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Russell Kirk's "Libertarians, the Chirping Sectaries"

Fri, 30/07/2021 - 23:15

Professor Bradley Birzer from Hillsdale College joins the show to dissect Russell Kirk's famous 1981 essay condemning libertarians. Is libertarianism necessarily utopian and unworkable, as Kirk suggests? Is it hubris to imagine we don't need the state—or even God—to prevent social chaos? Do libertarians have more in common with Communists than conservatives? Or was Kirk simply attacking an absurd strawman of the atomistic individual, with Rothbard as the particular (unstated) target of his ire? Dr. Birzer is a thoroughgoing scholar of Kirk, and provides great insights into the context and thinking behind this critique.

Russel Kirk's "Libertarians, The Chirping Sectaries": Mises.org/Kirk Rothbard's "Myth and Truth About Libertarianism": Mises.org/HAP77a Dr. Birzer's "Kirk and the Libertarians": Mises.org/HAP77b Hornberger's "An Open Letter to Russell Kirk": Mises.org/HAP77c
Categories: Current Affairs

We’re in the Middle of a Long War with the State

Fri, 30/07/2021 - 20:00

The term “the state” is a term that gets thrown around a lot with various meanings. Even excluding the confusing American terminology in which the United States is composed of “states,” we’re still left with many other meanings. For example, in the international relations literature, most independent countries are generally referred to as states. Historically, governments and polities of all types have been referred to as states.

Moreover, the audience here will certainly be familiar with the term in the context of opposing the state. In libertarian circles, we often hear—although perhaps not often enough—about the need to fight the state, smash the state, abolish the state, etc. Certainly, one doesn’t have to spend an enormous amount of time reading Murray Rothbard to be familiar with this position.

Why We Must Be Precise about the State

But often, when the “smash the state” position is invoked—especially among those less familiar with the state as an institution—further investigation often reveals a dangerous lack of precision about what exactly the state is.

In many cases, “the state” is (wrongly) understood as all forms of civil government, or any institution that employs coercion such as law courts and other legal institutions. “The state” can include everything from the highest levels of the national security apparatus right on down to your local dog catcher. Or historically, it can mean everything from the local feudal lord to the grandest imperial despot.

This vague and all-inclusive notion of the state, however, exposes the antistate position to a pretty convincing objection from others.

That is, if “the state” is any and all types of government, then the state is as old as mankind and apparently endemic to the human condition. By this definition, no group of human beings has ever existed without a state, because even the most primitive tribal elders have “coerced” members, in the form of forcing guilty parties to pay retribution to wronged parties. Or in extreme cases, local leaders have sometimes imposed exile or enslavement on others in their community. No human association simply lets people do whatever they want whenever they want and still remain members of that group in good standing.

If this is true, then eliminating the state—defined as any organization using coercion—this would strike many if not most reasonable people as utopian in the extreme. If “the state” has always existed and is found in every human society, then its elimination is about as likely or wise as eliminating the family.

This objection can be addressed by being more precise and clear about what we mean by “the state.”

By better understanding what the state is, we can perhaps also better see why it is an especially damaging and dangerous institution. And once we understand that, we can better see how to fight and unravel the state more effectively.

What I want to do here today is 2 things. I want to show how the state—which I will sometimes call “the sovereign state” or the “modern state” is a very specific type of government, and not at all eternal or necessary in ordering human affairs. Its abolition is by no means utopian.

Secondly, I want to discuss what is the role of liberal—that is the “classical liberal” or libertarian—in advocating for the radical reining in and ideally, the elimination of the state altogether. (As a side note: I agree with historian Ralph Raico, one of our late senior fellows here who regarded what we now call libertarianism as simply a modern variant of so-called classical liberalism or more correctly, simply liberalism. Raico used all three terms interchangeably, and I’ll do the same

What Is the State?

So, when I say, “the state” what do I mean?

First, we can briefly note what the state is not. Rothbard covers this well in his essay “The Anatomy of the State,” so there’s no need to belabor the point here, but the jist of it is this:

Rothbard uses the standard Weberian definition for the most part: the state is an organization with a monopoly on the means of coercion within a specific territory. Even if we don’t quite agree with it in every respect, it is at least a good starting point.

As Rothbard points out, the fact that it is a specific organization means it is not us. The state is not society overall. The old classical liberals made this distinction. In fact they invented the notion of using the word “society” to be something distinct from the state. “Society” is all those things that are not the state. Families, churches, the marketplace, even arguably some local governments where power is more localized and specific rather than centralized and general. But society is certainly any voluntary institution built on voluntary relations.

Now, this can be confusing for readers of older writers. St Augustine uses the term “the state” to mean something closer to society in general. Or more correctly, he uses a Latin term rem publicum—or other variants—which are generally translated as “the state.” But what St Augustine means by this is better understood as the word “polity” which is a community of human beings and all its institutions, including its governmental institutions.

So, in our usage here the state is not the same thing as a polity, a community, or even a civil government.

So we’ve declared what the state is not—is not the community, or the polity in which we live.

And what is the nature of this organization?

There are four main aspects of what the state is that I want to discuss here.

ONE: the first point is that the state exists in the people’s minds.

Martin van Creveld, for instance, states

The state … is an abstract entity which can be neither seen, nor touched.

Van Creveld’s observation takes us back to Joseph Strayer, author of On The Medieval Origins of the Modern State, who reiterates that the state exists in the minds of people. And the crucial step takes place when people start to believe that they need a state.

Now, neither Van Creveld not most other historians of the state would deny that the tools of the state are obviously real and tangible. We can touch and see the state’s prisons, its armies, its execution chambers, its nuclear bombs, its bureaucrats, its judges, its courtrooms, and so on. But nonstate organizations (with the exception of nuclear weapons–only states have ever owned those) have controlled these other state amenities in history.

But the fact that these are all held together toward the pursuit of certain goals, is evidence that there is a unifying idea, in the minds of the people who use these tools—and the populations who accept their usage.

TWO: a second important aspect is the fact the state is impersonal and bureaucratic, and permanent. The prestate princes of Europe were expected to provide a provided an actual service in that he led soldiers in battle and he often traveled around his domains personally acting as judge in legal cases.

Charles Tilly paints an important picture here—the medieval king before the age of states was personally provided security services. He could be found on the field of battle.

The monarch after the rise of state—say in the sixteenth century—sat behind a desk. He headed an enormous, permanent, and impersonal apparatus designed to impose his edicts across a large territory. He did paperwork.

THREE: this takes us to the next crucial and more dangerous step: when people start to believe the state is sovereign.

Strayer says that yes, people must believe the state exists in order for it to exist. But critical in creating a state is that people must believe the state is sovereign in that the state gets the final say on everything within its borders. There is no peer or higher organization that can challenge is decisions. As we will see, sovereignty is a key issue here. It’s one of two key differences that makes the state what it is.

FOUR: but there is one final key step in understanding the state, and this, along with sovereignty, is what truly makes the state different and modern and distinct from other types of civil government.

This is the fact that morality does not apply to the state the way it applies to you and me.

Van Creveld provides a key insight here:

Hobbes deserves the credit, for inventing the `state' … Bound by no law except that which [the sovereign ruler] himself laid down (and which, of course, he could change at any moment), Hobbes's sovereign was much more powerful than … any Western ruler since late antiquity.

That is, between the end of the Roman Empire and the rise of the state, European society did not, in theory, buy into the idea that the state could do whatever it wanted regardless of ordinary morality. Notions like “there are not rules in war” or the basic idea, loved by politicians that if you want to make an omelet you have to break some eggs. Certainly, there were abuses. Certainly many princes acted at times like they could do whatever they wanted. But it was not generally accepted on a theoretical level—as it is today—that it was a positive good that states and state agents be freed from the inconveniences of morality for the sake of statecraft. That came later with theorists like Machiavelli

So, this gives us some basic clues as to identifying a state when we see one, but its these last two characteristics that I want to focus on here, because they’re the most dangerous. The sovereignty of the state, and the state’s detachment from ordinary morality.

Let’s let Luigi Bassani and Carlo Lottieri explain why this is important:

One of the central axioms of libertarianism is the idea that the same morality applies to every person, whether acting on behalf of a public apparatus or in his individual capacity. Society and individuals must be judged as a whole: if something is morally unacceptable, it should be so for everybody. In Human Action, Mises affirms that the most weighty revolt against reason can be found in the idea that “there is no such thing as a universally valid logic.” Mises calls this polylogism: “Marxian polylogism asserts that the logical structure of mind is different with the members of various social classes. Racial polylogism differs from Marxian polylogism only insofar as it ascribes to each race a peculiar logical structure of mind.” The rise of the State brought about a different kind of polylogism, whose paramount importance for the general theory escapes no one: the division between the mass of subjects and the elite of political rulers.

So that’s the state in theory.

Law before the State

But it’s important to remember we’re not dealing with mere theory here. These are real institutions that exist in real history.

The state really came into its own in the sixteenth and seventeenth century, with the rise of the Westphalian state or modern state, and especially with the rise of absolutism.

But understanding what came before the state in western Europe remains difficult for people to understand, largely because people have been so completely indoctrinated into the idea that there must always be a final sovereign authority within a specific territory.

But prior to the state, this was not the case.

Prior to the rise of the state and notions of patriotism and national identity, the medieval Europeans were much more pragmatic in their view of government power. The prince or king existed to address problems in emergencies. Moreover, he and the many other lords, dukes, and other members of the warrior class existed to be arbitrators in disputes, and to exact retribution from wrongdoers.

Naturally, this sort of work required violence, and these groups used coercive means in their work.

But these groups were not strong enough to claim sovereignty or a true monopoly on the means of coercion, and each prince had to compete with other princes. Indeed, kings were, in the words of Hendryk Spruyt, just a first among equal princes within their realms.

Political units tended to be very small. Moreover, as described by Spuyt, human beings were in the West subject to overlapping legal claims—people could be vassals of more than one prince. This meant an attempt to tax a city, a bishopric, an individual local lord, could encounter stiff resistance from the church, from a city council, or from another prince. Spruyt writes:

One could simultaneously be the vassal of the German emperor, the French king, and various counts and bishops, none of whom necessarily had precedence over the other. … a vassal might recognize different superiors under different circumstances.

The effect this meant that various competing powers sought consensus, negotiation, and other means of dispute resolution other than simply calling upon a sovereign to impose his will through the power of physical force.

Obviously, this placed substantial limits on the power of political leaders. For examples, historian Charles McIlwain who writes:

[P]roperty which a subject had of legal right in the integrity of his personal status, and the enjoyment of his lands and goods, was normally beyond the reach and control of the King.… At the opening of the fourteenth century John of Paris [a Dominican philosopher] declared that neither Pope nor King could take a subject’s goods without his consent.

Moreover, Bruno Leone concluded:

[A]n early medieval version of the principle, “no taxation without representation,” was intended as “no taxation without the consent of the individual taxed,” and we are told that in 1221, the Bishop of Winchester, “summoned to consent to a scutage tax, refused to pay, after the council had made the grant, on the ground that he dissented, and the Exchequer upheld his plea.”

