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

Tue, 20/10/2020 - 16:30

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

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

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Categories: Current Affairs

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

Mon, 20/07/2020 - 21:00

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

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

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

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

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

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

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

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

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

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

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

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

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

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

     Lionel Robbins puts the case in his usual pellucid prose:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Pete Buttigieg's Sovietesque Plan for Rural Revitalization

2 hours 24 min ago

In his bid for the presidency, Pete Buttigieg rhetorically grabs a tiger by the tail, so to speak. Not the Siberian tiger still clutched by Russia, but an American mountain lion.

The tails in both instances are vestiges of towns and cities far from viable markets, a situation that leaves those remaining with little hope for economic expansion. These lives of despair are encouraged by government policies purporting to revitalize rural areas whose futures have long since passed. So, instead of migrating to areas with remunerative prospects, folks remain.

The book The Siberian Curse: How Communist Planners Left Russia in the Cold details the failure of centralized planners to encourage economic growth in the hinterlands east of the Urals. For years, Russia has been trying to settle the wilds of its frozen tundra. First, the tsars encouraged population movement, then the Soviets commanded it. The result today is cities crumbling in Siberia, far removed from population centers and markets.

As these cities age, Russia is burdened by their very existence. A solution under a system of interventionism does not exist. And a semiauthoritarian government cannot simply let its masses exit the tundra and find their own productive places to live and work, places likely within the already burdened population centers of Moscow, etc.

We look at such a system—centrally planned cities that are inefficient and unprofitable, far removed from centers of commerce—as vestiges of the Evil Empire. Yet, the US does the very same thing, despite Ludwig von Mises's clear refutation of the ability of central planners to achieve anything greater than a sustained descent toward general starvation.

Russia suffers due to the cost of supporting the residents of cities that are not efficiently located. At the same time, the US suffers due to similar redistributive measures supporting residents in regions that no longer provide jobs. In both cases, residents remain in areas that are unproductive while the rest of their respective nations suffer due to the redistribution of wealth from economically productive regions to economically unproductive ones.

In the face of this, Buttigieg has proposed a plan to repopulate declining rural areas with immigrants, stating,

I'm proposing what we call "Community Renewal Visas" that when a community that is very much in need of growing its population, recognizes that, and makes a choice to welcome more than its share of new Americans that we create a fast-track, if they apply for an allotment of visas, that goes to those who are willing to be in those areas that maybe are hurting for population but have great potential.

Who will recognize potential (great or small) in a struggling area? Acting men and women? Entrepreneurs seeking to satisfy consumer desires? No. Potential will be defined politically, just as in Russia and the former Soviet Union.

And when populations in depressed areas are propped up for political reasons, more taxpayers dollars are likely to follow. Areas designated as impoverished by government already receive federal dollars. For the local politicians, federal largess is a cash cow. Federal appropriations include dollars earmarked for rural poverty assistance, road and infrastructure improvements, new and revitalized schools, etc. Whether it's the smooth asphalt on roads that have little residential or commercial traffic or war on poverty–type programs such as federal support for education, politicians—local, state, and federal—benefit at the polls by being the providers of this pork.

However, struggling rural areas are impoverished because high-paying jobs do not exist there. So, instead of having acting individuals move to areas of economic prosperity, the feds attempt to chain rural residents to areas where the golden years are long gone.

You hear the politicians claim that the infrastructure needs to be improved and then jobs will follow. And now Buttigieg wants additional residents, claiming that renewal will follow. This is similar to the pronouncements coming from the Soviet planners of yore. Both claims are fallacious and without merit. Building a new school and paving additional roads in declining rural regions will not encourage businesses to relocate any more than doing the same in Siberia resulted in long-term, sustainable enterprises, nor will adding citizens to an area that has no need for them.

Business owners—entrepreneurs—are not fooled by the plaintive tales spun by the vote-hungry class. Businesses locate in the areas that their owners deem most profitable. The lure of paved roads, new schools, government support programs, and additional unemployed workers are not enough to counteract (say) the physical distance to market.

Of course, by adding more residents (future citizens and voters) to these regions the government will lock even more voters in to lives of tax dependency. Federal dollars will be spent by local and state politicians in a manner not too different from that of the Soviet planners; local infrastructure will be increased where it is not needed, and fruitless support programs will be created or expanded.

Sure, in the short run, some rural residents will benefit by being employed in these governmental works projects. But these very same residents will be unemployed once the projects or programs lose federal funding. The cycle of poverty will continue.

As harsh as it sounds, the only way to improve the lives of the residents of struggling rural regions is to remove government support. Let these folks face the true cost of their decisions. Some will accept reduced lifestyles and remain to enjoy the natural features of these still wild regions, while others will migrate to areas where they can attain higher-paying jobs. Either way, acting individuals will demonstrate their preferences within a market environment. And US taxpayers will not have to continue funding what has become America's Siberia.

Categories: Current Affairs

Steve Mariotti: Teaching Entrepreneurship as the Universal Route to a Better Life

3 hours 54 min ago

Can entrepreneurship be learned? We’d like to believe it can, since entrepreneurs drive economic growth — creating tomorrow as Per Bylund puts it — and betterment for their individual customers and for society.

Emergent circumstances placed Steve Mariotti in the position of teaching entrepreneurship to boys and girls in the nation’s toughest high school. After some trial and error, here’s what he established.

Key Takeaways And Actionable Insights

There’s a universal desire for the fruits of entrepreneurship. Steve classified this desire as a drive to escape poverty.

You are restricted from ownership, and all the feelings of pride and fulfillment that come with it, when you are poor. Ownership — what economists call private property — is an exciting prospect. If entrepreneurship provides a route, people will take it.

Steve’s innovative entrepreneurship curriculum generated intense excitement.

He had difficulty in commanding attention for English and Math, but the same students who resisted conventional learning were stimulated and energized by the subject of entrepreneurship.

The open door to learning entrepreneurship is understanding market pricing.

Steve started the entrepreneurial journey for students with thinking about pricing of an everyday product — in his case, wristwatches. Why are there so many prices for wristwatches? Why are there so many kinds of wristwatches at different price points? Why is it that one person would pay a high price for one kind of wristwatch and another person would refuse, preferring an alternative at a different price? Just thinking about pricing in this way was a revelation.

Thinking about pricing can lead to an understanding of unit economics.

Entrepreneurs need to know two prices — the one the buyer will pay and the one that represents their cost. Steve quickly established that this knowledge is harder to establish. Is there a profit in the priced transaction for the entrepreneur once all costs — of time, money, effort and alternatives — are taken into account. This requires an understanding of sourcing and supply chains, wholesalers and vendors, direct and indirect costs and overhead, as well as personal preferences (do you really want to spend all the time and effort that the business will require of you?)

High schools are resistant to teaching entrepreneurship, and Steve’s students were constrained by regulation and authority.

“You may not talk about money in the classroom.” These and other restrictions were typical of the barriers Steve faced – and faced down. Entrepreneurship is one of the most relevant skills to impart to high schoolers, and yet the subject was viewed with disdain.

Steve emphasizes practicality as the critical foundation for teaching entrepreneurship.

He taught his kids unit economics, profit and loss, simple accounting and the practicalities of starting, growing and managing a business. No theory. Everyone in his class succeeded with a starter business. Many went on to greater entrepreneurial success.

Steve has taught entrepreneurship all over the world, and found that culture matters a great deal.

In post-communist Russia, young people could not grasp supply and demand, entrepreneurial profit and unit economics. The labor theory of value had been brainwashed into them.

In post-communist Vietnam, in contrast, people thronged to his teaching and eagerly pursued all the behavioral changes he advocated, both at the entrepreneurial level and the government administrative level (like adopting low, simple tax schemes). Theirs was a more receptive culture.

Additional Resources

The role of knowledge in entrepreneurship—"Steve Mariotti Channels F.A. Hayek" (PDF): Mises.org/E4E_54_PDF

"The Austrian Entrepreneur’s Journey" online course: Mises.org/E4E_Learn

Steve’s book, Goodbye Homeboy: How My Students Drove Me Crazy and Inspired a Movement

Steve’s guide, Entrepreneurship: Starting and Operating A Small Business

Categories: Current Affairs

Why Wall Street Bankers and Federal Lawyers Hate Michael Milken

7 hours 24 min ago

Donald Trump’s recent pardon of Michael Milken, the so-called junk bond king, has brought out the usual suspects to denounce Milken. John Carroll, one of the federal prosecutors that secured Milken’s guilty plea (more on Carroll later) declared in the Washington Post that Trump’s action “outraged” him and claimed that the pardon is proof that American “justice” is unjust:

What outrages me, and what I think should outrage others, is the process that brought about the pardon. In as guileless an admission as I have ever seen of rich man’s justice, the White House bolstered its decision by listing a murderer’s row of Republican donors and billionaires who provided “widespread and long-standing” support for Milken’s pardon.

In fact, what makes this pardon worse, according to Carroll, is that wealthy people—and even Rudy Giuliani himself, the man who led Milken’s prosecution—asked Trump to pardon him. In other words, some of those who have stood up for Milken are wealthy beyond a reasonable doubt, and if their names aren’t George Soros or Kennedy, they should just shut up and count their money.

Indeed, I, too, am outraged by Trump’s pardoning Michael Milken, but the cause of my outrage is that Milken should have needed a pardon at all. That he was coerced into a guilty plea—for “crimes” that federal judges later would say were not criminal actions—and that he spent two years in a federal prison is the real outrage, and the fact that even after thirty years American political and legal elites still are holding to the same false narrative should raise the blood pressure of any person who believes in liberty, fairness, and the rule of law.

For those readers who do not remember the infamous Wall Street prosecutions of more than three decades ago, the story does not have a happy ending. In his brief article celebrating the Milken pardon, David Gordon cites Murray Rothbard’s commentary on that era. Rothbard correctly identified it as a struggle between Michael Milken—a true financial genius who had a positive macroeconomic effect on the US economy—and the power elite.

The story of Michael Milken does not begin with his guilty plea or even the start of the Wall Street predations led by Rudy Giuliani, who then was the US attorney for the Southern District of New York and used his success to launch his political career. Instead, it begins during the Great Depression, when the Franklin Roosevelt administration decided that America’s economic salvation lay in reorganizing the US economy into a series of cartels.

Because of the huge rate of bank failures in the early 1930s, the New Dealers especially sought to cartelize the nation’s financial system, and although the system held together in the first two decades after World War II, by the 1970s it was clear that the heavily regulated and noncompetitive system was not up to enterprises tied in with the new technologies making their way into the economy. That is where Michael Milken and his high-yield bonds underwritten through the upstart investment bank Drexel Burnham stepped in.

When CNN ran its story on the pardon with a snarky headline derisively calling Milken the “Junk Bond King” (and falsely intimating that he was convicted of insider trading and calling him the “face of greed,” another misnomer), the story failed to point out that CNN’s very existence is due to the fact that Milken underwrote its financing through those “junk bonds” that CNN’s talking heads now are deriding. The cartelized banking system was not about to finance a 24-hour news channel, something the “experts” were panning, and especially not one founded by the iconoclastic Ted Turner and to be headquartered in Atlanta and not New York.

Milken also led the financing for McCaw Cellular and MCI, both of which helped to revolutionize telecommunications and upset the status quo. However, as Rothbard points out, Milken’s real “sin” was to be a major force in financing the wave of mergers and hostile takeovers that challenged the progressive status quo in corporate America and the mainstream media. Rothbard wrote:

What Milken did was to resurrect and make flourish the takeover bid concept through the issue of high-yield bonds (the "leveraged buyout"). The new takeover process enraged the Rockefeller-type corporate elite, and enriched both Mr. Milken and his employers, who had the sound business sense to hire Milken on commission, and to keep the commission going despite the wrath of the establishment. In the process Drexel Burnham grew from a small, third-tier investment firm to one of the giants of Wall Street.

He continued:

The establishment was bitter for many reasons. The big banks who were tied in with the existing, inefficient corporate elites, found that the upstart takeover groups could make an end run around the banks by floating high-yield bonds on the open market. The competition also proved inconvenient for firms who issue and trade in blue-chip, but low-yield, bonds; these firms soon persuaded their allies in the establishment media to sneeringly refer to their high-yield competition as "junk" bonds, which is equivalent to the makers of Porsches persuading the press to refer to Volvos as "junk" cars.

The Wall Street establishment had its own weapon in Giuliani, who saw an opportunity to permanently ingratiate himself with New York’s political and financial ruling classes, which would prove to be valuable to him when he later became the city’s mayor. Both Daniel Fischel and Harvey Silverglate have written definitive books in which they detail the abusive way that federal prosecutors went after the financial upstarts using the Racketeer Influenced and Corrupt Organizations (RICO) Act. I also detailed Giuliani’s predations in Regulation a decade ago:

The most notorious business RICO prosecutions came in the late 1980s when Giuliani, then the U.S. attorney for the Southern District of New York, went after two investment firms, Princeton-Newport Securities and Drexel-Burnham-Lambert, which employed Michael Milken. Because RICO’s language is vague, Giuliani found a political treasure trove on Wall Street, where the onerous penalties that accompany RICO coincided with the fact that few people who work on Wall Street ever have been caught up in the maw of the criminal justice system. Giuliani bragged that business people “roll a lot easier” than do hardened criminals. The complexity of the criminal charges plus the stigma of being investigated or charged with “crimes” made Wall Street figures more likely to plead guilty.

Giuliani made it clear that he had targeted Milken for prosecution no matter what, and given the malleability of federal criminal law, Giuliani was able to channel the infamous Lavrentiy Beria, Stalin’s state security head who once declared, “Find me the man, and I will find you the crime.”

Giuliani’s strategy was simple: denounce Milken to a hungry press and feed journalists what for all purposes was disinformation. Select reporters such as James Stewart and Laurie P. Cohen of the Wall Street Journal and journalists at the New York Times received illegally leaked material from the grand jury. Although such leaks are felonies, federal prosecutors are not in the habit of indicting themselves, and the lawless behavior of Giuliani and the elite financial press sent a signal to Milken and everyone else in the federal crosshairs that the rule of law did not apply when the feds were engaged in a popular “war on greed.”

Using the RICO statute enabled Giuliani and his staff to take regulatory violations that normally were handled in the civil arena by the Securities and Exchange Commission and bundle them into “racketeering” charges. At the same time, federal prosecutors constantly threw out the accusations of insider trading, even though they never charged Milken with such “crimes” (and had they had real evidence, there is no doubt that they would have levied that charge, too). However, the progressive American media picked up the “insider trading” narrative and ran with it, just as they did with Martha Stewart (who also did not engage in that act).

While prosecutors levied the usual “fraud” charges against Milken that one sees in federal prosecutions, the actual charges were weak, something that really would come to light when federal judges later deep-sixed identical charges against other Wall Street defendants in future trials. Milken, however, pleaded guilty, something that Carroll writes is proof of his guilt:

I cannot speak to Milken’s place in financial history, but I can attest that he committed financial crimes. I know that not only because we prosecutors saw the evidence but also because his attorneys, the best lawyers of his generation, counseled him to plead guilty. It is true that his crimes were “technical” and “regulatory” in the sense that they violated, as Milken himself put it, “the laws and regulations that govern our industry.” I have always thought that his sentence answered any suggestion that his crimes were less than serious. The sentencing judge determined that Milken should spend years of his life in prison and then three more years doing community service. That has always seemed very serious to me.

Actually, Carroll seems to be quoting himself regarding the “technical” and “regulatory” aspect of Milken’s so-called crimes, since it was Carroll who bragged to Rutgers University law students in 1992 that the government had broken new ground in this case. Federal prosecutors, he said,

were guilty of criminalizing technical offenses….Many of the prosecution theories we used were novel. Many of the statutes that we charged under…hadn’t been charged as crimes before….We’re looking to find the next areas of conduct that meets [sic] any sort of statutory definition of what criminal conduct is.

In other words, Milken and Carroll made the same claims, but now Carroll somehow wants to say that only Milken was saying such a thing. This speaks volumes about Carroll’s integrity.

So why did Milken plead guilty? Even had a Manhattan jury convicted him, the appellate courts almost certainly would have overturned the convictions as they did for the Princeton-Newport defendants. Milken pleaded because federal prosecutors essentially took hostages. First, they aimed their guns at Milken’s 92-year-old grandfather, threatening to prosecute him. Then they indicted Milken’s brother, Lowell. However, they promised Michael that if he pleaded guilty, they would drop the charges against his brother and not prosecute his grandfather. As Giuliani would quip, “A brother for a brother.”

More than three decades have passed since Milken pleaded guilty, his case still brings out the long knives. It doesn’t matter that federal prosecutors committed felony after felony and lied about Milken’s activities. It doesn’t matter that Milken probably broke no criminal statutes and that the advances in finance that he helped create were immeasurable. Nor does it matter that Milken has been a major player in researching prostate cancer—and he even reached out to Giuliani when the latter was stricken with prostate cancer.

No, Michael Milken was responsible for the nonexistent “Decade of Greed.” The New York Times says so. Barron’s says so. The Washington Post says so. Even CNN says so, and Fox News also got into the “greed” act. The narratives, however, are built on something other than the truth. Rothbard puts the whole thing into perspective:​

this whole Milken affair, in fact, the entire reign of terror that the Department of Justice and the Securities and Exchange Commission have been conducting for the last several years in Wall Street, raises a lot of questions about the workings of our political as well as our financial system. It raises grave questions about the imbalance of political power enjoyed by our existing financial and corporate elites, power that can persuade the coercive arm of the federal government to repress, cripple, and even jail people whose only "crime" is to make money by facilitating the transfer of capital from less to more efficient hands. When creative and productive businessmen are harassed and jailed while rapists, muggers, and murderers go free, there is something very wrong indeed.

Categories: Current Affairs

The WTO Is Both Irrelevant and Unnecessary

19 hours 9 min ago

The World Trade Organization (WTO) is in a state of crisis. When it comes to trade negotiations among large states like the US, India, and China, the WTO has been shown to be an organization that is largely irrelevant.

Despite grandiose dreams of a global trade organization that would enforce global bureaucrats' broad vision for multilateral trade agreements, the world looks more and more like it neither wants nor needs an organization like the WTO.

CNBC reports this week that the WTO is in "a reform-or-die moment" as both the US and Chinese governments appear uninterested in taking orders from the WTO.

Back in the 1990s, it seemed like the WTO was a very big deal. When it was formed in the 1990s, scores of states — rich and poor, large and small — gathered to put together "rules" for how the sovereign states of the world would interact on trade. As Razeem Sally has noted, however, multilateral agreements were not what made global liberalization happen:

since the 1980s there has been a veritable trade-policy revolution outside the West, with region after region shifting from protection and isolation to freer trade and global economic integration. Observers often forget that this has come more ‘from below’ than ‘from above’

Share of total tariff reduction, by type of liberalization1983–2003, by %:

liber 

Moreover, during the heady days of the 1990s when the weaker GATT gave way to the stronger WTO, it was assumed trade would be regularized and mandated worldwide through multilateral action. But while international trade did indeed increase over this period, it remains unclear that the WTO was the cause.

Doubts about the WTO had already surfaced nearly twenty years ago. For example, economist Andrew Rose in 2002 concluded "[a]n extensive search reveals little evidence that countries joining or belonging to the GATT/WTO have different trade patterns than outsiders."

In a separate 2002 paper, Rose writes:

Despite my use of over sixty measures of trade policy, I have been unable to find convincing evidence that membership in the multilateral trade system is associated with more liberal trade policy.

So if the WTO isn't driving global trade, what is?

Well, it could be any number of reasons. As Rose notes:

Why has trade grown faster than income, if not because of the GATT/WTO? Who knows? But there are plenty of other candidates. Higher rates of productivity in tradables, falling transport costs, regional trade associations, converging tastes, the shift from primary products towards manufacturing and services, growing international liquidity, and changing endowments are all possibilities.

