Blogroll: Mises Institute
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It is widely believed that resources that are utilized in normal times to promote economic prosperity become underutilized during recessions. Some experts hold that what is required are policies which will increase the availability of credit. On this Ludwig von Mises wrote in Human Action,
Here, they say, are plants and farms whose capacity to produce is either not used at all or not to its full extent. Here are piles of unsalable commodities and hosts of unemployed workers. But here are also masses of people who would be lucky if they only could satisfy their wants more amply. All that is lacking is credit. Additional credit would enable the entrepreneurs to resume or to expand production. The unemployed would find jobs again and could buy the products. This reasoning seems plausible. Nonetheless it is utterly wrong.
It makes sense to suggest that what is lacking to absorb idle resources is the scarcity of credit. One should however emphasize that the credit that is lacking is productive credit. Briefly, productive credit emerges when a wealth generator lends some of his real wealth to another wealth generator. By giving up the use of the loaned real wealth at present, the lender is compensated in terms of interest that the borrower agrees to pay.
As a rule, the greater the expansion in real wealth, the lower the interest rate that the lender is likely to agree to accept (i.e., his time preference is likely to decline).
Observe that the interest rate is just an indicator, as it were — it is not responsible for the expansion in real wealth. Any policy that tampers with interest rates makes it much harder for wealth generators to assess the true state of the productive credit. This in turn leads to the misallocation of productive credit and to the weakening in the wealth generation process.
As a result of distorted interest rates, an overproduction of some goods and the under production of other goods emerges.Loose Monetary Policy Appears To Work Because of the Expanding Pool of Real Wealth
As long as the pool of real wealth is expanding, easy monetary policy will appear to “work.” Once, however, the pool becomes stagnant or starts declining, the “music stops” and no amount of central bank monetary pumping is going to “work.”
On the contrary, the more aggressive the central bank’s stance is in attempting to revive the economy the worse things are likely to get. The reason being because easy monetary policy strengthens the exchange of nothing for something thereby weakening the process of real wealth generation — the heart of economic growth.
One could argue that, irrespective of the reasons for the emergence of idle resources, the role of the central bank is to pursue policies that will make it possible for a greater use of these resources.
Loose monetary policy cannot replace real savings that are required to employ idle resources. Note that the central bank is not a real wealth generator, and hence does not have real savings to support real economic growth. (GDP growth has nothing to do with a genuine economic growth. Individuals in the various stages of production require goods and services to maintain their life and wellbeing, not pieces of paper we label as money).Idle Resources Emerge from the Previous Boom
What those commentators who advocate easy monetary policies to absorb idle resources have overlooked is that as a rule, idle resources emerge on account of boom-bust policies of the central bank. As a result of the previous easy monetary stance, various non-productive or “bubble” activities have emerged. These activities depend on easy monetary policy for their existence, which diverts real wealth to them from wealth generators.Once the the bust takes hold, bubbles burst and more resources become idle.
There is only one sustainable solution to this. People would have to cut back on consumption and production which were not truly wealth-generating but were bubbles created out of easy-money policies. It is quite possible that certain types of consumption and production would have to be abolished all together. This also implies that individuals that are employed in activities that generate products which are on the lowest priority list of consumers would have to adjust their conduct. This could be done by accepting lower salaries or by trying to be employed in activities that generate products, which are on the highest priority list of consumers. For this, they would have to alter their skills.
In the meantime, there will be many idle resources.
According to Mises,
Out of the collapse of the boom there is only one way back to a state of affairs in which progressive accumulation of capital safeguards a steady improvement of material well-being: new saving must accumulate the capital goods needed for a harmonious equipment of all branches of production with the capital required. One must provide the capital goods lacking in those branches which were unduly neglected in the boom. Wage rates must drop; people must restrict their consumption temporarily until the capital wasted by malinvestment is restored. Those who dislike these hardships of the readjustment period must abstain in time from credit expansion.
Furthermore says Mises,
If commodities cannot be sold and workers cannot find jobs, the reason can only be that the prices and wages asked are too high. He who wants to sell his inventories or his capacity to work must reduce his demand until he finds a buyer. Such is the law of the market. Such is the device by means of which the market directs every individual's activities into those lines in which they can best contribute to the satisfaction of the wants of the consumers.
Obviously, printing more money cannot fix the issue of idle resources. What is required is time to re-build the pool of real wealth, which was damaged by the previous easy monetary policies of the central bank. The reinvigorated pool of real wealth will make it possible to strengthen the pool of real savings, which in turn will make it possible to employ various idle resources.
The most important decision that authorities could make is to acknowledge the damage that the printing presses have caused and remove themselves from managing the so-called economy.
Not every square inch of the planet earth is suitable for a housing development. Flood plains are not great places to build homes. A grove of trees adjacent to a tinder-dry national forest is not ideal for a dream home. And California's chaparral ecosystems are risky places for neighborhoods.
This is nothing new. While people many Americans who live back East may imagine that something must be deeply wrong when they hear about fires out West, the fact is things are different in North America west of the hundredth meridian. The West is more prone to extreme temperatures, hundred-year droughts, and fires in the wilderness. Many of these ecosystems evolved with this fire risk.
Efforts to blame them primarily on climate change ignore the long standing reality. The Sacramento Bee notes, for example:
It’s also not enough to blame the growing devastation of recent wildfires solely on climate change, researchers said. While drier, warmer conditions have lengthened the fire season and likely increased the severity of the blazes, wildfires are only destroying more homes today than decades before because of rapid growth in rural areas.
It's not that fires are more devastating in the natural sense. The problem is that human beings insist on putting their property in places where fires have long destroyed the landscape, over and over again.
The Bee continues:
[T]he fires aren’t getting closer to us — we’re getting closer to the fires. “We’re seeing wildfires that have always been a part of the landscape that are now interacting more and more with us..."
Strader studied wildfire history in the western United States going back three decades, then mapped population growth in areas where fire activity had ranged from medium to very high. His research determined there were 600,000 homes in fire prone areas in the West in 1940. Today, that number is around 7 million.
So, why do people keep building homes in these places? Part of it is natural populations growth, of course. But the manner and rapidity with which this development expands out into the fringes of metro areas is also partly due to government policy and infrastructure.
In an unhampered market, it would be very expensive to extend a new neighborhood out into ever-further-out regions near metro areas. In order to reach these places, housing developers would need to find a way to finance both the new housing construction and the roads that give access to them. Certainly, developers often provide part of the funding through development fees demanded by governments. But these roads are often also subsidized by state and local governments, especially in the form of ongoing maintenance. Once a road to a new semi-rural community is built, governments will often maintain it, while spreading the cost across all the jurisdiction's taxpayers.
This system of subsidy allows more rapid and more dispersed development. Unsubsidized roads would tend to force more close-in and more dense development.
The federal development also subsidizes the construction of larger and more sprawling residential property through the FHA insurance programs and government-sponsored enterprises like Fannie Mae. By purchasing home loans on the secondary market, the GSEs push more liquidity into the home loan market, making loans cheaper, and pushing up demand for larger, sprawling developments.
Many conservatives often speak of density in residential and commercial development as if it were some kind of left-wing conspiracy. It is assumed that few people who opt for density were there not left-wing urban planners to force it on everyone.
But the reality is that in an unhampered market, density levels would be higher than they are now, because sprawl would be (all else remaining equal) much more costly to consumers than is now the case.
Naturally, many left-wing advocates favor changing California's housing development patterns in light of the fire risk. But they can only point toward more restrictive government regulations. The Los Angeles Times editorial board, for example, complains that "Land-use decisions are made by local elected officials and they’ve proven themselves unwilling to say no to dangerous sprawl development ..."
But government prohibitions simply aren't necessary. If people insist on building and selling homes in fire-prone areas, let them be the ones to cover all the costs. This includes the cost of fire mitigation and rebuilding after fire. This in itself would limit development in these areas.
And yet, while California pundits are complaining that policymakers aren't doing enough, California politicians are actively taking steps to keep the market from correcting the excessive building in fire-prone areas.
This week, California regulators prohibited insurance companies from dropping the homeowners' insurance policies of homeowners in fire prone areas:
The state said its moratorium applies to about 800,000 homes, and more areas are expected to be added.
A state law passed last year allows the California Department of Insurance to require insurers to renew residential policies for one year in ZIP Codes that have been affected by declared wildfire disasters.
Previously, insurers had to renew policies for homeowners who suffered a total loss. The current law extends to all policyholders in an affected area, regardless of whether they experienced a loss.
Not surprisingly, many homeowners in fire-prone areas of the state are having problems finding fire insurance for their homes. And they often pay handsomely when they do find it. That's too bad for the owners this fact doesn't justify handing down state mandates that insurance companies continue to cover people who have taken on unacceptably high risk.
By stepping in to force insurance companies to cover these homeowners, California politicians are doing two things:
They're continuing the cycle of encouraging homebuyers to buy homes in areas likely to fall victim to wildfires. At the same time, regulators are increasing the costs incurred by insurance companies, and this will likely have the effect of driving up the price of fire insurance for homeowners who more prudently declined to purchase a house in fire-prone areas.1
At the macro level, the end result will be something akin to what we've seen in flood-prone areas in the United States. Thanks to federal regulations and subsidies, many property owners can avail themselves of flood insurance priced well below what would be available in an unhampered market. Legislation such as the National Flood Insurance Act of 1968 means builders and homeowners have been encouraged to place property where they're likely to be flooded over and over again.
We're now seeing a similar type of moral hazard at work in California.
In a more sane political environment, however, those who insist on living in the way of wildfires would have to assume the risk of doing so, rather than demanding politicians force the cost on insurance companies and taxpayers.
- 1. Fire insurance is often more expensive in rural and semi-rural areas not just as a function of fire risk. These areas often lack water infrastructure other than wells, which means no fire hydrants. Water for fire suppression can only be used if transported by truck to the site.
The Austrian business cycle theory offers a sound explanation of what happens with the economy if and when the central banks, in close cooperation with commercial banks, create new money balances through credit expansion. Said credit expansion causes the market interest rate to drop below its "natural level," tempting people to save less and consume more. Credit expansion also drives firms to increase investment spending. The economy enters into a boom phase.
However, the boom is unsustainable. After the effect of the injection of new money balances has worked itself through the economy, consumers and entrepreneurs realize that the economic expansion has been a one-off affair. They return to their previously preferred savings-consumption-investment affinity: once again, they save more, consume, and invest less. This manifests itself in a rising market interest rate and the boom subsequently turns into bust.Credit Market Distortion
The market interest rate plays a crucial role in the boom and bust cycle. As it is manipulated downwards by the central bank, a boom sets off, and as the market interest returns to its "natural level," the boom turns into bust. This explains why central banks have been increasingly trying to gain full control over the market interest rate in recent years: for he who controls the market interest rate controls the boom and bust cycle.
The major central banks around the world have effectively taken over the credit markets in an attempt to prevent the current boom from turning into yet another bust. On the one hand, monetary authorities fix the short-term market interest rate in the interbank funding market. By doing so, they also exert a rather strong influence on credit rates across all maturities.
On the other hand, central banks influence long-term interest rates directly: They purchase long-term bonds, thereby determining their price and yield. The credit market ‘government securities’ can be expected to already be under full control of monetary policymakers; and it is just a technicality for any central bank to extend its purchases if needed to bank and corporate debentures and mortgage debt.Keeping the Boom Going
If and when central banks succeed in keeping market interest rates at very low levels, the "correction mechanism" — namely a rise in market interest rates — is put to rest, and the boom can be kept going, while the bust is postponed. Basically, all major central banks around the world have taken recourse to policies controlling market interest rates, and quite effectively so as the economic expansion — fueled by overconsumption and malinvestment — in the last decade testifies.
The question is, however, whether the boom can last indefinitely, whether the economies can flourish with chronically artificially suppressed interest rates? This is a rather complicated question, deserving of an elaborate answer. To start with, the boom can be kept going as long as market interest rates remain suppressed below the economy’s "natural interest rate."
If however, the market interest rate hits zero, things take a nasty turn, as people would stop saving and investing. Why save and invest, why take any risks that do not yield a positive return? In fact, with the market interest rate hitting zero, capital consumption sets in, the division of labor collapses. A nightmare scenario: If the market interest rate disappears, we will fall back into a primitive hand-to-month economy.Causing Price Bubbles
Against this backdrop, we may say the following: As long as there is still room for pushing the market interest rate down further, the chances are reasonably good that the boom continues, and that the bust will be adjourned into the future. As per the charts below, current market interest rates in the US have not reached rock bottom yet. Corporate and mortgage credit costs in particular still have some way to go before hitting zero.
Meanwhile, the forced depression of market interest rates drives up asset prices such as, for instance, stocks for at least two reasons. First, expected future profits are discounted at a lower interest rate, thereby increasing their present value and thus market price. Second, lower interest rates reduce firms’ cost of debt, translating into higher profits — which also contributes to higher stock prices in the market place.
It should therefore not come as a surprise that the decline in market interest rates in recent years has indeed been accompanied by buoyant stock prices — as illustrated in the chart above. Just to point out one thing again: The decline in market interest rates is only one factor among many others which explain why stock prices have gone up in recent years. But it is a significant factor, and it contributes to the build-up of a price bubble.Wiping Out Investment Returns
As long as the boom keeps going, people rejoice — especially so when asset returns remain buoyant — and they do not question the underlying forces driving the "make-believe world of prosperity." However, a monetary policy of ever-lower interest rates can only go so far. For if central banks push their key interest rate and government bond yields to zero, they basically drag down all other investment returns with them.
This is because investors, in a desperate search for yields, would bid up the prices for assets such as, say, stocks, land, and real estate. As the purchase price of these assets rises relative to their "intrinsic" value, future investment returns diminish and in the extreme case converge towards the central bank’s zero interest rate.1 At least, in theory, a central bank nailing down its key interest rate at zero would also drive investment returns of existing assets towards zero.
However, the division of labor would already start unraveling at a market interest rate of slightly higher than zero. The reason is that acting man — be it as a consumer or an entrepreneur — has a time preference that is always and everywhere positive, and so is its manifestation, the originary interest rate (or "natural interest rate"). The originary interest rate is always and everywhere positive, it cannot fall to zero, let alone become negative.A Helping Hand from Above?
Since central banks have established a rather firm grip on market interest rates, the chances are that the ongoing boom will continue — and it may well continue for much longer than most market observers expect at the current juncture. However, there should be little doubt that the longer the boom keeps going, the bigger the distortions in the economic and financial market system will become.
This, in turn, suggests that the severity of the crisis that must be expected to unfold at some point in the future — at the latest when all market interest rates have been pushed onto the zero line and investment returns have become negligible — is driven to ever-higher levels. This is something we do know from the Austrian Business Cycle Theory. But it is certainly not enough to come up with a reliable forecast.
It goes beyond the science of economics to come up with quantitative forecasts. What economics can do, however, is pointing out and making intelligible the conditions under which today’s economic and financial systems work; in particular that market interest rate manipulation through central banks causes damages on a grand scale and will end badly — something that may only be prevented by a helping hand from above.
- 1. Value is subjective, but by "intrinsic value," I mean value based on demand that would have existed in the absence of extreme interventions by central banks.
[This talk was delivered 23 November at the Palais Coburg in Vienna, Austria, at an event commemorating the 70th anniversary of the publication of Mises's Human Action.]
Nowadays, it’s not uncommon for people as young as 20 or 30 to feel they have to share their memories with the world. Even at an advanced age, I prefer not to talk publicly about personal things and experiences in my life, but to reserve this for private conversations.
But on the occasion of this event I would like to tell you something about my intellectual development: about my development from a child of his time, who through his encounter with Ludwig von Mises and the Austrian School of Economics became an intellectual exotic – some would say a dangerous madman – apparently from a different time. And to this end a little biographical background is appropriate.