Power was divided up among local princes, the Holy Roman emperor, and the Church. All competed with each other for power. Over time, this means that all these different groups also were careful to define their own rights within the legal system.

This didn’t mean lawlessness, of course, just as there is not lawlessness today in today’s anarchic world of international relations. There is international law. There are countless agreements among sovereign states. Similarly, in the prestate world of nonsovereign governments, there was law, there was conflict resolution, there was enforcement of legal rulings, and negotiations among semi-independent powers were commonplace. Yet there was no sovereign, final power. Kings existed to settle disputes, to subdue violent aggressors, and engage in conflict resolution. They often succeeded they often failed. Just as in any age of mankind.

These legal systems were often systems of restorative justice designed to offer a means of obtaining payment from those who committed offenses against others. It wasn’t perfect, but it would be hard to argue that the age of absolutism in the seventeenth century, or the age of total war in the twentieth century, was less chaotic or bloody.

Nor were regular people on their own and at the mercy of grand organizations. Human beings and households were affiliated with many organizations. City governments, guilds, churches, family clans, (and more) provided shelter to individuals which could offer legal and physical protection from outsiders and criminals. The untethered, atomistic individual did not really exist.

This of course, was the world that Machiavelli and other “modern” thinkers wanted to do away with.

And they succeeded.

What they got instead was the state, absolutism, and sovereignty.

In the prestate world, no politicians could be confident that he would not be challenged by a party of equal legal stature.

In the state system, every sovereign, whether a king, president, or parliament excises final and total authority within his jurisdiction. Just as important is the fact that most other states, most of the time, recognize the sovereignty of other states.

Not surprisingly, absolutism followed soon thereafter, which is described by absolutism’s defender Jean Bodin:

The sovereign, furthermore, must be unitary and indivisible, the locus of command in society … we see the principal point of sovereign majesty and absolute power to consist in giving laws to subjects in general, without their consent.

So, in both theory and practice, consent if of no importance in the mind of the absolutist. So to this, of course, Machiavelli would give a knowing nod.

Liberals versus the State

It is not surprising that during this period we see a multiplication of efforts to assign “divine right” to monarchs. This is often attributed to the middle ages, but few monarchs in prestate Europe could credibly claim such a title. It was also during this period when absolutists made other outlandish claims, such as the notion that “"God ordains all magistrates." Or that to disobey the king is to disobey God. We can contrast this with the idea of St. Thomas Aquinas, who sanctioned the killing of tyrant kings, or St. Augustine, of course, who declared that an unjust law is no law at all.

But it wasn’t just in the stylings and claims of the ruling class that communicated the growing power of those who ruled in this period.

Absolutism manifested itself in many ways. The most remembered today, perhaps, is the economic system of absolutism, known as mercantilism. Mercantilism, as described by Rothbard, was simply the everyday expression of absolutism, and a system of special favors and interest group politics that naturally grew up around absolutist rulers. Rothbard writes:

Mercantilism, which reached its height in the Europe of the 17th and 18th centuries, was a system of statism which employed economic fallacy to build up a structure of imperial state power, as well as special subsidy and monopolistic privilege to individuals or groups favored by the state. 

This was the natural outcome of the sovereign state. No longer bound by any law other than its own will, the state could dole out favors to its supporters, redistributing property and granting monopoly powers at will.

This is where the liberals come in. In many ways liberalism is a reaction against the rise of the state and absolutism.

Rothbard writes that the Levellers of England in the seventeenth century were likely the first self-conscious and true libertarian movement. They explicitly opposed both the mercantilist system of favors, and the absolute power of the monarch. They explained the impoverishment imposed on ordinary people by trade restrictions. They advocated for decentralizing the armed forces into militias.

In the Americas, the Antifederalists carried on this tradition, to an even greater extent. They often nurtured a deep distrust of centralized power, and opposed the idea of federal sovereignty altogether in many cases. In practice, even the state legislatures in America lacked sovereignty, especially since the means of coercion was so diffuse and in the hands, in many cases, of local militias. Decentralization, of course was a key issue.

By the nineteenth century, liberalism gained ground in France, in England, an in Italy. These placed obstacles in the path of the state, in efforts to reduce abuses and to more greatly decentralize power. The Jacksonians and Cleveland Democrats in America carried on this tradition as well, into the very late nineteenth century. But in many cases this failed to address the two most dangerous aspects of the state: sovereignty and moral polylogism. But some liberals did in deed zero in on the central problem of the state.

Systematic opposition to the very idea of state sovereignty among liberals likely reached its most sophisticated level in this period with Gustave de Molinari.

Specifically, he explicitly opposed the very idea of state sovereignty even to the extent of opposing a monopoly over military power and security services. This, of course, was long the main claim the state made in favor of sovereignty—it must be the last word on matters of security, and war and peace.

But at the foundation of Molinari’s opposition to monopoly was his rejection of the idea that the state could apply its own version of morality. He writes:

It offends reason to believe that a well established natural law can admit of exceptions. A natural law must hold everywhere and always, or be invalid.

Just as natural law—i.e., basic moral laws—dictated people were free to choose providers or shoes or food, the same was true for security services. This position would have appeared quite reasonable to many prestate Europeans. Today, however, many consider it to be outlandish.

Unfortunately, few liberals since Molinari go this far. Some Rothbardians qualify, of course, but most assume the state as a given. Even the most seemingly radical theorists, either miss the key problem of state sovereignty and moral exceptionalism, or are simply unwilling to address it.

So What Is to Be Done?

If we accept the idea that the state does not exist on its own moral plane, or that the state should be ultimately be sovereign above all other possible challengers, what is to be done?

First, is to not buy into the grift. And it is a grift.

If the state relies on the perpetuation of the idea of the state, we need to at least stop believing the idea ourselves. But most important is to reject the idea that the state gets to function on its own moral plane. We hear this all the time from regime supporters of course. We shouldn’t complain too much, we’re told, because poiticians make “the hard decisions” and we can’t hold state actors to the same standards as mere ordinary people whose only function should be, apparently, to pay all the bills. This is poisonous thinking, and should be treated with the contempt it deserves.

Moreover, we must fight the historical myths that back the state, such as the regime narrative that the state is a progressive force for humanity and human rights. The state has been immensely successful in writing its own history in which it is both inevitable and highly beneficial. Both of these claims must be rejected.

Support Secession

The second step is to support secession and radical decentralization.

It’s very hard for people to wrap their minds around the idea of competing sovereignties, and this is an obstacle to winning them over in the fight against state sovereignty. But one thing people do understand is the right to self-determination, self-government, and local autonomy. People don’t want to be ruled by a culturally alien force imposing the will of the majority on powerless minorities within a large state.

The answer to this problem of course, lies in secession, and in making government power more polycentric, more dispersed, more decentralized. This by itself brings us closer to the prestate model even without requiring a direct attack on the idea of sovereignty.

Moreover, secession does act as a de facto indirect attack on sovereignty in 2 ways. First of all, because a regime that fails to impose perpetual unity on its subjects is a weakened regime. And secondly, because secession creates smaller states, and secession prone, small states are less able to exercise sovereignty. The smallness of the state, and the relative ease with which people may leave that state, mean that it is more constrained in its ability to raise taxes and impose regulations, and to abuse the population in general.

Build up Other Institutions

And lastly—but perhaps most importantly, because it’s the right thing to do in all circumstances, is build up nonstate institutions.

What are these institutions? They’re the institutions that predate the state. The family, the church, the market. Even local governments are key in this equation.

As Van Creveld has explained the rise of the state required the triumph over all these institutions. It has been the decline of these institutions—encouraged by the state itself—that has paved the way for state dominance of society in so many cases.

And it’s easy to understand why. Society naturally organizes around kinship, around religious groups, around economic ties, professional associations, guilds, town governments, and even neighborhoods.

The work of the state for centuries has been to destroy and impoverish these natural organizations, replacing them with the artifice of the state, claiming the whole time that the state can better provide what these institutions once provided. But all the while creating a more fragile society. The project of the state and its intellectuals has been to run down especially families and churches and local allegiances because these groups have been so fundamental in creating parallel institutions that have competed with the state for loyalty and for resources.

Ultimately, it’s not enough to just oppose the state and call it a day because society has to organize itself around some institutions other than the state. If these alternative institutions don’t exist, people will turn to the state and it will only be strengthened.

Most importantly, these other institutions of the marketplace and private society are nothing like the state. They aren’t above morality. They aren’t sovereign, handing down immutable edicts to the rest of us to obey. In fact, these nonstate institutions help to illustrate just how different, and dangerous the state is. It’s a lesson we must not forget.

Categories: Current Affairs

Finnis on a Problem for Property Rights

Fri, 30/07/2021 - 17:00

John Finnis, for many years a professor at Oxford, is one the world’s greatest legal philosophers. Along with the late Germain Grisez, he is the foremost defender of a version of natural law theory called “new classical natural law theory.” In his fullest account of his legal theory, Natural Law and Natural Rights (Oxford 1980), he argues that the right to acquire property, as defended by Robert Nozick, is subject to limits that severely weaken its force. Although he does not consider Murray Rothbard in the book, his argument would if correct apply to Rothbard’s theory as well. In what follows, I’ll attempt to explain Finnis’s argument and to show why it does not succeed.

To be clear, Finnis does not reject private property. He says,

And in all those areas of activity, including economic activity, where individuals, or families, or other relatively small groups, can help themselves by their own private efforts and initiatives without thereby injuring (either by act or omission) the common good, they are entitled in justice to be allowed to do so, and it is unjust to require them to sacrifice their private initiative by demanding that they participate instead in a public enterprise…. The principle of subsidiarity … is a principle of justice.

Finnis thus allows private property and enterprise, indeed even insists on it, but the right to acquire property is limited by the “common good.”

Finnis makes evident in his discussion of Nozick what he has in mind by the “common good.” He says,

A primary concern of Nozick’s Anarchy, State, and Utopia is to argue that once anyone has justly acquired capacities, endowments, or holdings (property, etc.), it is unjust for anyone, including the State, to deprive him of any of these holdings, or to conscript any of his capacities, for the purpose of aiding other persons. Systems of taxation for purposes of redistribution and social welfare are therefore unjust; they amount to the imposition of forced labour, an unwarrantable infringement of a man’s rights over his own body, effort, and property, his rights not to be forced to do certain things.

Finnis’s objection to Nozick is different from what you probably expect. He doesn’t say that coercion by the state overrides individual rights. He instead contends that Nozick’s argument rests on a false polarization. In line with most modern thinkers, Nozick contrasts individual rights with state redistribution. Unlike John Rawls and his many followers, Nozick thinks the state ought not to engage in redistribution, but he shares the common contemporary view that if redistribution were justified, this would be a matter for the state to undertake.