Similarly, in a 2004 paper from the Bank of England, researchers Maria Barriel and Mark Dean write:

First, productivity growth in the tradable goods sector has caused a fall in the relative price of such goods, and so increased trade. Second, tariff rates have fallen in most major economies,reducing the cost of international trade and increasing the returns to specialisation.

Factors other than tariffs, dominate, however.  The authors contend a drop in tariffs was responsible for only 21 percent of "the increase in the trade to total final expenditure ratio" from 1980 to 2000.

But even if cuts in tariffs were the overwhelming force behind growing trade, we still couldn't assume this was attributable to the WTO or its predecessor GATT.

Indeed, we have little reason to thank the WTO for what liberalization has happened in the past twenty years. The failure of the so-called Doha Round — which was the successor agreement to the the Uruguay Round and attempted to expand the WTO's mandate — as now just accepted as a done deal:

"The WTO hasn’t produced any big achievements since 1994, when the Uruguay Round closed, and has progressively lost its attractiveness,” Fredrik Erixon, an international trade expert at the Brussels-based think tank ECIPE, told CNBC via email.

"All in all, WTO has not managed to make the multilateral trade framework move ahead since it was established more than 20 years ago," economist Jean-Pierre Cling observed in 2014. This is due to a wide gulf between the ambitions of the WTO, and "the new power relationship prevailing in the world economy, with new emerging powers (China, India, etc.)."

Moreover, the lion's share of liberalization in China took place before it entered the WTO:

By the time China entered the World Trade Organization in 2001 the import regime had been almost entirely transformed. .... the average statutory tariff, which stood at the relatively high level of 56 percent in 1982, was reduced to 15 percent by 2001. The share of all imports subject to licensing requirements fell from a peak of 46 percent in the late 1980s to fewer than 4 percent of all commodities by the time China entered the WTO.

Since then, there are growing signs that the world's states are hitting the brakes on trade liberalization. That's a bad thing because it increases consumers' cost of living. But it's especially a blow to entrepreneurs and small business owners who depend on access to affordable inputs for the goods and services they produce. Put another way: trade barriers often hit the productive classes the most.

But just as the liberalization we saw during the late 1980s and the 1990s was primarily a product of unilateral action, the growing turn toward protectionism is a result of domestic politics. And now the process is going in reverse:

Carmen Dorobat pointe this out last year:

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.

The WTO appears to be a minor player in all of this. The WTO was not the reason world trade was liberalized during the 1980s and 1990s. Thus, it is unnecessary. And now, even if such a thing were desirable, the WTO is in no position to force liberalization on countries like the US, China, or India. Thus, the WTO is also irrelevant.

The time has come to move on. Trade liberalization is an excellent thing. Countries that do it have been often been shown to have higher incomes, and to be resilient. If anything, the WTO is now becoming a tool for large states to drive harder bargains with the rest of the world. That's a step in the wrong direction, and we'd be better off in a world of bilateral agreements and unilaterally liberalized trade.

Categories: Current Affairs

Abolish Government Schools

Mon, 24/02/2020 - 17:00

The thought of abolishing government schools is reflexively appalling to many, but it shouldn’t be. The enormous problems with state provision of schools can fill numerous books, such as Murray Rothbard’s Education: Free and Compulsory and E.G. West’s Education and the State. Here, I’ll focus on a small subset of the possible criticisms, briefly addressing the questions of poverty, the balance of power between a country’s institutions, and the economic calculation problem.

The Poverty Concern

By far the most pressing fear that fuels support for government schools is that without them the poor wouldn’t be able to afford schooling. But even if it’s true that some wouldn’t be able to afford schooling without government financial assistance, the idea that this necessitates the government creating and running its own schools is a glaring non sequitur.

If the poor can’t afford schooling without government assistance, the state can provide the poor with money that may be exclusively spent on private schools, homeschooling, or other forms of education provided by civil society. The way the state deals with government schools is akin it stopping the provision of food stamps and instead running most grocery stores.

Government financial assistance for private schooling is still conceding far too much, but the focus of this article is criticizing government-run schools.

The Balance of Power between Society and the State

Government schools can be challenged on sociological grounds. The state is not the only institution in society. There are others: the nuclear family, the extended family, the church, fraternal organizations, charities, private schools and universities, sports clubs, symphony orchestras, and many others.

The state is an institution that currently holds a monopoly on the military, the police, and the courts. By and large it controls the country’s transportation networks and utilities. Through taxation and regulation, it has a hand in nearly everything else. And more than any other organization it controls the country’s formal schooling for pre-K–12 students: about 90 percent.

Is it healthy or safe for a single one of a country’s institutions to wield so much function and authority at the expense of all of the rest? Or is this a source of soft totalitarianism today and worse tomorrow?

Anyone who is concerned when, say, a software company holds above a certain threshold of the market share should shout from the rooftops that the state receive a thousandfold dose of its own antitrust medicine.

A more evenly spread balance of power between a nation’s organizations is a check against totalitarianism. But as the growing state continues to absorb the resources and roles of competing institutions, a continuously atrophying civil society becomes increasingly powerless to halt future usurpations until all of human life revolves around the state.

This monopolization of every sphere of life is particularly alarming when it comes to schooling children from the ages of four to seventeen, exposing them to a particular view of history, economics, literature, culture, morality, and civics. Is it not a conflict of interest for the state to teach children about the historical record and proper role of the state?

The Economic Calculation Problem

In addition to concerns about the distribution of power, government provision of schooling will misallocate resources because of the economic calculation problem.

Resources are scarce but wants are unlimited. Resources spent on education can’t be spent on healthcare. Resources spent on music boxes can’t be spent on tractors. With all of these competing goals creating a tug-of-war on our limited resources, how can we decide how to deploy resources to best satisfy consumers’ wants?

The answer is profit and loss calculation in terms of money. Money is a common denominator that all goods are bought and sold against, so it’s the unit of account when making economic decisions. I can tell how many bananas a ton of steel can be exchanged for because money prices exist for both of these goods.

Now, profit is determined by two things: revenue and cost. The importance of revenue is that this is how much money people actually pay for a good or service, demonstrating through their actions their preference for that good or service over everything else they could have purchased with that quantity of money.

The importance of cost is that this is how much money one must give up, in order to convince someone else to give up a particular good or service. The more dearly needed a good or service is to achieving goal X, the more money one must give up to divert its use to goal Y.

To put everything together, when monetary revenue exceeds costs and an entrepreneur makes a profit, this means that the way the entrepreneur used his inputs was preferred by consumers to the alternate uses that these inputs could have served. Contrariwise, when costs exceed revenue and an entrepreneur suffers a loss, this means that consumers wish that those inputs had been used differently, toward some other goal.

Economic Calculation and Schools

Now we can apply the idea of economic calculation to private versus government schools.

Producers of private schooling engage in profit and loss calculation in terms of money. If they want to stay in business, they have to make sure that their revenue (what people are willing to pay or donate) exceeds the costs of running the school. If they succeed, the ensuing profits they earn mean that society prefers the schooling they provided to the other possible uses of the resources that went into creating it: the bricks, plaster, asphalt, paper, computers, the labor of the teachers and administrators, etc.

If a private school suffers losses, that means that consumers would have preferred that the resources that went into that school had been spent otherwise. This could mean that the school should be run differently, offering different classes, operating on a different schedule, hiring different teachers, etc. Or, it could mean that this particular school shouldn’t exist at all.

The problem with tax-funded government schools, or tax-funded anything, is that economic calculation can’t take place. The involuntary nature of the funding means that the connection between consumers’ preferences and the use of resources is lost.

The questions of how many government schools to build, where to build them, whom to hire, how big the parking lots should be, how long each class should be, etc. are not determined by customers voluntarily choosing which school to patronize. If you don’t pay taxes, you go to jail.

Instead, these economic decisions are made bureaucratically and politically. But, whereas for private businesses revenue communicates information about consumer preferences, revenue provided by involuntary taxation says nothing about consumer preferences.

As a result, bureaucrats and politicians have no market prices on the revenue side of the equation, and no idea whether or not the lumber, plaster, paper, and labor they’re using to run a particular school a particular way is more urgently desired by society in another application: on healthcare, housing, comic books, or different forms of schooling.

Without voluntary exchange, there are no market prices, and so the employment of the means of production has no link to consumers’ preferences. Economic calculation becomes literally impossible. Scarce resources are being spent on X, when society more urgently wants Y.

In sum, the existence of poverty does not justify government schools. State monopolization of schooling is a mark of soft totalitarianism. And economic decisions regarding government schools must be conducted without market prices because they aren’t funded voluntarily. The attitude toward the government school as an indispensable institution is not the product of careful deliberation. It more closely resembles an article of religious faith, one which government schools may not have had a small hand in instilling.

Categories: Current Affairs

Mises and the "New Economics"

Mon, 24/02/2020 - 17:00

[This article is excerpted from a talk delivered on February 22, 2020 at the Austrian Student Scholars Conference, hosted by Grove City College in Pennsylvania.]

I. Introduction

What a wonderful gathering of students today, on this impressive and beautiful campus. We can see why Hans Sennholz loved this place, and why Drs. Herbener and Ritenour so enjoy living and teaching here. You are all too young to serve as the "remnant," so we will consider you the vanguard instead. I'm always impressed by young people with an interest in serious scholarship and ideas, who have the intellect to read 900-page books. We are told nobody reads anymore, and certainly not dense tomes about economic theory, but this raises a question: are the rare people who do read such books likely to be more important or less important in the future? I suspect the former.  

Imagine how pleased Ludwig von Mises would be by this conference today, to know people still find his work vital and relevant nearly half a century after his death. He is far better known today, and far more widely read, than during his lifetime. And most of his important works today are available in multiple languages, online, free and instantly to anyone around the world. What more could any important thinker want? 

There is a wonderful French expression, élan vital, which technically translates to "vital impulse" or "vital force" in English. The early twentieth-century French philosopher Henri Bergson developed the term to describe the creative force within an organism which drives growth, change, and desirable adaptation. Professor Mises liked it so much he discussed it toward the end of Human Action, to make the broader point that human history is not deterministic, that individuals acting purposefully and willfully could change their fortunes. In other words, human volition trumps fate. We are all possessed of at least some measure of our own élan vital.

Now for some reason, dead philosophers get a lot more respect than dead economists! Maybe this is because philosophy seems ancient and timeless, suited to the human experience across any age. 

II.   Dead Economists vs. Presentism

But if Bergson's vital force moves us inexorably forward, why study dead economists at all? What can an economist like Mises, born in the late nineteenth century into a vastly different world, teach us today? Why in the world should a group of young students gather in Grove City, Pennsylvania, in 2020, to consider a school of economics with roots in Habsburg-era Vienna? 

These are fair questions, given the relentless doctrine of “presentism” which dominates everything in our culture today today. Presentism is the ahistorical and arrogant insistence on interpreting past events, historical figures, and existing bodies of knowledge by the supposedly enlightened standard of our time—standards which shift so rapidly that today’s wokest enforcers are tomorrow’s victims of the mob.

Presentism is at the core of the progressive worldview, which insists the past is alway retrograde, the present is always better but still deeply imperfect, and the future has an ultimately happy deterministic arc. It is one manifestation of the hubris which comes from imagining we live in a unique time, and a uniquely enlightened time.

Presentism is the hallmark of the imagined economics smart set: the Paul Krugmans, Christine Lagardes, Thomas Pikettys, Noah Smiths, and Benyamin Appelbaums of today. The economics they advocate—mostly in blogs, social media, financial news shows, or pop books, and never in treatises—is sui generis, unique to them. It’s their own economics, created out of whole cloth by them individually, supposedly scientific and brand new to suit today’s world. It’s a New Economics for 2020. And of course they all insist they’re merely following and interpreting the data, going where it takes them. After all, they're scientists! 

But exactly what theory or education or discipline do they apply to that data? Is it really economics?

Of course we know there is no New Economics, any more than there is new physics or new calculus. There are advances and discoveries in economic science, and there are new technologies which of course have an enormous effect on economies. But economics is, and always will be, about human action in the context of choice, scarcity, opportunity cost, and subjective measures of value.  

It’s no secret where these economists and professors and New York Times pundits get their views, even if they don’t have much of a sense of their place in the field. And why should they? It’s entirely possible to obtain a PhD in economics without taking a single course in the history of economic thought. Their economics represent warmed-over Marx, or Keynes, or John Kenneth Galbraith, or Paul Samuelson, though they rarely mention these names. They don't announce themselves as neo-Keynesians, or Samuelsonites, or as advancing the views of any dead economist—because presentism makes that unthinkable. They are their own economists!

But it turns out their ideas and policy ideas aren't new at all. It’s all about demand, demand, demand, whether from workers or shoppers or homebuyers or restaurant diners or students paying $40,000 for a year of college. Every economic policy they conjure, whether fiscal or monetary, comes down to one goal: stimulating demand, encouraging all of us to want to borrow more and spend more. That’s it. All of their modern economic theories come down to consumption über alles. That’s how the modern profession thinks we create an economy. 

Austrian economists, by contrast, often tend to preface every argument with a reference back to the old masters like Mises or Hayek, as though there is only old economics. It's a marketing problem in a world of presentism! Are modern Austrians simply less egotistical than their peers, and thus attempt to provide support and foundation for their work? Do they simply recognize that economics is built on an edifice of previous knowledge that can’t be thrown out with the bathwater at every new crisis? 

But this goes against the grain, because “everybody knows” those old Austrian theories no longer apply in our digital age. Hubris is the order of our day, not the humility of a cautious and circumspect social scientist engaged in truth-seeking.

III. How Economics Lost Its Way

So why indeed should we consider dead economists? The answer, of course, is they still have something to tell us about the world and how it works, that their work forms the foundation from which today’s analysis should begin. Something the Krugmans and Pikettys, always shooting from the hip and following the data wherever it goes, cannot provide.

In fact, from what I can tell most economists don’t concern themselves much at all with finding truth or helping us better understand the world. our serving humanity by working to increase our wealth and happiness. From my perspective economics exists mostly to provide sinecures for people whose chief concern is whether a tiny group of their peers think they’re smart. 

Somewhere along the way, economics stopped attempting to serve humanity by making us happier, healthier, and wealthier. Somewhere along the way, economics became a discipline of hyper-specialized technicians, of statistics and data and models. Somewhere along the way, economics got small. It lost its élan​ vital.

So what happened? In a sense economics simply succumbed to the ugly hubris of our day.

The mood in the West is not friendly to intellectuals, much less dead intellectuals. We prefer social media and short videos to books and lectures. We want journalism to provide entertainment, to match our short attention spans. We want someone to curate and provide us with easily-digestible information and news, rather than seeking original sources for ourselves. We don’t have time for context or nuance. With limited knowledge of history, we tend to fetishize new over old, modernity over tradition, and data over theory. In our self-regard we imagine ourselves in a new era, where old knowledge and wisdom no longer apply. 

But we imagine this at our own peril. The accelerating pace of technology lulls us into believing human development is linear. Technology, not dusty old ideas from another century, seems the primary driver of change. But technology can’t answer the age-old question of whether humans choose compulsion or cooperation: it cannot create a “third way” between market and state. Ideas still rule the world, but sometimes we mistake new technology for new ideas.

All of the exciting developments seem to abound only in the physical sciences. Quantum mechanics promises to dramatically increase computing power. Physicists and engineers make the possibility of affordable private space travel closer to reality every day. Advances in artificial intelligence, computer science, and information technology promise to radically alter our physical world through an emerging Internet of Things. If there’s one thing that still excites the Western imagination, it is the possibility of radical advances in technology—all due, at least in large part, to advances and applications in the physical sciences.   

By contrast, the social sciences and humanities are moribund, reduced to hyphenated studies and manufactured “intersectionality” disciplines. Academic work in the soft sciences is shrill and brittle, far more concerned with political and cultural crusades than teaching students or engaging in serious scholarship. Music, cinema, modern art, and literature suffer under the weight of their own pretensions and heavy-handed messaging. Historians whitewash history, English professors ignore English literature, and sociology devolves into a definitional science. Yale scraps art history. 

Then we have economics, the orphaned social science whose practitioners masquerade as data miners. Economics has become the unwitting younger cousin to math, statistics, and finance, which explains why so many universities have shunted it off onto their business schools. Empiricism, the jealous impulse to apply scientific methodology to problems of human action, insists economists have value only to the extent they successfully test and “prove” their hypotheses.  

As a result, economics has been corrupted into a predictive discipline which fails to correctly predict anything; into a prescriptive discipline which prescribes the wrong policies, and into an empirical discipline which collects data but misses the point.

IV. Why We Need Mises

This is exactly why we need Mises, who perhaps more than any economist of his time understood economics as a theoretical science. But readers of Mises appreciate not only the depth and breadth of his insights, but also the elegance of his language. Even writing in English, a language he adopted in middle age, Mises conveyed dense conceptual theories and big ideas with a vigorous style not normally associated with economists. Nothing in his writing is dry or technical. This is why, for example, opening Human Action to any random page can yield immediate benefits. To use an analogy from the days when music came on vinyl and compact discs, with songs in a particular order, there are no throwaway songs in Mises’s work.

Mises did not hesitate to borrow heavily from other fields in his writing, including history, sociology, and philosophy (especially epistemology and logic), always in service of presenting economics holistically. His drive to understand the broader implications of human action and reason saved him from the kind of tunnel vision we see in academia today, where intersectionality—far from what its trendy name suggests—serves a narrow political purpose rather than the broader cause of advancing knowledge.

In this sense he demonstrated a characteristic humility, contrasted with the hubris displayed by so many brilliant academics: he understood his chosen profession as part of a larger human experience, rather than a self-serving body of knowledge with rigid boundaries to be guarded even as they continually bump up against other disciplines.

One great example of Mises’s wonderful use of language comes at the end of Human Action, in a typically ambitious chapter titled “Economics and the Essential Problems of Human Existence.” As usual, Mises’s syntax and diction hardly bring to mind a boring economics text:

Our “ineradicable craving” compels us to seek happiness, minimize discontent, and spend our lives “purposively struggling against the forces adverse to (us).”

“Civilization, it is said, makes people poorer, because it multiplies their wishes and does not soothe, but kindles, desires. All the busy doings and dealings of hard-working men, their hurrying, pushing, and bustling are nonsensical, for they provide neither happiness nor quiet.

Yet all such qualms, doubts, and scruples are subdued by the irresistible force of man's vital energy. As long as a man lives, he cannot help obeying the cardinal impulse, the élan vital.”

Not the kind of stuff I remember from my undergraduate micro class!

Mises’s work exemplified the spirit and sense of life missing from economics today. We don’t revere dead economists to maintain their place in some academic hierarchy, or to satisfy an atavistic desire for an unchanging intellectual order. We revere them because their ideas still have purchase, because their work yields knowledge that is sorely needed today. We read them and promote them in order to understand the world as it is, filled with billions of purposeful but often irrational human actors. We need dead economists to save us from ourselves and to refute the stubborn myths of collectivism. We need them most of all because their work and their insights are far superior to those of most economists alive today. There is no New Economics, only new academic work which painstakingly advances the knowledge bequeathed to us.

V. Conclusion

Mises certainly lived his life with a certain quiet élan, even in the face of setbacks and slights that would enrage a lesser man. Through it all he maintained a quiet dignity and elegance reminiscent of Old Austria. Never giving up, never giving in, always turning to the next task with steady resolve, believing in his work when the world did not.

Of course Mises sometimes allowed himself to succumb to pessimism, which you know if you’ve read his memoirs. Anyone who lived through the Great War, who had to flee authoritarianism and uproot his life twice, who had to start over financially and otherwise in a new country in a new language, who was treated so shabbily by the academic establishment, can be excused for this. 

We don't have that excuse. We have the full body of Mises's work to read and enjoy, to guide us in our thoughts and actions today. We can read more Mises in 2020, and less throwaway news and political commentary. His work inspires and engages us in ways that saturated social media outlets, lightweight editorialists, and maudlin self-help literature. Let’s face it: most articles, books, podcasts, and television shows today are not worthy of our time. Free online content is almost infinite today, but time surely is not. 