I was born in 1949 in post-war Germany, the same year that Ludwig von Mises' magnum opus Human Action was published, which I was to discover almost 30 years later, and which had a decisive influence on my intellectual development, and which today, on this occasion, is to be presented for the first time translated into German.
My parents were both refugees from the area of the former GDR, who after the war had ended up in a small village in Lower Saxony, West Germany. My father was a self-employed master tailor – among many other things, a common feature I have with Roland Baader, whose father was also a master tailor – who after having been a prisoner of war did not return to his Soviet-occupied hometown. The family of my mother, who was later to become a primary school teacher, had been expropriated by the Soviets in 1946 as so-called east-Elbian Junkers and had been driven out of their homes and farms, carrying nothing more than their backpacks. Until our move to the nearby district town, seven years after my birth, we lived in great poverty, with an outhouse outside the tiny workshop apartment. But as a boy I didn't really notice that. On the contrary, I remember my first years as a little village boy as a very happy time. Since the early fifties my family, thanks to the enormous hard work of my parents and their life-long practiced resolute and disciplined thriftiness, experienced an economic upswing year after year.
The local edition of the Hannoversche Allgemeine was read regularly in my parents' house and every Monday Der Spiegel magazine fluttered into the house. There were also a number of books, classical literature like that of Lessing, Goethe, Schiller, Kleist and Fontane, and modern literature like that of Thomas and Heinrich Mann, Max Frisch, Böll and Grass. There were also a few works on German, European, and ancient history, as well as various reference works and atlases. My parents were eager readers themselves and always encouraged me to read, whereby history always fascinated me more than literature (and this has remained so to this day). We did not have a television until I was 16 or 17 years old. But my parents were not intellectuals who could have guided me in my reading, disciplined me or sharpened my judgment. And I would pass the same judgment on my grammar school teachers, almost all of whom came from the war and pre-war generation. The history lessons at school strengthened my interest in studying history, the biology lessons drew my attention to Konrad Lorenz and ethology, and the religious instruction given by a Protestant theologian awakened my interest in philosophy for the first time.
It was however not least this burgeoning interest in philosophical questions that also led to my increasing intellectual dissatisfaction and disorientation. Many of the answers and explanations I received for my questions seemed arbitrary, more opinion than knowledge, contradictory or inconsistent. Where did these contradictions and disputes come from, on the basis of which criteria could they possibly be resolved and decided, or was there perhaps no clear answer to certain questions? Above all, however, I missed something like an intellectual systematization, an overall view of all things and connections, and it was especially this need and the search for a solution that made me – initially and for some years – a typical child of my time: the time of student rebellion, which began in the late 1960s, during my final two school years, and reached its peak in 1968, the year in which I began my university studies, and whose spiritual products were later to be called the 68 generation.
Inspired by the leading figures of the student rebellion, I first began to study Marx and then the theorists of the new left, the so-called cultural Marxists of the Frankfurt School: Marcuse, Fromm, Horkheimer, Adorno, Habermas, etc., assuming I would find an answer to my questions from them. I became (temporarily) a socialist, albeit not a follower of the ‘real existing socialism’ as practiced in the former GDR, which I knew from my own experience from regular visits of relatives and whose miserable, pitiful economy of scarcity and its proletarian leaders disgusted me. Instead, I became a follower of, as it was called, "humane democratic socialism," led by a supposedly wise elite of philosophers. And so it came to pass that Jürgen Habermas, at that time the rising young star of the new left and today the high priest of social democratic statism and politically correct virtue-signalling, became my most important first philosophy teacher and dissertation supervisor. In 1974, the year of my PhD, my socialist phase was of course already over, and my dissertation on an epistemological topic – a critique of empiricism – had nothing to do with socialism or ‘the "left."
My short leftist phase was followed by an equally short ‘moderate’ phase. Instead of the Frankfurt School, my intellectual curiosity was now increasingly focused on the Viennese School. More specifically: to the so-called Viennese circle around Moritz Schlick, and even more specifically to Karl Popper's philosophy, which is located at the edge of this circle of logical positivists. The core of Popper's philosophy, which to this day is probably the most widespread and influential worldview, especially in the non-academic field, is the following double thesis: All statements about reality are of a hypothetical nature, i.e. they can be refuted or falsified by experience. Conversely, all non-hypothetical, a priori or apodictic statements, i.e. statements which in principle are not exposed to falsification, are statements without reference to reality.
I was by no means prepared to accept the universality of this thesis. (By the way: Is this a hypothetical or an apodictic statement?) Even while working on my doctoral dissertation, I came across Paul Lorenzen and the so-called Erlangen School, which made the validity of the Popper thesis appear highly doubtful, especially in the field of natural sciences. Isn't it necessary to first collect and measure data and carry out controlled experiments in order to test a hypothesis regarding causal connections? Doesn't the knowledge regarding the construction of measuring instruments and the performance of controlled experiments come methodically before the hypothesis test? And doesn't the falsifiability of hypotheses owe itself to the non-falsifiability of the construction of measuring instruments and the methodology of experimenting?
Today I consider the importance of these questions to be greater than I did then, but this is not the place or the opportunity to pursue this subject (or any higher philosophy at all). Then (as now), my main interest was in the social sciences, and as far as that is concerned, I was to a large extent initially willing to follow Popper. Like Popper, I thought that social science statements were generally hypothetical, in principle falsifiable ‘if then’ statements, and that practical social research must be, as Popper put it, “piecemeal social engineering.” One must always test one's hypotheses before either proving them for the time being (but never definitively) or falsifying and revising them. Non-falsifiable statements, on the other hand, especially those that relate to reality, i.e. about real objects, do not exist in the social sciences.
Today I consider this thesis of Popper’s, apparently so tolerant and open to experience, not only to be wrong, but I also consider it to be downright disastrous or even dangerous.
First, a small example from everyday experience to demonstrate their error. No one will want to expose the statement “a person cannot be in two different places at the same time” to falsification. Instead, we accept it as an "apodictic" or "a priori" true statement. And yet it undoubtedly has a reference to reality, as every fan of crime thrillers knows. For if Mr Meier was stabbed to death in Vienna on January 1, 2019 and Mr Müller was in New York at that time, then Mr Müller cannot be considered a murderer in this case: not only hypothetically not, but clearly and categorically not. This statement forms the basis of the so-called alibi principle, which repeatedly provides us with infallible help in everyday life.
My complete break with Popperism came about while working on my habilitation thesis on the foundations of sociology and economics. On the one hand, it became clear to me that when explaining human action one cannot in principle do without the categories of choice, purpose or goal, means, success or failure, whereas natural events and natural processes "are as they are" and must be explained causally, without any reference to choice, goal, means, success or failure. On the other hand, less obvious and of incomparably far greater significance, it became clear to me that the sciences of human action contain a segment: the economy (in contrast to history and sociology), in which one can very well make apodictic statements and judgments, in such a way that one does not have to test something in order to know how it ends, but where one knows the result from the outset, ‘a priori,’ and is able to predict it with certainty.
While studying economics I came across statements such as the quantity theory of money, according to which an increase in the money supply leads to a reduction in purchasing power per monetary unit. For me it was obvious that this statement is a logically true statement, which cannot be falsified by any ‘empirical data,’ and nevertheless a statement with a clear reference to reality, about real things. But wherever I looked in contemporary literature, whether on the left by Paul Samuelson or on the right by Milton Friedman, the entire guild of economists was, to put it bluntly, in love with the Viennese philosophy of logical positivism or Popperism, according to which such apodictically true real statements are impossible or scientifically inadmissible. For them, this statement was instead either a mere tautology, a definition of words made up of other words (without any reference to reality), or a hypothesis to be tested that could be empirically falsified.
However, the intellectual tension and irritation which initially arose from this apparent discrepancy quickly dissipated to my full satisfaction. On winding paths I had finally come across Mises's Human Action in my studies – in the library of the University of Michigan. Mises not only confirmed my judgment about the logical character of central economic statements, he also presented a whole system of apodictic or a priori statements (his so-called praxeology) and explained the errors and disastrous consequences of the positivist philosophy of Viennese provenance, the central protagonists of which he, as their contemporary, was intimately familiar with.
The discovery of Mises and, immediately afterwards, that of his American students, in particular of Murray Rothbard, brought me, on the one hand, a great intellectual relief – here was finally the long-awaited integrated, coherent overview of all things, an architectonic of human knowledge! – on the other hand, however, it also brought with it much anger and disappointment and led to an increasing alienation from the academic-university business and prevailing public opinion.
This ambivalent development – increasing intellectual certainty on the one hand coupled with increased social alienation on the other – can be illustrated and explained on the basis of a small list of examples of apodictic or quasi-apodictic statements, as brought to light by the Mises-Rothbard School – the so-called Austro-Libertarians. For each of the following examples, a more detailed explanation exists as to how far the statement in question is not a falsifiable statement in Popper's sense, but I simply trust here that this circumstance is always immediately, intuitively understandable, and that in any case the concentrated power of the various examples is sufficient to recognize that one by no means has to try and tolerate everything in order to know how it ends (and also how it definitely does not end).
Thus, for example, the previously mentioned quantity theory leads to the statement that it is impossible to increase social prosperity by increasing the money supply. How else should one explain that despite the existing possibility of any amount of increase in paper money, poverty continues to exist in some places, unchanged. An increase in the amount of money can only ever lead to a redistribution of a given stock of welfare goods. It favors the first and early recipients of the new, additional money at the expense of the last and late users.
Let me continue with a whole battery of statements of similar, i.e. apodictic or quasi-apodictic, quality.
Human action is the conscious pursuit with scarce resources of goals regarded as valuable.
No one can deliberately not act.
Every action strives to increase the subjective well-being of the actor.
A larger quantity of a good is always preferred to a smaller quantity of the same good.
The earlier attainment of a given goal by given means is preferred to its later attainment.
Production must always precede consumption.
Only those who save – spend less than they earn – can increase their prosperity permanently (unless they steal).
What is consumed today cannot be consumed again tomorrow.
Price fixings above the market price, such as minimum wages, lead to unsalable surpluses, i.e. to forced unemployment.
Price-fixing below the market price, such as rent ceilings, leads to shortages and a persistent shortage of rented housing.
Without private ownership of production factors – in classical socialism – there can be no factor prices and without factor prices an economic calculation is impossible.
Taxes – compulsory charges – are a burden on income producers and/or property owners and reduce production and capital formation.
No form of taxation is compatible with the principle of equality before the law, because any taxation involves the creation of two unequal classes of persons with conflicting interests: those of the (net) taxpayer on the one hand, for whom taxes are a burden one seeks to reduce, and on the other hand the class of recipients or rather consumers of (net) tax, for whom taxes qua source of income are a delight that one seeks instead to increase as much as possible.
Democracy – majority rule – is incompatible with private property – individual property and self-determination – and leads to creeping socialism, i.e. to ongoing redistribution and the progressive erosion of all private property rights.
Whatever is subsidized by taxes, such as lounging about or doing things for which there is no profitable customer demand, is further encouraged and strengthened by the subsidy.
Whoever is not personally liable for the repayment and redemption of so-called public debts incurred by him or with his participation, as is the case today with all politicians and parliamentarians, will frivolously and without hesitation take up debts for his own present advantage and to the detriment of an impersonal future public.
Whoever controls a territorial money printing monopoly enforced by state power, like all so-called central banks, will also make use of this privilege and, even if an increase in the amount of money can never increase social prosperity as a whole, but can only redistribute it, will still print more and more new money for his own benefit and that of his direct affiliates and closest business partners.
And finally, there’s this: Whoever or whichever institution has a territorial monopoly on the use of force and jurisdiction, as actually claimed by all states, will also make use of it. I.e. he will not only exert violence himself, but he will also declare his exertion of violence to be lawful by virtue of his ultimate legal representative. And in all conflicts and disputes of a private person with representatives of this institution (the state) no independent, neutral third party decides on good and evil, or about the guilt and innocence of the opponents, but always and invariably an employee, i.e. a dependent representative, one of the two conflict parties (the state) itself, with a corresponding, reliably predictable partisan, "state-supporting" result.
The list of such apodictic or quasi-apodictic statements could easily be continued, but it should be long enough to see what kind of consequences arise from this ensemble of elementary insights of social science.
Obviously, these insights are in blatant conflict with social reality. In this reality there are monopolies of violence, monopolies of money printing, taxes, taxpayers and tax consumers, tax-subsidized idleness and uselessness, majority rule (democracy), public debt, politicians and parliamentarians exempt from liability, capital consumption (consumption without saving), redistribution of property, minimum wages and maximum rents. And what's more, all these acts and institutions are not subject to constant criticism. On the contrary, they are, almost monotonously and from all quarters, presented and praised as self-evident, correct, good and wise.
The consequence of these insights and their comparison with social reality should be clear. To put it colloquially: one is – and I myself was – at first simply flabbergasted. It became increasingly clear to me what blatant madness prevails in the present world. And I was flabbergasted at the time and effort it had taken me to arrive at this in fact obvious insight.
And there were obviously two reasons for this insanity. One was simply human stupidity. Although the ends one supposedly pursued might have been well-meaning, one was mistaken in the choice of means. It was stupid, for example, to try to fight unemployment with minimum wages or housing shortages with rent caps. It was stupid to expect more general prosperity from an increase in the money supply or more economic growth from an expansion of credit (without increased savings). It was stupid to introduce democracy as a means to protect property. And it was also stupid to expect a reduction in violence or even justice, i.e. impartial conflict resolution, from the establishment of a monopolist on the use of force and the judiciary (i.e. a state); because taxes, i.e. the threat and use of force, and partisanship in conflict resolution are essential characteristics of any state.
But it was by no means (and unfortunately) only stupidity or ignorance that was responsible for the rule of madness. There was also deliberate deception, lies and fraud. There were also liars and deceivers who knew all this. They knew that the aforementioned measures and institutions could not, and could never, lead to the benevolent results hoped for by their simpler contemporaries, who nevertheless or precisely because of that propagated and supported them vigorously, because they themselves and their friends and followers could profit from them – even if only at the expense and to the chagrin of others. And, of course, it became immediately clear to me who the people and circles, who were these crooks and their minions, were.
And another thing I understood through my studies of Mises and his school of thought: the reason for the popularity and the affectionate promotion of Popperism especially in these circles. For it is not only this philosophy that allows any insane assertion to be considered hypothetically possible and any nonsense to be tried out. On the contrary, it also allows, quite contrary to its alleged receptivity and openness to experience, to protect any nonsense with cheap excuses against refutation. If minimum wages do not reduce unemployment or poverty, it is because they are not high enough. If money or credit expansion does not lead to increased prosperity, it is because it is too small. If socialism leads to impoverishment instead of prosperity, it is only because it was executed by the wrong people, or because climate change or some other ‘intervening variable’ has intervened, etc., etc.
However, as already indicated, all this knowledge and understanding and the inner peace, satisfaction and yes, joy, which one, which I, experienced through my encounter with Mises's work, also had its price. For once you have understood your Mises and learned to see the world with Austrian eyes, you will quickly notice, at least if you admit to it, that in many respects you are quite lonely and isolated.
Not only was one faced with the opposition of all (these) political crooks, but also of large sections of their various minions, especially the entire, almost exclusively tax-financed academic-university establishment, which I tried to find a way into. An academic career was difficult, if not impossible, and it took considerable courage, willingness to fight, and sacrifice not to resign or give up. In Germany – let alone Austria – I was at that time out on a limb. I therefore decided to move to America. And so Mises became not only an intellectual but also a personal role model for me.