This assumption is what Finnis challenges. He says that the polarization between the individual and the state wrongly neglects the fact that individuals, apart from the state, have duties of distributive justice. Finnis, a scholar of immense erudition, traces the polarization to the fifteenth- and sixteenth-century scholastic theologian Cardinal Thomas Cajetan, and once we reject the antithesis between the state and the individual, distributive justice appears in a new light.

“Nozick is far indeed,” Finnis says,

from the tradition of the scholastic textbooks, pre- or post-Cajetan. But the plausibility of his argument comes entirely from its focus on the coercive nature of the State’s intervention as the agent of (re)distributive justice. Suppose we abandon this perspective. That is to say: leave the State out of consideration for a moment, and ask instead whether a private property holder has duties of redistributive justice. (The question is strictly inconceivable in the post-Cajetan tradition.) Then we will find that Nozick indeed has little to say in favour of his assumption that what one has justly acquired one can hold without regard for the needs, deserts, or other claims of others…. If we see no reason to adopt his assumption that the goods of the earth can reasonably be appropriated to the substantial exclusion of all others and if we prefer instead the principle that they are to be treated by all as for the benefit of all according to the criteria of distributive justice though partly through the mediation of private holdings, then the question of State coercion, which dominated Nozick’s argument, becomes in principle of very secondary importance.

It soon transpires that state coercion is by no means excluded. The duties of redistribution individuals have are not created by the state, but if someone does not obey these requirements, the state may compel him to do so. “For in establishing a scheme of redistributive taxation, etc., the State need be doing no more than crystallize and enforce duties that the property-holder already had” (emphasis in original).

Finnis’s prolix style should not occlude from our vision the crucial premise of his argument that property acquisition is to be “treated by all as for the benefit of all according to the criteria of distributive justice”? Why should we accept this premise?

Finnis’s defense of this premise proceeds by uncovering what he takes to be a false assumption of Nozick’s defense of unlimited acquisition. Nozick thinks that coercive redistribution is contrary to justice because it violates claims that people have on these resources. “On what is this principle based? Well, in a nicely ironical passage of Anarchy, State, and Utopia, Nozick remarks: ‘Things come into the world already attached to people having entitlements over them.  . . .’” But, Finnis says, Nozick is wrong. “The decisive fact is that in our own world the natural resources from which all ‘things’ or ‘objects’ are made did appear ‘out of nothing’ and did not come into the world already attached to people having entitlements over them. This basic fact conditions all the entitlements subsequently derived from labour contribution, purchase, or other just sources of private title” (emphasis in original).

Finnis has started from a fact that supporters of Lockean theories of property acquisition do not deny, but instead incorporate as part of their own position. Land and other natural resources start out unowned: it is precisely this fact that enables acts of acquisition to proceed. The passage by Nozick that Finnis quotes is intended only to apply to items that have already been justly acquired. It is these that come into the world already attached.

From the premise that resources come into existence unowned, Finnis’s contention that individuals have duties of distributive justice does not follow. It amounts simply to a rejection of the view held by Nozick and Rothbard, rather than an argument for it. “Resources start off unowned. Therefore people who own property have individual duties of distributive justice.”  I wish Finnis had supplied the missing premises in this argument.

Categories: Current Affairs

The Q2 Impact Report Is Here

Fri, 30/07/2021 - 16:00

Spring at the Mises Institute has been busy, with our incredible Rothbard Graduate Seminar week and events in Birmingham and New Hampshire. We are excited by the response to our Medical Freedom Summit, which featured an incredible lineup of speakers.

But we have much more happening, and planned—so please take a moment to open our Impact Report and stay current on everything the Mises Institute is doing!

Thank you as always for your support and commitment to our mission.

second_quarter_2021.png Q2 report

 

Categories: Current Affairs

Toilet Paper Rolls Are Getting Smaller. Blame the Fed.

Fri, 30/07/2021 - 12:00

A term has been coined for product sellers who shrink their packages, and thus, the amount of product in those packages, keeping the package price the same: shrinkflation. Anyone with a bit of good sense or economics training knows this is another form of price inflation, caused by what used to be the dictionary meaning of inflation; an increase in the supply of money. 

For example, while the average American behind continues to widen, toilet paper has narrowed. A friend’s mother busted out a ruler to confirm her theory. Last year John Hebbe of Fairfax, Virginia, provided photographic proof to the Washington Post: an old roll was 4.5 inches wide, a new roll, 3.75 inches. Of course the new rolls are fatter, for now, causing annoyance with home owners with toilet paper dispensers with the roller too close to the wall to accommodate the fatter rolls. 

Greg Rosalsky wrote for NPR.org, “The original Charmin roll of toilet paper, [Edgar Dworsky, former Massachusetts assistant attorney general,] says, had 650 sheets. Now you have to pay extra for "Mega Rolls" and "Super Mega Rolls"—and even those have many fewer sheets than the original. To add insult to injury, Charmin recently shrank the size of their toilet sheets. Talk about a crappy deal.” 

tp Source: WBUR.

"Downsizing is really a sneaky price increase," Dworsky told NPR. "Consumers tend to be price conscious. But they're not net-weight conscious. They can tell instantly if they're used to paying $2.99 for a carton of orange juice and that goes up to $3.19. But if the orange juice container goes from 64 ounces to 59 ounces, they're probably not going to notice."

Homo economicus is assumed to notice this trickery pokery in neoclassical economics theory. Oliver Kim wrote in The Crimson, “But here’s a confession: Homo economicus is at most a useful fiction—in economic jargon, a model. Human beings do not actually think like Scrooge McDuck, but, in approximation and in aggregate, we often behave like we do.”

“Over the years, Edgar Dworsky has documented the downsizing of everything from Doritos to baby shampoo to ranch dressing. ‘The downsizing tends to happen when manufacturers face some type of pricing pressure,’ he says. For example, if the price of gasoline or grain goes up,” Rosalsky explained.

What the NPR scribe misses is inflation’s breakdown of the division of labor. Average folk, not savvy Homo economicus types, have to pump their own gas, scan their own groceries, and, probably worst of all, manage their own retirement funds.

Since the government has deemed its paper tickets and computer digits to be money, Murray Rothbard wrote, “then the government, as dominant money-supplier, becomes free to create money costlessly and at will. As a result, this ‘inflation’ of the money supply destroys the value of the dollar or pound, drives up prices, cripples economic calculation, and hobbles and seriously damages the workings of the market economy.” That would include the division of labor. 

“As we're seeing inflation picking up now, that's why I think you're going to see more items being downsized," Dworksy told Rosalsky. "And maybe it's going to be a double-whammy: We're going to see some products going up in price at the same time that you're actually getting less in the package.”

A Charmin spokeswoman, when confronted by reporters at WBUR about shrinking the size of their toilet sheet squares, pulled an explanation out of her you-know-what, suggesting it was the result of “innovations” allowing “consumers to, basically, wipe their butts more efficiently.” 

Rosalsky, writing from NPR La La Land believes, “consumers will start to notice and voice concern and the power of consumer demand will force companies to listen and right-size their products.” Right-size? What’s the right size? 

Don’t blame Charmin, as Ludwig von Mises explained. “[I]f the ruling party does not want to imperil its popularity by heavy taxation, it takes recourse to inflation.”

Consumers should complain to those working at the Eccles Building producing money, not to those in the private market producing toilet paper. 

Categories: Current Affairs

If the US Wants to Beat China, Why Is It Copying China's Socialism?

Thu, 29/07/2021 - 20:00

If the US wants to strengthen its economic and geostrategic position versus China, it needs to apply the same free market principles that made it prosperous and powerful in the first place. 

Original Article: "If the US Wants to Beat China, Why Is It Copying China's Socialism?"

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Categories: Current Affairs

1789: The Electoral College Meets for the First Time

Thu, 29/07/2021 - 20:00

With all but two relatively obscure states—Rhode Island and North Carolina—having ratified the Constitution, the Confederation Congress was now ready to put the new federal government in place. As soon as New Hampshire became the ninth state to ratify, Congress dutifully created a committee to get the new Constitution up and running. Only the doughty Abraham Yates dissented—in a sense, the last attempt to block the Constitution as a whole. To the determined Antifederalists throughout the county, their next tack was forcefully imposed upon them by the very course of the ratification struggle: they must mobilize and put their plans into Congress in order to fulfill their pledge for restrictive amendments, preferably by calling another constitutional convention that would redress the imbalance of the first.

It was relatively easy for the old Confederation Congress to decide to hold elections and choose electors for the president the following January 7, to assemble the Electoral College to vote for a president on February 4, and to assemble the new U.S. Congress on March 4, 1789.

Attendance at, and interest in, the old Confederation Congress drifted away, and its last day with a quorum was October 10, 1788. There was a flurry of hope in January of the new year, when everyone awaited the new government, and members began to drift into the old Congress, where the faithful Charles Thomson, secretary ever since the opening of the glorious first Continental Congress, sat waiting for the old Congress to meet yet another time, and also to preserve its tenuous existence so that he could hand over the reins to the new government. When March 4 arrived, the old executive departments of Congress were passed into the new Congress for a traumatic period—the nation could not be permitted to live for a few days without the continuity of an executive bureaucracy. Poor old Thomson lounged around for several months and hopefully expected to find a place in the swollen bureaucracy of the New Order. But he found it not, and resigned his office at the end of July to sink into a life of obscurity. In a sense, the passing of Charles Thomson from the political scene paralleled the passing of the Confederation Congress: both met the end of their days humbly, passively, resignedly, and making not a peep.

The old Congress’ most important problem was to decide where the site of the national capital would be. Every large city wanted the honor, and of the two leading Federalists, Hamilton wanted the site to be in New York, and Madison wanted to see it located on the Potomac. Wherever it was, the Federalists would undoubtedly be strong at that location, and the Federalists of that location would correspondingly control the levers of power in the national government. Baltimore, pushed by the southern states, was accepted in early August 1788. However, within a month Hamilton had succeeded in changing the vote to have the capital be New York City. Shrewdly, he was able to argue that since the capital site was agreed by all to be strictly temporary, there was no point in moving the Confederation Congress to another location. As a result, Madison repeated his bitter accusation that Hamilton and the New York Federalists’ shrewd acceptance of the convention’s circular letter was made to have the state ratify in time to retain the capital in New York City.1

The capital would be temporary because the nationalists had made a proviso that the Constitution empowered the Congress to receive a district no larger than one hundred square miles of land, which its governing state or states may cede to it; Congress might then treat the District as its fief—its seat of national government over which it can exclusively rule. This specter of such a protected Federal city, an enclave for super-government unique in the world, was one of the points of contention by the Antifederalists. But, as the new government loomed on the horizon, Maryland, at the end of December 1788, offered to cede a district that Congress might decide upon for the eventual capital.