Yes, there are very dark clouds on the horizon. Liberalism, the good and true version, never fully took hold in the West. And it’s waning today. We shouldn't kid ourselves about this, or pretend otherwise. The West is politically illiberal today, and getting worse. But this does not counsel despair; it counsels us to summon our own sense of élan vital.​​

Categories: Current Affairs

How Fractional Reserve Lending Makes Money Disappear

Mon, 24/02/2020 - 12:00

According to the popular way of thinking, it is held that banks are responsible for the expansion of lending also known as credit, and given that economic prosperity is associated with an increase in credit, they are seen as crucial to the economic well-being. But are banks the true source of credit?

Real Credit Is Backed by Real Savings

For instance, take farmer Joe, who produced two kilograms of potatoes. He requires one kilogram for his own consumption. The rest he decides to lend for one year to farmer Bob. The unconsumed one kilogram of potatoes that Joe agrees to lend is his real savings.

Remember, real savings are a necessary precondition of lending. Loans must be fully backed by real savings.

By lending one kilogram of potatoes to Bob, Joe agrees to give up ownership of these potatoes for one year. In return, Bob provides Joe with a written promise to repay 1.1 kilograms of potatoes in one year. The additional 0.1 kilograms constitutes interest.

What we have here is an exchange of one kilogram of present potatoes for 1.1 kilograms of potatoes in one year. Both Joe and Bob have entered this transaction voluntarily, because they both have reached the conclusion that it would serve their objectives.

The introduction of money does not alter the essence of what lending is all about. Let’s say that instead of lending his one kilogram of potatoes Joe first exchanges (sells) it for money, let us say for ten dollars.

Joe may now decide to lend his money to another farmer, John, for one year at the going interest rate of 10 percent. John the farmer in turn buys a piece of equipment with the borrowed money, which increases his production.

Observe that the introduction of money did not change the fact that real savings precede the act of lending. When a saver lends money, what he in fact lends to borrowers are final consumer goods that he did not consume.

Credit Unbacked by Real Savings Results In Economic Impoverishment

When credit is not backed by real savings, no real savings have been exchanged. The borrower holds empty money, so to speak, which he exchanges for goods and services.

What emerges is an exchange of nothing for something, or consumption of goods that is not backed by production. This leads to the diversion of real wealth from wealth-generating activities toward the holders of credit, who hold money generated out of “thin air.”

Obviously, this type of credit undermines the production of real wealth, and the weakening of the production of real wealth ultimately diminishes the borrower’s own ability to repay his debt.

Fractional Reserve Banking as the Source of Money Out of "Thin Air"

The existence of the system of fractional reserve banking permits commercial banks to generate credit not backed by real savings, i.e., the generation of credit out of "thin air."

For instance, let’s say that farmer Joe sells his saved kilogram of potatoes for ten dollars. He then deposits this money with the Bank A. The ten dollars are fully backed by the saved kilogram of potatoes.

Now let us say that Bank A "lends" $5 to Bob by taking $5 from Joe’s deposit. The money hasn't really been lent, because Joe still uses his $10 as if it it hadn't been lent out at all. This means that whenever he deems it necessary he is entitled to take the $10 out of deposit. No additional real savings have been accumulated to back the $5 loaned to Bob.

Once Bob, the borrower of the $5, uses the borrowed money, he has in fact engaged in an exchange of nothing for something, the reason being that the $5 are not backed by any real savings—it is empty money.

What we have here is $15 that are only backed by $10 proper. The $10 are fully backed by one kilogram of potatoes—real wealth that has been saved.

How Money Disappears

Because this $5 dollars was never backed by real savings it presents a problem: when credit originates out of "thin air" and is returned to the bank on the maturity date, this leads to a withdrawal of money from the economy, i.e., to a decline in the money stock. This is because in this case we never had a saver/lender, since this credit was unbacked.

 So now when Bob repays the $5, the money leaves the economy because the bank is not required to transfer it back to the original lender. There is no original lender—the bank created the $5 loan out of nothing. When a bank generates a new deposit that is unbacked by real savings and lends it out, we have no original lender/saver.

The $5 in new money set in motion an exchange of nothing for something and provide a platform for various nonproductive activities that prior to the generation of unbacked credit would not have emerged.

As long as banks continue to expand credit out of “thin air” in this way, nonproductive activities continue to expand. But once the continuous generation of such credit increases the pace of real wealth consumption above the pace of real wealth production, the positive flow of real savings is arrested and a decline in the existing pool of real savings is set in motion.

Because what drives economic activity is real saving, the performance of various activities starts to deteriorate and the number of bad loans starts to increase. In response to this, banks curtail their lending activities, setting in motion a contraction of the money stock. (Remember, the money stock declines once loans generated out of “thin air” are repaid and not renewed.)

The fall in the money stock begins to undermine various nonproductive bubble activities, which cannot stand on their own feet—an economic recession emerges. These activities require the assistance of unbacked credit that is no longer available—credit created out of “thin air” and that had diverted real wealth from its producers to them.

According to many mainstream economists, a severe economic slump, also known as an economic depression, occurs due to the sharp fall in the money supply. This view originated with the Chicago school and was championed by Milton Friedman.

But as we have seen, depression is not caused by the collapse in the money stock as such, but by the shrinking pool of real savings on account of previous easy monetary policy.

Thus, even if the central bank were to be successful in preventing the fall of the money stock, it could not prevent a depression as long as the pool of real savings was declining.

Conclusion

To conclude, then, banks do not lend but merely facilitate the lending of real savings by wealth producers. Banks facilitate the flow of real savings by connecting the suppliers of real savings with the demanders. In the sense of fulfilling the role of intermediary, banks play an important role in the process of real wealth formation.

When banks begin to engage in lending by attempting to replace genuine lenders/savers, however, it sets in motion the menace of the boom-bust cycle and economic impoverishment.

It must be understood that it is not possible to genuinely increase credit without the growth of real savings. Unbacked credit expansion can only encourage volatile, nonproductive activities that consume real saved wealth and halt its accumulation, setting the stage for certain economic disaster.

Categories: Current Affairs

The Origins of Nazism

Sat, 22/02/2020 - 20:00

[An excerpt from Omnipotent Government: The Rise of Total State and Total War, originally published in 1944 by Yale University as the first full-scale examination of German-style National Socialism as a species of socialism in general.]

1. The Ancient Regime and Liberalism

It is a fundamental mistake to believe that Nazism is a revival or a continuation of the policies and mentalities of the ancien régime or a display of the "Prussian spirit." Nothing in Nazism takes up the thread of the ideas and institutions of older German history. Neither Nazism nor Pan-Germanism, from which Nazism stems and whose consequent evolution it represents, is derived from the Prussianism of Frederick William I or Frederick II, called the Great. Pan-Germanism and Nazism never intended to restore the policy of the electors of Brandenburg and of the first four kings of Prussia. They have sometimes depicted as the goal of their endeavors the return of the lost paradise of old Prussia; but this was mere propaganda talk for the consumption of a public which worshiped the heroes of days gone by. Nazism's program does not aim at the restoration of something past but at the establishment of something new and unheard of.

The old Prussian state of the House of Hohenzollern was completely destroyed by the French on the battlefields of Jena and Auerstädt (1806). The Prussian Army surrendered at Prenzlau and Ratkau, the garrisons of the more important fortresses and citadels capitulated without firing a shot. The King took refuge with the Czar, whose mediation alone brought about the preservation of his realm. But the old Prussian state was internally broken down long before this military defeat; it had long been decomposed and rotten, when Napoleon gave it the finishing stroke. For the ideology on which it was based had lost all its power; it had been disintegrated by the assault of the new ideas of liberalism.

Like all the other princes and dukes who have established their sovereign rule on the debris of the Holy Roman Empire of the Teutonic Nation, the Hohenzollerns too regarded their territory as a family estate, whose boundaries they tried to expand through violence, ruse, and family compacts. The people living within their possessions were subjects who had to obey orders. They were appurtenances of the soil, the property of the ruler who had the right to deal with them ad libitum. Their happiness and welfare were of no concern.

Of course, the king took an interest in the material well-being of his subjects. But this interest was not founded on the belief that it is the purpose of civil government to make the people prosperous. Such ideas were deemed absurd in eighteenth-century Germany. The king was eager to increase the wealth of the peasantry and the townsfolk because their income was the source from which his revenue was derived. He was not interested in the subject but in the taxpayer. He wanted to derive from his administration of the country the means to increase his power and splendor. The German princes envied the riches of Western Europe, which provided the kings of France and of Great Britain with funds for the maintenance of mighty armies and navies. They encouraged commerce, trade, mining, and agriculture in order to raise the public revenue. The subjects, however, were simply pawns in the game of the rulers.

But the attitude of these subjects changed considerably at the end of the eighteenth century. From Western Europe new ideas began to penetrate into Germany. The people, accustomed to obey blindly the God-given authority of the princes, heard for the first time the words liberty, self-determination, rights of man, parliament, constitution. The Germans learned to grasp the meaning of dangerous watchwords.

No German has contributed anything to the elaboration of the great system of liberal thought, which has transformed the structure of society and replaced the rule of kings and royal mistresses by the government of the people. The  philosophers, economists, and sociologists who developed it thought and wrote English or French. In the eighteenth century the Germans did not even succeed in achieving readable translations of these English, Scotch, and French authors. What German idealistic philosophy produced in this field is poor indeed when compared with contemporary English and French thought. But German intellectuals welcomed Western ideas of freedom and the rights of man with enthusiasm. German classical literature is imbued with them, and the great German composers set to music verses singing the praises of liberty. The poems, plays, and other writings of Frederick Schiller are from beginning to end a hymn to liberty. Every word written by Schiller was a blow to the old political system of Germany; his works were fervently greeted by nearly all Germans who read books or frequented the theater. These intellectuals, of course, were a minority only. To the masses books and theaters were unknown. They were the poor serfs in the eastern provinces, they were the inhabitants of the Catholic countries, who only slowly succeeded in freeing themselves from the tight grasp of the Counter-Reformation. Even in the more advanced western parts and in the cities there were still many illiterates and semiliterates. These masses were not concerned with any political issue; they obeyed blindly, because they lived in fear of punishment in hell, with which the church threatened them, and in a still greater fear of the police. They were outside the pale of German civilization and German cultural life; they knew only their regional dialects, and could hardly converse with a man who spoke only the German literary language or another dialect. But the number of these backward people was steadily decreasing. Economic prosperity and education spread from year to year. More and more people reached a standard of living which allowed them to care for other things besides food and shelter, and to employ their leisure in something more than drinking. Whoever rose from misery and joined the community of civilized men became a liberal. Except for the small group of princes and their aristocratic retainers practically everyone interested in political issues was liberal. There were in Germany in those days only liberal men and indifferent men; but the ranks of the indifferent continually shrank, while the ranks of the liberals swelled.

All intellectuals sympathized with the French Revolution. They scorned the terrorism of the Jacobins but unswervingly approved the great reform. They saw in Napoleon the man who would safeguard and complete these reforms and—like Beethoven—took a dislike to him as soon as he betrayed freedom and made himself emperor.

Never before had any spiritual movement taken hold of the whole German people, and never before had they been united in their feelings and ideas. In fact the people, who spoke German and were the subjects of the Empire's princes, prelates, counts, and urban patricians, became a nation, the German nation, by their reception of the new ideas coming from the West. Only then there came into being what had never existed before: a German public opinion, a German public, a German literature, a German Fatherland. The Germans now began to understand the meaning of the ancient authors which they had read in school. They now conceived the history of their nation as something more than the struggle of princes for land and revenues. The subjects of many hundreds of petty lords became Germans through the acceptance of Western ideas.

This new spirit shook the foundations on which the princes had built their thrones—the traditional loyalty and subservience of the subjects who were prepared to acquiesce in the despotic rule of a group of privileged families. The Germans dreamed now of a German state with parliamentary government and the rights of man. They did not care for the existing German states. Those Germans who styled themselves "patriots," the new-fangled term imported from France, despised these seats of despotic misrule and abuse. They hated the tyrants. And they hated Prussia most because it appeared to be the most powerful and therefore most dangerous menace to German freedom.

The Prussian myth, which the Prussian historians of the nineteenth century fashioned with a bold disregard of facts, would have us believe that Frederick II was viewed by his contemporaries as they themselves represent him—as the champion of Germany's greatness, protagonist in Germany's rise to unity and power, the nation's hero. Nothing could be further from the truth. The military campaigns of the warrior king were to his contemporaries struggles to increase the possessions of the House of Brandenburg, which concerned the dynasty only. They admired his strategical talents but they detested the brutalities of the Prussian system. Whoever praised Frederick within the borders of his realm did so from necessity, to evade the indignation of a prince who wreaked stern vengeance upon every foe. When people outside of Prussia praised him, they were disguising criticism of their own rulers. The subjects of petty princes found this irony the least dangerous way to disparage their pocket-size Neros and Borgias. They glorified his military achievements but called themselves happy because they were not at the mercy of his whims and cruelties. They approved of Frederick only in so far as he fought their domestic tyrants.

At the end of the eighteenth century German public opinion was as unanimously opposed to the ancien régime as in France on the eve of the Revolution. The German people witnessed with indifference the French annexation of the left bank of the Rhine, the defeats of Austria and of Prussia, the breaking-up of the Holy Empire, and the establishment of the Rhine Confederacy. They hailed the reforms forced upon the governments of all their states by the ascendancy of the French ideas. They admired Napoleon as a great general and ruler just as they had previously admired Frederick of Prussia. The Germans began to hate the French only when—like the French subjects of the Emperor—they finally became tired of the endless burdensome wars. When the Great Army had been wrecked in Russia, the people took an interest in the campaigns which finished Napoleon, but only because they hoped that his downfall would result in the establishment of parliamentary government. Later events dispelled this illusion, and there slowly grew the revolutionary spirit which led to the upheaval of 1848.

It has been asserted that the roots of present-day nationalism and Nazism are to be found in the writings of the Romantics, in the plays of Heinrich von Kleist, and in the political songs which accompanied the final struggle against Napoleon. This, too, is an error. The sophisticated works of the Romantics, the perverted feelings of Kleist's plays, and the patriotic poetry of the wars of liberation did not appreciably move the public; and the philosophical and sociological essays of those authors who recommended a return to medieval institutions were considered abstruse. People were not interested in the Middle Ages but in the parliamentary activities of the West. They read the books of Goethe and Schiller, not of the Romantics; went to the plays of Schiller, not of Kleist. Schiller became the preferred poet of the nation; in his enthusiastic devotion to liberty the Germans found their political ideal. The celebration of Schiller's hundredth anniversary (in 1859) was the most impressive political demonstration that ever took place in Germany. The German nation was united in its adherence to the ideas of Schiller, to the liberal ideas.

All endeavors to make the German people desert the cause of freedom failed. The teachings of its adversaries had no effect. In vain Metternich's police fought the rising tide of liberalism.

Only in the later decades of the nineteenth century was the hold of liberal ideas shaken. This was effected by the doctrines of etatism. Etatism—we will have to deal with it later—is a system of sociopolitical ideas which has no counterpart in older history and is not linked up with older ways of thinking, although—with regard to the technical character of the policies which it recommends—it may with some justification be called neo-Mercantilism.

2. The Weakness of German Liberalism

At about the middle of the nineteenth century those Germans interested in political issues were united in their adherence to liberalism. Yet the German nation did not succeed in shaking off the yoke of absolutism and in establishing democracy and parliamentary government. What was the reason for this?

Let us first compare German conditions with those of Italy, which was in a similar situation. Italy, too, was liberal minded, but the Italian liberals were impotent. The Austrian Army was strong enough to defeat every revolutionary upheaval. A foreign army kept Italian liberalism in check; other foreign armies freed Italy from this control. At Solferino, at Königgrätz, and at the banks of the Marne the French, the Prussians, and the English fought the battles which rendered Italy independent of the Habsburgs.

Just as Italian liberalism was no match for the Austrian Army, so German liberalism was unable to cope with the armies of Austria and Prussia. The Austrian Army consisted mainly of non-German soldiers. The Prussian Army, of course, had mostly German-speaking men in its ranks; the Poles, the other Slavs, and the Lithuanians were a minority only. But a great number of these men speaking one of the German dialects were recruited from those strata of society which were not yet awakened to political interests. They came from the eastern provinces, from the eastern banks of the Elbe River. They were mostly illiterate, and unfamiliar with the mentality of the intellectuals and of the townsfolk. They had never heard anything about the new ideas; they had grown up in the habit of obeying the Junker, who exercised executive and judicial power in their village, to whom they owed imposts and corvée (unpaid statute labor), and whom the law considered as their legitimate overlord. These virtual serfs were not capable of disobeying an order to fire upon the people. The Supreme War Lord of the Prussian Army could trust them. These men, and the Poles, formed the detachments which defeated the Prussian Revolution in 1848.

Such were the conditions which prevented the German liberals from suiting their actions to their word. They were forced to wait until the progress of prosperity and education could bring these backward people into the ranks of liberalism. Then, they were convinced, the victory of liberalism was bound to come. Time worked for it. But, alas, events belied these expectations. It was the fate of Germany that before this triumph of liberalism could be achieved liberalism and liberal ideas were overthrown—not only in Germany but everywhere—by other ideas, which again penetrated into Germany from the West. German liberalism had not yet fulfilled its task when it was defeated by etatism, nationalism, and socialism.

3.The Prussian Army

The Prussian Army which fought in the battles of Leipzig and Waterloo was very different from the army which Frederick William I had organized and which Frederick II had commanded in three great wars. That old army of Prussia had been smashed and destroyed in the campaign of 1806 and never revived.

The Prussian Army of the eighteenth century was composed of men pressed into service, brutally drilled by flogging, and held together by a barbaric discipline. They were mainly foreigners. The kings preferred foreigners to their own subjects. They believed that their subjects could be more useful to the country when working and paying taxes than when serving in the armed forces. In 1742 Frederick II set as his goal that the infantry should consist of two-thirds foreigners and one-third natives. Deserters from foreign armies, prisoners of war, criminals, vagabonds, tramps, and people whom the crimps had entrapped by fraud and violence were the bulk of the regiments. These soldiers were prepared to profit by every opportunity for escape. Prevention of desertion was therefore the main concern of the conduct of military affairs. Frederick II begins his main treatise of strategy, his General Principles of Warfare, with the exposition of fourteen rules on how to hinder desertion. Tactical and even strategical considerations had to be subordinated to the prevention of desertion. The troops could only be employed when tightly assembled together. Patrols could not be sent out. Strategical pursuit of a defeated enemy force was impossible. Marching or attacking at night and camping near forests were strictly avoided. The soldiers were ordered to watch each other constantly, both in war and in peace. Civilians were obliged by the threat of the heaviest penalties to bar the way to deserters, to catch them, and deliver them to the army.

The commissioned officers of this army were as a rule noblemen. Among them, too, were many foreigners; but the greater number belonged to the Prussian Junker class. Frederick II repeats again and again in his writings that commoners are not fit for commissions because their minds are directed toward profit, not honor. Although a military career was very profitable, as the commander of a company drew a comparatively high income, a great part of the landed aristocracy objected to the military profession for their sons. The kings used to send out policemen to kidnap the sons of noble landowners and put them into their military schools. The education provided by these schools was hardly more than that of an elementary school. Men with higher education were very rare in the ranks of Prussian commissioned officers.1

Such an army could fight and—under an able commander—conquer, only as long as it encountered armies of a similar structure. It scattered like chaff when it had to fight the forces of Napoleon.

The armies of the French Revolution and of the first Empire were recruited from the people. They were armies of free men, not of crimped scum. Their commanders did not fear desertion. They could therefore abandon the traditional tactics of moving forward in deployed lines and of firing volleys without taking aim. They could adopt a new method of combat, that is, fighting in columns and skirmishing. The new structure of the army brought first a new tactic and then a new strategy. Against these the old Prussian Army proved impotent.