Mises had been denied a regular academic career in Austria and, after the National Socialists seized power, was forced to emigrate to the US. Even there, in the heartland of capitalism, it was difficult for him to gain a foothold. But his courage and will to fight were unbroken and he managed to make his work increasingly heard and to raise a new generation of students, especially the brilliant Murray Rothbard. Rothbard, too, had been obstructed throughout his life, and his academic career had been rather bumpy. But it was Rothbard who now took me under his wing in the USA, helped me to obtain a professorship and in particular connected me with the Ludwig von Mises Institute, founded by Lew Rockwell in 1982 and inspired by him, Rothbard, as academic director.
It is, essentially, thanks to the work of the Mises Institute, with which I have remained closely connected from its humble beginnings to the present day, and which, under the direction of the incomparable Lew Rockwell, has grown into an institution with worldwide appeal and connections, that an event like this one can once again take place in Austria today. Thanks to his work, the names and works of Mises and Rothbard are much better known today than they were during their lifetimes. In fact, there is no country in the world where there are no Misesians or Rothbardians. My own writings are now also available in more than 30 languages. And it is certainly also an indicator of the progress that the Austrian school has since made, when an audience of 1,500 attended a lecture that I recently gave, in Moscow of all places, and a few hundred more even had to be turned away due to lack of space.
In spite of this undeniable progress, one cannot, of course, hide the fact that the Misesian Austrian School still represents an intellectual outsider-position. Indeed, especially as an "Austrian" one has every reason to be pessimistic about the further development of the Western world, at least in the short and medium term. For we are currently living through a period in which the normal madness, which I have already mentioned, is once more intensified by the crazy doctrine of political correctness and the pathological, quasi-religious climate mania of infantile so-called climate protectors, confronted with whom one often no longer knows whether to simply howl and cry, or instead crack up laughing.
However, today there is no more stopping the Mises School. And when the truth finally wins out, because only what is true can also work smoothly in the long run, then the hour of the Austrian School of Economics will have come.
(Translated from German by Robert Grözinger.)
An influential line of thought in contemporary political philosophy began well but quickly got off track. The line of thought began as a criticism of Isaiah Berlin. In his famous paper, “Two Concepts of Liberty,” Berlin set forward a notion of “negative freedom” that libertarians will find familiar: “I am normally said to be free to the degree to which no man or body of men interferes with my activity. Political liberty in this sense is simply the area within which a man can act unobstructed by others. If I am prevented by others from doing what I could otherwise do, I am to that degree unfree; and if this area is contracted by other men beyond a certain minimum, I can be described as being coerced, or, it may be, enslaved.”
Berlin’s “negative freedom” looks like the NAP, but as we’ll see below, it isn’t the same thing. Several writers, the so-called “civic republicans,” seized on a crucial flaw in Berlin’s concept. The best known of these writers are the historian of ideas Quentin Skinner, (whom Murray Rothbard greatly admired) and the philosopher Philip Pettit. The flaw that the civic republicans found in “negative freedom” is that you could be uncoerced but still dominated by someone who held power over you. Suppose, for example, that you were a slave, but your master did not interfere with your life. In Berlin’s sense you are “free”, but your master could at any time change his mind and render you unfree. Even if he never did change his mind, you would still be dependent on him in an unacceptable way.
Philip Pettit generalizes the civic republican’s key theme:
“Think of how you feel when your welfare depends on the decision of others and you have no come-back against that decision. You are in a position where you will sink or swim, depending on their say-so. And you have no physical or legal recourse, no recourse even in a network of mutual friends, against them. You are in their hands.
In any case of this kind you will be dominated by others, being in a position where those others have the power of interfering in your life in a certain way: and this, more or less arbitrarily; more or less at will and with impunity. If you do escape ill treatment, then, that will be by the grace or favour or the powerful, or by your own good fortune in being able to stay out of their way or keep them sweet. And even if you are lucky enough to escape such treatment, you will still live under the mastery of those others: they will occupy the position of a dominus — the Latin word for master — in your life … the central theme in republican concerns throughout the ages — the theme that explains all their other commitments — has been a desire to arrange things so that citizens are not exposed to domination of this kind. They do not live, as the Romans used to say, in potestate domini: in the power of a master.”
Pettit and his civic republican colleagues take their good point in the wrong direction. They emphasize that the power of the person who dominates you is “arbitrary.” By this term, they don’t mean that the master follows a policy that can’t be predicted. Even if a slave knew what his master was going to do, he would still be under the master’s domination. Rather, they mean that the person dominated is under the will (ad arbitrium) of the master.
Now for the wrong turn. They think that in a democracy, under certain conditions, people aren’t subject to the arbitrary will of others. If you participate in a deliberative democracy, then you are involved in choosing the rules by which you are governed. The rules, in this view, aren’t imposed on you arbitrarily, even if these rules aren’t the ones you most prefer. To qualify as non-arbitrary, a majority vote isn’t sufficient. Rather, the rules must be decided through deliberation, by the citizens or their representatives. You could be drafted into the army, or taxed at very high rates, without being dominated, in the civic republican sense.
Before we turn to showing what is wrong with the civic republican position, one misunderstanding needs to be averted. The civic republican doctrine is not the same as Rousseau’s “general will.” If you democratically deliberate and other policies than the ones you prefer are chosen, it isn’t the case that your “real” will now chooses the other policies. The civic republicans wisely avoid that bit of murky metaphysics. Rather, what they contend is no more, and no less, than that with democratic deliberation, you aren’t dominated.
What is wrong with their view? From a libertarian standpoint, the answer is obvious. Even if you aren’t “dominated,” you can still be coerced, if you are prevented from doing what you want to do. From the correct perception that Berlin’s “negative freedom” isn’t sufficient for genuine liberty, the civic republicans wrongly judge that negative freedom isn’t necessary for genuine liberty.
The NAP avoids the problem that the civic republicans found in Berlin’s concept. The NAP says that no one has the right to initiate aggression. In other words, you have a right to be free from coercion. If you have this right, then you are not subject to anyone’s domination. Democratic deliberation isn’t needed to avoid domination, and it can’t take away your rights.
It’s no secret that Donald Trump is one of the most aggressive arms salesmen in history. How do we know? Because he tells us so at every conceivable opportunity. It started with his much exaggerated “$110 billion arms deal” with Saudi Arabia, announced on his first foreign trip as president. It continued with his White House photo op with Crown Prince Mohammed bin Salman in which he brandished a map with a state-by-state rundown of American jobs supposedly tied to arms sales to the kingdom. And it’s never ended. In these years in office, in fact, the president has been a staunch advocate for his good friends at Boeing, Lockheed Martin, Raytheon, and General Dynamics — the main corporate beneficiaries of the US-Saudi arms trade (unlike the thousands of American soldiers the president recently sent into that country’s desert landscapes to defend its oil facilities).
All the American arms sales to the Middle East have had a severe and lasting set of consequences in the region in, as a start, the brutal Saudi/United Arab Emirates war in Yemen, which has killed thousands of civilians via air strikes using US weaponry and pushed millions of Yemenis to the brink of famine. And don’t forget the recent Turkish invasion of Syria in which both the Turkish forces and the Kurdish-led militias they attacked relied heavily on US-supplied weaponry.
Donald Trump has made it abundantly clear that he cares far more about making deals for that weaponry than who uses any of it against whom. It’s important to note, however, that, historically speaking, he’s been anything but unique in his obsession with promoting such weapons exports (though he is uniquely loud about doing so).
Despite its supposedly strained relationship with the Saudi regime, the Obama administration, for example, still managed to offer the royals of that kingdom a record $136 billion in US weapons between 2009 and 2017. Not all of those offers resulted in final sales, but striking numbers did. Items sold included Boeing F-15 combat aircraft and Apache attack helicopters, General Dynamics M-1 tanks, Raytheon precision-guided bombs, and Lockheed Martin bombs, combat ships, and missile defense systems. Many of those weapons have since been put to use in the war in Yemen.
To its credit, the Obama administration did at least have an internal debate on the wisdom of continuing such a trade. In December 2016, late in his second term, the president finally did suspend the sale of precision-guided bombs to the Royal Saudi Air Force due to a mounting toll of Yemeni civilian deaths in US-supplied Saudi air strikes. This was, however, truly late in the game, given that the Saudi regime first intervened in Yemen in March 2015 and the slaughter of civilians began soon after that.
By then, of course, Washington’s dominance of the Mideast arms trade was taken for granted, despite an occasional large British or French deal like the scandal-plagued Al Yamamah sale of fighter planes and other equipment to the Saudis, the largest arms deal in the history of the United Kingdom. According to the Stockholm International Peace Research Institute, from 2014 to 2018 the United States accounted for more than 54% of known arms deliveries to the Middle East. Russia lagged far behind with a 9.5% share of the trade, followed by France (8.6%), England (7.2%), and Germany (4.6%). China, often cited as a possible substitute supplier, should the US ever decide to stop arming repressive regimes like Saudi Arabia, came in at less than 1%.
The US government’s stated rationales for pouring arms into that ever-more-embattled region include: building partnerships with countries theoretically willing to fight alongside US forces in a crisis; swapping arms for access to military bases in Kuwait, the United Arab Emirates, Qatar, and other Persian Gulf states; creating “stability” by building up allied militaries to be stronger than those of potential adversaries like Iran; and generating revenue for US weapons contractors, as well as jobs for American workers. Of course, such sales have indeed benefited those contractors and secured access to bases in the region, but when it comes to promoting stability and security, historically it’s been another story entirely.The Nixon Doctrine and the Initial Surge in Mideast Arms Sales
Washington’s role as the Middle East’s top arms supplier has its roots in remarks made by Richard Nixon half a century ago on the island of Guam. It was the Vietnam War era and the president was on his way to South Vietnam. Casualties there were mounting rapidly with no clear end to the conflict in sight. During that stopover in Guam, Nixon assured reporters accompanying him that it was high time to end the practice of sending large numbers of US troops to overseas battlefields. To “avoid another war like Vietnam anywhere in the world,” he was instead putting a new policy in place, later described by a Pentagon official as “sending arms instead of sending troops.”
The core of what came to be known as the Nixon Doctrine was the arming of regional surrogates, countries with sympathetic rulers or governments that could promote US interests without major contingents of the American military being on hand. Of such potential surrogates at that moment, the most important was the Shah of Iran, with whom a CIA-British intelligence coup replaced a civilian government back in 1953 and who proved to have an insatiable appetite for top-of-the-line US weaponry.
The Shah’s idea of a good time was curling up with the latest copy of Aviation Week and Space Technology and perusing glossy photos of combat planes. Egged on by the Nixon administration, his was the first and only country to buy the costly Grumman F-14 combat aircraft at a time when that company desperately needed foreign sales to bolster the program. And the Shah put his US-supplied weapons to use, too, helping, for instance, to put down an anti-government uprising in nearby Oman (a short skip across the Persian Gulf), while repressing his own population at the same time.
In the Nixon years, Saudi Arabia, too, became a major weapons client of Washington, not so much because it feared its regional neighbors then, but because it had seemingly limitless oil funds to subsidize US weapons makers at a time when the Pentagon budget was beginning to be reduced. In addition, Saudi sales helped recoup some of the revenue streaming out of the US to pay for higher energy prices exacted by the newly formed OPEC oil cartel. It was a process then quaintly known as “recycling petrodollars.”The Carter Years and the Quest for Restraint
The freewheeling arms trade of the Nixon years eventually prompted a backlash. In 1976, for the first (and last) time, a presidential candidate — Jimmy Carter — made reining in the arms trade a central theme of his 1976 campaign for the White House. He called for imposing greater human-rights scrutiny on arms exports, reducing the total volume of arms transfers, and initiating talks with the Soviet Union on curbing sales to regions of tension like the Middle East.
Meanwhile, members of Congress, led by Democratic Senators Gaylord Nelson and Hubert Humphrey, felt that it was long past time for Capitol Hill to have a role in decision-making when it came to weapons sales. Too often Congressional representatives found out about major deals only by reading news reports in the papers long after such matters had been settled. Among the major concerns driving their actions: the Nixon-era surge of arms sales to Saudi Arabia, then still an avowed adversary of Israel; the use of US-supplied weapons by both sides in the Greek-Turkish conflict over the island of Cyprus; and covert sales to extremist right-wing forces in southern Africa, notably the South African-backed Union for the Total Independence of Angola. The answer was the passage of the Arms Export Control Act of 1978, which required that Congress be notified of any major sales in advance and asserted that it had the power to veto any of them viewed as dangerous or unnecessary.
As it happened, though, neither President Carter’s initiative nor the new legislation put a significant dent in such arms trafficking. In the end, for instance, Carter decided to exempt the Shah’s Iran from serious human-rights strictures and his hardline national security advisor, Zbigniew Brzezinski, undercut those talks with the Soviet Union on reducing arms sales.
Carter also wanted to get the new Rapid Deployment Force (RDF) he established — which eventually morphed into the U.S. Central Command — access to military bases in the Persian Gulf region and was willing to use arms deals to do so. The RDF was to be the centerpiece of the Carter Doctrine, a response to the 1979 Soviet invasion of Afghanistan and the fall of the Shah of Iran. As the president made clear in his 1980 State of the Union address: "An attempt by any outside forces to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States. It will be repelled by use of any means necessary, including the use of force." Selling arms in the region would prove a central pillar of his new doctrine.
Meanwhile, most major sales continued to sail through Congress with barely a discouraging word.Who Armed Saddam Hussein?
While the volume of those arms sales didn’t spike dramatically under President Ronald Reagan, his determination to weaponize anti-communist “freedom fighters” from Afghanistan to Nicaragua sparked the Iran-Contra scandal. At its heart lay a bizarre and elaborate covert effort led by National Security Council staff member Oliver North and a band of shadowy middlemen to supply US weapons to the hostile regime of Ayatollah Khomeini in Iran. The hope was to gain Tehran’s help in freeing US hostages in Lebanon. North and company then used the proceeds from those sales to arm anti-government Contra rebels in Nicaragua in violation of an explicit Congressional ban on such aid.
Worse yet, the Reagan administration transferred arms and provided training to extremist mujahedeen factions in Afghanistan, acts which would, in the end, help arm groups and individuals that later formed al-Qaeda (and similar groups). That would, of course, prove a colossal example of the kind of blowback that unrestricted arms trading too often generates.
Even as the exposure of North’s operation highlighted US arms transfers to Iran, the Reagan administration and the following one of President George H.W. Bush would directly and indirectly supply nearly half a billion dollars worth of arms and arms-making technology to Iran’s sworn enemy, Iraqi autocrat Saddam Hussein. Those arms would bolster Saddam’s regime both in its war with Iran in the 1980s and in its 1991 invasion of Kuwait that led to Washington’s first Gulf War. The US was admittedly hardly alone in fueling the buildup of the Iraqi military. All five permanent members of the United Nations Security Council (the US, the Soviet Union, France, the United Kingdom, and China) provided weapons or weapons technology to that country in the run-up to its intervention in Kuwait.
The embarrassment and public criticism generated by the revelation that the US and other major suppliers had helped arm the Iraqi military created a new opening for restraint. Leaders in the US, Great Britain, and other arms-trading nations pledged to do better in the future by increasing information about and scrutiny of their sales to the region. This resulted in two main initiatives: the United Nations arms trade register, where member states were urged to voluntarily report their arms imports and exports, and talks among those five Security Council members (the largest suppliers of weapons to the Middle East) on limiting arms sales to the region.
However, the P-5 talks, as they were called, quickly fell apart when China decided to sell a medium-range missile system to Saudi Arabia and President Bill Clinton’s administration began making new regional weapons deals at a pace of more than $1 billion per month while negotiations were underway. The other suppliers concluded that the Clinton arms surge violated the spirit of the talks, which soon collapsed, leading in the presidency of George W. Bush to a whole new Iraqi debacle.