The Constitution provided that at the meeting of the Electoral College, the person garnering the majority number of votes would be chosen president; the person with the second highest to be vice-president and presiding officer of the Senate. It was a foregone conclusion that George Washington would be the president, but the victorious Federalists had to decide on whom they would choose for the second post. Since Washington was a Virginian, the vice-president must obviously be from the North, which meant either New York or Massachusetts. New York was out of the question, for while the Federalists now grew more powerful in the state and were able to control the choice of U.S. senators, Governor Clinton was still the commanding personality. Clinton, who had abstained from the final vote at the New York Convention, was the Antifederalist candidate for vice-president and planned on pushing for restrictive amendments. Due to political gridlock, New York was to cast no electoral votes in 1789.

Massachusetts it was, then; here, there were clearly only two possibilities: Governor Hancock, who had been promised the post, and John Adams, who had returned from his term as minister to England in the spring of 1788 and chosen as a member of the House of Representatives for Massachusetts. The Federalists realized full well that Hancock was a vain, flighty opportunist whose views, such as they were, differed greatly from their own, so it was a pleasure for them to double-cross the Massachusetts governor. This left John Adams.

Adams, of course, was a hard pill for Hancock and the Federalist leaders to swallow, for they remembered all too well Adams’ radical role during the Revolutionary War and the powerful Left leadership of the Adams-Lee faction in Congress. But Adams had come a long way since those days. As Hamilton wrote to the Massachusetts Federalist Theodore Sedgwick: “his further knowledge of the world seems to have corrected those jealousies which he is represented to have once been influenced by.”

Adams, conservative enough in the postwar period, had indeed shifted staunchly and significantly rightward during his term in England—rightward enough to take his full place in the “high mounted” new Federalist order. Away in England from 1785 to 1788, he found there in the British imperial monarchy the model of ideal government, and his admiration for monarchical statism deepened and intensified under the shock of Shays’ Rebellion. During his stay in London, Adams published in 1787–1788 his newly developed views in his A Defense of the Constitutions of Government of the United States of America. In this original work, Adams developed and advocated what would later be called the social philosophy of “Bonapartism”—from Napoleon’s role in French politics. In the analysis of Bonapartism, Napoleon was supposed to have maintained himself in power by playing off against each other the two great power groups in France: the masses and the aristocracy. John Adams’ theory was an exalted and precursory view of essentially the same process. Adams, too, saw the world as basically divided into the aristocracy and the democracy, or “the common people,” and these two great classes, he believed, were permanently destined to war against each other. The fundamental task of government, for Adams, was to hold the equal balance between these two vast groups and to enforce impartial justice upon them both. Both groups should be equally represented in government, i.e., the rich in an upper house, the common man in a lower house, of the country’s legislature. Where, then, shall the all-important, impartial arbiter of justice come from? He is to appear, according to Adams, in the pen of the executive, the great man who, with an absolute veto over the legislature, is to be exalted above all mere conflicting groups and classes in society and to dispense equal justice for all.

But by what mysterious process is this noble deus ex machina to appear and perform his great work? What is to ensure that the Great Man will really perform in this exalted way? The traditional solution to this problem, of course, was the Divine Right of Kings; the king operating as the vehicle of divine wisdom by definition, so that takes care of that. But John Adams, after all, as a man of the eighteenth century, couldn’t accept this kind of solution. Instead, he thought he saw the answer in sheer self-interest. In a kind of parody of the theory of the free market, the king (or president) was to advance the social interest by serving his own:

It is the true policy of the common people to place the whole executive power in one man, to make him a distinct order in the state, from whence arises an inevitable jealousy between him and the gentlemen; this forces him to become a father and protector of the common people.

Assuming, as we must, that John Adams was serious in this apologetic for executive power, the naïveté of this interesting theory is staggering. In the first place, it is by no means given that the self-interest of the dictatorial Chief Executive is to spend his days as the supreme balancing agent of impartial justice. On the contrary, as the head and will of the full-time executive bureaucracy, the Chief and his followers constitute an independent class interest of their own and will exploit the rest of the population for his and their own benefit. Secondly, in order to catapult himself into power, the Chief will undoubtedly purchase allies among either of the two classes, more profitably so among the influential aristocracy. We can only conclude that the vaunted “realism” of John Adams’ conservative social theory is actually the worst naïve kind of utopian fancy, a fancy, however, that does perform the required function of spinning plausible apologies for executive depredation and oligarchical statism.

The chief executive, Adams believed, should have the absolute power to appoint, make war, and conclude treaties. Only with a single chief executive at the helm with the entire nation looking up to him can one “hope for uniformity, consistency, and subordination …” In fact, Adams, as his ultimate ideal, yearned for a hereditary monarchy and aristocracy. Privately he wrote that hereditary monarchy and aristocracy are

the only Institutions that can possibly preserve the Laws and Liberties of the People, and I am clear that America must resort to them as an Asylum against discord, Seditions and Civil War, and that at no very distant period of time. … Our Country is not ripe for it, in many respects … but our ship must ultimately land on that shore or be cast away.

Adams felt that the English government exemplified his ideal: it was, he wrote grandiosely, “the most stupendous fabric of human invention.” Only ancient Macedonia could come close to this standard. In this admiration, derived from Montesquieu, Adams did not realize that England at the time was far less of an absolute monarchy and far more of a parliamentary oligarchy than what Adams desired.

Adams was particularly enamored of titles of nobility, and even for elective officers, Adams held titles to be absolutely necessary to maintain the dignity and honor of the federal government, and above all “to make offices and laws respected.” Apparently, the real choice was between titles of nobility and anarchy: “I do not abhor Titles, nor the Pageantry of Government. If I did I should abhor Government itself—for there never was, and never will be, because there never can be, any government without Titles and Pageantry.”2 So enamored was Adams of the title, indeed, that he spent a good part of his first year as vice-president trying to persuade the Senate to adopt a system of titles.

It is apparent that Alexander Hamilton was right; John Adams had indeed learned much, and his ideological worldview had matured compared to so many years ago. He was obviously as ready as any man could be to assume the exalted post of vice-president of the United States of America.

The way the electoral system worked, then, was along the design that the vice-presidential and presidential nominees might tie, so it was obviously expedient to arrange the “throwing away” of a few votes so that the agreed upon vice-presidential choice might place second. Hamilton, however, still suspicious of Adams, secretly threw himself into this task with excessive relish, and Adams ended with thirty-four electoral votes to Washington’s sixty-nine. The latter vote was unanimous except for New York, which, due to a clash between a Federalist New York Senate and Clintonian Assembly, never agreed on a choice of electors. Adams was bitterly upset at the results, for he thought he had a real chance to be the supreme arbiter of justice.

While Washington and Adams were elected in February, the Constitution could not go into effect until the opening of the new Congress, scheduled for March 4, 1789. But a quorum of the new Congress did not appear until April 6 when the electoral votes were officially counted; the presidential inauguration then took place on April 30, 1789, the effective starting date of the new government.

This passage is excerpted from Murray N. Rothbard's Conceived in Liberty, vol. 5, The New Republic: 1784–1791.

  • 1. [Editor’s footnote] E. Wilder Spaulding, New York in the Critical Period, 1783–1789 (New York: Columbia University Press, 1932), pp. 270–71.
  • 2. Manning J. Dauer, The Adams Federalists (Boston: Johns Hopkins Press, 1953), p. 48n. [Editor’s remarks] Ibid., pp. 37–54, 78–83.
Categories: Current Affairs

Mises University 2022

Thu, 29/07/2021 - 17:30
Categories: Current Affairs

Rothbard Graduate Seminar 2022

Thu, 29/07/2021 - 17:15
Categories: Current Affairs

Recession and Recovery: W.H. Hutt’s View

Thu, 29/07/2021 - 17:00

There is a considerable Austrian literature on the unsustainable boom driven by credit expansion. When the boom ends, a depression begins. The depression is a transitional period of reduced production that lasts until entrepreneurs restructure capital and labor into sustainable uses. During the depression, there is unavoidable unemployment of both people and productive assets. The recovery is marked by an increase in production and the employment of resources that were idle during the bust.

What happens during a depression? Should we expect it to end, or can an economy remain stuck at the bottom? Is “stimulus” required to start the recovery? The British Austrian economist “W.H.” Hutt In The Keynesian Episode: A Reassessment, provided a coherent theory of the downturn and recovery, driven by the market price system. Hutt incorporated the ideas of coordination through entrepreneurial forecasting and Say’s law to answer these critical questions.

If prices adjust to balance supply and demand, how can there be so many unemployed resources, both capital and labor? If entrepreneurs are reasonably good at forecasting, why should many business firms fail at more or less the same time? Mises’s Austrian theory of the business cycle identifies the banking system issuing excess credit leveraged on deposits as the cause. The interest rate does not accurately reflect the scarcity of savings. The system as a whole sets off in a direction that would only make sense if there were more complementary labor and capital goods than exist in reality. Entrepreneurs set out to produce the wrong mix of capital goods of different types. 

The depression begins as some producers, somewhere in the supply chain, inevitably suffer losses. In some cases the inputs they need are not available in quantity and at a price that was expected; shortages and bottlenecks of scarce inputs drive the prices up. In others cases, the demand for their products is not what was expected. Planned allocations are found to be misallocations; continued progress in the same direction is unsustainable. Some businesses will experience losses, others fail entirely. Inventories must be marked down and even sold at a loss. Hutt used the term “discoordination” to describe the state of affairs. The first wave of unemployment comes at this point, as some firms realize their mistakes.

An example of this is the notorious 90s tech bubble incarnation of pets.com. They were unable to economically ship heavy items such as bags of pet food. According to Investopedia, “Given the choice between ordering online and waiting for delivery or walking into the nearest store to buy the product and take it home immediately, the majority of people preferred the latter.” Today, most people prefer the former. Delivery times are almost as fast as going to the store, and the ease of home delivery predominates over driving, parking, and lugging a heavy bag of cat food back and forth to your car. The present success of this sector is due to the build-out of complementary capital in the form of logistics and transport systems to move the goods. The complementary infrastructure to get the products to the customer did not exist in 1999. Considerable savings and capital investment over the intervening years were necessary to make this business feasible today. 

The productive assets that were used for loss-generating activities during the boom were wasted. These resources had alternative uses. If more of the wrong thing was produced, then somewhere else, fewer goods that people did want and could pay for were not produced. Entrepreneurs in other industries were not able to expand as they otherwise would have, because they could not hire the labor or obtain the capital goods that were diverted into malinvestment. The office space, machinery, energy and workers were otherwise engaged. We can not say for sure what those industries were, but some neglected sectors such as tobacco products, gold mining, and energy boomed during the collapse of the dot-com bubble. Other firms were able to take advantage of the surplus of unemployed financial analysts and tech workers to grow.

The recession brings to a halt those projects that should never have been started in the first place. But the impact of the recession is not limited to the industries where the misallocation took place. There is a secondary impact as the bubble unwinds. Hutt explained that “unemployment is infectious.”1 A self-reinforcing cycle amplifies the downturn. The feedback is driven by two reinforcing principles: inflexible prices and Say’s law.