The French pattern served as a model for the organization of the Prussian Army in the years 1808–13. It was built upon the principle of compulsory service of all men physically fit. The new army stood the test in the wars of 1813–15. Consequently its organization was not changed for about half a century. How this army would have fought in another war against a foreign aggressor will never be known; it was spared this trial. But one thing is beyond doubt, and was attested by events in the Revolution of 1848: only a part of it could be relied on in a fight against the people, the "domestic foe" of the government, and an unpopular war of aggression could not be waged with these soldiers.

In suppressing the Revolution of 1848 only the regiments of the Royal Guards, whose men were selected for their allegiance to the King, the cavalry, and the regiments recruited from the eastern provinces could be considered absolutely reliable. The army corps recruited from the west, the militia (Landwehr), and the reservists of many eastern regiments were more or less infected by liberal ideas.

The men of the guards and of the cavalry had to give three years of active service, as against two years for the other parts of the forces. Hence the generals concluded that two years was too short a time to transform a civilian into a soldier unconditionally loyal to the King. What was needed in order to safeguard the political system of Prussia with its royal absolutism exercised by the Junkers was an army of men ready to fight—without asking questions—against everybody whom their commanders ordered them to attack. This army—His Majesty's army, not an army of the Parliament or of the people—would have the task of defeating any revolutionary movement within Prussia or within the smaller states of the German Confederation, and of repelling possible invasions from the West which could force the German princes to grant constitutions and other concessions to their subjects. In Europe of the 1850s, where the French Emperor and the British Prime Minister, Lord Palmerston, openly professed their sympathies with the popular movements menacing the vested interests of kings and aristocrats the army of the House of Hohenzollern was the rocher de bronze amid the rising tide of liberalism. To make this army reliable and invincible meant not only preserving the Hohenzollerns and their aristocratic retainers; it meant much more: the salvation of civilization from the threat of revolution and anarchy. Such was the philosophy of Frederick Julius Stahl and of the right-wing Hegelians, such were the ideas of the Prussian historians of the Kleindeutsche school of history, such was the mentality of the military party at the court of King Frederick William IV. This King, of course, was a sickly neurotic, whom every day brought nearer to complete mental disability. But the generals, led by General von Roon and backed by Prince William, the King's brother and heir apparent to the throne, were clearheaded and steadily pursued their aim.

The partial success of the revolution had resulted in the establishment of a Prussian Parliament. But its prerogatives were so restricted that the Supreme War Lord was not prevented from adopting those measures which he deemed indispensable for rendering the army a more reliable instrument in the hands of its commanders.

The experts were fully convinced that two years of active service was sufficient for the military training of the infantry. Not for reasons of a technical military character but for purely political considerations the King prolonged active service for the infantry regiments of the line from two years to two and a half in 1852 and to three in 1856. Through this measure the chances of success against a repetition of the revolutionary movement were greatly improved. The military party was now confident that for the immediate future they were strong enough, with the Royal Guards and with the men doing active service in the regiments of the line, to conquer poorly armed rebels. Relying on this, they decided to go further and thoroughly reform the organization of the armed forces.

The goal of this reform was to make the army both stronger and more loyal to the King. The number of infantry battalions would be almost doubled, the artillery increased 25 per cent, and many new regiments of cavalry formed. The number of yearly recruits would be raised from under forty thousand to sixty-three thousand, and the ranks of commissioned officers increased correspondingly. On the other hand the militia would be transformed into a reserve of the active army. The older men were discharged from service in the militia as not fully reliable. The higher ranks of the militia would be entrusted to commissioned officers of the professional corps.2

Conscious of the strength which the prolongation of active service had already given them, and confident that they would for the time being suppress a revolutionary attempt, the court carried out this reform without consulting Parliament. The King's lunacy had in the meanwhile become so manifest that Prince William had to be installed as prince regent; the royal power was now in the hands of a tractable adherent of the aristocratic clique and of the military hotspurs. In 1859, during the war between Austria and France, the Prussian Army had been mobilized as a measure of precaution and to safeguard neutrality. The demobilization was effected in such a manner that the main objectives of the reform were attained. In the spring of 1860 all the newly planned regiments had already been established. Only then the cabinet brought the reform bill to Parliament and asked it to vote the expenditure involved.3

The struggle against this army bill was the last political act of German liberalism.

4. The Constitutional Conflict in Prussia

The Progressives, as the liberals in the Prussian lower chamber (chamber of deputies) called their party, bitterly opposed the reform. The chamber voted repeatedly against the bill and against the budget. The King—Frederick William IV had now died and William I had succeeded him—dissolved Parliament, but the electors returned a majority of Progressives. The King and his ministers could not break the opposition of the legislative body. But they clung to their plan and carried on without constitutional approval and parliamentary assent. They led the new army into two campaigns, and defeated Denmark in 1864 and Austria in 1866. Only then, after the annexation of the Kingdom of Hanover, the possessions of the Elector of Hessen, the Duchies of Nassau, Schleswig, and Holstein, and the Free City of Frankfort, after the establishment of Prussian hegemony over all states of Northern Germany and the conclusion of military conventions with the states of Southern Germany by which these too surrendered to the Hohenzollern, did the Prussian Parliament give in. The Progressive party split, and some of its former members supported the government. Thus the King got a majority. The chamber voted indemnification for the unconstitutional conduct of affairs by the government and belatedly sanctioned all measures and expenditures which they had opposed for six years. The great Constitutional Conflict resulted in full success for the King and in a complete defeat for liberalism.

When a delegation of the chamber of deputies brought the King the Parliament's accommodating answer to his royal speech at the opening of the new session, he haughtily declared that it was his duty to act as he had in the last years and that he would act the same way in the future too should similar conditions occur again. But in the course of the conflict he had more than once despaired. In 1862 he had lost all hope of defeating the resistance of the people, and was ready to abdicate. General von Roon urged him to make a last attempt by appointing Bismarck prime minister. Bismarck rushed from Paris, where he represented Prussia at the court of Napoleon III. He found the King "worn out, depressed, and discouraged." When Bismarck tried to explain his own view of the political situation, William interrupted him, saying: "I see exactly how all this will turn out. Right here, in this Opera square on which these windows look, they will behead first you and a little later me too." It was hard work for Bismarck to infuse courage into the trembling Hohenzollern. But finally, Bismarck reports, "My words appealed to his military honor and he saw himself in the position of an officer who has the duty of defending his post unto death."4

Still more frightened than the King were the Queen, the royal princes, and many generals. In England Queen Victoria spent sleepless nights thinking of the position of her eldest daughter married to the Prussian Crown Prince. The royal palace of Berlin was haunted by the ghosts of Louis XVI and Marie Antoinette.

All these fears, however, were unfounded. The Progressives did not venture a new revolution, and they would have been defeated if they had.

These much-abused German liberals of the 1860's, these men of studious habits, these readers of philosophical treatises, these lovers of music and poetry, understood very well why the upheaval of 1848 had failed. They knew that they could not establish popular government within a nation where many millions were still caught in the bonds of superstition, boorishness, and illiteracy. The political problem was essentially a problem of education. The final success of liberalism and democracy was beyond doubt. The trend toward parliamentary rule was irresistible. But the victory of liberalism could be achieved only when those strata of the population from which the King drew his reliable soldiers should have become enlightened and thereby transformed into supporters of liberal ideas. Then the King would be forced to surrender, and the Parliament would obtain supremacy without bloodshed.

The liberals were resolved to spare the German people, whenever possible, the horrors of revolution and civil war. They were confident that in a not-too-distant future they themselves would get full control of Prussia. They had only to wait.

5. The "Little German" Program

The Prussian Progressives did not fight in the Constitutional Conflict for the destruction or weakening of the Prussian Army. They realized that under the circumstances Germany was in need of a strong army for the defense of its independence. They wanted to wrest the army from the King and to transform it into an instrument for the protection of German liberty. The issue of the conflict was whether the King or Parliament should control the army.

The aim of German liberalism was the replacement of the scandalous administration of the thirty-odd German states by a unitary liberal government. Most of the liberals believed that this future German state must not include Austria. Austria was very different from the other German-speaking countries; it had problems of its own which were foreign to the rest of the nation. The liberals could not help seeing Austria as the most dangerous obstacle to German freedom. The Austrian court was dominated by the Jesuits, its government had concluded a concordat with Pius IX, the pope who ardently combated all modern ideas. But the Austrian Emperor was not prepared to renounce voluntarily the position which his house had occupied for more than four hundred years in Germany. The liberals wanted the Prussian Army strong because they were afraid of Austrian hegemony, a new Counter-Reformation, and the reëstablishment of the reactionary system of the late Prince Metternich. They aimed at a unitary government for all Germans outside of Austria (and Switzerland).

They therefore called themselves Little Germans (Kleindeutsche) as contrasted to the Great Germans (Grossdeutsche) who wanted to include those parts of Austria which had previously belonged to the Holy Empire.

But there were, besides, other considerations of foreign policy to recommend an increase in the Prussian Army. France was in those years ruled by an adventurer who was convinced that he could preserve his emperorship only by fresh military victories. In the first decade of his reign he had already waged two bloody wars. Now it seemed to be Germany's turn. There was little doubt that Napoleon III toyed with the idea of annexing the left bank of the Rhine. Who else could protect Germany but the Prussian Army?

Then there was one problem more, Schleswig-Holstein. The citizens of Holstein, of Lauenburg, and of southern Schleswig bitterly opposed the rule of Denmark. The German liberals cared little for the sophisticated arguments of lawyers and diplomats concerning the claims of various pretenders to the succession in the Elbe duchies. They did not believe in the doctrine that the question of who should rule a country must be decided according to the provisions of feudal law and of century-old family compacts. They supported the Western principle of self-determination. The people of these duchies were reluctant to acquiesce in the sovereignty of a man whose only title was that he had married a princess with a disputed claim to the succession in Schleswig and no right at all to the succession in Holstein; they aimed at autonomy within the German Confederation. This fact alone seemed important in the eyes of the liberals. Why should these Germans be denied what the British, the French, the Belgians, and the Italians had got? But as the King of Denmark was not ready to renounce his claims, this question could not be solved without a recourse to arms.

It would be a mistake to judge all these problems from the point of view of later events. Bismarck freed Schleswig-Holstein from the yoke of its Danish oppressors only in order to annex it to Prussia; and he annexed not only southern Schleswig but northern Schleswig as well, whose population desired to remain in the Danish kingdom. Napoleon III did not attack Germany; it was Bismarck who kindled the war against France. Nobody foresaw this outcome in the early 1860s. At that time everybody in Europe, and in America too, deemed the Emperor of France the foremost peacebreaker and aggressor. The sympathies which the German longing for unity encountered abroad were to a great extent due to the conviction that a united Germany would counterbalance France and thus make Europe safe for peace.

The Little Germans were also misled by their religious prejudices. Like most of the liberals they thought of Protestantism as the first step on the way from medieval darkness to enlightenment. They feared Austria because it was Catholic; they preferred Prussia because the majority of its population was Protestant. In spite of all experience they hoped that Prussia was more open to liberal ideas than Austria. Political conditions in Austria, to be sure, were in those critical years unsatisfactory. But later events have proved that Protestantism is no more a safeguard of freedom than Catholicism. The ideal of liberalism is the complete separation of church and state, and tolerance—without any regard to differences among the churches.

But this error also was not limited to Germany. The French liberals were so deluded that they at first hailed the Prussian victory at Königgrätz (Sadova). Only on second thought did they realize that Austria's defeat spelled the doom of France too, and they raised—too late—the battle cry Revanche pour Sadova.

Königgrätz was at any rate a crushing defeat for German liberalism. The liberals were aware of the fact that they had lost a campaign. They were nevertheless full of hope. They were firmly resolved to proceed with their fight in the new Parliament of Northern Germany. This fight, they felt, must end with the victory of liberalism and the defeat of absolutism. The moment when the King would no longer be able to use "his" army against the people seemed to come closer every day.

6. The Lassalle Episode

It would be possible to deal with the Prussian Constitutional Conflict without even mentioning the name of Ferdinand Lassalle. Lassalle's intervention did not influence the course of events. But it foreboded something new; it was the dawn of the forces which were destined to mold the fate of Germany and of Western civilization.

While the Prussian Progressives were involved in their struggle for freedom, Lassalle attacked them bitterly and passionately. He tried to incite the workers to withdraw their sympathies from the Progressives. He proclaimed the gospel of class war. The Progressives, as representatives of the bourgeoisie, he held, were the mortal foes of labor. You should not fight the state but the exploiting classes. The state is your friend; of course, not the state governed by Herr von Bismarck but the state controlled by me, Lassalle.

Lassalle was not on the payroll of Bismarck, as some people suspected. Nobody could bribe Lassalle. Only after his death did some of his former friends take government money. But as both Bismarck and Lassalle assailed the Progressives, they became virtual allies. Lassalle very soon approached Bismarck. The two used to meet clandestinely. Only many years later was the secret of these relations revealed. It is vain to discuss whether an open and lasting coöperation between these two ambitious men would have resulted if Lassalle had not died very shortly after these meetings from a wound received in a duel (August 31, 1864). They both aimed at supreme power in Germany. Neither Bismarck nor Lassalle was ready to renounce his claim to the first place.

Bismarck and his military and aristocratic friends hated the liberals so thoroughly that they would have been ready to help the socialists get control of the country if they themselves had proved too weak to preserve their own rule. But they were—for the time being—strong enough to keep a tight rein on the Progressives. They did not need Lassalle's support.

It is not true that Lassalle gave Bismarck the idea that revolutionary socialism was a powerful ally in the fight against liberalism. Bismarck had long believed that the lower classes were better royalists than the middle classes.5 Besides, as Prussian minister in Paris he had had opportunity to observe the working of Caesarism. Perhaps his predilection toward universal and equal suffrage was strengthened by his conversations with Lassalle. But for the moment he had no use for Lassalle's coöperation. The latter's party was still too small to be considered important. At the death of Lassalle the Allgemeine Deutsche Arbeiterverein had not much more than four thousand members.6

Lassalle's agitation did not hinder the activities of the Progressives. It was a nuisance to them, not an obstacle. Neither had they anything to learn from his doctrines. That Prussia's Parliament was only a sham and that the army was the main stronghold of Prussia's absolutism was not new to them. It was exactly because they knew it that they fought in the great conflict.

Lassalle's brief demagogical career is noteworthy because for the first time in Germany the ideas of socialism and etatism appeared on the political scene as opposed to liberalism and freedom. Lassalle was not himself a Nazi; but he was the most eminent forerunner of Nazism, and the first German who aimed at the Führer position. He rejected all the values of the Enlightenment and of liberal philosophy, but not as the romantic eulogists of the Middle Ages and of royal legitimism did. He negated them; but he promised at the same time to realize them in a fuller and broader sense. Liberalism, he asserted, aims at spurious freedom, but I will bring you true freedom. And true freedom means the omnipotence of government. It is not the police who are the foes of liberty but the bourgeoisie.

And it was Lassalle who spoke the words which characterize best the spirit of the age to come: "The state is God."

  • 1. Delbrück, Geschichte der Kriegskunst (Berlin, 1920), part IV, pp. 273 ff., 348 ff.
  • 2. Ziekursch, Politische Geschichte des neuen deutschen Kaiserreichs (Frankfurt, 1925–30), I, pp. 29 ff.
  • 3. Sybel, Die Begründung des deutschen Reiches unter Wilhelm I, 2d ed. (Munich, 1889), II, p. 375; Ziekursch, op. cit., I, p. 42.
  • 4. Bismarck, Gedanken und Erinnerungen, new ed. (Stuttgart, 1922), I, pp. 325 ff.
  • 5. Ziekursch, op. cit., I, pp. 107 ff.
  • 6. Oncken, Lassalle (Stuttgart, 1904), p. 393.
Categories: Current Affairs

When It Comes to Raw Power, Few Have More of It Than Central Bankers

Sat, 22/02/2020 - 17:00

A common retort to the claim that in voluntary exchange both parties expect to become better off (or they wouldn’t do it) is that exchanges are seldom, if ever, a matter of horizontal, equal exchange of values. Instead, any such interaction between people is ultimately a matter of their exercising power over one another. The implication, and often explicitly stated conclusion, is that there is no voluntariness, that exploitation is always present, that one party necessarily gains at the other’s expense.

This rather dismal view of man makes clear that people apparently are slaves to power, their own hunger for it as well as others’ wielding of it. We are forever at each other’s throats in some kind of hyper-Hobbesian fashion:

Although power is always involved, barter trade, in which goods are traded for other goods, sees significantly less of it. Here, the exchange of, for example, fish for bread reduces our ability to rely on power, and we are thus forced, as it were, to accept a somewhat equal trade. But the introduction of money exacerbates the problem by having a seemingly mysterious magnifying impact on the underlying power structures.

In a recent Twitter exchange, the tweeter summarized the issue with admirable (and rare) clarity: “a dollar is a unit of entitlement, an authorization to obtain resources, goods, and services.” In other words, the person with the dollar does not simply have something to use in exchange with others. Money is a means to command others to give up their goods, the ultimate expression of power. Money releases our savage lust for power and innate desire to cause harm to one another.

Consequently, markets unleash the barbarian within us and worse: they provide a framework that rewards greed by providing numerous goods and values, all expressed in money, to be used in our quest to subdue others. The only way to stop this destructive process from running amuck is to establish a social institution to keep these forces at bay, to leash the beast. In other words, it requires a state strong enough to counterbalance the detrimental impact of markets and also to suppress and control our basic destructive desires.

Or so the reasoning goes. But let’s unpack this all-too-common view, because it doesn’t make much sense even on its own terms.

What Is Money?

Those claiming the power of money hesitate to define this mysterious institution. The resulting lack of clarity explains some of the confusion. A money is simply a medium of exchange, something that is generally accepted—universally employed—in trade.

Money helps facilitate exchange throughout the economy by releasing actors of the necessity of finding exchange partners who want exactly what they are offering in trade and have exactly what they want to acquire. In other words, where there is money we can engage in indirect exchange: instead of being limited to situations of coincidence of wants for trade, person A can sell what they produce to person B for money and then use that money to pay person C for what they sell.

Simply put, money earned represents one’s value contribution to the economy and, since money is a generally accepted medium, it has purchasing power roughly representing that value. We produce in order to consume, and our production facilitates our consumption by earning us purchasing power—which is generally usable through the institution of money.

So where do power and command enter this picture? They do not, because there is no requirement that a potential seller accept money in exchange for what they are selling. And there certainly is no magic power in money to buy what is offered for sale regardless the amount of money offered.

The seller typically has a reservation price below which they will not sell. Unless the potential buyer offers a sufficiently high amount, the seller will not accept and there will be no trade. And the seller will accept money in exchange for the good simply because it is money, and so can be used in terms of its purchasing power. Similarly, the buyer would not part with his money unless he considered the good more valuable to him than the purchasing power of the money given up.

Consequently, the voluntariness of exchange remains a fact. Both parties can veto the exchange, meaning that it will take place only if both parties consider it worth it. Assuming no fraud and that what is offered in exchange is legitimately theirs, we have no reason to question the ethics of this situation.

This holds true virtually regardless of the nature of money, since it is traded (and traded for) given its estimated purchasing power. It doesn’t matter if the money exchanged is a gold coin, a fully backed bill of exchange, or a fiat currency like the dollar. However, those believing money is power should recognize the fact that an economy that relies on a commodity money is practically still a barter economy, but with the difference that actors released from the burden of coincidence of wants. They should thus be comparatively in favor of an economy with, say, a gold standard, since it leaves less room for the exercise of power than one with a fiat money regime.

When and How Power Enters

Where money is a commodity, regardless of which particular commodity, it is simply a good like any other except that it is also used in indirect exchange. This does not in itself imply that this money provides the holder with power. Nobody, or at least very few, would claim that bread in a bread commodity-money economy is a source of power over people that other types of food (or any other types of goods) are not. It is still just bread, the difference being only that people would accept bread as payment even if they do not actually want bread—because they expect that they can use the bread as payment when trading with others.

The bread itself is still useful. Even if we do not particularly care for it, whether temporarily or at all, we can see that it is a good with specific uses. The same is true with any commodity money, even though precious metals likely have fewer specific uses to us personally than bread does.