The most important series of arms deals during the George W. Bush years involved the training and equipping of the Iraqi military in the wake of the invasion of Iraq and the overthrow of Saddam Hussein. But $25 billion in US arms and training was not enough to create a force capable of defeating the modestly armed militants of ISIS, when they swept into northern Iraq in 2014 and captured large swaths of territory and major cities, including Mosul. Iraqi security forces, short on food and equipment due to corruption and incompetence, were also short on morale, and in some cases virtually abandoned their posts (and US weaponry ) in the face of those ISIS attacks.The Addiction Continues
Donald Trump has carried on the practice of offering weaponry in quantity to allies in the Middle East, especially the Saudis, though his major rationale for the deals is to generate domestic jobs and revenues for the major weapons contractors. In fact, investing money and effort in almost anything else, from infrastructure to renewable energy technologies, would produce more jobs in the US. No matter though, the beat just goes on.
One notable development of the Trump years has been a revived Congressional interest in curbing weapons sales, with a particular focus on ending support for the Saudi-led war in Yemen. (Watching Turkish and Kurdish forces face off, each armed in a major way by the US, should certainly add to that desire.) Under the leadership of Senator Chris Murphy (D-CT), Senator Bernie Sanders (I-VT), Senator Mike Lee (R-UT), Representative Ro Khanna (D-CA), and Representative Ted Lieu (D-CA), Congress has voted to block bomb sales and other forms of military support for Saudi Arabia, only to have their efforts vetoed by President Trump, that country’s main protector in Washington. Still, congressional action on Saudi sales has been unprecedented in its persistence and scope. It may yet prevail, if a Democrat wins the presidency in 2020. After all, every one of the major presidential contenders has pledged to end arms sales that support the Saudi war effort in Yemen.
Such deals with Saudi Arabia and other Mideast states may be hugely popular with the companies that profit from the trade, but the vast majority of Americans oppose runaway arms trading on the sensible grounds that it makes the world less safe. The question now is: Will Congress play a greater role in attempting to block such weapons deals with the Saudis and human-rights abusers or will America’s weapons-sales addiction and its monopoly position in the Middle Eastern arms trade simply continue, setting the stage for future disasters of every sort?
It has now become commonplace for politicians and media pundits to casually assert that "everyone" — to use Alexandria Ocasio-Cortez's term — is now working more and more hours — and perhaps two or three jobs — just to attain the most basic, near-subsistence standard of living.
This is repeated time and time again, usually without context or supporting evidence. Never mind, for example, that the Bureau of Labor Statistics reports only around 5 percent of workers hold more than one job.
And while there is some compelling evidence working time and incomes have moved sideways since 2001 — thanks largely to the effects of endless inflationary government stimulus — the median American is not working more now than in the good ol' days of post-war America. Moreover, the standard of living is far, far higher now than during the 1950s and 1960s when new houses were on average 1,000 square-feet, most families had at most one car, and we all faced near-certain death if diagnosed with cancer.
Nonetheless, the current narrative is that Americans work all the time. Even worse, we're told this endless grind has abolished the weekend, and no there's no longer any common day of rest during which to enjoy time with our families.Bring Back the Blue Laws?
As noted by Zachary Yost, some conservatives are now pressing for more government mandates — known as "blue laws" — forcing businesses to remain closed on Sundays. Yost writes:
Recently, a great many traditionalists were up in arms over North Dakota’s repeal of its blue laws, which prohibited retail businesses from operating before noon on Sundays. Blue laws were once in place across the country and increasingly have been rolled back. Usually they take the form of bans on alcohol and retail sales, hunting, and certain other recreations.
Perhaps among the most outraged was Fr. Dominic Bouck who argued:
The 24-7 retail culture hurts our poor. Those who suffer most from the loss of blue laws are those conscripted into hourly wage jobs: the young, the impoverished, single mothers, and all those who struggle. Are they not allowed to attend Mass? Worship the God of freedom? Blue laws protected the weakest among us by making sure they could attend church on Sundays.
Aside from the ridiculous likening of retail work to the slavery of conscription, Bouck has a point. The existence of a common day off for most of the population does indeed facilitate the promotion of family life, religious institutions, and social life in general beyond commercial institutions.
It's a good thing.
However, as is so often the case with social conservatives these days, Bouck immediately rushes to a policy prescription — yet another government mandate — which leaves much to be desired.Why People Work on Sunday
Before we can go any further on the matter of Sunday work hours, it is important to note the reason people work on Sunday. It's not because evil cigar-chomping capitalists decided they could force people into their stores if only those stores opened on Sunday.
In reality, shops and stores only open on Sunday when the owners believe there are enough customers who want to shop there on Sunday. Only if the customers show up do Sunday hours justify the extra expense of staffing the shop. Moreover, shop owners are concerned that if they remain closed on Sunday, their potential customers will go somewhere else. And again, this is only an issue if customers show up.
For example, grocery stores are open on Sunday because the stores' owners predicted — correctly — that a sufficiently large number of customers wanted the stores open that day. The same is true of any luggage store, gas station, or restaurant. If customers stop showing up to those places, those locations will cease to open on Sunday.
(Some businesses choose to close on Sunday anyway, due to concerns for intangibles. Chick-fil-A, for example, is closed on Sunday partly out of concern for maintaining better worker-management relations. Other concerns include the founder's religious beliefs.)
Thus, the reason businesses open on Sunday is due to bottom-up pressure from consumers, not top-down conniving on the part of management. As much as some people would prefer otherwise, the fact is we live in a society where most people see no problem at all with going to the movies or shoe shopping on Sunday. Business owners merely respond by attempting to meet this demand.The Problem with Blue Laws
If we lived in a society where people didn't want to buy and sell things on Sunday, we wouldn't "need" blue laws in the first place. But since the Sunday-shopping reality reflects the value systems of average Americans, we know that such laws will bring attempts at circumventing them, while also preventing people from doing what they otherwise would rather do. This means a reduction in many people's real-world utility.
Moreover, some people more or less need to go shopping on Sunday.
For example, some orthodox Jews actually take their sabbath seriously. For them, that means no shopping between Friday evening and Saturday evening. For many of these people, Sunday offers the only opportunity for shopping or for secular entertainment.
Shall we endorse state laws that prohibit them from shopping on the one day during which they have neither work obligations nor religious obligations?
And, if a Jewish entrepreneur were to open his or her store on Sunday to help provide these needed goods and services, how shall this person be punished by state authorities? Since every law also brings with it the need to enforce those laws, how large of a fine shall be assessed on Jewish shopkeepers who dare violate the blue laws? $5,000 per offense? $50,000? One could claim it would be easy for lawmakers to just carve out an exemption for Jews. But then police must take measures to prevent non-Jews from shopping at the stores. If a non-Jew walks into a Jewish-owned deli on Sunday and buys groceries, we'll need judges, prosecutors, and police to impose the prescribed sanctions whether those be fines, jail time, probation, or mandatory community service. Repeat offenders, of course, will require harsher penalties.
This need not be a religious issue either. Some workers are very badly needed at odd times. Pipes can burst on any day of the week, and this problem must usually be remedied immediately. Cars break down on all days of the week. Tow-truck drivers will be sorely tempted to provide a much-needed — and surely greatly appreciated — service on Sunday by helping a family clear the roadway and get the family's car to a repair shop. Police will need to be on hand to punish these people.
In response, some might say "golly, we're only asking that non-essential businesses be closed!" But who is to decide what businesses are essential? Politicians?
Economic systems are complex things, as are human societies. Yes, it would be a good thing if people took more seriously the idea of a common day or rest. But as we've seen in our examples, we haven't even been able to decide on which day shall be that day. Different people come from different cultural and religious backgrounds.
Views also differ on how this day of rest ought to be celebrated. Murray Rothbard writes of how the problem manifested itself in conflicts between liturgical Christians and "Pietist" Christians during the Progressive era.
Rothbard points out liturgical Christians — i.e., Lutherans and Catholics — liked to meet up in taverns and drink and eat together on Sundays. Some other Christian groups, meanwhile, insisted that no alcohol be consumed on Sunday at all. Naturally, efforts by the Pietists to legally proscribe Sunday commerce on this matter was a significant cultural problem for others.Decentralize the Blue Laws
The more broadly applied these rules are, the most unjust they become. In any political jurisdiction lacking total religious and cultural uniformity, a one-size-fits-all legal regimen is sure to favor one group at the expense of others.
As with so many other laws dealing with controversial "social policy" — i.e., abortion, circumcision, drug and alcohol use — legal mandates are only tolerable or arguably moral when they conform to the cultural views of a near-100-percent majority. When views are mixed within a single jurisdiction, such laws become naturally oppressive to the out-of-power minority.
If we are to insist on blue laws to address issues like Sunday labor, they must be kept local, decentralized, and applied in a manner that respects local demographic realities. Applied at the municipal or county level, such laws are more likely to reflect the specific cultural realities of the local population. We certainly can't say the same of national or statewide laws. Moreover, at the local level, these laws are easy to circumvent with only moderate effort. Christians living in a Jewish neighborhood — where everything may be closed Saturday morning — can without strenuous effort travel to a neighboring area where it is easy to buy groceries on Saturday. This would be a feature, not a bug.
Hardliners in favor of blue laws will of course denounce this sort of freedom that results from decentralized legal regimes. They'll claim too much freedom defeats the purpose of the blue laws, which is to force a way of life on certain people.
There is another way. The people who deplore Sunday shopping could work to convince others to voluntarily refrain from shopping. This however, would require a lot of effort and self-discipline on the part of the busybodies. In order to demonstrate any sort of consistent commitment to the ideal of a work-free Sunday, these people would need to give up watching NFL games on Sunday. Football games require a lot of workers to put them on. Consistency would require no more ordering pizzas on Sunday; no more Sundays flying on commercial airlines; no more trips to the hardware store. And so on. So don't expect to see a wave of our cultural gatekeepers teaching us by example any time soon. It's much easier to just have some politicians pass some laws.
Foreign policy commentators live in their own bubble. The WTO’s credibility is gone and its survival uncertain due to its lack of impact on world trade over the last two decades. A China vs. USA trade war is still growing and the economic community of European states is in its worst-ever shape. Yet no one stops to wonder if all these failures have anything to do with the kind of economic integration they propose. In fact, the media is now childishly excited about the ASEAN-led Regional Comprehensive Economic Partnership (RCEP), a Trans-Pacific Partnership surrogate many years in the making.
What no one recognizes is that the common reason for the breakdown of world economic relations is the combination of interventionist domestic policies and government-led, top-down, faulty trade integration, which serves only interest groups and is subject to perverse incentives. The positive effects of inter-governmental multilateral trade agreements are minor at best. Their negative effects, however, such as stifling global trade, diversion of trade flows, or increasing red tape, have been growing at an alarming rate.
Trade agreements have thus become obsolete tokens of negotiation in larger geopolitical disputes, protectionist tools for managing and interfering with global trade flows. RCEP’s tentative provisions serve as a great illustration of the adulteration and vitiation of trade deals. For example, RCEP would allow and encourage poorer members to “proceed cautiously and gradually in lowering tariffs on manufactured goods… [over] adjustment periods of up to 25 years” (The Economist, 2019). However, it is precisely the poorer members of such agreements who benefit from reducing their tariffs to zero. According to Mises (1990), “their own policies are the main obstacle to any improvement and economic progress. There cannot be any question of imitating the technological procedures of the capitalistic countries if there is no capital available. Whence should this capital come if domestic capital formation as well as the inflow of foreign capital are sabotaged?”
RCEP would also allow India to “impose some sort of ‘safeguard’ tariffs if imports surged too sharply” (The Economist, 2019). In other words, India could easily withdraw their already weak commitment to this economic partnership without incurring any direct consequences — allowing them to have their managed trade cake and eat it too. However, despite this mollification, India remained reluctant to commit and Narendra Modi refused to sign the current draft agreement, citing the trade deficit with China, the danger to Indian farmers, Ghandi, and his own conscience.
Lastly, the text of the RCEP is littered with “non-committal phrases… [such as] "members shall endeavour to" rather than "members shall’” (The Economist, 2019). As The Economist argues, “in these sort of agreements do and do not are not the only options. There is plenty of "try" (The Economist, 2019). But no rose-colored glasses can make free trade anything but a black and white issue. To reference Yoda again, this is why you fail. Either trade is entirely free, and thus works to bring about prosperity and economic growth, or it is government-managed, thus not free, and bound only to bring about more intervention and economic distortions. In matters of economic freedom, there is no try.
Preparations for the Regional Comprehensive Economic Partnership are now 8 years old and 30 negotiation rounds have already taken place. A fantastic leap of faith is necessary to imagine that, once signed, this agreement will have any beneficial impact, or will indeed be managed efficiently. A leap of faith that should be impossible for any minimally informed and honest commentator. Sadly, much like true free trade agreements, there are few such left.
December 5 is Walt Disney’s birthday, and more than fifty years after his death, Disney’s reputation is well-deserved. After all, he was the creator of Mickey Mouse and a score of lovable animated characters; was a pioneer in adding sound and color to movies; created the game-changing full-length animated feature; invented the concept of children’s programming for television with The Mickey Mouse Club; and built the world’s first theme park with the creation of Disneyland.
But he never lost sight of the importance of serving the consumers.
Ludwig von Mises illustrated how even if entrepreneurs steer the ship of the economy, they are bound to serving consumers. Mises wrote in Human Action:
The direction of all economic affairs is in the market society a task of the entrepreneurs. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain’s orders. The captain is the consumer. Neither the entrepreneurs nor the farmers nor the capitalists determine what has to be produced. The consumers do that. If a businessman does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.
Consumers never cease wanting better products at lower prices to address their desires and wants. In a world of competition and insatiable consumer demand for value satisfiers and value fulfillment, no organization can stand still for very long. No matter how brilliant or small an innovation, other entrepreneurs stand ready to copy and improve upon it to win consumers and profits, thereby diluting the market value of previous innovations.
Speaking metaphorically, the marketplace rewards with wealth the innovations it approves. Buyers are willing and eager to trade something they have for something they perceive to be of greater value. Sellers are willing and eager to do the same. The result is voluntary value exchange, with both parties of the immediate transaction benefiting, as well as all parties in the long trail of economic production and work that was required to enable the final consumer purchase.
Walt Disney’s career growth was similar in kind to most entrepreneurs, beginning with very modest means and creating something new that others find valuable, and are willing to pay for. When demand is high and the product can be delivered profitably, entrepreneurs can become wealthy very quickly. Walt and the studio struggled for years to be financially successful, from his early start in Kansas City, Missouri, in the early 1920s, through the creation of the characters of Oswald the Lucky Rabbit and Mickey Mouse. He was always struggling to innovate in one way or another with new ideas and production techniques to create a more highly valued quality product to entertain audiences and to take away the pressure of meeting payroll from week to week. With each new innovation new ways of creating and doing things replaced the old in a process of continuous improvements and creative destruction.
Each stage of Walt’s success was the result of creating and delivering something new that was valued highly, not only by Walt and his team, but most importantly by movie houses and movie-going consumers. At first it was black-and-white silent Laugh-O-gram fairy tale cartoons that he produced in Kansas City, followed by the Alice Comedies, then by Oswald the Lucky Rabbit. This led to the huge success and phenomenon of Mickey Mouse, and later other characters, particularly Donald Duck.
Unlike many others in the cartoon business who flogged the same old products in multiple variations to an increasingly disinterested consumer, Disney continued to innovate in quality, sound, and color, as new technologies became available and public tastes evolved. Doing so allowed him to charge premium prices, bringing in more money to invest in further innovation and quality improvements.