Say’s law is a modern term for principles that originated in the general glut debate. This was a historical controversy between two explanations of the post-Napoleonic war depression in England. Thomas Malthus blamed an overproduction of goods in general (a “general glut”); or, when looked at from the other direction, the purchasing power of the public could not keep up with production of goods and services.2 He advised what we would now call a “stimulus package.” Unproductive consumption should be encouraged to make up the difference.

James Mill, Jean-Baptiste Say, and David Ricardo responded that there can never be such a thing as a deficiency of demand. The power to demand is derived from production. Everyone has the role of both a producer and a consumer. A good offered for sale constitutes a demand for a different good. When this is understood, it is obvious that demand as a whole and supply as a whole are only different ways of looking at the same thing—the two sides of the totality of market exchanges.

The classical economists did not suggest that any production at all, of anything, creates the power to demand. Businesses must produce things that people want, and are willing to pay for. Even a good that can only be sold at a loss still provides the seller with some revenues. But when there are mistakes in production, not as much power to demand is created as was used up. If a good has no value to anyone, or perhaps creates greater liabilities than it can be sold for, then it does not contribute to demand at all. As Mises observed many years after the original controversy:

With regard to economic goods there can never be absolute overproduction…. With regard to economic goods there can be only relative overproduction…. The attempts to explain the general depression of trade by referring to an allegedly general overproduction are therefore fallacious.

Hutt applied Say’s law in reverse to the process of unemployment. Unemployed workers pause in their contribution to supply and so lose their power to demand. Workers not only demand consumer goods, but indirectly all of the higher-order capital goods required to produce them and the chain of services such as marketing and retailing that bring them to the consumer. The loss of demand for consumption goods ripples up the supply chain. As supply slows down, by Say’s law demand weakens as well. The sales revenues of firms in other industries decreases, and they may have to lay off workers as well. As these second-order layoffs decrease supply, they further decrease demand in a chain reaction. 

Hutt explained the process this way:

[T]he individual firm is working at low pressure because other firms are working at low pressure. Each is inactive because the general power to consume has fallen; and the general power to consume has fallen because of and in proportion to the general decline in the activity of production.3

And:

In a situation in which widespread layoffs of men are occurring, and physical assets are being thrust into idleness, the withholding of supplies … appears as a sort of evaporation of demands or as a sort of redundancy of excess of supplies, not as a withholding of supplies. Keynesian teaching accepts that appearance as reality.4

Hutt’s language might sound superficially like the Keynesian circular flow in which the spending of one party is the income of another. Hutt would agree that there is an interdependence between all participants in the market. We are all consumers and we are all producers. The interdependence is through production. As each consumer-producer stops producing, he loses his power to demand, and therefore to consume. Hutt would agree with Keynes that demand is depressed, but not for lack of consumption.

The reinforcing nature of rigid prices contributes to the depressionary feedback cycle. “Each group of producers in pricing itself out of the market, priced out others also.”5 In a recession, “the self-aggravating process under which prices in key activities come to diverge still further above market-clearing levels can get almost completely out of hand.”6

Demand is lacking because production is not taking place. Production is depressed because firms can or must no longer accept the losses that result from producing the wrong things. But it takes time for entrepreneurs to figure out what the right things are. In many cases a different set of people will make the decisions about what to produce for the economy to recover than the ones who drove up the boom. Some assets need to change hands in bankruptcy. Prices must fall, but the new bids for capital and labor will come from a different set of firms producing a different mix of goods than during the prior boom.

Must the disruption of production go on forever? Is there a bottom to the valley? The depression exists so long as the market for capital goods and idle labor does not . Once a place is found for the assets within the price system, production, and therefore supply, will resume. Prices must be restructured—mostly lowered—to enable the idle resources to be brought back into use. At each stage of production, costs must fall more than prices to give clear profit opportunities to entrepreneurs. This may be on top of a general deflation affecting all prices due to an increase in money demand, or, in the days before the Fed, a contraction of money supply.

During the depression, Hutt explained, revenues are lower than during the boom. This means that businesses derive less revenue from each unit of labor and of capital. Yet as Hutt emphasized, any valuable productive resource has some use, somewhere, at some price. The equilibrium price theory, in which labor earns its discounted marginal value product, still applies, but the expected revenues are lower, and so the wage that a business can pay for the same work is lower during the depression than it was in the boom.7

[Businesses] are justifiably pessimistic, faced with low prospective yields. Hence the market-clearing prices of potentially profitable inputs are very much lower at that moment than they are destined ultimately to be.8

Hutt explains why the transition from recession to recovery is not instantaneous: “[I]n the course of entrepreneurial decision making, what we now call ‘market signalsneed time to be observed, and acted upon.”9 Many factors can influence a fall in demand for particular products. It can take weeks or months for a firm to determine that a fall in demand is not temporary, that they have more inventory than needed and price cuts will be necessary. Firms will to some extent try to wait it out, to avoid the costs of laying off and then rehiring and retraining competent employees.

If the process takes longer, Hutt blamed mainly sellers for not accepting the changed reality. They are pulled by inertia toward keeping the memories of the boom. For a business that was not in the epicenter of the misallocations during the boom, this may be a good strategy. Demand for everyday products, housing, clothing, and transport will return to its former levels. Demand for the exemplars of the worst excesses of the boom may be permanently gone.

Seen in a clear light, can houses in two dozen coastal cities really be worth 20 or 50 percent more each year for six years running, from 2000 to 2008? Or like Pets.com, failures in one bubble may become economic years later, when substantial savings and investment have been realized to create the complementary capital goods that were missing the first time around.

Anything that impedes the market price system will slow the recovery: “[S]uch things as subsidized unemployment compensation and the maintenance of wage rates under private coercion or governmental edict…. Welfare activities often have deplorable effects; but worst of all … subsidize the “occupation of being unemployed.”10

[A]t wages rates equal to the “marginal prospective product” all labor is immediately employable. And I argued further that in the reemployment of labor (through pricing for market clearance) in any particular sector “will set in operation the required ‘groping’ process; this process will lead, in subsequent periods, to a rise in labor scarcity; and that scarcity will, in turn, result in the entrepreneur being forced to offer real wage rates which correspond to labor’s rising realized marginal product.”11

The adjustment will happen more rapidly to the extent that the sellers of inputs (labor and inventories in the supply chain) will accept price cuts. Lower costs, in the face of lower prospective demand will create the possibility for a profit margin even in the depths of the depression. Entrepreneurs who are rationally pessimistic require a greater margin of safety.

Even when matters are at their worst, even when entrepreneurs generally fear that if they provide jobs for the unemployed, they might connect vocover their additional costs … they might still be prepared to shoulder the risks if only labor were generally prepared to accept wage rates which equated with labor’s temporarily low marginal prospective product.12

With profit margins opened up by lower costs, entrepreneurs tentatively begin to employ more of the idle resources. And then, Say’s law operates in the forward direction. The newly employed workers, or those who stayed in their jobs are able to produce, and to supply. This supply constitutes a demand for other noncompeting products, which contributes to the recovery of output in other industries:

[Keynesians do not understand that the fall in the rigid asking prices of idle resources] does not always mean that prospective yields are bound to rise in [the same industry]. Yields will tend to rise for all noncompeting industries.13

Rigid prices can be caused by sellers being unsure of how to adapt to the fall in demand for their products. Hutt explained that it can take some time for a firm to determine if a decline in business is temporary or of a longer duration, and to estimate the best selling prices for their inventories under worse market conditions than expected when the inventories were acquired. Longer established firms may try to hold on to their employees to avoid the cost of laying off and rehiring.

Institutional arrangements that prevent prices from falling serve only to prolong the adjustment period, or prevent it from happening at all. In Britain at the time of Keynes, there were efforts as a matter of policy to maintain nominal wages at or above their boom-time levels. In the American Great Depression, the National Recovery Administration sought to prevent both wage and price adjustments. The inability of these regulated markets to clear by lowering prices kept them stuck in surplus. Unemployed workers, by not producing, withdrew their power to demand other goods from other industries, prolonging the depression.

Say’s law shows that when production is impaired, demand is weakened—only because the supply is not forthcoming. The Keynesian program of “stimulating” consumption can only make the process worse by squandering scarce consumption goods. Putting idle resources to work with stimulus only slows the process of price adjustment. The consumer’s ability to pay comes from his own production. What is needed is coordination through the price system so that all willing labor and useful resources may be used for the greatest contribution to supply. Production must be reorganized in such a way that scarce labor and capital are used to supply things that people want.

  • 1. W.H. Hutt, The Keynesian Episode: A Reassessment (Indianapolis, IN: Liberty Fund, 1980), p. 52. Hereafter cited as KER.
  • 2. Malthusian thinking was later resurrected by Keynes as the basis for his theory of “macro economics.
  • 3. KER, p. 150.
  • 4. W.H. Hutt, A Rehabilitation of Say’s Law (Athens: Ohio University Press, 1974), p. 8.
  • 5. KER, p. 59.
  • 6. KER, p. 55.
  • 7. Murray N. Rothbard, Man, Economy, and State, with Power and Market, 2d scholar’s ed. (Auburn, AL: Ludwig von Mises Institute, 2009), chap. 7.
  • 8. KER, p. 162.
  • 9. KER, p. 53.
  • 10. KER, p. 54.
  • 11. KER, p. 284.
  • 12. KER, p. 55.
  • 13. KER, p. 151.
Categories: Current Affairs

Why Europe's Highly Regulated Power Market Is So Bad for Growth

Thu, 29/07/2021 - 15:00

In Europe, there is no competitive market for electrical power. And since power is an important factor of production, it also means the overall marketplace is wasteful, inefficient, and sluggish. 

Original Article: "Why Europe's Highly Regulated Power Market Is So Bad for Growth"

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Categories: Current Affairs

Private Investment Is the Answer to Declining Postindustrial Towns

Thu, 29/07/2021 - 12:00

My town, Tallassee, Alabama, is an old mill town. It straddles the Tallapoosa River, which is dammed at that point by the Thurlow Dam to generate electricity. On both sides of the river are the ruins of a massive complex of textile mills which employed a significant portion of the town’s population until 2005. In fact, the current mayor, Johnny Hammock, worked in the mills as a young man, and his father and grandfather also worked there. Today, the town is somewhat stagnant: some of the mills, which were burned in a massive fire in 2016, are in shambles; the bridge connecting the two sides of the town is rusty and the paint flakes off in the wind; and there are many empty storefronts and houses. Many people think that the way to restore the town is for the government to take an aggressive role, and one of the mayor’s main strategies has been to apply for grants to undertake the projects that he thinks would benefit the town most. In light of this approach, it is important to take a look at how Tallassee developed into the bustling little city it once was. Private industry had a strong hand in the town’s development.

