to some of the confusions about it, not of Keynes himself, but of the "post-Keynesians." Prof. Gottfried Haberler has been by no means uncritical of Keynes,14 but his discussion of Keynes's discussion of Say's law is peculiar. He presents part of the quotation I have already presented from Ricardo (on pp. 37–38) but does so in truncated form, and ends with the sentence: "Money is only the medium by which the exchange is effected." He then declares: "The meaning of this original formulation of this law seems to me quite clear: It states that income received is always spent on consumption or investment; in other words, money is never hoarded."15

Now the meaning of Ricardo's formulation of Say's law is already quite clear, particularly when it is given in full. It does not require any exegesis by Haberler or anyone else, and certainly no paraphrase that quite changes its meaning. Not only did Ricardo never explicitly assert the proposition that Haberler attributes to him; there is every reason to suppose that he would have repudiated it. At several points he actually describes what we today might call money hoarding and its effects. At many points in his Notes on Malthus he writes, regarding some view that Malthus attributes to him: "Where did I ever say this?"16 We may be confident that he would have written the same regarding this Haberler "interpretation."

Our conclusion, thus [Haberler goes on] is that there is no place and no need for Say's Law in modern economic theory and that it has been completely abandoned by neo-classical economists in their actual theoretical and practical work on money and the business cycle….Summing up, we may say that there was no need for Keynes to rid neo-classical economics of Say's Law in the original, straightforward sense, for it had been completely abandoned long ago.17

The short answer to this is that there is still need and place to assert Say's law whenever anybody is foolish enough to deny it. It is itself, to repeat, essentially a negative rather than a positive proposition. It is essentially a rejection of a fallacy. It states that a general overproduction of all commodities is not possible. And that is all, basically, that it is intended to assert.

Haberler is right insofar as he denies the belief of Keynes (and such disciples as Sweezy) that Say's law "still underlies the whole classical theory, which would collapse without it" (General Theory, p. 19). It is true that Say's law is not explicitly needed in the solution of specific economic problems if its truth is tacitly taken for granted. Mathematicians seldom stop to assert that two and two do not make five. They do not explicitly build elaborate solutions of complicated problems upon this negative truth. But when someone asserts that two and two make five, or that an existing depression is the result of a general overproduction of everything, it is necessary to remind him of the error.

There is still another line of attack on Say's law, which Haberler among others seems to adopt, and this is to assert that in the sense in which Say's law is true it is "mere tautology." If it is tautological, it is so in the same sense in which basic logical and mathematical propositions are tautological: "Things that are equal to the same thing are equal to each other." One does not need to say this as long as one does not forget it.

To sum up, Keynes's "refutation" of Say's law, even if it had been successful, would not have been original: it does not go an inch beyond Malthus's attempted refutation more than a century before him. Keynes "refuted" Say's law only in a sense in which no important economist ever held it.

To Save Is to Spend

Risking the accusation of beating a dead horse, I should like to address myself to one more effort by Keynes to disprove Say's law, or what he calls "a corollary of the same doctrine" (p. 19). "It has been supposed," he writes, "that any individual act of abstaining from consumption necessarily leads to, and amounts to the same thing as, causing the labor and commodities thus released from supplying consumption to be invested in the production of capital wealth" (p. 19). And he quotes the following passage from Alfred Marshall's Pure Theory of Domestic Values (p. 34) in illustration:

The whole of a man's income is expended in the purchase of services and of commodities. It is indeed commonly said that a man spends some portion of his income and saves another. But it is a familiar economic axiom that a man purchases labor and commodities with that portion of his income which he saves just as much as he does with that he is said to spend. He is said to spend when he seeks to obtain present enjoyment from the services and commodities which he purchases. He is said to save when he causes the labor and the commodities which he purchases to be devoted to the production of wealth from which he expects to derive the means of enjoyment in the future.