It wasn’t until Disney created, and the public accepted, the brilliance of something brand new — an emotionally and visually engaging full-length animated feature film — that Walt Disney Productions received a drastic increase in the inflow of money from ticket purchases. Though Walt started the Disney Brothers Studio with his older brother Roy in their Uncle Robert’s Los Angeles garage in 1923, it wasn’t until 1938 with the public’s acceptance of Snow White and the Seven Dwarfs that Walt and Roy could finally put their money worries behind them (at least for a little while).
By buying tickets to see Snow White, consumers inadvertently made the creators of that product wealthy; inadvertently because movie-goers neither think about nor care who they are making rich or poor when they make consumer choices. They could just as easily have decided to avoid an animated film, as most studios and experts in the industry predicted and expected. Had that been the case, after having spent years developing and animating the film, Snow White would have bankrupted the Disney studio. Instead, Walt Disney was richly rewarded for his risk-taking. His employees, suppliers, investors, and distribution channel partners were also rewarded by Walt’s vision, courage, and entrepreneurial risk-taking.
In this one example, one can see how a harmony of interests exists in the voluntary pursuit of values both within organizations and across society. Entrepreneurs and capitalists invest in production infrastructure and pay wages to those who contribute as employees, each in pursuit of their own economic and personal interests and values.
George Reisman identifies the essential elements of such prime movers and business titans as providers of “guiding and directing intelligence at the highest level in the productive process” to achieve the goal of producing a product, creating customers, and achieving profits.”
[This article was adapted from The Business of Walt Disney and the Nine Principles of His Success.]
Jeffrey Rogers Hummel joins Bob Murphy for an in-depth discussion of the economics of slavery, touching on subtleties such as the labor/leisure trade-off, and the recent claims by some historians that slavery was efficient. Bob also asks Hummel to explain the provocative claim in his book, that the Confederacy would have done much better militarily if it had used the same guerrilla warfare tactics that the American colonists had used against the British.
As a follow-up to the episode on the Ranbaxy Scandal, Accad and Koka are joined by medicinal chemist John Tucker, PhD, and hypertension specialist Swapnil Hiremath, MD. The guests share their perspectives and impressions on the unsettling question of generic drugs.
There are basically only two ways in which economic life can be organized. The first is by the voluntary choice of families and individuals and by voluntary cooperation. This arrangement has come to be known as the free market. The other is by the orders of a dictator. This is a command economy. In its more extreme form, when an organized state expropriates the means of production, it is called socialism or communism. Economic life must be primarily organized by one system or the other.
It can, of course, be a mixture, as it unfortunately is in most nations today. But the mixture tends to be unstable. If it is a mixture of a free and a coerced economy the coerced section tends constantly to increase.
One qualification needs to be emphasized. A "free" market does not mean and has never meant that everybody is free to do as he likes. Since time immemorial mankind has operated under a rule of law, written or unwritten. Under a market system as any other, people are forbidden to kill, molest, rob, libel or otherwise intentionally injure each other. Otherwise free choice and all other individual freedoms would be impossible. But an economic system must be dominantly either a free or a command system.
Ever since the introduction and spread of Marxism the great majority of people who publicly discuss economic issues have been confused. Recently a very eminent person was quoted as denouncing economic systems that respond "only to the forces of the market place," and are governed "by the profit motive of the few rather than the needs of the many." He warned that such a system could put "the world's food supply into even greater jeopardy."
The sincerity of these remarks is beyond question. But they show how phrases can betray us. We have come to think of "the profit motive" as a narrowly selfish drive confined to a small group of the already-rich whose profit comes at the expense of everybody else. But in its widest sense the profit-motive is one that all of us share and must share. It is our universal motive to make conditions more satisfactory for ourselves and our families. It is the motive of self-preservation. It is the motive of the father who is not only trying to feed and house himself but his wife and his children, and to make the economic conditions of his whole family, if possible, constantly better. It is the dominant motive of all productive activity.Voluntary Cooperation
This motive is often called "selfish." No doubt in part it is. But it is hard to see how mankind (or any animal species) could have survived without a minimum of selfishness. The individual must make sure he himself survives before the species can survive. And the so-called profit motive itself is seldom solely selfish.
In a primitive society the "unit" is seldom the individual but the family, or even the clan. Division of labor begins within the family. The father hunts or plants and harvests crops; the mother cooks and bears and nurses children; the children collect firewood, and so forth. In the clan or the wider group there is even more minute subdivision and specialization of labor. There are farmers, carpenters, plumbers, architects, tailors, barbers, doctors, lawyers, clergymen, and so ad infinitum. They supply each other by exchanging their services. Because of his specialization, production increases more than proportionately to numbers; it becomes incredibly efficient and expert. There develops an immense system of voluntary productive cooperation and voluntary exchange.
Each of us is free (within certain limits) to choose the occupation in which he himself specializes. And in selecting this he is guided by the relative rewards in this occupation, by its relative ease or difficulty, pleasantness or unpleasantness, and the special gifts, skills, and training it requires. His rewards are decided by how highly other people value his services.Free-Market Economy
This immense cooperative system is known as a free-market economy. It was not consciously planned by anybody. It evolved. It is not perfect, in the sense that it leads to the maximum possible balanced production and/or distributes its rewards and penalties in exact proportion to the economic deserts of each of us. But this could not be expected of any economic "system." The fate of each of us is always affected by the accidents and catastrophes as well as the blessings of nature—by rainfall, earthquakes, tornadoes, hurricanes, or what not. A flood or a drought may wipe out half a crop, bringing disaster to those growers directly hit by it, and perhaps record-high prices and profits to the growers who were spared. And no system can overcome the shortcomings of the human beings that operate it—the relative ignorance, ineptitude, or sheer bad luck of some of us, the lack of perfect foresight or omniscience on the part of all of us.
But the ups and downs of the market economy tend to be self correcting. Over-production of automobiles or apartments will lead to fewer of them being produced the following year. A short crop of corn or wheat will cause more of that crop to be planted the following season. Even before there were government statistics, producers were guided by relative prices and profits. Production will tend to be constantly more efficient because the less efficient producers will tend to be weeded out and the more efficient will be encouraged to expand output. The people who recognize the merits of this system call it the market economy or free enterprise. The people who want to abolish it have called it—since the publication of The Communist Manifesto in 1848—capitalism. The name was intended to discredit it—to imply that it was a system developed for and by the "capitalists"—by definition the disgustingly rich who used their capital to enslave and "exploit" the "workers."
The whole process was grossly distorted. The enterpriser was putting his accumulated savings at risk at what he hoped was an opportunity. He had no prior assurance of success. He had to offer the going wage or better to attract workers from their existing employments. Where the more successful enterprisers were, the higher wages also tended to be. Marx talked as if the success of every new business undertaking was a certainty, and not a sheer gamble. This resulted in his condemning the enterpriser for his very risk-taking and venturesomeness. Marx took profits for granted. He seemed to assume that wealth could never be honestly earned by successful risk-taking but had to be inherited. He ignored the record of constant business failures.
But the label "capitalism" did pay unintended tribute to one of the system's supreme merits. By providing rewards to some of the people who risked investing their capital, it kept putting into the hands of the workers more and constantly better tools to increase per capita production more and more. The system of private property and capitalism is the most productive system that has ever existed.
The Communist Manifesto was an appeal to "the masses" to envy and hate the rich. It told them that their only salvation was to "expropriate the expropriators," to destroy capitalism root and branch by violent revolution. Marx attempted a rationalization of this course, built upon what he saw as inevitable deductions from a doctrine of Ricardo. That doctrine was in error; in Marx's hands the error became fateful. Ricardo concluded that all value was created by "labor" (which might almost be true if one counted labor from the begin ning of time—all the labor of everybody that went into the production of houses, land clearing, grading, plowing, and the creation of factories, tools and machines. But Marx chose to use the term as applying only to current labor, and the labor only of hired employees. This completely ignored the contribution of capital tools, the foresight or luck of investors, the skill of management, and many other factors.The Errors of Marx
The theoretical errors of Marx have since been exposed by a score of brilliant writers. In fact, his preposterous conclusions could also have been proved wrong even at the time Das Kapital appeared by a patient examination of the available contemporary knowledge of incomes, payrolls and profits.
But the day of organized, abundant, and even "official" statistics had not yet come. To cite only one of the figures we now know: In the ten years from 1969 to 1978, inclusive, American "nonfinancial" corporations were paying their employees an average of 90.2 percent of the combined total available for division between the two groups, and only 9.8 percent to their stockholders. The latter figure refers to profits after taxes. But only about half of this amount—4.1 percent—was on the average of those ten years paid out in dividends. (These figures compared with public-opinion polls taken at the time which showed a consensus of most Americans that corporate employees got only 25 percent of the total available for division and the stockholders 75 percent.)
Yet the fierce diatribes of Marx and Engels led to the Russian Revolution of 1917, the slaughter of tens of thousands, the conquest and communization by Russia of some half dozen neighboring countries, and the development and production of nuclear weapons that threaten the very survival of mankind.
Economically, communism has proved a complete disaster. Not only has it failed to improve the welfare of the masses; it has appallingly depressed it. Before its revolution, the great annual problem of Russia was to find sufficient foreign markets for its crop surpluses. Today its problem is to import and pay for less than adequate foodstuffs.
Yet The Communist Manifesto and the quantity of socialist propaganda which it inspired continue to exert immense influence. Even many of those who profess themselves, quite sincerely, to be violently "anticommunist," feel that the most effective way to combat communism is to make concessions to it. Some of them accept socialism itself—but "peaceful" socialism—as the only cure for the "evils" of capitalism. Others agree that socialism in a pure form is undesirable, but that the alleged "evils" of capitalism are real—that it lacks "compassion," that it does not provide a "safety net" for the poor and unfortunate; that it does not redistribute the wealth "justly"—in a word, that it fails to provide "social justice."
And all these criticisms take for granted that there is a class of people, our officeholders, or at least other politicians whom we could elect in their place, who could set this all right if they had the will to do so.
And most of our politicians have been promising to do exactly that for the last half century.
The trouble is that their attempted legislative remedies turn out to be systematically wrong.
It is complained that prices are too high. A law is passed forbidding them to go higher. The result is that fewer and fewer items are produced, or that black markets develop. The law is ignored, or finally repealed.
It is said that rents are too high. Rent ceilings are imposed. New apartments cease to be built, or at least fewer of them. Old apartment buildings stand vacant, and fall into decay. Higher rents are eventually legally allowed, but they are practically always set below what market rates would be. The result is that tenants, in whose supposed interest the rent controls were imposed, eventually suffer as a body even more than landlords, because there is a chronic shortage of housing. Wages are supposed to be too low. Minimum wages are fixed. The result is that teenagers, and especially black teenagers, are thrown out of work and on the relief rolls. The law encourages strong unions and compels employers to "bargain collectively" with them. The result is often excessive wage-rates, and a chronic amount of unemployed.
Unemployment relief and Social Security schemes are put into effect to provide "safety nets." This reduces the urgency for the unemployed to find new or better-paid work and reduces their incentive to look. Unemployment payments, Social Security and other such safety nets continue to grow. To pay for these, taxes are increased. But they do not raise the expected revenue because the taxation itself, reducing profit incentives and increasing losses, reduces enterprise and production. The spending and safety nets are increased. Deficit spending appears and increases. Inflation appears, demoralizing production further. Sad to relate, these consequences have appeared in country after country. It is hard to find a single country today that has not become a bankrupt Welfare State, its currency constantly depreciating. Nobody has the courage to suggest dismantling it or to propose reducing its handouts or safety nets to affordable levels. Instead the remedy proposed everywhere is to "tax-the-rich" (which turns out everywhere to include the middle-classes) still more, and to redistribute the wealth.Guided by Profit
Let us return to our point of beginning. The eminent person that I quoted then is mistaken when he tells us that we are governed by the profit-motive of the few rather than the needs of the many. The profit motive is simply the name for the practically universal motive of all men and all families—the motive to survive and to improve one's condition. Some of us are more successful at this effort than others. But it is precisely the profit-motive of the many that must be our main reliance for supplying the needs of the many.
It is strange that so little recognition is given to the fact that a man cannot grow richer without making others richer, whether that is his intent or not. If he invests and starts a new and successful business, he must hire an increasing number of workers, and raise wages by his own increased demand. He is supplying his customers either with a better product than they had before, or as good a product at a cheaper price, in which case they have more money left to buy other things. Even if he uses his own receipts only to increase his own consumer demand, he helps provide more employment or higher pay; but if he reinvests his profits to increase the output of his business, he directly provides more employment, more production, more goods.
So let us be thankful for the successful profit-motive in others. Of course, none of us should respond "only to the forces of the market place." Fortunately few of us do. Americans are not only among the richest people in the world today but among the most generous. It is only when each of us has provided for more than his own needs that he can acquire a surplus to help meet the needs of others. Voluntary cooperation is the key.[From the February 1985 issue of The Freeman. Excerpted from The Wisdom of Henry Hazlitt]
Over the past two decades, fears about China’s rapid economic and technological advancement have grown exponentially and culminated in the recent trade war unleashed by President Trump. But only supporters of government intervention could think of China’s market socialism as a redoubtable challenger to a market-oriented economy. But that’s not how it works. Murray Rothbard, for example, has clearly shown that government interventions result in more interventions to deal with the unintended negative consequences of the first ones.1 Moreover, interventions aimed at restoring initial market conditions further disrupts the market process. The case of China illustrates very well this cumulative nature of government interventions.
After very high growth rates at the beginning of its transition to a market economy, China’s economic dynamism waned toward the end of the 1990s. Growth received renewed impetus only when China significantly lowered barriers to foreign trade and investment as a condition to join the WTO in 2001. An export-led economic boom followed, as exports of goods and services surged from around 20% of GDP in the late 1990s to 36% of GDP in 2006. Real GDP growth climbed to 14% y-o-y in 2007 (see graph 1).
Foreign direct investment (FDI) inflows increased four-fold from about USD 40 billion in 2000 to USD 170 billion in 2008. This meant domestic investment, capital accumulation, and productivity took off at impressive growth rates (see graph 2). China truly became a manufacturing workshop for the rest of the world helped by the global economic boom in the early 2000s.
Graph 1: Real GDP and Exports
Graph 2: Investment and Productivity
China’s trade liberalization was undermined by mercantilist policies designed to hoard a large amount of forex reserves. In the early 2000s, China ran a currency peg to the US dollar and the People’s Bank of China (PBoC) was obliged to buy or sell foreign currency at a fixed exchange rate. By purchasing forex inflows from growing FDI and surging exports, the PBC accumulated almost USD 2 trillion in reserves (more than 40% of GDP) until 2008 (see graph 3). Yet, simple exchange operations would not have resulted automatically in such a large accumulation of reserves. The equivalent amount of RMBs sold on the market would have increased the domestic money supply and price level, increasing imports and capital outflows. In turn, this would have drawn down the forex reserves and rebalanced the current account surplus which peaked at 10% of GDP in 2007 and 2008. However, PBoC sterilized the increase in the domestic money supply, initially via open market operations — sale of Central Bank Bills and drawing of government deposits — and later by increasing the banks’ reserve requirements from 6% in 2000 to 17.5% in 2008.2 It thus kept the real exchange rate undervalued and the latter depreciated by almost 20% from 2001 to 2004, instead of appreciating under the pressure of hefty financial inflows (see graph 4). Subsidies to state-owned enterprises boosted exports as well, in particular in sectors such as steel and solar panels. Meanwhile, high tariffs curtailed imports, especially for food and other consumer goods. At the same time, capital controls limited financial outflows and kept the foreign currency in the country.
Graph 3: Foreign Exchange Reserves
Graph 4: Exchange Rate Developments
Mercantilist policies, including currency devaluations, have significant negative consequences, primarily in terms of welfare loss. According to Mises in Human Action “…citizens of the devaluating country are getting less for what they are selling abroad and paying more for what they are buying abroad; concomitantly they must restrict their consumption.” Indeed, private consumption declined markedly from 47% of GDP in 2000 to a rather low level of 36% of GDP in 2008. In addition, the households’ returns on their high savings were deliberately repressed in the financial sector dominated by state-owned banks and via strict controls of private investment in real estate and overseas.