Tallassee is one of many examples of towns that were developed by private industry. Although large landholders and small-scale businesses contributed to the town’s development, arguably the most significant changes were spurred by the cotton mills. The Tallassee Manufacturing Company built the first mill on the west side of the river in 1844.1 It constructed a larger, four-story mill nearby in 1852. In this early period, the company also built “grist and flour mills, a gin, a sawmill, a foundry, and a blacksmith shop” to serve its employees (many part-time farmers) and local people.2 These mills were powered by electricity generated by a dam that the company had built partway across the river.3

In the earliest years of the mills’ existence, before 1850, Tallassee was a hamlet with a few stores and plain, unpainted log houses.4 As the operation grew, however, the mills undertook the development of a local infrastructure. A third mill was built on the east side of the river in 1897. In the 1890s, the company created a new division and built a railroad to connect the town to the Western Railway of Alabama, which made the town less isolated than before. To power its growing operation, it also built a larger dam, this time spanning the whole river, and a new power plant, which also lit other businesses, the streets, and a few select residences.5 Unfortunately, in 1916, the Alabama Power Company, a state utility, took the mills to the Supreme Court for its rights to the land and water, seeking to build its own dam at the location, and the court ruled hydroelectric power manufacture a public use of property, opening the structure to eminent domain. Alabama Power only took over the dam in 1924, however, it and the mills having finally agreed to share the electricity generated at the Tallassee Falls the year before.6

The company also built a bridge across the river in 1896 to connect the west mills to the new mill it was going to build on the east bank of the river. Although a covered bridge had existed a mile downriver, built privately in 1845 by John H. McKenzie (in fact, he bequeathed the bridge and all toll proceeds from it to his daughter as part of her dowry), this bridge had collapsed of old age in 1863 and had not been replaced.7 For decades, the only way to cross the river to the other side of town was by a ferry that was pulled across the river by a cable. The ferry was maintained by the mills but operated by “Old George.”8 When the mills undertook to build the bridge, the State of Alabama “relieved and released [the company] from all penalties now provided by law for failing hereafter to maintain and operate said ferry.”9

The bridge, of course, was built to make it easier for the company to receive materials and transport goods, but it was also a boon to the community. The company allowed people associated with the company to cross for free, as well as people transporting cotton, the company’s key raw material. Everyone else paid a toll, and the company used the proceeds to maintain the bridge. Unfortunately, the state quickly encroached on private infrastructure. After protests that the tolls were too high, the judge probate of Tallapoosa County (where the east side of town is) claimed the power to control toll rates, and the state legislature backed him on it. Market pricing was snuffed out after an appeal before the Supreme Court of Alabama failed in 1909.10 Although the company had tried to sell off the bridge in 1908—who wouldn’t?—the county commissioners, so helpfully forcing nonsensically low toll rates on the true owners of the bridge, could not afford to purchase it outright. The tolls remained. After 1925, the company continued to maintain the bridge, but the people indirectly paid the company a rental fee to use the bridge through their counties instead.11

In the 1920s, the mills, by this time incorporated as Mount Vernon-Woodberry Mills, embarked on a new spate of updates to the mills and “the villages” (the developments on either side of the river, which were each complete with a company store, housing, and increasing amenities over time12). In 1923, a new bridge replaced the temporary 1920 bridge, which had been built after a flood damaged the old bridge in 1919.13 The mills also built “the Mt. Vernon Theater, the school buildings, the Community Hospital, and the . . . Guest House.”14 At least as late as the 1940s, the mills maintained the town’s water supply and sewage system.15 The company also built the town’s library (est. 1921) and expanded its collection over the years, donating it to the city in 1978, just after adding a new wing to it.16

The mills also built most of the houses in the town, including my own, which are referred to as mill houses. Employees initially lived in these simple pine houses rent-free, but later, probably as living standards improved and costs rose, the company sold them to employees instead.17 Initially served by wells and outhouses, and lit by carbon and kerosene, the mills’ 1920s improvements brought electricity, running water, and finally “sanitary toilets” to Tallassee homes.18 In an era of state-enforced racial segregation, the mills also maintained “a Negro village to the south of West Tallassee . . . [with] a twelve-grade school with a cafeteria, an athletic field, a lodge hall and a church building” in addition to the East and West Tallassee villages.19 Local historian W.C. Bryant, writing in the 1930s, also noted that the mills planned many cultural and entertainment events for the town, such as carnivals, circuses, parades, and patriotic celebrations. In fact, the book by Virginia Noble Golden that I’ve been citing here was published by the company in 1949, showing the depth of their investment in the town. The wealth that Tallasseeans created in the mills put money in their pockets, and consequently the town had over 150 private businesses in the 1940s.20

No benevolent motives were needed to encourage this long record of contributions. The town’s physical and social integrity benefitted the business’s operations, improving efficiency and likely encouraging the best laborers to remain with the company long term. By the same token, since the market is constantly adjusting, the west mills ceased operation in the 1960s, leaving only the newer east mills active. These mills remained open until 2005, when Mount Vernon was forced to downsize and close its Alabama mills for good (it still maintains other mills in the South).

It might seem like the market burned Tallasseeans in the end, leaving them with aging infrastructure, less jobs, and a bunch of empty buildings, but that is not the case. The market, being an aggregation of individual human choices, does not change things overnight, but people see value in the mills and not long after they closed down, other entrepreneurs moved in on them.

The west mills sat for some time, but were finally purchased in 1991 by Montgomery speculators who wanted to take them apart gradually to sell the materials for reuse. They “removed the window sash and gutted the five-story wooden interior structural system,” but the rest of the project seems to have fallen by the wayside. The owners may be waiting for the right moment to act on the remains. (Oddly enough, I could not find a sale record for the site, and the plot is not acknowledged by the Alabama GIS.)

The east mills were purchased by Process Knowledge in 2006; they deconstructed some cotton warehouses on the site for resale and sold the property to Mount Vernon Pine in 2016. Mount Vernon Pine planned to salvage the valued long-leaf heart pine in Mill No. 2. In fact, when these mills burned down later that year, the owner says they already “had hundreds of thousands of dollars of orders for which we received deposits. One man bought $230,000 of wood. He sent us by wire transfer $45,000 because he found the wood to be so desirable.” They had also intended to improve the other mill on the property, added in the 1920s, to lease as warehouse space and also planned to make part of it a museum. The fire was a major setback, of course. The company bought the property for $1,088,000 but only had a $1 million insurance policy on the place. There is very little reclaimable wood left in the remains, ruining the original business plan. The insurance also would not cover the cleanup, which was estimated to run $1 million. 

Although the owners of the eastern mills were looking for a new use for their property (their most recent plan was to crush the rubble and convert it into construction aggregate), the mayor of the town was eager to purchase it to put it to the use that he and other prominent townsmen think best. Finally, not able to get the company to sell voluntarily, the city sued Mount Vernon Pine in 2019, for “public nuisance after the property was not properly cleaned up” following the fire. As a “resolution” to the case, Mount Vernon Pine “donated” the east mills to the city this year, basically coerced but at least getting a tax advantage to help defray its massive sunk costs.

Given that private industry built Tallassee and that the market was already in the process of recycling the mills, making room for new opportunity, politicians should have stood down. The process of market renewal takes time, and although it may be thwarted by unexpected events like the fire, it is inexorable given leeway. Entrepreneurs would have found a good use for the remains and the land. Instead, the city is flying blind, asking the people what they think it should do with its ill-gotten property. The result will be arbitrary, whether based on nothing but the whims of people with no financial skin in the game. Those who will inevitably be hired to do the actual work of revitalization will charge a pretty penny, knowing they’re dealing with a big spender, and will enrich themselves. Some locals may clamor for a fancy new shopping district or housing—they’ll order the caviar, because, hey, it’s not their land. 

The reality is that after the fire it may not be worth moving forward in any way for the foreseeable future—it all depends on what people are willing to invest in voluntarily. No one had to beg Mount Vernon Pine to drop over $1 million dollars on buildings that to some probably seemed worthless. In time, people would have identified new opportunities in the seemingly worthless rubble. They would have been willing to put their money where their mouth is to put one of those ideas to the test, and people would have voted on it with their dollars.

Bleeding local taxpayers to repurpose the area based on the decisions of people with no financial skin in the game is a bad idea and, like all central planning, will be proven a failure in time. Instead of applying for so many grants, Tallassee should place the mills, the rusty infrastructure, the schools, the “substandard” rental properties, and the other buildings it has seized back in the care of the market that sprouted them. Doing so will lead to less costly and likely quicker outcomes that are tailored to the acting preferences of the people of the town themselves.

  • 1. Virginia Noble Golden, A History of Tallassee for Tallasseeans (Tallassee, AL: Tallassee Mills, 1949), pp. 17–18.
  • 2. Golden, A History of Tallassee for Tallasseeans, p. 27.
  • 3. E.W. Wadsworth, A History of Tallassee, ed. Olivia Solomon (1940; repr., Montgomery, AL: Blount Foundation, 2005), pp. 31–32.
  • 4. Golden, A History of Tallassee for Tallasseeans, p. 22.
  • 5. Golden, A History of Tallassee for Tallasseeans, pp. 40 and 42; and Wadsworth, A History of Tallassee, p. 50.
  • 6. William E. Goss and Karen Pell, Tallassee (Charleston, SC: Arcadia Publishing, 2008), pp. 8–9; and Wadsworth, A History of Tallassee, p. 72.
  • 7. Wadsworth, A History of Tallassee, p. 29.
  • 8. Golden, A History of Tallassee for Tallasseeans, pp. 16–17; and Wadsworth, A History of Tallassee, pp. 55–57.
  • 9. An Act to Authorize the Tallassee Falls Manufacturing Company to Discontinue a Ferry across the Tallapoosa River near Tallassee, Elmore County, Alabama (approved Feb. 5, 1897), qtd. In Wadsworth, A History of Tallassee, p. 57.
  • 10. Wadsworth, A History of Tallassee, pp. 57–58.
  • 11. Golden, A History of Tallassee for Tallasseeans, p. 59; and Wadsworth, A History of Tallassee, p. 58.
  • 12. Wadsworth, A History of Tallassee, pp. 61–62 describes the laying out and building of the East Tallassee village, which occurred in the early 1900s, soon after the new east mill was built. See also pp. 71–73.
  • 13. Golden, A History of Tallassee for Tallasseeans, pp. 64 and 66.
  • 14. Golden, A History of Tallassee for Tallasseeans, p. 68.
  • 15. Golden, A History of Tallassee for Tallasseeans, p. 54.
  • 16. Golden, A History of Tallassee for Tallasseeans, p. 56.
  • 17. Wadsworth, A History of Tallassee, pp. 52.
  • 18. Wadsworth, A History of Tallassee, pp. 52 and 70.
  • 19. Golden, A History of Tallassee for Tallasseeans, p. 74.
  • 20. Golden, A History of Tallassee for Tallasseeans, p. 58.
Categories: Current Affairs

Cuba: The Dictatorship and the "Blockade" Lie

Wed, 28/07/2021 - 20:00

Cuba is a dictatorship that uses terror and propaganda to repress its people. It locks citizens up, strips them of the most basic human rights, silences them, and confronts families using extortion and threats. The regime’s constant practices of illegal detention, the personal ruin of political dissidents, and limitation of fundamental rights have nothing to do with any blockade or embargo but everything to do with the totalitarian Communist dictatorship.