This doctrine, of course, goes much further back than Marshall. Keynes could have quoted his bête noir, Ricardo, to the same effect. "Mr. Malthus," wrote Ricardo, "never appears to remember that to save is to spend, as surely as what he exclusively calls spending."18 Ricardo went much further than this, and in answering Malthus answered one of Keynes's chief contentions in advance: "I deny that the wants of consumers generally are diminished by parsimony—they are transferred with the power to consume to another set of consumers."19

And on still another occasion Ricardo wrote directly to Malthus:

We agree too that effectual demand consists of two elements, the power and the will to purchase; but I think the will is very seldom wanting where the power exists, for the desire of accumulation [i.e., saving] will occasion demand just as effectually as a desire to consume; it will only change the objects on which the demand will exercise itself.20

For the present, however, it may be sufficient merely to note Keynes's contention on this point rather than to try to analyze it in full. There will be plenty of opportunity for that later. As we shall see, Keynes himself alternates constantly between two mutually contradictory contentions: (1) that saving and investment are "necessarily equal," and "merely different aspects of the same thing" (p. 74), and (2) that saving and investment are "two essentially different activities" without even a "nexus" (p. 21), so that saving not only can exceed investment but chronically tends to do so. The second is the view which he chooses to support at this point. We shall have occasion to analyze both views later. For the present it is sufficient merely to note the presence of this deep-seated contradiction in Keynes's thought.21

[This article is excerpted from Failure of the New Economics (1959).]

  • 1. Economics and the Public Welfare (New York: Van Nostrand, 1949), pp. 390–93.
  • 2. Planning for Freedom (South Holland, Ill.: Libertarian Press, 1952), pp. 64–71.
  • 3. Paul M. Sweezy in The New Economics, ed. by Seymour E. Harris (New York: Alfred Knopf, 1947), p. 105.
  • 4. Op. cit., pp. 64–65.
  • 5. Vol. I, Book IV, Chap. I (Edwin Cannon edition, 1904), p. 404 ff.
  • 6. Economics and the Public Welfare, p. 390.
  • 7. Principles of Political Economy, Book III, Chap. xiv. Sect. 2.
  • 8. Op. cit., p. 392.
  • 9. Bernice Shoul, "Karl Marx and Say's Law," The Quarterly Journal of Economics, Nov., 1957, p. 615.
  • 10. David Ricardo, The Principles of Political Economy and Taxation (Everyman ed., New York), pp. 193–94.
  • 11. The phrase "effectual demand," however, was italicized merely to bring out here the fact that Keynes did not invent this phrase. Ricardo even uses the phrase "effective demand" in his Notes on Malthus (Sraffa edition, Cambridge University Press, p. 234). The term "effectual demand" was actually introduced by Adam Smith in The Wealth of Nations (Book I, Chap. 7). John Stuart Mill explains. "Writers have…defined [demand as] the wish to possess, combined with the power of purchasing. To distinguish demand in this technical sense, from the demand which is synonymous with desire, they call the former effectual demand." Principles of Political Economy, 1848, Book III, Chap. II, § 3.
  • 12. Sraffa edition, Cambridge University Press, p. 305.
  • 13. Op. cit., pp. 306–07.
  • 14. Haberler's comments on the General Theory in Chap. 8 of the third edition of his Prosperity and Depression (Geneva: League of Nations, 1941) contain many penetrating observations.
  • 15. The New Economics, ed. by Seymour E. Harris, p. 174.
  • 16. See, e.g., Sraffa edition, p. 424.
  • 17. Op. cit., pp. 175–76.
  • 18. David Ricardo, Notes on Malthus (Sraffa edition), p. 449.
  • 19. Ibid., p. 309.
  • 20. Letters of Ricardo to Malthus, ed. by Bonar (1887). Letter of Sept. 16, 1814, p. 43.
  • 21. Supplementing the present chapter, the reader is referred to the remarkable statement and defense of Say's law by John Stuart Mill, quoted at length on pp. 364–71.
Categories: Current Affairs

Identity Politics Is Hurting Young People—of All Colors

Fri, 10/07/2020 - 18:00

Pointing to a recent Twitter thread from a progressive detailing his white male cisness, Bob shows how narrow the focus is on only particular "privileges" and not others. More generally, the effort to demonize white men is causing young people great harm, whether white or otherwise. The movement is based on power politics and relies on economic ignorance.

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Categories: Current Affairs

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