In addition, China developed a structure of production aligned to an artificially inflated external demand which collapsed when the credit boom stopped in the rest of the world. China’s mercantilist policy and the resulting very high current account surpluses would not have been possible without the monetary expansion of major developed economies. If imports are curtailed, exports should drop as well, unless foreign buyers are willing to significantly reduce their foreign asset balances. In China’s case, exports were largely purchased with money printed abroad as the Chinese government amassed a large amount of US Treasuries. It was hardly a safe or profitable investment and certainly not worth curtailing private consumption or distorting private investment.After the Great Recession
When the global recession hit, China doubled down on its interventions. It not only continued piling up forex reserves which grew by another USD 1.9 trillion over 2008-2014, but also engaged in recurrent growth stimuli to prop-up domestic demand as well. China has implemented growth stimuli approximately every two years since the Great Recession. Each time macroeconomic policies were tightened to reduce domestic imbalances, growth slipped and the Chinese planners resorted to a new round of easing.
Growth stimuli targeted primarily infrastructure and real estate projects, with a large part of the financing provided by local governments, either directly via sales of land and special bonds or, indirectly, via special financial vehicles (LGFVs). Although China’s annual budget deficit seemed benign at an average of 2.5% of GDP over 2008–2018, the “augmented fiscal deficit” calculated by the IMF, which includes off-budget spending, averaged an astounding 8.5% of GDP. At the same time, aggressive monetary easing was carried out via cuts in both policy rate and bank reserve requirements which dropped from 17.5% in 2008 to 10.5% in October 2019. While the bank credit multiplier (M2/M0) increased moderately from 10 in 2001 to 13 in 2008, it almost doubled to 25 by end-2018. As a result, the stock of domestic private credit surged to 210% of GDP by 2018 after being almost flat at about 120% of GDP over 2002-2008 (see graph 5). As a result, total domestic debt reached about 300% of GDP in 2018, one of the highest among developing economies.
Graph 5: Credit and Total Debt-to-GDP
Graph 6: Money Stock Growth (Jan 2000=100)
As monetary expansion increased exponentially, it got out of sync with the one in the US, in particular when the Fed started to normalize interest rates (see graph 6). The RMB appreciated by almost 60% in real terms from 2005 to 2015. After the announcement of a new stimulus round in 2015, hefty capital outflows to the tune of USD 1.3 trillion occurred, as capital controls had been partially relaxed in the meantime. Eventually the PBC spent about USD 830 billion in reserves during 2015–2016 to ease the depreciation of the RMB.
In addition to the balance of payments crisis of 2015–2016, the artificial credit expansion led to a considerable distortion in the allocation of factors of production. More and more resources got diverted into financial, real estate and construction activities, whose share in GDP went up significantly to the detriment of manufacturing. Overbuilding created the so-called “ghost cities” where an estimated 80 million of dwelling units, more than 20% of the total stock, are sitting empty. Such vacancy rates have been seen elsewhere only after the collapse of construction booms, like the one in Spain. In addition, surging mortgage credit inflated housing price bubbles which slumped on several occasions, most recently in 2012 and 2015 (Graph 7).
Graph 7: Wages and Prices
Graph 8: Wages and Labor Productivity
The monetary expansion pushed up domestic prices and wages with the latter advancing much faster than labor productivity, which had not been the case prior to 2008 (see graphs 7 and 8). China’s price competitiveness deteriorated visibly and FDI inflows dwindled significantly in recent years (see graph 9). Moreover they were overtaken by FDI outflows since 2016, driven by the so-called Belt and Road Initiative, a new government strategy to diversify foreign assets away from US Treasuries. In addition to being misallocated, investment growth slumped, in particular in manufacturing, slowing labor productivity (see graph 2). Exports declined from 35% of GDP in 2007 to 21% of GDP in 2008 and the current account surplus nearly vanished by 2018 (Graph 10). Real GDP growth rates almost halved from about 10% of GDP in 2010 to 6% in Q3 2019. When President Trump decided to go against China in 2018, the latter’s economic prowess was already under siege from its own misdirected government interventions.
Graph 9: FDI Flows
Graph 10: Current Account BalanceConclusion
China’s last two decades of roller-coaster growth, surging domestic debt and malinvestment provide a good example that continuous tampering with the market process is both inefficient and has a snow-ball effect. The first mercantilist intervention over 2001–2008 led to misallocation of resources in an export-oriented structure of production for which external demand proved illusory. The repressed private consumption and distorted investment resulted in a notable welfare loss. After 2008, the government intervention continued even more forcefully via recurrent growth stimuli, in an attempt to artificially boost domestic demand as well. Private consumption didn’t benefit much and only grew by about 3% of GDP over 2008-2018 because resources got squandered in infrastructure and real estate malinvestment. At the same time, price competitiveness, labor productivity and growth took a big hit while indebtedness shot up undermining China’s ambitions to rapidly catch-up with advanced economies. Yet, China’s economy can rise again if it opens up unconditionally to foreign investment and allows markets to allocate resources efficiently. Only private investment in market-oriented production facilities could bring jobs and life to China’s otherwise doomed “ghost cities.”
- 1. For a detailed typology of government interventions, see Rothbard (Man, Economy and State, Chapter 12 and Power and Market, link: https://cdn.mises.org/Man,%20Economy,%20and%20State,%20with%20Power%20and%20Market_2.pdf )
- 2. Increasing bank reserve requirements in order to limit the capacity of fractional-reserve banks to create artificial fiduciary credit and put the banking system on a sounder footing is certainly a worthy policy. However, this was not the purpose of PBoC’s interventions. As a proof, after 2008, PBoC drastically lowered reserve requirements again.
Prosperity & Liberty: What Venezuela Needs. Edited by Rafael Acevedo. Econintech, 2019.
Rafael Acevedo is a distinguished Venezuelan economist, now in part-time residence at Texas Tech University, who is deeply concerned about the future of his native country. Socialism has brought Venezuela to rack and ruin, and if the country is to recover, a move to the free market is essential.
Many have said the same thing, but Acevedo has done much more than bemoan his country’s fate and point to the obvious remedy. He is the head of a think tank called Econintech, and he and his collaborators have proposed detailed plans for the reconstruction of Venezuela from its present state of wreckage.
In Prosperity & Liberty, Acevedo has gathered together a number of these plans, as well as essays by eminent scholars who tell Venezuela’s sad tale and compare the situation of that country with what has taken place elsewhere.
A vital point made in the book is that Venezuela’s descent into disaster did not begin with the overtly socialist regime of Hugo Chávez. To the contrary, the relatively free economy that had existed before 1958, albeit under a political dictatorship, was gradually supplanted by interventionist policies that brought with them massive corruption and a decline in economic growth. Though Venezuela is blessed with immense natural resources, oil deposits foremost among them, these did not suffice to fend off disaster.
Given the economy’s poor performance, what was to be done? One might think the answer obvious, a return to a freer economy, but unfortunately another path gained popularity. Advocates of this path said that Venezuela’s economic problems resulted not from too much socialism, but rather from too little of it. As Acevedo and Luis Cirocco note in an illuminating essay,
Over time, the gradual destruction of economic freedom led to more and more impoverishment and crisis. This, in turn, set the stage for the rise of a political outsider with a populist message: Hugo Chávez. He was elected in 1998 and promised to replace our “lighter” socialism by a form of hard socialism, which he called “the revolution of the 21st century” and which only magnified the problems we had faced for decades. He was able to pass an even more anti-private property constitution. Since Chávez’s death in 2013, the attacks against private property continued, and Chávez’s successor, Nicolás Maduro, keeps promising more of the same. The government has turned toward outright authoritarian socialism …
Students of Austrian economics will not be surprised that the socialist program has failed completely. The most overt sign of economic chaos is the country’s extraordinary inflation rate. Essential consumer goods are at best in short supply, and the entrepreneurial spirit, a key to economic growth, has been stifled. Small wonder that many have fled the country, and many among those who remain cross the border to engage in black market exchanges. It must be said, though, that the contributors to the book fail to address the dire effects of American economic sanctions on the Venezuelan people.
The disaster that has resulted from socialism is by no means confined to the economic sphere. Those who openly challenge the regime have been arrested and sometimes tortured as well, and again this should come as no surprise. As Friedrich Hayek long ago taught us,
a competitive capitalist economy is necessary to sustain democracy, and that once a country becomes “dominated by a collectivist creed, democracy will inevitably destroy itself.” The reason is simple. Centrally planned, socialist economic systems necessarily concentrate economic power in the hands of government planners who can, through their economic edicts, punish dissent.
If Hayek accurately depicted the road to serfdom, our pressing question becomes, what is the road to freedom? The answer does not lie in the deposition of Maduro and his replacement by his rival Juan Guaidó. He is, sad to say, also a socialist, though not so extreme a one as Maduro, and his program would not rescue Venezuela from the economic doldrums. I should add, though the contributors to the volume do not state this directly, that it would be a path of folly to install Guaidó by force, a course of action urged by many American neoconservatives, ever eager to mind the business of other countries.
As Ron Paul has trenchantly remarked about the recent CIA-backed effort to oust Maduro,
While US Administrations engaged in “regime change” have generally tried to mask their real intentions, this US-backed coup is remarkable for how honest its backers are being. Not long ago the National Security Advisor to the president, John Bolton, openly admitted that getting US companies in control of Venezuelan oil was the Administration’s intent. Trump Administration officials have gone so far as mocking the suffering of Venezuelans when a suspiciously-timed nationwide power failure heightened citizens’ misery. … Was the US behind the take-down of Venezuela’s power grid? It would not be the first time the CIA pulled such a move, and US officials are open about the US goal of making life as miserable as possible for average Venezuelans in hopes that they overthrow their government.
The starvation blockade imposed on Venezuela, denounced by the eminent international lawyer Alfred de Zayas, has brought about great suffering. Most Venezuelans, even those not favorable to Maduro, naturally resent efforts by foreigners to order them to change their government, and they remember with bitterness the CIA-orchestrated coup against Chávez in 2002. Support for such efforts, even in the name of opposition to socialism, plays into the hands of the CIA’s efforts, dating from the inception of that agency, to promote at all costs global American hegemony.
Political and economic salvation for Venezuela can come only from the Venezuelan people themselves. They cannot be “forced to be free” but must seek, if they have the wit and wisdom to do so, the guidance of experienced free market economists like Acevedo and his coworkers at Econintech.
What is the best way to establish a free market economy? Acevedo with penetrating insight accepts the counsel of the greatest Austrian economist of the latter half of the twentieth century, Murray Rothbard. Economic reform must be extensive and fast, not creeping and piecemeal: “Freeing only a few areas at a time,” Rothbard said, “will only impose continuous distortions that will cripple the workings of the market and discredit it in the eyes of an already fearful and suspicious public.”
It is heartening that Acevedo and his colleagues have learned so much from the Austrian school, and he and his colleagues have made abundantly clear the best course of action for Venezuela. It is a course of action that only the Venezuelan people themselves can take.
It's becoming more and more apparent that the United States will not be going back to "business as usual" after Donald Trump leaves office, and it is easy to imagine that the anti-Trump parties will use their return to power as an opportunity to settle scores against the hated rubes and "deplorables" who dared attempt to oppose their betters in Washington, DC, California, and New York.
Certainly, this ongoing conflict will manifest itself in the culture war through further attacks on people who take religious faith seriously, and on those who hold any social views unpopular among degreed people from major urban centers. The First Amendment will be imperiled like never before with both religious freedom and freedom of speech denounced as vehicles of "hate." Certainly, the Second Amendment will hang by a thread.
But even more dangerous will be the deep state's return to a vaunted position of nearly untrammeled power and obeisance from elected officials in the civilian government. The FBI and CIA will go to even greater lengths to ensure the voters are never again "allowed" to elect anyone who doesn't receive the explicit imprimatur of the American intelligence "community." The Fourth Amendment will be banished forever so that the NSA and its friends can spy on every American with impunity. The FBI and CIA will more freely combine the use of surveillance and media leaks to destroy adversaries.
Anyone who objects to the deep state's wars on either Americans or on foreigners will be denounced as stooges of foreign powers.
These scenarios may seem overly dramatic, but the extremity of the situation is suggested by the fact that Trump — who is only a very mild opponent of the status quo — has received such hysterical opposition. After all, Trump has not dismantled the welfare state. He has not slashed — or even failed to increase — the military budget. His fights with the deep state are largely based on minor issues.
His sins lie merely in his lack of enthusiasm for the center-left's current drive toward ever more vicious identity politics. And, of course, he has been insufficiently gung ho about starting more wars, expanding NATO, and generally pushing the Russians toward World War III.
For even these minor deviations, we are told, he must be destroyed.
So, we can venture a guess as to what the agenda will look like once Trump is out of the way. It looks to be neither mild nor measured.
If the effort at preventing any future Trumps succeeds, it will signal essentially the final victory over so-called "Red State" America.
And then what?
In that situation, half the country may regard itself as conquered, powerless, and unheard.
That's a recipe for civil war.The Need for Separation
So long as most Americans labor under the authoritarian notion that the United States is "one nation, indivisible" there will be no answer to the problem of one powerful region (or party) wielding unchallenged power over a hapless minority.
Many conservatives naively claim that the Constitution and the "rule of law" will protect minorities in this situation. But their theories only hold water if the people making and interpreting the laws subscribe to an ideology which respects local autonomy and freedom for worldviews in conflict with the ruling class. That is increasingly not the ideology of the majority, let alone the majority of powerful judges and politicians.
Thus, for those who can manage to leave behind the flag-waving propaganda of their youths, it is increasingly evident that the only way to avoid a violent conflict over control of the national government is breaking the United States up into smaller pieces. Or at least decentralizing power sufficiently to allow for meaningful autonomy beyond the reach of federal power.
As I've noted in the past, this notion has long been gaining steam in Europe, where referendums on greater local autonomy are growing more frequent.
And conservatives are increasingly seeing the writing on the wall. Among the more insightful of these has been Angelo Codevilla. In 2017, Codevilla, writing in the Cleremont Review of Books, laid out a blueprint for local opposition to federal power and noted:
Texas passed a law that, in effect, closes down most of its abortion clinics. The U.S. Supreme Court struck it down. What if Texas closed them nonetheless? Send the Army to point guns at Texas rangers to open them? What would the federal government do if North Dakota declared itself a “Sanctuary for the Unborn” and simply banned abortion? For that matter, what is the federal government doing about the fact that, for practical purposes, its laws concerning marijuana are being ignored in Colorado and California? Utah objects to the boundaries of national monuments created by decree within its borders. What if the state ignored those boundaries? Prayer in schools? What could bureaucrats in Washington, D.C., do if any number of states decided that what the federal courts have to say about such things is bad?
Now that identity politics have replaced the politics of persuasion and blended into the art of war, statesmen should try to preserve what peace remains through mutual forbearance toward jurisdictions that ignore or act contrary to federal laws, regulations, or court orders. Blue states and red states deal differently with some matters of health, education, welfare, and police. It does no good to insist that all do all things uniformly.
And by 2019, the need for separation was becoming more urgent. Last week Codevilla continued in this line of thinking:
[A]fter the 2020 elections ordinary Americans will have to deal with the same dreadful question we faced in 2016: How do we secure and perhaps restore our fast-diminishing freedom to live as Americans? And while we may wish for help from Trump, we have to look to ourselves and to other leaders for how we may counter the ruling class’s manifold assaults now, and especially in the long term...