Fiat money changes the situation somewhat, but not regarding the actual use and nature of money in exchanges. Money is still used and accepted for its (expected) purchasing power. However, it is not a good that we can use for anything other than as money. So, in a sense, we’re stuck with it as money only, whereas bread can be eaten, gold can be used in jewelry, and bills of exchange are direct claims on such goods.

For this reason, the bearer of noncommodity money is more vulnerable: if the money loses its purchasing power, partially or completely, there is no alternate course of action. A $20 bill is a $20 bill whether or not the purchasing power of the dollar plummets (or surges), whereas it might make sense to eat one’s bread money if its purchasing power falls.

The holder of cash in a fiat money regime is thus subject to the monetary policymakers. Should the latter choose to double the money supply, which would severely undermine the currency unit’s purchasing power, it would affect the money in your pocket, mattress, or bank account. You are made the victim of another’s decision, which is certainly a form of power. But this is the very opposite of what is claimed by those insisting that money is power. To them, to hold money is to have power. Yet in this example whoever holds money is powerless against any changes in monetary policy.

What about money as the power to command? As we saw above, there is no such thing in a barter economy. But fiat money may be different, and in our day and age typically is. This is due to legal tender laws. As is printed on every federal reserve note, “This note is legal tender for all debts, public and private.” In other words, if someone is indebted to you, you are legally required to accept payment in dollars. So whoever has borrowed can, due to the powers of the state, require that the lender accept dollars in repayment.

Although this does not mean that you can, as a holder of dollar bills, command anyone to sell to you, other laws introduce such power. For instance, Michigan’s Scanner Law requires stores not only to display prices for all goods offered for sale, but to accept the displayed price in dollars. This means the customer has the (legally granted) power to command the store to sell an item for the price displayed even if it was a mistaken one.

Consequently, we cannot fully dismiss the view that “money is power.” However, this power is not due to money being money, as is often and widely believed. Money is not mysteriously powerful. But there are situations in which money constitutes power. This is the case under fiat money regimes and legal tender laws, and other laws that may be in force to change the power dynamics. Whereas money is involved in all of these examples, the common source of such powers is not the money itself. The source is the state.

Categories: Current Affairs

Tax Burdens, Per Capita Income, and Simpson’s Paradox

Sat, 22/02/2020 - 12:00

How many times have you heard that higher taxes mean greater social welfare and economic development? The statement is backed up by a touch of popular wisdom: “More taxes, more public services.” Almost incontestable empirical evidence is also cited: with very few exceptions, the richest countries’ tax rates are very high, whereas taxes in poor countries are relatively low.

This article analyzes the statistical relationships that suggest that high tax burdens (government revenue/GDP) are linked to a high level of development (measured by GDP per capita).

We will see that the positive relationship between GDP per capita and tax burden suffers from a statistical problem known as Simpson’s paradox.

Simpson’s Paradox

The paradox got its name from the British statistician Edward Simpson. It refers to an error that results from analyzing aggregate data when, really, the observations belong in separate categories. Data disaggregated by category show one trend, whereas aggregate data show a different one.

Imagine we want to compare the number of bedrooms in a house with its price. We would expect the price of the home to increase as the number of bedrooms increases. However, if we look at all the data together, we see a marked negative trend. In other words, the more bedrooms a home has, the lower its price. Nonetheless, when we analyze the data by groups, we see that our first instinct was correct: the more bedrooms a home has, the higher its price.

Source: Borgatti (2017)

What is the problem? We are comparing apples and oranges. The number of bedrooms in a home (or the floor area) is not the only factor that affects its price. When determining the price of a home, its location is at least as important as its number of bedrooms.

The graph above shows homes grouped by area. Each point represents an apartment, and each color represents a different zone in a city (black represents downtown; red, the edges of town; blue, the suburbs; and green, the countryside). Homes are more expensive the closer they are to the city center. Once we take into account how near or far the home is from the city center, the number of bedrooms is indeed positively related to the price of the home.

Simpson’s paradox and this example demonstrate that one needs to be careful when interpreting statistical data.

As we will see, the apparent relationship between tax burden and economic growth suffers from a similar interpretation problem.

Analyzing Aggregate Data of the Tax Burden and per Capita Income: First Estimate

First, we must analyze the aggregate data of the tax burden and per capita income. Keep in mind that tax burdens are equal to tax revenue divided by total economic output.

With data from 2018, we can see that unquestionably, countries with higher taxes have higher income per capita.

Source: Prepared by the author with data from the International Monetary Fund (IMF). $2011 in PPP

For approximately every percentage point by which the tax burden increases, per capita income increases by no less than $700 per year.1

That is the conventional analysis. It is the one most used by economists and analysts who defend the idea that it is necessary to raise taxes in order to spur economic growth.

It would seem that the solution to economic stagnation is very clear: if the richest countries have a higher tax burden, then it is necessary to increase a country’s tax burden in order to improve its welfare.

Now let’s analyze the data disaggregated by the level of development to see if this conclusion still holds.

Analyzing disaggregated data: the real relationship

To disaggregate the data, we use the World Bank’s classification of every country by level of income:

  • Low-income countries (Gross national income (GNI) per capita of less than $1,025 per year; 30 countries)
  • Medium-low-income countries (GNI per capita of $1,026 to $3,995 per year; 46 countries)
  • Medium-high-income countries (GNI per capita of $3,996 to $12,375 per year; 58 countries)
  • High-income countries (GNI per capita greater than $12,376 per year; 60 countries)

We analyze the relationship between tax burdens and per capita income separately for each group of countries.

Source: Prepared by the author with data from the IMF. $2011 in PPP

The red points represent high-income countries; the green points are countries with medium-high incomes; the blue, medium-low incomes; and the purple, low incomes. Their respective lines show the trends.

As we can see, the positive relationship that we see with aggregated data disappears for all income levels. In other words, a greater tax burden does not accompany a higher level of income once each country’s level of development is taken into account.

Below, the same calculation is done, but using per capita–income logarithms to better understand the previous graph’s relationships.2

Source: Prepared by the author with data from the IMF. $2011 in PPP

This demonstrates even more clearly that the relationship between tax burdens and per capita income is practically nonexistent. What’s more, the relationship is negative in some cases, although it is statistically insignificant.3

If a country decides to increase its tax burden, it will not make its citizens more prosperous.4

Conclusion

Empirical analysis that seeks to prove that raising taxes leads to greater economic development falls prey to Simpson’s paradox. Statistics, when used correctly, indicate that raising taxes does not improve economic growth.

The statistical relationship is clear. The idea of increasing taxes to become a rich country is simply magical. The richest countries are not rich because they have large governments. The relationship seems to be that the countries are rich first, and only after that can they permit themselves the luxury of having large governments.

The “traditional view in economics” is right. Increases in per capita income and reductions in poverty levels appear only when productivity increases. Increases in productivity go hand in hand with more capital being invested well. To ensure that capital is properly invested, governments must not put obstacles in place for—or provide aid to—private initiatives, whether they are domestic or foreign.5

Reprinted from UFM Market Trends. For appendices, please see the original article.

  • 1. See first regression in the appendix for statistical significance.
  • 2. Using logarithms allows an economist to solve statistical problems that appear in variables such as income.
  • 3. See regression 2 in the appendix.
  • 4. However, it is very likely that a politician or bureaucrat who handles taxes does receive a higher income at the expense of making the taxpayer poorer.
  • 5. In the last resort, for a government to act this way, a population must accept the social principles upon which market cooperation is based. This is Deirdre McCloskey’s hypothesis.
Categories: Current Affairs

Pennsylvania's Anarchist Experiment: 1681–1690

Fri, 21/02/2020 - 20:00

In the vast stretches of America, William Penn envisaged a truly Quaker colony, "a Holy experiment…that an example may be set up to the nations."

In his quest for such a charter, Penn was aided by the fact that the Crown had owed his father, Admiral Sir William Penn, the huge sum of 16,000 pounds for loans and back salary. In March 1681 the king agreed to grant young William, the admiral's heir, proprietary ownership of the lands west of the Delaware River and north of the Maryland border in exchange for canceling the old debt. The land was to be called Pennsylvania. Penn was greatly aided in securing the charter by his friendship with the king and other high officials of the court.

The proprietary charter was not quite as absolute as the colonial charters granted earlier in the century. The proprietor could rule only with the advice and consent of an assembly of freemen—a provision quite satisfactory to Penn. The Privy Council could veto Pennsylvania's actions, and the Crown, of course, could hear appeals from litigation in the colony. The Navigation Acts had to be enforced, and there was an ambiguous provision implying that England could impose taxes in Pennsylvania.

As soon as Penn heard news of the charter, he dispatched his cousin William Markham to be deputy governor of Pennsylvania. The latter informed the five hundred or so Swedish and Dutch residents on the west bank of the Delaware of the new charter. In the fall Markham was succeeded by four commissioners, and they were succeeded by Thomas Holme as deputy governor in early 1682.

In May William Penn made the Frame of Government the constitution for the colony. The Frame was amended and streamlined, and became the Second Frame of 1683, also called the Charter of Liberties. The Frame provided, first, for full religious freedom for all theists. No compulsory religion was to be enforced. The Quaker ideal of religious liberty was put into practice. Only Christians, however, were to be eligible for public office; later, at the insistence of the Crown, Catholics were barred from official posts in the colony.

The government, as instituted by the Frame, comprised a governor, the proprietor; an elected Council, which performed executive and supreme judicial functions; and an Assembly, elected by the freeholders. Justices of lower courts were appointed by the governor. But while the Assembly, like those in other colonies, had the only power to levy taxes, its powers were more restricted than those of assemblies elsewhere. Only the Council could initiate laws, and the Assembly was confined to ratifying or vetoing the Council's proposals.

William Penn himself arrived in America in the fall of 1682 to institute the new colony. He announced that the Duke's Laws would be temporarily in force and then called an Assembly for December. The Assembly included representatives not only of three counties of Pennsylvania, but also of the three lower counties of Delaware. For Delaware—or New Castle and the lower counties on the west bank of Delaware Bay—had been secured from the Duke of York in August. While Penn's legal title to exercising governmental functions over Delaware was dubious, he pursued it boldly. William Penn now owned the entire west bank of the Delaware River.

The Assembly confirmed the amended Frame of Government, including the declaration of religious liberty, and this code of laws constituted the "Great Law of Pennsylvania." The three lower Delaware counties were placed under one administration, separate from Pennsylvania proper.

Penn was anxious to promote settlement as rapidly as possible, both for religious (a haven to Quakers) and for economic (income for himself) reasons. Penn advertised the virtues of the new colony far and wide throughout Europe. Although he tried to impose quitrents and extracted selling prices for land, he disposed of the land at easy terms. The prices of land were cheap. Fifty acres were granted to each servant at the end of his term of service. Fifty acres also were given for each servant brought into the colony. Land sales were mainly in moderate-sized parcels. Penn soon found that at the rate of one shilling per hundred acres, quitrents were extremely difficult to collect from the settlers.

Induced by religious liberty and relatively cheap land, settlers poured into Pennsylvania at a remarkably rapid rate, beginning in 1682. Most of the immigrants were Quakers; in addition to English Quakers came Welsh, Irish, and German Quakers. Penn laid out the capital, destined to become the great city of Philadelphia, and changed the name of the old Swedish settlement of Upland to Chester. The German Quakers, led by Francis Daniel Pastorius, founded Germantown. In addition to Quakers, there came other groups attracted by the promise of full religious liberty: German Lutherans, Catholics, Mennonites, and Huguenots. The growth of Pennsylvania was rapid: 3,000 immigrants arrived during this first year; by 1684 the population of Philadelphia was 2,500, and of Pennsylvania, 8,000. There were over 350 dwellings in Philadelphia by the end of 1683. By 1,689 there were over 12,000 people in Pennsylvania.

One of William Penn's most notable achievements was to set a remarkable pattern of peace and justice with the Indians. In November 1682 Penn concluded the first of several treaties of peace and friendship with the Delaware Indians at Shackamaxon, near Philadelphia. The Quaker achievement of maintaining peace with the Indians for well over half a century has been disparaged; some have held that it applied to only the mild Delaware Indians, who were perpetually cowed by the fierce but pro-English Iroquois. But this surely accounts for only part of the story. For the Quakers not only insisted on voluntary purchase of land from the Indians; they also treated the Indians as human beings, as deserving of respect and dignity as anyone else. Hence they deserved to be treated with honesty, friendliness, and evenhanded justice. As a consequence, the Quakers were treated precisely the same way in return. No drop of Quaker blood was ever shed by the Indians. So strong was the mutual trust between the races that Quaker farmers unhesitatingly left their children in the care of the Indians. Originally, too, the law provided that whenever an Indian was involved in a trial, six whites and six Indians would constitute the jury.

Voltaire, rapturous over the Quaker achievement, wittily and perceptively wrote that the Shackamaxon treaty was "the only treaty between Indians and Christians that was never sworn to and that was never broken." Voltaire went on to say that for the Indians "it was truly a new sight to see a sovereign [William Penn] to whom everyone said 'thou' and to whom one spoke with one's hat on one's head; a government without priests, a people without arms, citizens as equal as the magistrate, and neighbors without jealousy." Other features of the Assembly's early laws were Puritanical acts barring dramas, drunkenness, etc.

More liberally, oaths were not required and the death penalty applied only to the crime of murder. Punishment was considered for purposes of reform. Feudal primogeniture was abolished. To make justice more efficient and informal, the government undertook to appoint three arbitrators in every precinct, to hand down decisions in disputes. The Quakers, however, unsatisfactorily evaded the problem of what to do about a military force. So as not to violate Quaker principle against bearing arms, the Friends refused to serve in the militia, but they still maintained a militia in the province, and non-Quaker officials were appointed in command. But surely if armies are evil, then voting for taxes and for laws in support of the evil is serving that evil and therefore not to be condoned.

On the question of free speech for criticizing government, laws were, unfortunately, passed prohibiting the writing or uttering of anything malicious, of anything stirring up dislike of the governor, or of anything tending to subvert the government.

The tax burden was extremely light in Pennsylvania. The only tax laws were enacted in 1683; these placed a small duty on liquor and cider, a general duty on goods, and an export duty on hides and furs. But Governor Penn promptly set aside all taxes for a year to encourage settlers. In 1684, however, another bill to raise import and other duties for William Penn's personal use was tabled; instead, a group of leaders of Pennsylvania pointed out that the colony would progress much faster if there were no taxes to cripple trade. These men heroically promised to raise five hundred pounds for Penn as a gift, if the tax bill were dropped. The tax bill was dropped, but not all the money raised.

As might have been predicted, the first political conflict in Pennsylvania came as a protest against the curious provisions of the Frame restricting the Assembly to ratifying bills initiated by the Council. In the spring of 1683, several assemblymen urged that the Assembly be granted the power to initiate legislation. Several of Penn's devotees attacked the request as that which seemed "to render him ingratitude for his goodness towards the people." The Assembly balked too at granting the governor veto power over itself. There are indications that the non-Quaker elements in the Assembly were particularly active in criticizing the great powers assumed by the governor and the Council. One of the leaders of the incipient opposition to Penn was the non-Quaker Nicholas More, Speaker of the Assembly in 1684. And Anthony Weston, apparently a non-Quaker, was publicly whipped on three successive days for his "presumption and contempt of this government and authority."

Having founded the new colony and its government, and hearing of renewed persecution of Quakers at home, William Penn returned to England in the fall of 1684. He soon found his expectations of large proprietary profits from the vast royal grant to be in vain. For the people of the struggling young colony of Pennsylvania extended the principles of liberty far beyond what Penn was willing to allow. The free people of Pennsylvania would not vote for taxes, and simply would not pay the quitrents to Penn as feudal overlord. As a result, Penn's deficits in ruling Pennsylvania were large and his fortune dwindled steadily. In late 1685 Penn ordered the officials to use force to protect the monopoly of lime production that he had granted himself, in order to prevent others from opening lime quarries.

As to quitrents, Penn, to encourage settlement, had granted a moratorium until 1685. The people insisted that payment be postponed another year, and Penn's threatened legal proceedings were without success. Penn was especially aggrieved that his agents in Pennsylvania failed to press his levies upon the people with sufficient zeal. Presumably, the free taxless air of Pennsylvania had contaminated them. As Penn complained in the fall of 1686: "The great fault is, that those who are there lose their authority one way or another in the spirits of the people and then they can do little with their outward powers."

After Penn returned to England in 1684, the Council virtually succeeded him in governing the colony. The Council assumed full executive powers, and, since it was elected rather than appointed, this left Pennsylvania as a virtually self-governing colony. Though Thomas Lloyd, a Welsh Quaker, had by Penn been appointed as president of the Council, the president had virtually no power and could make no decisions on his own. Because the Council met very infrequently, and because no officials had any power to act in the interim, during these intervals Pennsylvania had almost no government at all—and seemed not to suffer from the experience. During the period from late 1684 to late 1688, there were no meetings of the Council from the end of October 1684 to the end of March 1685; none from November 1686 to March 1687; and virtually none from May 1687 to late 1688. The councillors, for one thing, had little to do. And being private citizens rather than bureaucrats, and being unpaid as councillors, they had their own struggling businesses to attend to. There was no inclination under these conditions to dabble in political affairs. The laws had called for a small payment to the councillors, but, typically, it was found to be almost impossible to extract these funds from the populace.

If for most of 1684–88 there was no colonywide government in existence, what of the local officials? Were they not around to provide that evidence of the state's continued existence, which so many people through the ages have deemed vital to man's very survival? The answer is no. The lower courts met only a few days a year, and the county officials were, again, private citizens who devoted very little time to upholding the law. No, the reality must be faced that the new, but rather large, colony of Pennsylvania lived for the greater part of four years in a de facto condition of individual anarchism, and seemed none the worse for the experience. Furthermore, the Assembly passed no laws after 1686, as it was involved in a continual wrangle over attempts to increase its powers and to amend, rather than just reject, legislation.

A bit of government came in 1685, in the person of William Dyer as collector of the king's customs. But despite the frantic urgings of William Penn for cooperation with Dyer, Pennsylvanians persisted in their de facto anarchism by blithely and regularly evading the royal navigation laws.

William Penn had the strong and distinct impression that his "holy experiment" had slipped away from him, had taken a new and bewildering turn. Penn had launched a colony that he thought would be quietly subject to his dictates and yield him a handsome profit. By providing a prosperous haven of refuge for Quakers, he had expected in turn the rewards of wealth and power. Instead, he found himself without either. Unable to collect revenue from the free and independent-minded Pennsylvanians, he saw the colony slipping gracefully into outright anarchism—into a growing and flourishing land of no taxes and virtually no state. Penn frantically determined to force Pennsylvania back into the familiar mold of the old order. Accordingly, he appointed vice commissioners of state in February 1687 "to act in the execution of laws, as if I myself were there present, reserving myself the confirming of what is done, and my peculiar royalties and advantages" Another purpose of the appointments, he added, was "that there may be a more constant residence of the honorary and governing part of the government for the keeping all things in good order." Penn appointed the five commissioners from the colony's leading citizens, Quakers and non-Quakers, and ordered them to enforce the laws.

The colonists were evidently content in their anarchism, and shrewdly engaged in nonviolent resistance against the commission. In fact, they scarcely paid any attention to the commission. A year passed before the commission was even mentioned in the minutes of the Council. News about the commission was delayed until the summer of 1687 and protests against the plan poured in to Penn. The commissioners, and the protesters too, pretended that they had taken up their posts as a continuing executive. Finally, however, Penn grew suspicious and asked why he had received no communication from the supposedly governing body.

Unable to delay matters any longer, the reluctant commissioners of state took office in February 1688, a year after their appointment. Three and one-half years of substantive anarchism were over. The state was back in its heaven; once more all was right with the world. Typically, Penn urged the commissioners to conceal any differences they might have among themselves, so as to deceive and overawe the public: "Show your virtues but conceal your infirmities; this will make you awful and revered with ye people." He further urged them to enforce the king's duties and to levy taxes to support the government.