All the propaganda that whitewashes the Cuban dictatorship is based on two lies: the nonexistent “blockade” and the allegedly excellent “public health.”

Cuba only suffers from one blockade: that of the dictatorship against its people, which limits imports of food, medicine, use of the internet, and freedom to travel. We have seen the evidence this week, when the regime “temporarily lifted” the limitation on imports of food and medicine.

Dismantling the lie of the so-called excellent Cuban public services is easy. You just have to go to Cuba to see it.

The healthcare system that the regime advertises so much is a failed and dilapidated system that only provides quality service to wealthy foreigners and to the regime’s leaders. Cuba suffers the “most expensive free healthcare in the world,” as they told me in Havana.

The myth of the quality of healthcare has been debunked on several occasions. María Werlau, from the NGO Archivo Cuba (Cuba Archive), explained that “healthcare in Cuba is terrible for the ordinary citizen. There is an apartheid that favors the ruling elite and foreigners who pay in US dollars,” and it has been shown that “the Cuban health system lacks transparency and capacity.” Its health policies not only have not yielded good results but also limit the basic rights of patients; “it is hardly a model to follow.”

Anyone who travels to Cuba can see that the often-repeated “nonexistence of child malnutrition” that some say UNICEF shows is a lie and only masks a regime that still uses ration cards and misery as tools to keep the population under its boot.

However, UNICEF never stated that Cuba had ended child malnutrition, but that the “incidence of underweight children has dropped to 4%,” a record that was broken by Costa Rica and Chile, for example, which reached 1 percent. Tracking Progress on Child and Maternal Nutrition: A Survival and Development Priority (UNICEF, November 2009, p. 102 et seq.) shows clearly how other countries have done significantly better than Cuba.

The actual data on infant mortality is twice the official figure and much worse than in countries such as Chile or Costa Rica, according to studies (for example, “Infant Mortality in Cuba: Myth and Reality,” by Roberto M. Gonzalez).

The myth of the blockade is even more hilarious. The nonexistent blockade is a lie that serves as an excuse to whitewash the dictatorship.

Cuba’s international trade over GDP was 27 percent of GDP in 2020, compared, for example, with Brazil’s, which is 32 percent. Its exports are 14.5 percent of GDP compared to 16 percent in Brazil (World Bank data).

The United States is Cuba’s ninth-largest trading partner, with 3 percent of imports. Cuba has more than twenty-seven bilateral treaties with more than ninety countries, and exports to Canada (22 percent), China (21 percent), Venezuela (13 percent), Spain (11 percent), Holland (7 percent), Germany, Belgium, Switzerland, Cyprus (2 percent each), and France (1 percent) among others (Cuban Statistical Office, 2020 ed.).

The exports of food and agricultural products from the United States to Cuba increased by 74.7 percent in March 2021, an increase of 54.3 percent annualized (Cuba Trade).

Cuba, in turn, imported in 2020 from Venezuela (crude at cost or free), China, Spain, Russia, Mexico, Italy, Argentina, Brazil, the United States, and Germany, among others. Some “lockdown.”

The only thing Cuba has is an embargo on those items that the dictatorial regime uses for military purposes.

What the Left hides about the embargo: the embargo was implemented in 1958 with the Batista regime to limit the sale of weapons. The 1960 embargo on US exports to Cuba did not include food or medicine. Since 2000, there has not been any type of embargo on US exports either in food or in medicine.

More than ninety North American multinationals have exported to Cuba since 2001. Since 2014, sixty North American companies have been operating directly in Cuba (Cuba Trade Economic Council)

Cuba exported $14.9 million worth of goods to the United States and imported $176.8 million in 2020 according to the Department of State. Imports and exports to China are also particularly important.

The United States is the largest supplier of food and agricultural products to Cuba, according to the Department of State, with exports of those goods valued at $220.5 million in 2018. The United States is also a major supplier of humanitarian goods to Cuba, including medicines and medical products, with a total value of $275.9 million in 2018. Remittances from the United States, estimated at $3.5 billion in 2017, are the dictatorship’s largest source of foreign exchange.

What has destroyed Cuba is communism. A destructive and wasteful dictatorial regime.

The Castro regime is a machine for squandering subsidies. It consumed aid from the Soviet Union between 1960 and 1990 equivalent to six Marshall Plans and failed to improve its growth pattern or take advantage of huge subsidies to improve productivity. Between 1960 and 1990, Cuba received more than $65 billion from the Soviet Union, not counting what it received from other socialist countries.

The Cuban dictatorship has also squandered subsidies and aid from China, Russia, and Venezuela.

For the Cuban medical program, Misión Barrio Adentro, alone the Havana dictatorship received $120 billion dollars in sixteen years, an official figure revealed by Nicolás Maduro in 2019 and confirmed by Julio García, head of the Cuban missions in Venezuela.

Cuba obtained more money from Venezuela for other concepts, other missions, for sales of power plants, for triangulation in food imports, and even for the sale of millions of light bulbs.

In the past eighteen years, China has forgiven nearly $5 billion in debt to Cuba, nearly half of the total debt it has forgiven its trading partners. Of course, trade with China has declined due to the constant defaults of the Cuban dictatorial regime.

Russia has donated billions of dollars to Cuba, with donations through, for example, the representation of the World Food Program (WFP) and the write-off of 90 percent of the debt contracted with Russia (2014), about $25.8 billion.

Between 2011 and 2014 alone, Mexico, Japan, China, and Russia together exempted the Cuban dictatorship from $40 billion dollars of debt, which is equivalent to 50 percent of Cuba’s current GDP, according to Forbes.

The Paris Club creditors in 2015 also canceled $8.5 billion in outstanding debt

The Cuban dictatorship always does the same: borrow, squander money, impoverish the population, and default on its commitments. And then it complains about a nonexistent “blockade.”

If we add donations, debt cancellation, and financial support, Russia, China, Venezuela, and Cuba’s main trading partners have given financial aid and donations to the Cuban dictatorship that exceed $200 billion in the last sixteen years. 

Despite all this, and with a monetary policy as destructive as that of Venezuela, printing Cuba pesos without value or demand while squandering the reserves it receives, inflation in 2021 will reach 500 percent according to Reuters

What has the Cuban dictatorship done with all this money? Fritter it away while condemning the Cuban people to misery.

Cuba has a poverty level that, calculated independently, reaches 50 percent. According to figures from the ONEI (Oficina Nacional de Estadísticas e Información), 35.6 percent of the working-age population is unemployed or unemployed. The monetary and economic disaster would lower the Human Development Index position for Cuba from seventy-three to the last places among the countries of the world.

What is it that destroyed Cuba? Communism, not the nonexistent blockade.

Categories: Current Affairs

Government Debt Is Starting to Look Almost as Sketchy as Payday Loans

Wed, 28/07/2021 - 20:00

As government seek ever larger amounts of debt to finance more spending, they're embracing huge debt levels in the way a broke consumer might embrace payday loans. In the end, we're left with nothing but a flimsy promise to pay. 

Original Article: "Government Debt Is Starting to Look Almost as Sketchy as Payday Loans"

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Categories: Current Affairs

This Is a Weak Jobs Recovery

Wed, 28/07/2021 - 15:00

The United States’s jobs recovery is extremely poor, especially if we consider the size of the monetary and fiscal stimulus and the spectacular upgrade to GDP estimates.

Original Article: "This Is a Weak Jobs Recovery"

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Categories: Current Affairs

Shrinkflation, Inflation’s Sneaky Cousin, Is on the Rise

Wed, 28/07/2021 - 12:00

Inflation has been on the rise for the past year and in the last few months it has accelerated. In June 2021, inflation, measured by the Consumer Price Index (CPI), hit the highest level since 2008. By inflation, economists refer to the increase in the general level of prices, which means that prices on average are increasing. The Bureau of Labor and Statistics (BLS) has a basket of goods and services that it tracks and uses to create a measure of the CPI. While inflation is the topic of the day in the news media and everyday conversations, many have not heard about its sneaky cousin, shrinkflation.

The term shrinkflation, is credited to British economist Pippa Malmgren, and refers to the shrinking weight of the products while the price for the package remains the same. This is in effect another form of inflation, since the per unit price of goods increases when products shrink. However, shrinkflation is trickier, since most consumers do not notice it (see here for a few examples of shrinkflation). Shrinkflation is an ongoing process, but we are seeing more of it in the past year, and especially the first half of 2021, as businesses scramble to catch up with increasing costs of production. Shrinkflation is so widespread today that there is a dedicated Reddit page for it.

Many complain about businesses resorting to shrinkflation and regard it as a sneaky way to increase prices. Yet many of the critics do not realize that businesses have no choice but to increase prices. Anyone who is paying attention to prices in the first half of 2021 will know that it is not only the price of consumer goods that it is increasing but also the prices of producer goods. In other words, the inputs used in the production of the goods we consume, including labor, have been getting more expensive. Consequently, businesses in a fight to maintain their profit margins have resorted to increasing prices or shrinking the size or weight of their products.

Normally, the BLS accounts for the weight of the products it tracks, which would allow them to account for shrinkflation, but as the Washington Post reports, the BLS has not been able to do this very well during the pandemic. This means that the current inflation measure, as measured by CPI, is most likely underreporting the extent of current inflation.

What is causing this increase in shrinkflation? Well, since shrinkflation is in fact a form of inflation, the short answer is that the same factors have caused inflation. As you may already be aware, many are blaming shortages and disruptions in the supply chain for the recent increases in inflation, but that hardly explains the whole story.

The two main candidates to blame are the Fed and the government. The Fed has printed tremendous amounts of money, which has led to the doubling of its balance sheet since March 2020. This is in fact what inflation is, and this is the cause of what we normally refer to as inflation, which, to be more accurate, is price inflation. In general, we know that the more money we print, holding all else equal, the more inflation we will get, and that is part of what we are seeing now.

On the other hand, we have had the federal government spend money at record levels for a peacetime period. This also has led to an increase of demand beyond what one would expect in the circumstances we have been in since spring of 2020. For example, retail sales have increased rapidly and have been above trend since late 2020. While some of this can be seen as catching up after the decrease we saw in the second quarter of 2020, it is definitely gone beyond catching up, as is clear from the graph below. Government spending has become a topic of concern even for mainstream economists like Larry Summers, who is now worried about the economy overheating because of it.Retail Sales

Lastly, while the supply chain disruptions are blamed on covid-19, it is the lockdowns instituted by governments, in the US and other countries, that are the main culprit behind these supply chain disruptions. The problem with the lockdowns was that they completely ignored the cost-benefit analysis by arbitrarily determining what constituted an essential business and what did not. As you may well know, one can ignore the laws of economics, but not their consequences, and we are now suffering the consequences of these arbitrary lockdowns.