The logical recourse is to conserve what can be conserved, and for it to be done by, of, and for those who wish to conserve it. However much force of what kind may be required to accomplish that, the objective has to be conservation of the people and ways that wish to be conserved.
That means some kind of separation.
...[T]he natural, least stressful course of events is for all sides to tolerate the others going their own ways. The ruling class has not been shy about using the powers of the state and local governments it controls to do things at variance with national policy, effectively nullifying national laws. And they get away with it.
For example, the Trump Administration has not sent federal troops to enforce national marijuana laws in Colorado and California, nor has it punished persons and governments who have defied national laws on immigration. There is no reason why the conservative states, counties, and localities should not enforce their own view of the good.
Not even President Alexandria Ocasio-Cortez would order troops to shoot to re-open abortion clinics were Missouri or North Dakota, or any city, to shut them down. As Francis Buckley argues in American Secession: The Looming Breakup of the United States, some kind of separation is inevitable, and the options regarding it are many.
It is notable that Codevilla's strategy is not marked by grandiose gestures of independence or a yearning to re-create the glorious military victories of the days of yore. Such were the mistakes of the Confederates in the mid-nineteenth century.
Interestingly, Codevilla's more sensible approach shares quite a bit in common with the strategies recommended by Hans-Hermann Hoppe in his essay "What Must Be Done." The idea is to assert local control and refuse cooperation with federal policymakers. But with restraint. Hoppe writes :
It would appear to be prudent ... to avoid a direct confrontation with the central government and not openly denounce its authority or even abjure the realm. Rather, it seems advisable to engage in a policy of passive resistance and non-cooperation. One simply stops to help in the enforcement in each and every federal law. One assumes the following attitude: “Such are your rules, and you enforce them. I cannot hinder you, but I will not help you either, as my only obligation is to my local constituents.”
Consistently applied, no cooperation, no assistance whatsoever on any level, the central government’s power would be severely diminished or even evaporate. And in light of the general public opinion, it would appear highly unlikely that the federal government would dare to occupy a territory whose inhabitants did nothing else than trying to mind their own business. Waco, a teeny group of freaks, is one thing. But to occupy, or to wipe out a significantly large group of normal, accomplished, upstanding citizens is quite another, and quite a more difficult thing.
Some will be unable to break out of the mindset that the United States must forever be governed by a singular national policy. They will insist any attempt at decentralization of this sort must necessarily result in violence.
Writing at The American Conservative, Michael Vlahos, for example, appears unconvinced that violence can be avoided. But even he concedes the violence is unlikely to take the form of mass bloodshed as seen in the 1860s:
Our antique civil wars were not bound to formal rules, yet somehow they held to well-etched bounds of expectation. American society today has very different norms and expectations for civil conflict, which certainly will constrain how we fight the next battle.
Today’s America no longer embraces a national landscape of an industrial-lockstep battlefield (think Gettysburg, D-Day). Our next civil war—as social media so eloquently reminds us—will enact its violence on a battle campus of equal pain, if less blood.
Many devotees of perpetual federal supremacy, of course, won't admit even this. Any attempt at decentralization, nullification, or secession is said to be invalid because "that was decided by the Civil War." There is no doubt, of course, that the Civil War settled the matter for a generation or two. But to claim any war "settled things" forever, is clearly nonsense.
It is true, however, that if the idea of a legally, culturally, and politically unified United States wins the day, Americans may be looking toward a future of ever greater political repression marked by increasingly common episodes of bloodshed. This is simply the logical outcome of any system where it is assumed the ruling party has a right and a duty to force the ways of the one group upon another. That is the endgame of a unified America.
Last week, the Washington Post's editorial board came out against sanctuary cities. No, not the kind of sanctuary cities that refuse to enforce federal immigration law. The Post's editors have no problem with that. Instead, The Post came out against the efforts by some local governments to oppose state- and federal-level enforcement of restrictions on gun ownership.
The Post didn't go easy on these efforts either. The editorial likened the gun-owner sanctuary efforts to "vigilantism" and "frontier justice," with the obvious implication being these people are one step away from organizing lynch mobs. Moreover, we're told the movement is "nonsense fanned by mischief-makers with an agenda," and will lead to "chaos."
Recognizing the obvious double standard the Post is proposing for immigrant sanctuaries and gun-owner sanctuaries, the authors try to explain it all away:
The distinction between the two sanctuaries is basic. Localities that have passed resolutions declaring themselves Second Amendment sanctuary jurisdictions are threatening to ignore laws enacted by duly elected state legislatures and signed by governors. Immigration-focused sanctuary localities are breaking no law; rather, they are refusing purely voluntary cooperation in service to federal law enforcement.
It's pretty hard to split this hair any finer. The Post's distinction here seems to be that local nullification of federal law is acceptable, but local nullification of state law is not.
Of course, whether or not local governments are breaking a law depends on each state's constitution and the nature of "home rule" in each state. Indeed, in California, Judge James Crandall, appointed by Democratic Gov. Jerry Brown, ruled against California's law mandating local enforcement of immigration law. Crandall argued the law was "an unconstitutional invasion into the rights of the city." He also said "the operation of a police department and its jail is a city affair. For the state to say one size fits all for policing isn’t going to fit everybody."
Here we find a case of a law prohibiting "sanctuary cities" enacted — to use the words of The Post editors "by duly elected state legislatures."
Does the post agree or disagree with the judge's logic? If the Post's editors disagree, then on what grounds to they justify support for local governments that ignore state laws mandating compliance with immigration enforcement? If the editors agree with the ruling, then on what grounds do they deny a local government's freedom to enforce gun laws as they wish?
Several states, including Florida , have adopted laws that prohibit sanctuary cities. According to this source, at least one local government in Florida has declared itself a sanctuary for illegal immigrants. Shall we expect an editorial from the Post denouncing this flouting of state laws? That seems unlikely.
Moreover, since The Post is now coming out in favor of state and local indifference toward federal law, will the Post's editors be throwing their support behind state-level efforts to nullify federal Obamacare laws or federal gun laws?
Obviously, that's not going to happen, and we should not expect any consistency on this from The Post. To anyone who is paying attention, it is clear The Post truly has a double standard here, and has been casting about for ways to justify support for one type of local nullification, while opposing a different kind.
What the Post should have done was just come out and state what is likely the editorial board's real position: namely that restrictions on gun ownership are good, and restrictions on immigration are bad. The conclusion: it is moral to ignore laws restricting immigration. But it is immoral to ignore laws restricting gun ownership.
Although this position on guns is certainly wrong, The Post's editors could at least have been respected for saying what they really meant. Instead, they fall back on a disingenuous claim that they support following the law, and that anything else is "chaos."
This ersatz conservatism was no doubt an attempt to appeal to people who fancy themselves as "reasonable" or "moderate." Indeed many of these sorts of people continue to support the War on Drugs with nonsense about how we're all obliged to follow clearly unconstitutional federal drug laws until those laws are changed. Nonetheless, The Post's the approach is inherently dishonest and double-dealing.
A truly consistent position is to let states and locals decide for themselves on all of these issues.
In a 2017 column for mises.org, I said exactly this:
If California establishes — yet again — that states can ignore and even inhibit federal arrests and prosecutions in the states, then it becomes all the easier for other states to refuse to enforce federal gun laws, federal drug laws, Obamacare, or federal mandates that states provide welfare programs and "free" taxpayer-funded services to non-citizens.
The only tool the federal government should have in these cases is to cut off funding. This is a very powerful tool, mind you, but it is also hardly a given that every state would face disaster if facing a cut in federal spending. Nor is this a one-way street. for political reasons, the federal government wants to spend money in the states just as much as the states want to receive it.
We should take this even further, of course, and support broad "home rule" powers for individual cities and counties, so they can decide for themselves what state laws to enforce, and which to nullify. Only by decentralizing and localizing political power can we hope to have laws that actually reflect to a reasonable extent the values of the local population. Radical decentralization also makes it easier for those who disagree with these policies to escape them through physical relocation. The alternative is more of what we already have: both state and federal governments impose the will of the majority in the legislature on the minority. Often, this is a near fifty-fifty split, yet we're suppose to believe, for example, that all 39 million Californians in a place larger than Britain are obliged to follow state laws because, say, 51 percent of the population supports those policies. And if you're in the minority? Tough luck, forever. Oh, and you'll have to move hundreds of miles away to live under different laws.
If the post really supported democracy, it would want more of it. That is, it would want more legislative bodies — whether city councils, county commissions or state legislatures — to decide matters for themselves. And that includes laws covering guns.
Negative interest rates are now entrenched reality in Europe, and not just for buyers of sovereign or corporate debt – even retail savings accounts are affected. What does this mean for real people trying to save for retirement? And more broadly, what does it mean for Europe culturally? Not to mention America, since Alan Greenspan tells us negative rates are coming here soon?
Our guest Rahim Taghizadegan from the independent Viennese Scholarium joins the show to discuss the anti-economics of negative rates. He is co-author of a new book titled The Zero Interest Trap. He is also a co-author of Austrian School for Investors.
[This article originally appeared in Studies in Logic, Grammer and Rhetoric 57, no. 1 (2019): 65–74. Reprinted with permission.]
Abstract: Due to the famous methodenstreit it is often well argued that Menger’s approach to social sciences can be seen as anti-historical, as according to him pure empirical studies are insufficient to establish a firm economic theory. By suggesting that some theorems have to precede historical studies, Menger may be seen as a representative of the a priori tradition in scientific method. The modern method in the mainstream of economic thinking is also to a large extent anti-historical and a priori, but because of its lack of realism and extensive reliance on very limiting assumptions. The main strength of the Mengerian anti-historical approach is lesser faith in imaginary constructs, implying a higher degree of realism in theorizing.Keywords: methodenstreit, a priori, Austrian, methodology
It is concrete acts, destinies, institutions of definite nations and states, it is concrete cultural developments and conditions whose investigation constitutes the task of history and statistics, whereas the theoretical social sciences have the task of elaborating the empirical forms of social phenomena and the laws of their succession, of their coexistence, etc. ~ Carl MengerHistoricism issue over economic laws
Methodenstreit: a methodological clash between prominent 19th century thinkers of the Historical and the Austrian School, with Menger standing against Schmoller. As much as it is methodological it seems to be mythological too. One side passionately argued for preserving economic theorizing and the other side wanted to crush it in favor of pure historical research (see e.g. Huerta de Soto 1998). Is it really the case that the poles were so extreme, or it is merely a modern interpretation of the debate, which is path dependent on the emotions and ideologies of the debate’s participants? Joseph Schumpeter — perhaps the theorist most distant from any kind of “teaming” in the history of economic thought — offers the following summary of the methodenstreit:
Since there cannot be any serious question either about the basic importance of historical research in a science that deals with a historical process or about the necessity of developing a set of analytic tools by which to handle the material, the controversy, like all such controversies, might well seem to us to have been wholly pointless (...) neither party really did question its opponent’s position outright (...)
The first thing to be observed about all controversies between scientific parties is the large amount of mutual misunderstanding that enters into them (...)
Secondly, this situation is made worse by the fact that methodological clashes often are clashes of temperaments and of intellectual bents (...)
Third, we must never forget that genuine schools are sociological realities — living beings. They have their structures — relations between leaders and followers — their flags, their battle cries, their moods, their all-too-human interests. Their antagonisms come within the general sociology of group antagonisms and of party warfare (Schumpeter 1954, pp. 814–815).
Schumpeter further continues that various terms used in the debate over method — such as empirical, realistic, modern, exact, speculative, futile — are beginning to live a life of their own. They do not necessarily have to denote the word to anything specific, but may stem from personal interest, quarrels, vanities and fights. That of course in turn is a natural feature of human beings, who are not like impassionate computers, passively processing received information. Ironically, in that respect: the best proof for the non-existence of homo oeconomicus are economists themselves.
In understanding the content of the topic one should not, however, be too much occupied with peculiar relations. Putting psychologizing and personal issues aside, the content of the methodological question remains: what is the status of economic science and which methods are used to study it? For Schumpeter the question is not properly framed as it depends on the content of what is being studied. Even though in many hypothetical examples the demarcation line is easy: “price” (a theoretical term) is different than “price for apples in New York in 1993” (a historical term), in reality puzzle solving in economics may involve various sophisticated configurations in which historical factors play important roles in theoretical narration (as I plan to show with some examples below). Inferring from Schumpeter’s comments, the conclusion would be quite radical: there is no such thing as methodenstreit. There is only methodensuche; a search for proper method at the right time. In-depth study of a particular puzzle is always to some extent a form of case study.
A quite fitting example for that can be Mises’s argument about the impossibility of socialism (Mises 1990). By the modern Austrians the argument is treated as a strong theoretical argument (rightly so). At the heart of it, however, lies a specific institutional concept: private property. The notion can and is analyzed by theoretical studies, but at the same time it is more context-based than very broad economic categories such as opportunity, cost, value, time preference, capital, and so forth. All those latter concepts are found in the highest forms of economic theorizing about economic action. Private property is a theoretical concept having a lot of cultural, legal, and historical flavor. What does it actually mean to have something privately owned? How does this system differ, say, from “several property”, or from “syndicalism”, “corporate capitalism” etc.? (see the recent debate Denis 2015; Bylund and Manish 2017).
By making a theoretical argument about the impossibility of socialism, Mises suddenly found himself tangled in institutional considerations about legal systems and their ideological basis. That itself does not mean that he went outside of theoretical considerations. Nevertheless he went directly into empirical waters as compared to his neoclassical colleagues, who wanted to do economic science much like Wieser and, for example, search for a universal value theory that would be applicable under all institutional arrangements (Bostaph 2003; Wieser 1971), including socialism. Lange’s reaction may seem like a sarcastic comment, when he stated that Mises, despite being a defender of theorizing, makes an institutional-historical type of argument (Lange 1939, p. 55)1. In reality the comment is not that surprising, because Mises’s theory follows from a different type of apriorism having more to do with empiricism than the theoretical isolation characteristic of neoclassical thinking.Theory is always needed and the data is always needed too
Any form of scientific reasoning requires conceptualization in a theoretical framework. In other words, science is virtually always theoretical. Even when confronted with a broad range of empirical data, that data has to be properly arranged and interpreted. To be precise, empirical systems are actually built on information, not just data. The latter is passive acquisition of observations, the former is based on interpretation and inquiry. There is a famous anecdote about Ludwig Wittgenstein asking someone in a seminar: “Why do people say it’s natural to think that the Sun goes around the Earth?”. The response was “Well, because it looks that way”. Yet a question follows: “And how would it look like if the Earth was moving around the Sun?”. Obviously it would look the same way, therefore on a purely sensualistic ground either conclusion can be reached. Fortunately though, empiricism is not sensualist, as it needs rational appraisal and well thought out reasoning.
Theoretization of data is related in methodology to Duhem-Quine’s thesis, which points to the fact that all observations require some form of background assumptions (see the illuminating discussion in Harding 1976). The thesis itself is related to physics, where measuring equipment for testing a particular hypothesis may be skewed, imperfect, or simply improper. An example could be given by the Michelson-Morley experiment, which was supposed to discover absolute time and space. The experiment, however, eventually ended with the conclusion that instead of absolute time and space, only the speed of light appears to be absolute. One of many potential conclusions from the observations, one should add. From such an inquiry, varieties of other inferences are possible: from saying that there is something wrong with the experiment, through something happening to the equipment, to a radical conclusion that Newtonian physics is flawed (on how the experiment reshaped physics, see: Shankland 1964).