The commissioners confined themselves to calling the Assembly into session in the spring of 1688, and this time the Assembly did pass some laws, for the first time in three years. The two crucial bills presented by the commissioners and the Council regulated the export of deerskins and once again, levied customs duties on imports so as to obtain funds to finance the government—in short, imposed taxes on a taxless colony. After almost passing the tax bill, the Assembly heroically defied the government once again and rejected the two bills.

The state had reappeared in a flurry of activity in early 1688, but was found wanting, and the colony, still taxless, quickly lapsed back into a state of anarchism. The commissioners somehow failed to meet and the Council met only once between the spring meeting and December. Pennsylvania was once again content with a supposedly dreadful and impossible state of affairs. And when this idyll came to an end in December 1688 with the arrival of a new deputy governor, appointed by Penn, the deputy governor "had difficulty finding the officers of the government….[He] found the Council room deserted and covered with dust and scattered papers. The wheels of government had nearly stopped turning."1

William Penn, seeing that the Pennsylvanians had happily lapsed into an anarchism that precluded taxes, quitrents, and political power for himself, decided to appoint a deputy governor. But the people of Pennsylvania, having tasted the sweets of pure liberty, were almost unanimously reluctant to relinquish that liberty. We have observed that the commissioners of state had failed to assume their posts and had virtually failed to function after it was presumed they accepted. No one wanted to rule others. For this reason, Thomas Lloyd, the president of the Council, refused appointment as deputy governor. At this point, Penn concluded that he could not induce the Quakers of Pennsylvania to institute a state, and so he turned to a tough non-Quaker, an old Puritan soldier and a non-Pennsylvanian, John Blackwell.

Once a state has completely withered away, it is an extremely difficult task to re-create it, as Blackwell quickly discovered. If Blackwell had been under any illusions that the Quakers were a meek and passive people, he was in for a rude surprise. He was to find very quickly that devotion to peace, to liberty, and to individualism in no sense implies passive resignation to tyranny. Quite the contrary.

In announcing Blackwell's appointment in September 1688, Penn made it clear that his primary task was to collect Penn's quitrents and secondarily to reestablish a government. As Penn instructed Blackwell:

Rule the meek meekly, and those that will not be ruled, rule with authority.

John Blackwell's initial reception as deputy governor was an omen of things to come. Sending word ahead for someone to meet him upon his arrival in New York, he landed there only to find no one to receive him. After waiting in vain for three days, Blackwell went alone to New Jersey. When he arrived at Philadelphia on December 17, he found no escort, no parade, no reception committee. We have mentioned that Blackwell couldn't find the Council or any other government officials—and this was after he had ordered the Council to meet upon his arrival. One surly escort appeared and he refused to speak to the new governor. And when Blackwell arrived at the empty Council room, a group of boys from the neighborhood gathered around to hoot and jeer.

The Quakers, led by Thomas Lloyd, now embarked on a shrewd and determined campaign of resistance to the imposition of a state. Thomas Lloyd, as keeper of the great seal, insisted that none of Blackwell's orders or commissions was valid unless stamped with the great seal. Lloyd, the keeper refused to do the stamping. It is amusing to find Edward Channing and other thorough but not overly imaginative historians deeply puzzled by this resistance:

This portion of Pennsylvania history is unusually difficult to understand. We find, for instance, so strong and intelligent a man as Thomas Lloyd declining to obey what appeared to be reasonable and legal direction on the part of the proprietor. As keeper of the great seal of the province, Lloyd refused point blank to affix that emblem of authenticity to commissions which Blackwell presented to him.2 

What Channing failed to understand was that Pennsylvanians were engaged in a true revolutionary situation, that they were all fiercely determined to thwart the reimposition of a burdensome state upon their flourishing stateless society. That is why even the most "reasonable and legal" orders were disobeyed, for Pennsylvanians had for some years been living in a world where no one was giving orders to anyone else.

Lloyd persistently refused to hand over the great seal or to stamp any of Blackwell's documents or appointments with it. Furthermore, David Lloyd, clerk of the court and a distant relative of Thomas, refused absolutely to turn over the documents of cases to Blackwell even if the judges so ordered. For this act of defiance, Blackwell declared David Lloyd unfit to serve as court clerk and dismissed him, but Thomas Lloyd promptly reappointed David by virtue of his alleged power as keeper of the great seal.

As a revolutionary situation grows and intensifies, unanimity can never prevail; the timid and the shortsighted begin to betray the cause. Thus the Council, frightened at the Lloyds' direct acts of rebellion, now sided with Blackwell. The pro-Blackwell clique was headed by Griffith Jones, who had consented to let Blackwell live at his home in Philadelphia. Jones warned that "it is the King's authority that is opposed and looks to me as if it were raising a force to rebel." Of the members of the Council, only Arthur Cook remained loyal to the Lloyds and to the resistance movement. Of a dozen justices of the peace named by Blackwell, four bluntly refused to serve.

When Blackwell found out the true state of affairs in Pennsylvania) his state-bound soul was understandably appalled. Here was a thriving trade based on continuing violations of the navigation laws. Here, above all, were no taxes, hence no funds to set up a government. As Bronner puts it:

He [Blackwell] deplored the lack of public funds in the colony which made it impossible to hire a messenger to call the Council, a doorkeeper, and someone to search ships to enforce the laws of England. He believed that some means should be found to collect taxes for the operation of the government.​3 

His general view, as he wrote to Penn, was the familiar statist cry that the colonists were suffering from excessive liberty: they had eaten more of the "honey of your concessions…than their stomachs can bear."

Blackwell managed to force the Council to meet every week during the first months of 1689, but his suggestion that every county be forced to maintain a permanent councillor in Philadelphia was protested by the Council. Arthur Cook led the successful resistance, maintaining that the "people were not able to bear the charge of constant attendance."

As Blackwell continued to denounce the Council and Pennsylvania as a whole before his accession, Pennsylvanian opposition to his call for statism was further intensified. On the Council, Arthur Cook was joined in the intransigent camp by Samuel Richardson, who launched the cry that Penn had no power to name a deputy governor. For this open defiance, Richardson was ejected from the Council.

The conflict of views continued to polarize Blackwell and the Pennsylvanians. Finally, the climax came on April 2, 1689, when Blackwell introduced proceedings for the impeachment of Thomas Lloyd, charging him with eleven high crimes and misdemeanors. (Blackwell had also refused to seat Lloyd when the latter was elected councillor from Bucks County.) In his impeachment speech, Blackwell trumpeted to his stunned listeners that Penn's and therefore his own powers over the colony were absolute. Penn was a feudal lord who could create manorial courts; furthermore, Penn could not transfer his royally delegated powers to the people, but only to a deputy such as himself. The Council, according to Blackwell's theory, existed in no sense to represent the people, but to be an instrument for William Penn's will. Blackwell concluded this harangue by threatening to unsheathe and wield his sword against his insolent and unruly opponents.

Blackwell's proclamation of absolute rule now truly polarized the conflict. The choice was now narrowed: the old anarchism or the absolute rule by Blackwell. Given this confrontation, those wavering had little choice but to give Thomas Lloyd their full support.

Blackwell now summarily dismissed from the Council Thomas Lloyd, Samuel Richardson, and John Eckly. On April 9, while the Council—the supreme judicial arm of the colony—was debating the charge against Lloyd, Blackwell threatened to remove Joseph Growdon. At this point, the Council rebelled and demanded the right to approve its own members. Refusing to meet further without its duly elected members, the Council was then dissolved by Blackwell.

With the Council homeward bound, the disheartened Blackwell sent his resignation to Penn, while seven councillors bitterly protested to Penn against his deputy's attempt to deprive them of their liberties. As for Blackwell, he believed the Quakers to be those agents of the devil foretold in the New Testament, who "despise dominion and speak evil of dignities."

From this point on, the decision was in the hands of Governor Penn, and Penn decided in favor of the Quakers and against Blackwell. For the rest of the year, Blackwell continued formally in office, but lost all concern for making changes or exerting his rule. From April 1689 until early 1690 he was waiting out his term. Blackwell wrote to Penn that "I now only wait for the hour of my deliverance." He summed up his grievance against the Quakers:

These people have not the principles of government amongst them, nor will be informed…

A Remarkable Achievement

Meanwhile, the Assembly, headed by Arthur Cook, met in May and fell apart on the issue of protesting the arrest of one of its members. Between May and the end of the year, the Council met only twice. Pennsylvania was rapidly slipping back toward its previous state of anarchism. William Penn enlivened this trend by deciding to reestablish the old system with the Council as a whole his deputy governor. Writing to the leading Quakers of Pennsylvania, Penn apologized for his mistake in appointing Blackwell but wistfully reminded them that he had done so because "no Friend would undertake the Governor's place."

Now he told them: "I have thought fit…to throw all into your hands, that you may all see the confidence I have in you." With Blackwell out of office, the Council, back in control, resumed its somnolent ways. Again headed by Thomas Lloyd, it met rarely, did virtually nothing, and told William Penn even less. Anarchism had returned in triumph to Pennsylvania. And when Secretary William Markham, who had been one of the hated Blackwell clique, submitted a petition for levying taxes to provide some financial help for William Penn, the Council completely ignored the request.

[Excerpt from Rothbard's five-volume history of the Colonial period of the United States, Conceived in Liberty, vol. 1, part 1, chap. 55, "'The Holy Experiment': The Founding of Pennsylvania, 1681–1690."]

  • 1. Edwin B. Bronner, William Penn's "Holy Experiment" (New York: Temple University Publications, 1962), p. 108. To Professor Bronner belongs the credit for discovering this era of anarchism in Pennsylvania.
  • 2. Edward Channing, A History of the United States, 6 vols. (New York: Macmillan, 1905–25), 2:125.
  • 3. Bronner, "Holy Experiment," p. 119.
Categories: Current Affairs

Capitalism vs. Socialism

Fri, 21/02/2020 - 18:15

Is Bernie right to say America has become a socialist country? Jeff Deist joins guest host Judge Andrew P. Napolitano on Kennedy (on Fox Business Network) to discuss the "Capitalism vs. Socialism" debate within the Democrat Party.

Original video © 2020 FOX News Network, LLC. Republished here under "Fair Use" for scholarship and research purposes by a nonprofit educational institution.

Categories: Current Affairs

Individual Responsibility and Guilt

Fri, 21/02/2020 - 17:00

Susan Neiman is a philosopher who has written well-regarded books on Kant and on the problem of evil. Last year she published a book with an unusual title: Learning From the Germans: Race and the Memory of Evil. Neiman lives in Berlin and directs the Einstein Forum. She is interested in how Germans deal with the crimes of the Nazi era. In her opinion, Germans after World War II ended were largely defensive, refusing to own up to their guilt. Nowadays, though, things are better. German youth feel appropriately guilty, though much work remains to be done.

Matters have so much improved in Germany, she contends, that Americans who live in the South can learn from the way the German youth accept guilt for the past and seek atonement. Southerners need to acknowledge guilt for slavery, segregation, and lynching. To help them do so, Neiman spent time in Mississippi and participated in another discussion forum.

As we’ll see, the book contains a number of controversial historical claims about both Germany and the American South. I’m not going to assess these here. Instead, I’m going to use her book to help bring out an important moral principle that goes against her way of thinking. This principle is that moral guilt is individual, not collective. You bear guilt only for your own bad acts.

The Welsh philosopher H.D. Lewis gives an excellent account of this principle in a classic article, “Collective Responsibility,” published in the British journal Philosophy in February 1948. In that article, Lewis says:

If I were asked to put forward an ethical principle which I considered to be especially certain, it would be that no one can be responsible, in the properly ethical sense, for the conduct of another. Responsibility belongs essentially to the individual.

Explaining why he is so convinced of this principle, Lewis says:

We cannot answer for one another or share each other’s guilt (or merit), for that would imply that we could become directly worse (or better) persons morally by what others elect to do—and that seems plainly preposterous.

Lewis wrote his article over seventy years before Neiman’s book came out, but it’s almost as if he had her in mind. She thinks that Germans must take responsibility for the crimes of the Nazi era, even if they did not themselves commit these crimes. The key concept in the book is a long German word: “Vergangenheitsaufarbeitung—working-off-the-past…meant confronting parents and teachers and calling their authority rotten” (pp. 7–8). After the war, many Germans refused this confrontation. Instead, they said that the Nuremberg Trials were “victor’s justice.” They pointed to Allied war crimes, such as the firebombing of Dresden. They wondered whether Hitler’s crimes exceeded those of Stalin.

Neiman condemns the comparison of Hitler to Stalin. In the Historians’ Debate (Historikerstreit), which began in West Germany in 1986,

the conservative historian and Heidegger student Ernst Nolte…charged that all of Hitler’s crimes, and the misdemeanors as well, were a reaction to Stalin, whom Hitler had imitated….Habermas, [Rudolf] Augstein, and many others insisted that any comparison between those crimes and the crimes of the Nazis was morally illegitimate….Nazi crimes are incomparable to any others, and any attempt to compare them is an attempt to get the Germans off the hook. (pp. 86–87)

As I mentioned above, I’m not going to discuss Neiman’s historical claims. Those who want to compare Hitler and Stalin should read Ralph Raico’s outstanding essay “Nazifying the Germans” in his Great Wars and Great Leaders.

I’d like instead to ask the following question, which returns us to H.D. Lewis’s essay. Suppose that Neiman is right about the unique evil of Hitler and the Nazis. Why do Germans who did not commit crimes have a moral duty to “work off” the past? To make the question more pointed, suppose a German born after the war finds out that his father or grandfather committed crimes. Why does this taint him as well, so that he needs to atone for this sordid past by denouncing his family and engaging in breast-beating discussions and demonstrations? The young German has done nothing wrong and is not responsible for the crimes of others. Of course, he should not become a Nazi, but this is so because he ought not to embrace morally wrong views. It is not a matter of his relation to the crimes of other people.

Lewis’s point that moral responsibility is not collective applies also to the American South. Neiman thinks that white Southerners need to “work off” the past as well. Because some of their ancestors owned slaves and enforced racial segregation, they are morally responsible. They must not seek to excuse the crimes of their ancestors. In particular, people must acknowledge that slavery was the main cause of the Civil War:

Very simple truths, like the fact that the Civil War was fought over slavery, need to be reestablished again and again. Descendants of Confederate soldiers have self-serving reasons for denying that their ancestors fought and fell in service to a criminal enterprise. It’s natural to defend the honor of your forbears….He fought for states’ rights. States’ rights to do what? (p. 316)

Once more, I don’t propose to discuss Neiman’s account of war origins, though the notion of an Official Truth is disturbing. Again, she holds that responsibility is collective rather than individual, and this leads to her claims about the duties of white Southerners. If we adopt Lewis’s principle, things look different. No one should own slaves, but if your ancestors did, this does not generate a moral obligation to atone for the past.

Neiman is aware of the view that moral responsibility is individual rather than collective, but she regards this as an expression of “neoliberalism.” You would not expect anything else from someone who looks with nostalgia on the demise of communist East Germany.

Categories: Current Affairs

Why Rothbard Wanted "Radical Decentralization"

Fri, 21/02/2020 - 16:30

From at least the 1960s onward, Murray Rothbard regarded secession and what he called "radical decentralization" as central to libertarian ideology.

For example, in May 1969 during his supposed "New Left period," Rothbard published an editorial in his Libertarian Forum endorsing the mayoral candidacy of Norman Mailer. Specifically, Rothbard was supportive of Mailer's support for the idea of decentralizing New York's gargantuan city government into a number of much smaller neighborhood governments. Rothbard also presumably liked Mailer's idea "that New York City secede from New York State and form a separate 51st State."

Decentralizing New York's government, Rothbard concluded, was

a position not only consistent with breaking up large governmental bodies but also with the crucial libertarian principle of secession. Secession is a crucial part of the libertarian philosophy: that every state be allowed to secede from the nation, every sub-state from the state, every neighborhood from the city, and, logically, every individual or group from the neighborhood.

Later, in a 1977 editorial supporting the secession of Quebec from Canada, Rothbard wrote:

There are two positive reasons for the libertarian to cheer at the imminent achievement of Quebec Independence. In the first place, secession—the breaking up of a State from within—is a great good in itself for any libertarian. It means that a giant central State is been broken up into constituent parts; it means greater competition between governments of different geographical areas, enabling people of one State to zip across the border to relatively greater freedom more easily; and it exalts the mighty libertarian principle of secession, which we hope to extend on down from the region to the city to the block to the individual.

Not surprisingly, then, we find in the pages of Libertarian Forum numerous calls for secession around the globe. Rothbard penned editorials supporting the secession of Biafra from Nigeria. He lamented the US's intervention in the the "secession movement" of Moise Tschombe in what is now the Democratic Republic of the Congo, and which led to "an artificially centralized Congo."

In 1983, Rothbard supported the separation of Greek Cyprus from Turkish Cyprus, denouncing the US state's call for unity. Rothbard asked, "why shouldn't the Turkish minority on Cyprus have the power to secede and set up their own republic?"

This is all in line with passages from Rothbard's book Power and Market, which had allegedly been penned in 1962 but was not published until 1970 due to the publisher's concern that it was "too radical."

In any case, in the chapter on "Defense Services on the Free Market," Rothbard noted that almost no one insists that in order to function, human society requires one single state to impose a just system of law. In fact, many recognize that the establishment of a single global mega-state comes with many downsides. So, given that it is acceptable that there be more than one political entity, the principle ought to be merely expanded down to the most basic level possible:

If Canada and the United States can be separate nations without being denounced as being in a state of impermissible “anarchy,” why may not the South secede from the United States? New York State from the Union? New York City from the state? Why may not Manhattan secede? Each neighborhood? Each block? Each house? Each person?

Needless to say, Rothbard comes down on the prosecession side of this debate.

He would continue to hold this position until his death.

During the 1990s, Rothbard supported numerous cases of secession during the breakup of the old Iron Curtain, including in the Baltic states, Slovenia, and Czechoslovakia.

In 1994, he continued to push for the breaking up of the old Soviet Union and all other large states—including the United States—contending,

In short, every group, every nationality, should be allowed to secede from any nation-state and to join any other nation-state that agrees to have it.

But if Rothbard regarded individual freedom as the most important political value—not to be confused with the most important value overall, by the way—why did he regard secession as so important?

After all, secession in itself does not guarantee more freedom to the inhabitants of the new, smaller jurisdiction.

Rothbard pushed secession for two main reasons:

One: he regarded it as a useful tactic in moving toward his ideal of individualist anarchism.

Two: even when this ideal is not achieved, decentralization is valuable because smaller states are less able to exercise monopoly power than large states.

Decentralization Brings Us Closer to Individual Political Independence

Rothbard expressed his wish to decentralize down to the individual level in Power and Market. He noted that the purpose of seceding on the neighborhood level and beyond was to move toward true individual political independence:

But, of course, if each person may secede from government, we have virtually arrived at the purely free society, where defense is supplied along with all other services by the free market and where the invasive State has ceased to exist.

In this Rothbard was not making a novel observation, but taking an argument earlier made by Ludwig von Mises to its natural conclusion. In Liberalism (1927), Mises wrote of the need for highly localized government as a means of "self-determination." His view stemmed from the problem of ensuring that minority groups would not be overwhelmed by other groups that formed a majority within a larger jurisdiction. Mises writes:

However, the right of self-determination of which we speak is not the right of self-determination of nations, but rather the right of self-determination of the inhabitants of every territory large enough to form an independent administrative unit. If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done.

Mises suggested that this could be accomplished through secession:

whenever the inhabitants of a particular territory, whether it be a single village, a whole district, or a series of adjacent districts, make it known, by a freely conducted plebiscite, that they no longer wish to remain united to the state to which they belong at the time, but wish either to form an independent state or to attach themselves to some other state, their wishes are to be respected and complied with.

For his part, Mises apparently thought it too difficult—in terms of real-world implementation—to provide self-determination "to every individual person" even if it this was morally preferable.