Even though Duhem-Quine’s thesis seems to be crafted for physical considerations, it very strongly applies to the social sciences, where measurement is even more ambiguous. Take the case of the most fundamental variable in economic science: the overall “condition” of the individual. Amartya Sen by extensively studying wealth and development perfectly captured the assessment problem: “You could be well off, without being well. You could be well, without being able to lead the life you wanted. You could have got the life you wanted, without being happy. You could be happy, without having much freedom. You could have a good deal of freedom, without achieving much” (Sen 1985, p. 1). And such problems are only a beginning. No data stands on its own, therefore it requires a theoretical framework to interpret it. The accuracy of such measurements can also be questioned (Morgenstern 1964; Bagus 2011). How much more true that becomes while dealing with individuals, whose well-being is subjective and not entirely based on material factors.
Therefore, no escape from theorizing is possible in science. Theorizing actually constitutes science as it is, since science is based on some form of nomothetic reasoning.Different kinds of apriorism
If science is always theorizing, then any clashes in science are always collisions of different theories. In the light of the above, one is inclined to conclude that “apriorism” may have many faces. As the term indicates, a priori statements are being made prior to some empirical research. Nevertheless those statements themselves may already contain empirical elements in them. Therefore there are varying degrees of apriorism. Starting from the extreme side: there is apriorism based only on deduction and by the power of the already assumed. Such a version of economic theory would be like Euclidean geometry: arbitrarily chosen assumptions and their logical consequences. Apriorism does not have to be that extreme. If one allows for the assumption to be based on a broad range of observations, then economic apriorism is still using deduction, but is not anti-empirical. Rather, it is precisely the opposite (Smith 1996).
Nothing demonstrates the divergence between dissimilar apriorisms better than the difference between the Mises-Menger “anti-historical” method and Knight’s “anti-historical” method (see Knight 1940). Both camps are nominally a priori and often treated as being part of the same tradition against historicism, but the reality is that the Austrian camp would be closer to historicism than they are to Knight’s neoclassical equivocations. The Mengerian Austrian theory is constructed in a logical a priori manner, but it already comprehends many of the empirical notions about reality. The examples are: leisure as a consumption good, diversity of individuals, cognitive peculiarity of human beings, variety of natural resources, dynamism of preferences, heterogeneity of capital, differences in institutional arrangements (property rights versus regulatory intervention).2 In opposition to that, neoclassical apriorism starts off in a theoretical vacuum without inductive references about human reality.
On the very general level, both the Austrian School and the neoclassical school can properly be labeled as a priori and deductive. They start off, however, with a completely different set of assumptions. In the case of neoclassicism the assumptions may be chosen at random. It is possible to isolate a particular thing from any surroundings and push the abstraction into the extreme. Only later can one make some empirical sense out of them by confronting the predictions of the model with individual experiences as Friedman’s famous position asserts (Friedman 1953; see also Mäki 1994). No other theory in economics is more extreme in its apriorism than the neoclassical approach. No empiricism in the beginning and middle. Empiricism is injected only at the very end of a thought process, when individual forecasts are confronted with individual facts in order to assess the predictive power of theoretical frameworks. Yet before that there is a blank check for offering any kind of model. In some sense, then, Friedman’s idea was a license for formal revolution to introduce any unrealistic a priori model (Wade Hands 2009, pp. 150–151).
By contrast the Mengerian School uses apriorism in a much more mild and loose way: broad empirical considerations are always at hand along each step of the way in reasoning, and the limitations of theoretical components may be contested at all times. At the same time unrealistic tools (such as equilibrium concepts) are conceptually used, but with careful selection of their worth — always with their deficiencies in mind. Hence, Menger called his method “realistic-empirical” (Menger 1985, p. 66).
In other words, it can well be argued that the Austrian School is both a priori and empirical in its descriptions. And much more empirical then its neoclassical colleagues are.“Testing” in economics
Just as much apriorism has many faces in economics, so is the case with empirical confrontation of a particular theory with sets of data. Perhaps one could mention here Popper’s explanation about the falsificationist method. In social sciences it seems that Popper’s way is treated as a simplistic form of empiricism, where extremely theoretical systems are being subjected to selective testing by reference to small real world predictions. In reality that is not the case. First, Popper noted that his method is a form of conventionalism: there is no such thing as data against theory, because of Duhem-Quine’s. A particular theory is always confronted with another theory (see for example Popper 1959, pp. 79–82; see also Lakatos 1978, pp. 93–101).
Second, Popper suggested a different approach to social sciences than to natural sciences. One can even be restrained in calling this a particular “method”, since Popper simply gave general Socratic advice to social scientists: they should construct their theoretical systems in such a way to make it contestable by critical discussion in any relevant aspect (Popper 1994, pp. 166–172; Boland 1979; Boland 1994, pp. 157–167). Such a tactic is radically opposed to Milton Friedman’s views from his famous methodological essay. Friedman makes an argument that unrealistic theory can safely be wrong as long as it conforms to some set of selected predictions. Popper’s view is much broader, however: any theory can and should be contested along the way. Therefore, critical rationalism is not supposed to defend some sets of assumptions, but to contest all of them without exceptions.
Popper’s second point brings us close to the question of how empirical notions can harmonize theoretical investigations. Here, let me just briefly mention a few noncontroversial (I hope) examples.
The first and foremost one would be embedded in the so called escape from the Malthusian Trap. Before 1800 one can generally agree with the notion that per capita production could not significantly go beyond the means of subsistence, so in the long run living standards were basically the same over the centuries (Clark 2007, p. 2).3 The great economic question was: is it a necessary state of affairs, or can growth harmoniously and exponentially happen to virtually all regions on Earth as the market economy may lead to universal and peaceful flourishing among the nations? The answer to such a question can only be “empirical” by understanding the boundaries of the law of decreasing returns. The escape from the Malthusian Trap happened for a variety of reasons, but it was manifested in the commercialization of technological advancement embodied in mercantile products. Hence the possibility to escape the Malthusian Trap crucially depends on productive powers hidden in nature and human capacities to discover and manage them: things we identify by observation.4
The second example would relate to the usefulness of economic models for forecasting. We know there is no universal economic model which would predict the behavior of a stock market, or any specific market for that matter. Despite having important and impressive developments of probabilistic modeling, no such venue appears to be possible now. How do we know this? Not really through logical reasoning, but from reasonable recognition of the empirical reality around us. Since virtually all human choices are permeated with pure Knightian uncertainty, such predictions fail (on Knightian uncertainty see Hoppe 2007). It is still possible to construct a priori sophisticated models using measurable probabilities. Yet the simple reason we reject them actually stems from their incapability to deliver: they are falsified by experience. If they actually delivered many times again and again, it could be a good reason to think over our skepticism.
A third example would relate to the complexity of production functions, or otherwise put: world heterogeneity. Factors of production are not expressed in natural units and their quantities are not easily related through weights and parameters (as assumed in the infamous Cobb-Douglas function; Georgescu-Roegen 1988, pp. 299–300). How relevant is that empirical notion? It goes well beyond the task of modeling production functions, since it is at the heart of the economic calculation argument about socialism (Mises 1990). Economic calculation in monetary terms would not be needed, if all processes of production were either completely specific, or completely unspecific. In the case of the former, full specificity would mean that no choice is even possible (since every goal has just one route). In case of the latter, calculation in monetary units would be pointless, as it could be substituted by some form of natural measurement related to homogenous usage (for example kilograms) (Mises, 1966, pp. 206–207).
This is another good example of how empirical notion fits into economic theory and allows it to reach significant real-world conclusions by the power of reasoning.Conclusion: Mengerian anti-Historicism is both a priori and empirical
The above discussion leads us to the final question of how the Mengerian approach to economics places itself in the development of economic science. Menger has been a member of the economic triumvirate, alongside Jevons and Walras. Jevons can be at times seen as a hybrid of the other two who were poles apart. Both Walras and Menger were pure theorists, using a nomothetic apparatus to state and develop economic laws. Yet they differed greatly in how those laws were formulated. They both believed that economic theories are stated prior to specific historical research. At the same time they differed with respect to the emphasis on empirical notions surrounding human beings. Whereas for Walras, the model could assume very unrealistic elements, Menger has been much more careful. His followers have developed a quite unique line of thinking which seems to be at odds with both the “historical” method and “theoretical” method. The approach, however, seems to be a quite sensible path; or to paraphrase Meyer’s alternative: for Menger and Mengerians, truth in economic science is at the expense of quantitative precision.
- 1. Just as Mises was called by Lange an institutionalist, so was the case with Menger classified in such a way by Streissler (1973. pp. 172–3) and Jaffé (1976, p. 520).
- 2. This point about Mengerian apriorism is perhaps most clearly discussed in Smith (1994, pp. 316–318).
- 3. This statement could, however, be questioned. Indeed, there was some very mild growth over the centuries, but it was very limited compared to what happened after 1800.
- 4. Of course it does not follow that technology itself can lead to the escape.
Marco Rubio is the latest public figure to join the burgeoning anti-liberal and anti-market movement masquerading itself as being defending “the common good” from the greedy claws of the rapacious capitalists. Writing in National Review, Rubio launched an attack on the market economy under the guise of promoting “common-good capitalism.” After listing a some of the very real social ills that plague our society, Rubio, with laughable predictability declares that “deciding what the government should do about it must be the core question of our politics.” He does not even consider the idea that any institution other than the state should be “in charge” of solving social problems or that the promotion of the common good can be achieved without state imposition.
Rubio joins figures such as talk show host Tucker Carlson, New York Post editor Sohrab Ahmari, Harvard law professor Adrian Vermeule, First Things editor Matthew Schmitz, and Missouri Senator Josh Hawley, to name a few, who have launched a reactionary assault on markets and personal liberty in the name of increasing state power.
Rubio is correct that American civil society is in a sorry state of decay, as has been documented by people such as Charles Murray in Coming Apart and Robert Putnam in Bowling Alone. Religious participation is at an all-time low, and deaths from despair are at an all-time high. The institution of the family is in obvious decline. Divorce rates are down from their previous high of 50 percent, but that seems to mostly be because Millennials aren’t getting married and starting families to begin with and are on track to have the lowest marriage rate in modern history. Even when families aren’t ripped apart by divorce, they generally have abandoned the important roles that families have played for thousands of years, being institutionally weak and fragile and turning the family home into what sociologist Pirtirim Sorokin terms a mere “overnight parking place,” rather than any entity that provides essential existential meaning for its members.
In response to these crises, the anti-liberals blame the market and freedom and turn to the state to fix them. However, in doing so they miss the fundamental role the state plays in undermining and weakening the very institutions they claim to care about.
Humans are social beings and cannot be understood in atomistic isolation. In his important essay “The Balance of Power in Society,” sociologist Frank Tannenbaum states that “man, as we know him, is not merely the product of society, he is the very child of a complex institutional system that conditions his survival and sets the stage for life itself.” Tannenbaum continues that human society has always contained four core institutions of society, these being family, religion, the state, and the market. These are the largest institutions that shape an individual’s life and development and each traditionally administers specific aspects of human existence.
According to Tannenbaum, friction and competition between these various institutions are a normal and healthy part of society and he explains at length a point similar to that of Mises regarding the fact that social stasis or the end of history can never be achieved and is merely a utopian fantasy. As long as a balance of power in society is maintained and the totalizing impulses of the various institutions kept in check these essential institutions demonstrate their health and vibrancy. However, society necessarily suffers when one institution comes to dominate the others.
Anyone familiar with the history of Western Civilization can easily think of times where institutions such as the Catholic Church or the clan-like family dominated the other aspects of society. When this occurs we observe one institution taking on the social roles traditionally carried out by the other institutions, often with deleterious effects.
Currently, we live in an epoch where the state has come to dominate all of human life nearly everywhere on the globe, and in doing so has subsumed the vast majority of the social functions of the other institutions that make up society. Whereas before, the family bore primary responsibility for the raising of children, socializing them, and educating them, the state has laid claim to children through compulsory education through which it attempts to mold what it considers to be model citizens. Whereas religious institutions once had the power to sanction marriages, regulate societal taboos, and carried out charity, all of these functions have been taken over by the state. As readers of the Mises Wire know all too well, the state has intruded upon every aspect of the market, with vast reams of regulations piled up into the rafters.
The growth of the state, or any other core institution of society, can only occur at the expense of the others. According to Tannenbaum, “every time the state assumes a new responsibility previously exercised by another institution, it necessarily is at the expense of that institution in a material as well as a spiritual sense.” Such domination is a sign of the poor health of the other institutions of society and their inability to check the tyranny that results from unbridled power.
The state obviously cannot fulfill the important functions it has taken from the rest of society and as a result has made an absolute mess of them. However, rather than working to restore the proper balance of power in society in which each institution maintains its correct sphere of power and influence, the rising anti-liberal conservatives desire to maintain the state’s domination of society and in some instances even increase it.
So-called “common-good conservatives,” like Marco Rubio do not actually believe in civil society at all, they believe that all of social life must be marshaled with the power of the state. Rather than decentralizing social power back to its proper spheres, they believe that the state should continue its attempted administration of society and that it should even annex more of the few remaining areas of social life not already under its control. When their highfalutin rhetoric regarding the common good and the higher ends of life are distilled down, the Rubio’s and Ahmari’s of the world simply believe that the state needs to be under new management (namely theirs), not that the church or family should be restored to their proper role. Far from being the saviors of society, they are merely the newest iteration of the long line of anti-social apologists for state domination.
Good economic theory predicts effective, cutting edge business practices. For example, the dynamic flexibility of capital resource allocation predicted by Austrian Capital Theory is being realized today via digitization, dematerialization and agile organizational innovations. Entrepreneurs who fully embrace Austrian theory can be leaders in the field of business implementation.
At the same time, economic theory evolves and it’s important to keep up. This week, Hunter Hastings and Per Bylund talk about the economics of value and how this body of theory is superseding old mainstream economic theories from the industrial age. We focused specifically on the industrial-age concept of economies of scale.Key Takeaways and Actionable Insights
Economies of scale can feel daunting to small and medium sized business (97% of all businesses) because of the implication that big businesses enjoy unmatchable efficiencies, advantages in procurement and hiring, and asymmetrical bargaining advantages when negotiating with smaller business as vendors or suppliers.
But this industrial age economic law is not applicable to today’s entrepreneurial businesses. It applies to commodity businesses competing to make the same product and sell it to the same customers. It was historically possible to invest in capital to increase output per worker and lower variable costs to their lowest possible level, thus achieving a price and / or profit advantage, as well as an experience curve benefit of perfecting methods through extended high volume applications. Today, entrepreneurs don’t compete with commodity businesses, or in commodity markets.
Entrepreneurs compete on value, not on cost. Entrepreneurs put the customer in prime position, not production. They select a customer group to serve in the best possible way – so that those customers can experience maximum (subjective) value. Superior service to selected customers to facilitate value for them – not low cost - creates entrepreneurs’ competitive advantage.
Instead of pursuing greater and greater unit volume to lower unit costs, entrepreneurs utilize the customer empathy and feedback cycle to increase the level of value they can facilitate for customers. They process more and more customer feedback to understand better how to improve their experience.
Instead of scaling up, entrepreneurs scale down. Personalization and customization are increasingly effective routes to customer value experiences. Producing less unleashes scarcity, exclusivity, limited availability and uniqueness as value signals to selected customers.
And, when needed, scale can be rented. In the specialized areas where economies of scale are relevant – particularly in shareable infrastructure like the Amazon Marketplace platform or cloud computing – entrepreneurial businesses can “download scale from the internet”, i.e. take advantage of the platform’s scale without building it themselves.
The same customer-first, value-centric model applies In B2B markets. Entrepreneurs identify ways to fit in to the customer’s system in a unique or superior way to re-balance asymmetric bargaining power. Relationship, not scale, brings advantage. Entrepreneurs always put customers and their value experience first, in both B2B and B2C.
Scale is a choice for the entrepreneur. Choose which customers to serve at what scale. The cost connection with scale is far less important than in the past.Additional Resource
"Economics of Value vs. Economies of Scale" (PDF): Mises.org/E4E_42_PDF.