Rothbard similarly regarded this sort of full-blown decentralization down to the individual as a difficult endeavor. Thus, he supported secession as a strategy which moved society in the proper direction:

Pending total privatization, it is clear that our model could be approached, and conflicts minimized, by permitting secessions and local control, down to the micro-neighborhood level, and by developing contractual access rights for enclaves and exclaves. In the U.S., it becomes important, in moving toward such radical decentralization, for libertarians and classical liberals—indeed, for many other minority or dissident groups—to begin to lay the greatest stress on the forgotten Tenth Amendment and to try to decompose the role and power of the centralizing Supreme Court. Rather than trying to get people of one's own ideological persuasion on the Supreme Court, its power should be rolled back and minimized as far as possible, and its power decomposed into state, or even local, judicial bodies.

Like Mises, Rothbard contended that smaller, more decentralized government made it more likely that individuals would be able to live within a community that more closely reflected their individual preferences and needs. That is, secession is a tool to increase "self-determination" for both voluntary communities and individuals.

Smaller States Are Less Oppressive States

The second reason that Rothbard advocated secession and radical decentralization was his belief that small states were less capable of exercising power over those who lived within their borders.

As he noted in Libertarian Forum, Rothbard thought it a good thing that smaller states facilitated individual efforts to cross "the border to relatively greater freedom."

Indeed, the smaller that states become, the less culturally isolated they are, and the less they are able to promote the myth that states can make their people better off through barriers to trade and exchange:

A common response to a world of proliferating nations is to worry about the multitude of trade barriers that might be erected. But, other things being equal, the greater the number of new nations, and the smaller the size of each, the better. For it would be far more difficult to sow the illusion of self-sufficiency if the slogan were "Buy North Dakotan" or even "Buy 56th Street" than it now is to convince the public to "Buy American." Similarly, "Down with South Dakota," or a fanion, "Down with 55th Street," would be a more difficult sell than spreading fear or hatred of the Japanese. Similarly, the absurdities and the unfortunate consequences of fiat paper money would be far more evident if each province or each neighborhood or street block were to print its own currency. A more decentralized world would be far more likely to turn to sound market commodities, such as gold or silver, for its money.

It was this "greater competition between governments of different geographical areas" which Rothbard regarded as a net gain for individuals.

After all, as noted by historian Ralph Raico, many economic historians by the mid-1970s had accepted the notion that competition between a large number of political units had been an important factor in Europe's rise to a region of relative material riches and relative political freedom.

Historians E.L. Jones, Jean Baechler, and Douglass North by the late seventies had all published new works contending that it was Europe's lack of a single dominant political entity—that is, Europe's relative "political anarchy"—which led to greater political freedom, and thus more economic prosperity.

It is likely that Rothbard was aware of this, and in this recognized it as empirical support for what was in many ways common sense: a world of a multitude of states offers more options and more avenues of escape to those who face political oppression.

Later research has continued to support this position. Since the end of the Cold War, Europe's smaller states have been notable for being more open to free trade than larger states, and smaller states have pushed down their tax rates to attract capital. Indeed, the presence of this tax competition has pushed down tax rates in larger states as well.

In Africa too smaller states have been shown to be more politically stable, more free, and less inclined toward controlled economies.

On both these counts, experience suggests that Rothbard has been right. For example, it's hard to see how Estonians, Poles, and Slovenians would all be somehow better off were they still chained to their old masters in Moscow or Belgrade. Meanwhile, experience continues to support the notion it is small states and microstates that continue to offer freedom, choice, and openness of a sort not even contemplated by large states like China, or even Germany.

Categories: Current Affairs

Blago Is Free

Fri, 21/02/2020 - 12:00

On Tuesday, February 18, President Trump with excellent judgment commuted the fourteen-year prison sentence of former Illinois governor Rod Blagojevich, a.k.a. “Blago.”

“We have commuted the sentence of Rod Blagojevich,” Trump said. “He’ll be able to go back home with his family after serving eight years in jail. That was a tremendously powerful, ridiculous sentence in my opinion. And in the opinion of many others.”

The president thus brought to an end a disgraceful episode in American politics. After Barack Obama was elected president in 2008, his seat as senator from Illinois became vacant. Blago was charged with trying to sell the seat.

If in fact Blago tried to sell the seat, he was just practicing the dirty, rotten business of politics in the normal crooked fashion for Chicago and America. But out of all the corrupt pols, why did a federal prosecutor target a sitting governor, wiretap him, not allow him to use the wiretaps to defend himself, and send him to jail for fourteen years? His real “crime,” in the eyes of the monstrous Obama and his henchman Rahm Emmanuel, was that he refused to appoint the man Obama had picked as his successor.

The indictment against Blago was unconstitutional. As the distinguished historian and authority on the Constitution Kevin Gutzman pointed out in an article written for LRC on January 6, 2009,

Interestingly, one might note that the statute Fitzgerald is enforcing against the governor bases Congress’s claim of power to criminalize corruption in state office on the Constitution’s Commerce Clause. One really wonders at the idea that conspiring to sell Jesse Jackson, Jr. a Senate seat is interstate commerce. No one takes this idea seriously; rather, it is based on a common lawyer’s corruption—yes, corruption—of language. On simple federal arrogation of state power. This corruption has far more far-reaching consequences than anything Blagojevich is accused of having done.

The indictment and trial were gross miscarriages of justice, as President Trump has said. Harvey Silverglate in an article written in 2011 gave the best analysis of the whole rotten business:

The most controversial charge Blagojevich faced was that he planned to sell Barack Obama’s U.S. Senate seat. But Fitzgerald decided to come out swinging, terminated the wiretaps on Blagojevich’s home and office, arrested the then-sitting governor, held a sensational press conference, and called it a wrap before this alleged sale would have even taken place. Fitzgerald was obviously unwilling to wait out the unfolding situation to see if the governor was really serious about “selling” the seat to the highest bidder.

Had Blagojevich actually followed through with the sale of a Senate seat, Fitzgerald’s heavy-handed prosecutorial approach might have been justified. But in light of the fact that no seat was sold, and that these appointments are regularly used for political benefit, the reasonable doubt that a crime was actually committed would appear to be overwhelming. For a US Attorney who is known for “crossing his T’s and dotting his I’s,” you have to wonder why Fitzgerald didn’t spring into action after the sale of the seat, once the dirty deal was done. Blagojevich’s own writing may give us a clue. Blagojevich claims in his memoir "The Governor," [sic] that the goal of the Senate appointment was to get a political opponent out of the way, not to sell the seat for cash. If this scenario is to be believed, then Fitzgerald went forward with the case when he did because, had he waited until after the seat was filled, there would not have been a case since the seat would have been awarded not for cash, but for quite traditional political advantage.

One of the most shocking, and seemingly damning, sound bites that came from the wiretaps was Blagojevich’s assertion that Obama’s Senate seat was “a [expletive] valuable thing. You don’t just give it away for nothing.” A U.S. Attorney whose last few cases ended unfavorably might be interested in spinning this quote to seem as though a cash transaction was being arranged in exchange for the Senate seat. However, if Blagojevich were looking to use the seat for his political benefit, then his statement would be crass, but would also be evidence that he was operating within the parameters of the law. The type of political maneuvering engaged in by the then-governor may seem to the average citizen (or juror, for that matter), to be less than wholesome, perhaps even a bit sneaky, but if every unwholesome or sneaky maneuver were a crime, we would not be able to build the prisons quickly enough to meet demand.

Why didn’t Fitzgerald wait? Joe Hall, writing on February 19 in Gateway Pundit has a good explanation. He says that Blago was set up by Mueller, Comey, and the deep state gang and that President Trump’s release of Blago may be intended to send the gang the message that he will fight them. Hall cites investigative reporter Marty Waters, who said last August that

the Deep State, led by Comey and Mueller, did the same thing with the fraudulent Mueller investigation sham as they did in the past.  They create distraction, diversion and disinformation. In the early 2000’s they created Plamegate to distract and divert from the billions lost in Iraq and the weapons of mass destruction narrative that got the US into the war.  In the mid-2000’s, they created the Rezco/Blagogate scandals to cover up for Obama’s corrupt actions early in his administration and while in the US Senate.  The Mueller investigation distracted from the many crimes involving Obama and the Clintons and was in the same mold as the prior sham investigations.

Hall sums up and concludes:

Of course Mueller was the Head of the FBI throughout most of the 2000’s and before Comey took over the now corrupted institution. Also, Comey claimed Fitzgerald was his attorney after it was suspected that Comey shared classified information with Fitzgerald during the Russian hoax scandal.

After Trump commuted Blago’s sentence, Governor of Illinois J.B. Pritzker condemned the president’s decision. He said, 

Illinoisans have endured far too much corruption, and we must send a message to politicians that corrupt practices will no longer be tolerated. President Trump has abused his pardon power in inexplicable ways to reward his friends and condone corruption, and I deeply believe this pardon sends the wrong message at the wrong time.

Pritzker’s self-righteous moralizing is ironic.  According to a story in the Chicago Tribune published May 31, 2017,

Pritzker, a billionaire businessman with political ambitions, told Illinois Gov. Rod Blagojevich he was “really not that interested” in the U.S. Senate seat the governor was dealing in late 2008. Instead, Pritzker offered his own idea: Would Blagojevich make him Illinois treasurer?

Blago is no angel, but I can’t help liking him. I admire his spirit. He refused to cave to Obama and the higher-ups. Now that he is out, he is free to tell us where the bodies are buried. You can be sure he knows a lot, and with the commutation, the Feds can’t shut him up anymore.  Blago has Obama on the ropes, and fortunately for those of us who care about truth, he is a skilled boxing champ.

Categories: Current Affairs

Mises and the Renaissance of Austrian Economics

Thu, 20/02/2020 - 21:45

Presented at Hillsdale College's Conference Commemorating the Centenary of the Birth of Ludwig von Mises on September 10, 1981.

Special thanks to Bettina Bien Greaves for making this important audio recording available.

Categories: Current Affairs

Marxist Dreams and Soviet Realities

Thu, 20/02/2020 - 20:00

The sharp contrast that Alexis de Tocqueville drew in 1835 between the United States and Tsarist Russia—"the principle of the former is freedom; of the latter, servitude"1—became much sharper after 1917, when the Russian Empire was transformed into the Soviet Union.

Like the United States, the Soviet Union is a nation founded on a distinct ideology. In the case of America, the ideology was fundamentally Lockean liberalism; its best expressions are the Declaration of Independence and the Bill of Rights of the US Constitution. The Ninth Amendment, in particular, breathes the spirit of the worldview of late eighteenth-century America.2 The Founders believed that there exist natural, individual rights that, taken together, constitute a moral framework for political life. Translated into law, this framework defines the social space within which men voluntarily interact; it allows for the spontaneous coordination and ongoing mutual adjustment of the various plans that the members of society form to guide and fill their lives.

The Soviet Union was founded on a very different ideology, Marxism, as understood and interpreted by V. I. Lenin. Marxism, with its roots in Hegelian philosophy, was a quite conscious revolt against the individual rights doctrine of the previous century. The leaders of the Bolshevik party (which changed its name to Communist in 1918) were virtually all revolutionary intellectuals, in accordance with the strategy set forth by Lenin in his 1902 work What Is to Be Done?3 They were avid students of the works of Marx and Engels published in their lifetimes or shortly thereafter and known to the theoreticians of the Second International. The Bolshevik leaders viewed themselves as the executors of the Marxist program, as those whom History had called upon to realize the apocalyptic transition to Communist society foretold by the founders of their faith.

The aim they inherited from Marx and Engels was nothing less than the final realization of human freedom and the end of the "prehistory" of the human race. Theirs was the Promethean dream of the rehabilitation of Man and his conquest of his rightful place as master of the world and lord of creation.

Building on the work of Michael Polanyi and Ludwig von Mises, Paul Craig Roberts has demonstrated—in books that deserve to be much better known than they are, since they provide an important key to the history of the twentieth century4— the meaning of freedom in Marxism. It lies in the abolition of alienation, i.e., of commodity production, production for the market. For Marx and Engels, the market represents not merely the arena of capitalist exploitation but, more fundamentally, a systematic insult to the dignity of Man. Through it, the consequences of Man's action escape from his control and turn on him in malign ways. Thus, the insight that market processes generate results that were no part of anyone's intention becomes, for Marxism, the very reason to condemn them. As Marx wrote of the stage of Communist society before the total disappearance of scarcity,

freedom in this field can consist only in socialized man, the associated producers, rationally regulating their interchange with Nature, bringing it under their common control, instead of being ruled by it as by the blind forces of Nature.5

The point is made most clearly by Engels:

With the seizure of the means of production by society, production of commodities is done away with, and with it the dominion of the product over the producers. Anarchy of social production is replaced by conscious organization according to plan. The whole sphere of the conditions of life which surround men, which ruled men up until now comes under the dominion and conscious control of men, who become for the first time the real, conscious lords of nature, because and in that they become master of their own social organization. The laws of their own social activity, which confronted them until this point as alien laws of nature, controlling them, then are applied by men with full understanding, and so mastered by them. Only from then on will men make their history themselves in full consciousness; only from then on will the social causes they set in motion have in the main and in constantly increasing proportion, also the results intended by them. It is the leap of mankind from the realm of necessity to the realm of freedom.6

Thus, Man's freedom would be expressed in the total control exercised by the associated producers in planning the economy and, with it, all of social life. No longer would the unintended consequences of Man's actions bring disaster and despair—there would be no such consequences. Man would determine his own fate. Left unexplained was how millions upon millions of separate individuals could be expected to act with one mind and one will—could suddenly become "Man"—especially since it was alleged that the state, the indispensable engine of coercion, would wither away.

Already in Marx and Engels's day—decades before the establishment of the Soviet state—there were some with a shrewd idea of just who it was that would assume the title role when the time came to perform the heroic melodrama Man Creates His Own Destiny. The most celebrated of Marx's early critics was the Russian anarchist Michael Bakunin, for whom Marx was "the Bismarck of socialism" and who warned that Marxism was a doctrine ideally fitted to function as the ideology—in the Marxist sense: the systematic rationalization and obfuscation—of the power urges of revolutionary intellectuals. It would lead, Bakunin warned, to the creation of "a new class," which would establish "the most aristocratic, despotic, arrogant, and contemptuous of all regimes"7 and entrench its control over the producing classes of society. Bakunin's analysis was extended and elaborated by the Pole Waclaw Machajski.8

Despite this analysis—or perhaps as a confirmation of it—the Marxist vision came to inspire generations of intellectuals in Europe and even in America. In the course of the vast, senseless carnage that was the First World War, the Tsarist Empire collapsed and the immense Imperial Russian Army was fragmented into atoms. A small group of Marxist intellectuals seized power. What could be more natural than that, once in power, they should try to bring into being the vision that was their whole purpose and aim? The problem was that the audacity of their dream was matched only by the depth of their economic ignorance.

In August 1917—three months before he took power—this is how Lenin, in State and Revolution, characterized the skills needed to run a national economy in the "first phase" of Communism, the one he and his associates were about to embark upon:

The accounting and control necessary for this have been simplified by capitalism to the utmost, till they have become the extraordinarily simple operations of watching, recording and issuing receipts, within the reach of anybody who can read and write and knows the first four rules of arithmetic.9

Nikolai Bukharin, a leading "Old Bolshevik," in 1919 wrote, together with Evgeny Preobrazhensky, one of the most widely read Bolshevik texts. It was The ABC of Communism, a work that went through eighteen Soviet editions and was translated into twenty languages. Bukharin and Preobrazhensky "were regarded as the Party's two ablest economists."10 According to them, Communist society is, in the first place, "an organized society," based on a detailed, precisely calculated plan, which includes the "assignment" of labor to the various branches of production. As for distribution, according to these eminent Bolshevik economists, all products will be delivered to communal warehouses, and the members of society will draw them out in accordance with their self-defined needs.11

Favorable mentions of Bukharin in the Soviet press are now taken to be exciting signs of the glories of glasnost, and in his speech of November 2, 1987, Mikhail Gorbachev partially rehabilitated him.12 It should be remembered that Bukharin is the man who wrote, "We shall proceed to a standardization of the intellectuals; we shall manufacture them as in a factory"13 and who stated, in justification of Leninist tyranny:

Proletarian coercion, in all its forms, from executions to forced labor, is, paradoxical as it may sound, the method of molding communist humanity out of the human material of the capitalist period.14

The shaping of the "human material" at their disposal into something higher—the manufacture of the New Soviet Man, Homo sovieticus—was essential to their vision of all the millions of individuals in society acting together, with one mind and one will,15 and it was shared by all the Communist leaders. It was to this end, for instance, that Lilina, Zinoviev's wife, spoke out for the "nationalization" of children, in order to mold them into good Communists.16

The most articulate and brilliant of the Bolsheviks put it most plainly and best. At the end of his Literature and Revolution, written in 1924, Leon Trotsky placed the famous, and justly ridiculed, last lines: Under Communism, he wrote, "The average human type will rise to the heights of an Aristotle, a Goethe, or a Marx. And above this ridge new peaks will rise." This dazzling prophecy was justified in his mind, however, by what he had written in the few pages preceding. Under Communism, Man will "reconstruct society and himself in accord with his own plan." "Traditional family life" will be transformed, the "laws of heredity and blind sexual selection" will be obviated, and Man's purpose will be "to create a higher social biological type, or, if your please, a superman."17 (The full quotation can be found in the article on Trotsky in this volume.)

I suggest that what we have here, in the sheer willfulness of Trotsky and the other Bolsheviks, in their urge to replace God, nature, and spontaneous social order with total, conscious planning by themselves, is something that transcends politics in any ordinary sense of the term. It may well be that to understand what is at issue we must ascend to another level, and that more useful in understanding it than the works of the classical liberal economists and political theorists is the superb novel of the great Christian apologist C.S. Lewis, That Hideous Strength.

Now, the fundamental changes in human nature that the Communist leaders undertook to make require, in the nature of the case, absolute political power in a few directing hands. During the French Revolution, Robespierre and the other Jacobin leaders set out to transform human nature in accordance with the theories of Jean-Jacques Rousseau. This was not the only cause but it was surely one of the causes of the Reign of Terror. The Communists soon discovered what the Jacobins had learned: that such an enterprise requires that Terror be erected into a system of government.18

The Red Terror began early on. In his celebrated November 1987 speech, Gorbachev confined the Communist Reign of Terror to the Stalin years and stated:

Many thousands of people inside and outside the party were subjected to wholesale repressive measures. Such, comrades, is the bitter truth.19

But by no means is this the whole of the bitter truth. By the end of 1917, the repressive organs of the new Soviet state had been organized into the Cheka, later known by other names, including OGPU, NKVD, and KGB. The various mandates under which the Cheka operated may be illustrated by an order signed by Lenin on February 21, 1918: that men and women of the bourgeoisie be drafted into labor battalions to dig trenches under the supervision of Red Guards, with "those resisting to be shot." Others, including "speculators" and counter-revolutionary agitators, were "to be shot on the scene of their crime." To a Bolshevik who objected to the phrasing, Lenin replied, "Surely you do not imagine that we shall be victorious without applying the most cruel revolutionary terror?"20

The number of Cheka executions that amounted to legalized murder in the period from late 1917 to early 1922—including neither the victims of the Revolutionary Tribunals and the Red Army itself nor the insurgents killed by the Cheka—has been estimated by one authority at 140,000.21 As a reference point, consider that the number of political executions under the repressive tsarist regime from 1866 to 1917 was about forty-four thousand, including during and after the Revolution of 190522 (except that the persons executed were accorded trials), and the comparable figure for the French Revolutionary Reign of Terror was eighteen to twenty thousand.23 Clearly, with the first Marxist state something new had come into the world.

In the Leninist period—that is, up to 1924—fall also the war against the peasantry that was part of "war communism" and the famine conditions, culminating in the famine of 1921, that resulted from the attempt to realize the Marxist dream. The best estimate of the human cost of those episodes is around 6 million persons.24

But the guilt of Lenin and the Old Bolsheviks—and of Marx himself—does not end here. Gorbachev asserted that "the Stalin personality cult was certainly not inevitable."

"Inevitable" is a large word, but if something like Stalinism had not occurred, it would have been close to a miracle. Scorning what Marx and Engels had derided as mere "bourgeois" freedom and "bourgeois" jurisprudence,25 Lenin destroyed freedom of the press, abolished all protections against the police power, and rejected any hint of division of powers and checks and balances in government. It would have saved the peoples of Russia an immense amount of suffering if Lenin—and Marx and Engels before him—had not quite so brusquely dismissed the work of men like Montesquieu and Jefferson, Benjamin Constant and Alexis de Tocqueville. These writers had been preoccupied with the problem of how to thwart the state's ever present drive toward absolute power. They laid out, often in painstaking detail, the political arrangements that are required, the social forces that must be nurtured, in order to avert tyranny. But to Marx and his Bolshevik followers, this was nothing more than "bourgeois ideology," obsolete and of no relevance to the future socialist society. Any trace of decentralization or division of power, the slightest suggestion of a countervailing force to the central authority of the "associated producers," ran directly contrary to the vision of the unitary planning of the whole of social life.26

The toll among the peasantry was even greater under Stalin's collectivization27 and the famine of 1933—a deliberate one this time, aimed at terrorizing and crushing the peasants, especially of the Ukraine. We shall never know the full truth of this demonic crime, but it seems likely that perhaps 10 or 12 million persons lost their lives as a result of these Communist policies—as many or more than the total of all the dead in all the armies in the First World War.28

One is stunned. Who could have conceived that within a few years what the Communists were to do in the Ukraine would rival the appalling butcheries of World War I—Verdun, the Somme, Passchendaele?

They died in hell,
They called it Passchendaele.

But what word to use, then, for what the Communists made of the Ukraine?

Vladimir Grossman, a Russian novelist who experienced the famine of 1933, wrote about it in his novel Forever Flowing, published in the West. An eyewitness to the famine in the Ukraine stated,

Then I came to understand the main thing for the Soviet power is the Plan. Fulfill the Plan….Fathers and mothers tried to save their children, to save a little bread, and they were told: You hate our socialist country, you want to ruin the Plan, you are parasites, kulaks, fiends, reptiles. When they took the grain, they told the kolkhoz [collective farm] members they would be fed out of the reserve fund. They lied. They would not give grain to the hungry.29

The labor camps for "class-enemies" had already been established under Lenin, as early as August 1918.30 They were vastly enlarged under his successor. Alexander Solzhenitsyn compared them to an archipelago spread across the great sea of the Soviet Union. The camps grew and grew. Who were sent there? Any with lingering tsarist sentiments and recalcitrant members of the middle classes, liberals, Mensheviks, anarchists, priests and laity of the Orthodox Church, Baptists and other religious dissidents, "wreckers," suspects of every description, then, "kulaks" and peasants by the hundreds of thousands.

During the Great Purge of the middle 1930s, the Communist bureaucrats and intellectuals themselves were victims, and at that point there was a certain sort of thinker in the West who now began to notice the camps, and the executions, for the first time. More masses of human beings were shipped in after the annexations of eastern Poland and the Baltic states; then enemy prisoners of war, the internal "enemy nationalities," and the returning Soviet prisoners of war (viewed as traitors for having surrendered), who flooded into the camps after 1945—in Solzhenitsyn's words, "vast dense gray shoals like ocean herring."31

The most notorious of the camps was Kolyma, in eastern Siberia—in actuality a system of camps four times the size of France. There the death rate may have been as high as 50 percent per year32 and the number of deaths was probably on the order of 3 million. It goes on and on. In 1940 there was Katyn and the murder of the Polish officers; in 1952, the leaders of Yiddish culture in the Soviet Union were liquidated en masse33—both drops in the bucket for Stalin. During the Purges there were probably about 7 million arrests, and one out of every ten arrested was executed.34

How many died altogether? No one will ever know. What is certain is that the Soviet Union has been the worst reeking charnel house of the whole awful twentieth century, worse even than the one the Nazis created (but then they had less time).35 The sum total of deaths due to Soviet policy—in the Stalin period alone—deaths from the collectivization and the terror famine, the executions and the Gulag, is probably on the order of 20 million.36

As glasnost proceeds and these landmarks of Soviet history are uncovered and explored to a greater or lesser degree, it is to be hoped that Gorbachev and his followers will not fail to point an accusing finger at the West for the part it played in masking these crimes. I am referring to the shameful chapter in twentieth-century intellectual history involving the fellow travelers of Soviet Communism and their apologias for Stalinism. Americans, especially American college students, have been made familiar with the wrongs of McCarthyism in our own history. This is as it should be. The harassment and public humiliation of innocent private persons is iniquitous, and the US government must always be held to the standards established by the Bill of Rights. But surely we should also remember and inform young Americans of the accomplices in a far different order of wrongs—those progressive intellectuals who "worshiped at the temple of [Soviet] planning"37 and lied and evaded the truth to protect the homeland of socialism, while millions were martyred. Not only George Bernard Shaw,38 Sidney and Beatrice Webb, Harold Laski, and Jean-Paul Sartre, but, for instance, the Moscow correspondent of the New York Times, Walter Duranty, who told his readers, in August 1933, at the height of the famine:

Any report of famine in Russia is today an exaggeration or malignant propaganda. The food shortage which has affected almost the whole population in the last year and particularly in the grain-producing provinces—the Ukraine, North Caucasus, the lower Volga region—has, however, caused heavy loss of life.39

For his "objective" reporting from the Soviet Union, Duranty won a Pulitzer Prize.40

Or—to take another fellow traveler virtually at random—we should keep in mind the valuable work of Owen Lattimore of Johns Hopkins University. Professor Lattimore visited Kolyma in the summer of 1944, as an aide to the Vice President of the United States Henry Wallace. He wrote a glowing report on the camp and on its chief warden, Commandant Nikishov, for the National Geographic.41 Lattimore compared Kolyma to a combination of the Hudson's Bay Company and the TVA.42 The number of the influential American fellow travelers was, in fact, legion, and I can think of no moral principle that would justify our forgetting what they did and what they did it in aid of.

In his speech of November 2, Gorbachev declared that Stalin was guilty of "enormous and unforgivable crimes" and announced that a special commission of the Central Committee is to prepare a history of the Communist party of the Soviet Union that will reflect the realities of Stalin's rule. Andrei Sakharov has called for the full disclosure of "the entire, terrible truth of Stalin and his era."43 But can the Communist leaders really afford to tell the entire truth? At the Twentieth Party Congress in 1956, Nikita Khrushchev revealed the tip of the iceberg of Stalinist crimes, and Poland rose up and there took place the immortal Hungarian Revolution, when they did

high deeds in Hungary
To pass all men's believing.

What would it mean to reveal the entire truth? Could the Communist leaders admit, for instance, that during World War II, "the losses inflicted by the Soviet state upon its own people rivaled any the Germans could inflict on the battlefield"? That "the Nazi concentration camps were modified versions of Soviet originals," whose evolution the German leadership had followed with some care? That, in short, "the Soviet Union is not only the original killer state, but the model one"?44 If they did that, what might the consequences not be this time?

But the fact that the victims of Soviet Communism can never be fully acknowledged in their homelands is all the more reason that, as a matter of historical justice, we in the West must endeavor to keep their memory alive.

This essay was originally published in 1988, by the Cato Institute, Washington, DC. It is collected in Great Wars and Great Leaders (2010), chap. 4: "Marxist Dreams and Soviet Realities."

Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

  • 1. Alexis de Tocqueville, Democracy in America, vol. 1 (New York: Vintage, 1945), p. 452.
  • 2. "The enumeration in the Constitution of certain rights shall not be construed to deny or disparage others retained by the people." Needless to say, the US government has seldom lived up to its proclaimed credo, or anything close to it.
  • 3. V.I. Lenin, What Is to Be Done? Burning Questions of Our Movement (New York: International Publishers, 1929).
  • 4. Alienation and the Soviet Economy: Towards a General Theory of Marxian Alienation, Organizational Principles, and the Soviet Economy (Albuquerque: University of New Mexico Press, 1971) and (with Matthew A. Stephenson) Marx's Theory of Exchange, Alienation, and Crisis (Stanford, CA: Hoover Insitution Press, 1973).
  • 5. Karl Marx, Capital: A Critique of Political Economy, vol. 3, ed. Friedrich Engels (New York: International Publishers, 1967), p. 820.
  • 6. Friedrich Engels, "Socialism: Utopian and Scientific," in Karl Marx and Friedrich Engels, Selected Works (Moscow: Progress Publishers, 1968), p. 432.
  • 7. See, for instance, Michael Bakunin, "Marx, the Bismarck of Socialism," in Leonard I. Krimerman and Lewis Perry, eds., Patterns of Anarchy. A Collection of Writings in the Anarchist Tradition (Garden City, NY: Anchor/Doubleday, 1966), pp. 80–97, especially p. 87. For a discussion of the theoretical problems involved in a "new class" analysis of Soviet society and a critique of James Burnham's attempt to generalize the interpretation to non-Marxist societies, see Leszek Kolakowski, Main Currents of Marxism, trans. P. S. Falla, vol. 3, The Breakdown, (Oxford: Oxford University Press, 1981), pp. 157–66.
  • 8. See Max Nomad, Political Heretics (Ann Arbor: University of Michigan Press, 1968), pp. 238–41. Also, Jan Waclav Makaïske, Le socialisme des intellectuels, ed. Alexandre Skirda (Paris: Editions du Seuil, 1979).
  • 9. V.I. Lenin, State and Revolution (New York: International Publishers, 1943), pp. 83–84.
  • 10. Sidney Heitman, in the “New Introduction” (unpaginated) to N. Bukharin and E. Preobrazhensky, The ABC of Communism (Ann Arbor: University of Michigan Press, 1966).
  • 11. Ibid., pp. 68–73.
  • 12. New York Times, no. 3, 1987.
  • 13. David Caute, The Left in Europe Since 1789 (New York: McGraw-Hill, 1966), p. 179.
  • 14. Ibid., p. 112.
  • 15. "The principal task of the fathers of the October Revolution was the creation of the New Man, Homo sovieticus," Michel Heller and Aleksandr Nekrich, L'utopie au pouvoir: Histoire de l'U.R.S.S. de 1917 á nos jours (Paris: Calmann-Lévy, 1982), p. 580. As for the result, Kolakowski states: "Stalinism really produced 'the new Soviet man': an ideological schizophrenic, a liar who believed what he was saying, a man capable of incessant, voluntary acts of intellectual self-mutilation." Kolakowski, vol. 3, p. 97.
  • 16. Heller and Nekrich, p. 50.
  • 17. Leon Trotsky, Literature and Revolution (Ann Arbor: University of Michigan Press, 1971), pp. 246, 249, 254–56. Bukharin entertained similarly absurd collectivist-Promethean notions of socialist achievement. He stated, in 1928 (when Stalin's domination was already apparent): "We are creating and we shall create a civilization compared to which capitalism will have the same aspect as an air played on a kazoo to Beethoven's Eroica Symphony." Heller and Nekrich, p. 181.
  • 18. Cf. J.L. Talmon, The Origins of Totalitarian Democracy (London: Mercury Books, 1961).
  • 19. New York Times, Nov. 3, 1987.
  • 20. George Leggett, The Cheka: Lenin's Political Police (Oxford: Clarendon Press, 1981), pp. 56–57.
  • 21. Ibid., pp. 466–67.
  • 22. Ibid., p. 468. The great majority of these occurred as a result of the 1905 revolutionary uprising.
  • 23. Samuel F. Scott and Barry Rothaus, eds., Historical Dictionary of the French Revolution, 1789–1799, L-Z (Westport, Conn.: Greenwood Press, 1985), p. 944.
  • 24. Robert Conquest, Harvest of Sorrow: Soviet Collectivization and the Terror-Famine (New York: Oxford University Press, 1986), pp. 53–55.
  • 25. Karl Marx and Friedrich Engels, The Communist Manifesto, in Selected Works, p. 49.
  • 26. On Marx's responsibility, Kolakowski (vol. 3, pp. 60–61) writes, "He undoubtedly believed that socialist society would be one of perfect unity, in which conflicts of interest would disappear with the elimination of their economic bases in private property. This society, he thought, would have no need of bourgeois institutions such as representative political bodies … and rules of law safeguarding civil liberties. The Soviet despotism was an attempt to apply this doctrine." See also ibid., p. 41.
  • 27. The "war against the nation"—Stalin's forced collectivization—was not the product of a power-mad cynic. As Adam Ulam has argued, "Stalin was seldom cynical….He was sincere and obsessed." His obsession was Marxism-Leninism, the science of society that unerringly points the way to total human freedom. If reality proved refractory, then the cause had to be the "wreckers"—whole categories and classes of people engaged in deliberate sabotage. Surely, the Marxist dream could not be at fault. Adam Ulam, Stalin. The Man and His Era (Boston: Beacon Press, 1973), pp. 300–01.
  • 28. Conquest, Harvest of Sorrow, pp. 299–307. The terrible famine year was 1933; after that, concessions were made to the peasant: a half-acre plot that he could work for himself and the right to sell crops on the market after the state's quota had been met. Stalin, however, begrudged these "concessions" to "individualism." Ulam, pp. 350–52.
  • 29. Cited in ibid., p. 346.
  • 30. Héléne Carrére d'Encausse, Stalin: Order Through Terror, trans. Valence Ionescu (London and New York: Longman, 1981), pp. 6–7.
  • 31. Aleksandr I. Solzhenitsyn, The Gulag Archipelago, 1918–1956. An Experiment in Literary Investigation, vols. 1–2.
  • 32. Nikolai Tolstoy, Stalin's Secret War (New York: Holt, Rinehart and Winston, 1981), p. 15.
  • 33. David Caute, The Fellow-Travellers. A Postscript to the Enlightenment (New York: Macmillan, 1973), p. 286.
  • 34. Robert Conquest, The Great Terror: Stalin's Purge of the Thirties (New York: Macmillan, 1968), p. 527.
  • 35. It should be obvious that, in logic and justice, the enumeration of Soviet crimes can in no way exculpate any other state — for instance, any Western democracy — for the crimes it has committed or is committing.
  • 36. Conquest, The Great Terror, pp. 525–35, especially p. 533. Caute, The Fellow-Travellers, p. 107, estimates the deaths in the camps between 1936 and 1950 at 12 million. He adds, "Stalin's policies may have accounted for twenty million deaths." Ibid., p. 303.
  • 37. Caute, The Fellow-Travellers, p. 259.
  • 38. George Bernard Shaw, for example, expressed his scorn for those who protested when the Soviet Union "judiciously liquidates a handful of exploiters and speculators to make the world safe for honest men." Ibid., p. 113.
  • 39. Quoted by Eugene Lyons, "The Press Corps Conceals a Famine," in Julien Steinberg, ed., Verdict of Three Decades. From the Literature of Individual Revolt Against Soviet Communism, 1917–1950 (New York: Duell, Sloan, and Pearce, 1950), pp. 272–73.
  • 40. Conquest, Harvest of Sorrow, pp. 319–20. As Conquest mentions, as of 1983 the New York Times still listed Duranty's Pulitzer Prize among the paper's honors. If the Times reporter and other correspondents lied so contemptibly about conditions in Soviet Russia and their causes, however, others were soon telling the truth: Eugene Lyons and William Henry Chamberlin published articles and books detailing, from personal experience, what Chamberlin called the "organized famine" that had been used as a weapon against the Ukrainian peasantry. See William Henry Chamberlin, "Death in the Villages," in Steinberg, p. 291.
  • 41. Caute, The Fellow-Travellers, p. 102.
  • 42. Conquest, The Great Terror, p. 354.
  • 43. New York Times, Nov. 7, 1987.
  • 44. Nick Eberstadt, Introduction to Iosif G. Dyadkin, Unnatural Deaths in the U.S.S.R., 1928–1954 (New Brunswick, NJ, and London: Transaction Books, 1983), pp. 8, 4.
Categories: Current Affairs

Is Free Market Economics Too "Ideological"?

Thu, 20/02/2020 - 17:00

Free market economics is often ignorantly dismissed for being "ideological" rather than scientific. It probably sounds smart to the economically illiterate, but it is decidedly not. It doesn't mean nearly what most people assume it does. The word "free" in free market economics is not used as a normative value judgment but indicates an economy that is unaffected by exogenous (from the outside) factors.

"Free" therefore means that it is the market economy in and by itself that is subject to theoretical analysis. This is, in fact, the only way to identify any and all "pure" market mechanisms and processes.

If economics tried to inductively extract theory from data, we could never know what it is we capture in those data: is it the actual (underlying) economic mechanisms, or the effect of regulations, or of a specific temporal context, or some mix?

As all such things in the real economy always coexist and are interdependent, we could never accurately separate them, and so could not figure out how the economy actually works. The results would be haphazard and contingent, which would make both predictions and understanding impossible. Any actual and specific mechanisms that are intrinsic to a market economy, i.e., its nature of market qua market, which determines the outcomes also when other things are involved, would be beyond our reach.

One can, of course, claim that there are no such mechanisms, and therefore that studying and theorizing about the market without such influences is irrelevant. But this claim requires first that the idea of "pure" economic mechanisms is properly dismissed. It is not sufficient to just claim this so, especially if the claim is made based on one's own preferred worldview and/or wishful thinking (i.e., ideology).

To dismiss any workings or mechanisms of the "pure economy" one need first seriously consider them, which means that one must still begin by theorizing on the free market economy.

In other words, such a critique of free market economics must itself take free market economics as starting point.

Another common but mistaken critique of free market economics is that it is based on presumed ideological concepts. Some claim that the individual as actor is ideological, which is too absurd to take seriously. But another and, at least on the surface, seemingly better critique is that free market economics assumes some form of (private) property. Especially those who are ideologically opposed to the concept consider this an unjust infringement on people's basic or natural right to freedom.

Yet they miss the point. The fundamental building block of any market is the exchange, which necessarily is an exchange of some claim of ownership. Exchange without ownership is no exchange. Whether or not one agrees with ownership, it is a necessary prerequisite for markets.

We can study socialist regimes without making the study itself ideological, and similarly we can study markets (assuming some form of ownership) without taking a normative stand on the existence or nature of ownership. Needless to say, any such free market reasoning would not (and could not) apply to situations where there is no ownership. But to the degree that free market mechanisms are simply human action, even though the specific outcome may be contingent on some form of ownership, the mechanisms should apply also to nonownership contexts. (Note, however, that this is the case for and due to the nature of human action and not the nature of markets, which are emergent from human action given ownership and exchange.)

These critiques are further mistaken for the simple reason that without a theory of "pure" market mechanisms we cannot separate, trace, and measure the effects of other influences on the market economy. How do we know the effect of, say, dramatically increasing the minimum wage on unemployment? Just looking at employment before and after is not enough (and it certainly provides no guidance regarding what to expect from such change).

A lot of things are involved before and after such a change, and in order to accurately assess the effect of the minimum wage increase itself, we need to know all those other things. This is simply impossible. But if we understand the mechanisms in play in the "pure" (free) market, we can predict how such other influences should affect the outcomes and workings of the market.

We can thus separate this impact, which allows us to make predictions and produce knowledge about the world. Yet any such predictions and knowledge require that we first have a good idea of how the mechanisms of the free market (would) work. If we do not, we are lost—and any attempts to understand are futile. And, as was already noted, even the assumption or assertion that there are no such mechanisms requires that the idea of a "market qua market" be properly rejected (not ideologically, but rationally, logically, and theoretically).

Consequently, it is blatantly ignorant, and a fundamental mistake and misunderstanding, to dismiss all free market economic theory as "ideology." Such claims cannot and should not be taken seriously, because they are only ignorant; they reveal a fundamental misunderstanding of the study of economics.

Yet it is sadly done all the time by people who should know (a lot) better. 

Formatted from Twitter @PerBylund

Categories: Current Affairs

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