The million-dollar question today is, How long will this rising inflation and shrinkflation last? The Fed insists that this inflation is transitory, but many, including BlackRock’s CEO, are concerned that this may not be the case. With the inflation data from June, we have some evidence that inflation may be more than transitory. As can be seen from the graph below, the transitory portion of inflation (base effects) was expected to retreat for June (the bar after the dashed line), but CPI advanced beyond the increase in May (reflected in the green portion of the bar added to the predicted June CPI by Oxford Economics).US Headline CPI Inflation   (The graph is modified to show the actual CPI change for June, by adding the green portion of the bar.)

Hence, with all the money that the Fed has printed and is continuing to print, and the increased spending by the federal government, we may well end up seeing higher inflation over the next few years. Whether this will happen or not remains to be seen, but one thing is for sure: the shrinking size and weight of the products is here to stay and it will only get worse as inflation pressures continue to worsen.

Categories: Current Affairs

The Jan. 6th Show Trials Threaten All of Us

Wed, 28/07/2021 - 11:15

The recent felony conviction and eight month prison sentence of January 6th protester Paul Hodgkins is an affront to any notion of justice. It is a political charge and a political verdict by a political court. Every American regardless of political persuasion should be terrified of a court system so beholden to politics instead of justice.

We’ve seen this movie before and it does not end well.

Worse than this miscarriage of justice is the despicable attempt by the prosecutor in the case to label Hodgkins – who has no criminal record and was accused of no violent crime – a “terrorist.”

As journalist Michael Tracey recently wrote, Special Assistant US Attorney Mona Sedky declared Hodgkins a “terrorist” in the court proceedings not for committing any terrorist act, not for any act of violence, not even for imagining a terrorist act.

Sedky wrote in her sentencing memo, “The Government … recognizes that Hodgkins did not personally engage in or espouse violence or property destruction.” She added, “we concede that Mr. Hodgkins is not under the legal definition a domestic terrorist.”

Yet Hodgkins should be considered a terrorist because the actions he took – entering the Senate to take a photo of himself – occurred during an event that the court is “framing…in the context of terrorism.”

That goes beyond a slippery slope. He is not a terrorist because he committed a terrorist act, but because somehow the “context” of his actions was, in her words, “imperiling democracy.”

In other words, Hodgkins deserved enhanced punishment because he committed a thought crime. The judge on the case, Randolph D. Moss, admitted as much. In carrying a Trump flag into the Senate, he said, Hodgkins was, “declaring his loyalty to a single individual over the nation.”

As Tracey pointed out, while eight months in prison is a ridiculously long sentence for standing on the floor of the “People’s House” and taking a photograph, it is also a ridiculously short sentence for a terrorist. If Hodgkins is really a terrorist, shouldn’t he be sent away for longer than eight months?

The purpose of the Soviet show trials was to create an enemy that the public could collectively join in hating and blaming for all the failures of the system. The purpose was to turn one part of the population against the other part of the population and demand they be “cancelled.” And it worked very well…for awhile.

In a recent article, libertarian author Jim Bovard quoted from Solzhenitsyn’s Gulag Archipelago about how average people turned out to demand "justice" for the state's designated “political” enemies: “There were universal meetings and demonstrations (including even school-children). It was the newspaper march of millions, and the roar rose outside the windows of the courtroom: ‘Death! Death! Death!’”

While we are not quite there yet, we are moving in that direction. Americans being sent to prison not for what they did, but for what they believe? Does that sound like the kind of America we really want to live in?

While many Biden backers are enjoying seeing the hammer come down on pro-Trump, non-violent protesters, they should take note: the kind of totalitarian “justice” system they are cheering on will soon be coming for them. It always does.

Reprinted with permission. 

Categories: Current Affairs

My Case against Minimum-Wage Laws

Tue, 27/07/2021 - 20:00

We often hear these minimum wage laws are well intentioned. I cannot agree. Minimum-wage laws are evil in their methods (coercion) and evil in their goals (to make people believe they’re dependent on government). 

Original Article: "My Case against Minimum-Wage Laws"

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

Categories: Current Affairs

Why Capital Goods Are the Key to Economic Progress

Tue, 27/07/2021 - 20:00

[This article is excerpted from chapter 18 of Human Action]

If one were to measure the length of the period of production spent in the fabrication of the various goods available now, one would have to trace back their history to the point at which the first expenditure of original factors of production took place. One would have to establish when natural resources and labor were first employed for processes that — besides contributing to the production of other goods — also contributed ultimately to the production of the good in question. The solution of this problem would require the solubility of the problem of physical imputation. It would be necessary to establish in quantitative terms to what extent tools, raw materials, and labor that directly or indirectly were used in the production of the good concerned contributed to the result. One would have to go back in these inquiries to the very origins of capital accumulation by saving on the part of people who previously lived from hand to mouth. It is not only practical difficulties that prevent such historical studies. The very insolubility of the problem of physical imputation stops us at the first step of such ventures.

Neither acting man himself nor economic theory needs a measurement of the time expended in the past for the production of goods available today. They would have no use for such data even if they knew them. Acting man is faced with the problem of how to take best advantage of the available supply of goods. He makes his choices in employing each part of this supply in such a way as to satisfy the most urgent of the not-yet-satisfied wants. For the achievement of this task, he must know the length of the waiting time that separates him from the attainment of the various goals among which he has to choose. As has been pointed out and must be emphasized again, there is no need for him to look backward to the history of the various capital goods available. Acting man counts waiting time and the period of production always from today on. In the same way in which there is no need to know whether more or less labor and material factors of production have been expended in the production of the products available now, there is no need to know whether their production has absorbed more or less time. Things are valued exclusively from the point of view of the services they can render for the satisfaction of future wants. The actual sacrifices made and the time absorbed in their production are beside the point. These things belong to the dead past.

It is necessary to realize that all economic categories are related to human action and have nothing at all to do directly with the physical properties of things. Economics is not about goods and services; it is about human choice and action. The praxeological concept of time is not the concept of physics or biology. It refers to the sooner or the later as operative in the actors' judgments of value. The distinction between capital goods and consumers' goods is not a rigid distinction based on the physical and physiological properties of the goods concerned. It depends on the position of the actors and the choices they have to make. The same goods can be looked upon as capital goods and as consumers' goods. A supply of goods ready for immediate enjoyment is capital goods from the point of view of a man who looks upon it as a means for his own sustenance and that of hired workers during a waiting time.

An increase in the quantity of capital goods available is a necessary condition for the adoption of processes in which the period of production and therefore waiting time are longer. If one wants to attain ends that are temporally further away, one must resort to a longer period of production because it is impossible to attain the end sought in a shorter period of production. If one wants to resort to methods of production with which the quantity of output is higher per unit of input expended, one must lengthen the period of production. For the processes with which output is smaller per unit of input have been chosen only on account of the shorter period of production they require. But on the other hand, not every employment chosen for the utilization of capital goods accumulated by means of additional saving requires a process of production in which the period of production from today on to the maturing of the product is longer than with all processes already adopted previously. It may be that people, having satisfied their more urgent needs, now want goods that can be produced within a comparatively short period. The reason why these goods have not been produced previously was not that the period of production required for them alone was deemed too long, but that there was a more urgent employment open for the factors required.

If one chooses to assert that every increase in the supply of capital goods available results in a lengthening of the period of production and of waiting time, one reasons in the following way: If a are the goods already previously produced and b the goods produced in the new processes started with the aid of the increase in capital goods, it is obvious that people had to wait longer for a and b than they had to wait for a alone. In order to produce a and b, it was not only necessary to acquire the capital goods required for the production of a but also those required for the production of b. If one had expended for an increase of immediate consumption the means of sustenance saved to make workers available for the production of b, one would have attained the satisfaction of some wants sooner.

The treatment of the capital problem customary with those economists who are opposed to the so-called "Austrian" view assumes that the technique employed in production is unalterably determined by the given state of technological knowledge. The "Austrian" economists, on the other hand, show that it is the supply of capital goods available at each moment that determines which of the many known technological methods of production will be employed.1 The correctness of the "Austrian" point of view can easily be demonstrated by a scrutiny of the problem of scarcity of capital.

Let us look at the condition of a country suffering from scarcity of capital. Take, for instance, the state of affairs in Rumania about 1860. What was lacking was certainly not technological knowledge. There was no secrecy concerning the technological methods practiced by the advanced nations of the West. They were described in innumerable books and taught at many schools. The elite of Rumanian youth had received full information about them at the technological universities of Austria, Switzerland, and France. Hundreds of foreign experts were ready to apply their knowledge and skill in Rumania. What was wanting was the capital goods needed for a transformation of the backward Rumanian apparatus of production, transportation, and communication according to Western patterns. If the aid granted to the Rumanians on the part of the advanced foreign nations had consisted merely in providing them with technological knowledge, they would have had to realize that it would take a very long time until they caught up with the West. The first thing for them to have done would have been to save in order to make workers and material factors of production available for the performance of more time-consuming processes. Only then could they successively produce the tools required for the construction of those plants that in the further course were to produce the equipment needed for the construction and operation of modern plants, farms, mines, railroads, telegraph lines, and buildings. Scores of decades would have passed until they had made up for the time lost. There would not have been any means of accelerating this process than by restricting current consumption as far as physiologically possible for the intermediary period.

However, things developed in a different way. The capitalist West lent to the backward countries the capital goods needed for an instantaneous transformation of a great part of their methods of production. It saved them time and made it possible for them to multiply very soon the productivity of their labor. The effect for the Rumanians was that they could immediately enjoy the advantages derived from the modern technological procedures. It was as if they had started at a much earlier date to save and to accumulate capital goods.

Shortage of capital means that one is further away from the attainment of a goal sought than if one had started to aim at it at an earlier date. Because one neglected to do this in the past, the intermediary products are wanting, although the nature-given factors from which they are to be produced are available. Capital shortage is dearth of time. It is the effect of the fact that one was late in beginning the march toward the aim concerned. It is impossible to describe the advantages derived from capital goods available and the disadvantages resulting from the paucity of capital goods without resorting to the time element of sooner and later.2

To have capital goods at one's disposal is tantamount to being nearer to a goal aimed at. An increment in capital goods available makes it possible to attain temporally remoter ends without being forced to restrict consumption. A loss in capital goods, on the other hand, makes it necessary either to abstain from striving after certain goals that one could aim at before or to restrict consumption. To have capital goods means, other things being equal, a temporal gain.3 As against those who lack capital goods, the capitalist, under the given state of technological knowledge, is in a position to reach a definite goal sooner without restricting consumption and without increasing the input of labor and nature-given material factors of production. His head start is in time. A rival endowed with a smaller supply of capital goods can catch up only by restricting his consumption.

The start that the peoples of the West have gained over the other peoples consists in the fact that they have long since created the political and institutional conditions required for a smooth and by and large uninterrupted progress of the process of larger-scale saving, capital accumulation, and investment. Thus, by the middle of the 19th century, they had already attained a state of well-being that far surpassed that of poorer races and nations less successful in substituting the ideas of acquisitive capitalism for those of predatory militarism. Left alone and unaided by foreign capital, these backward peoples would have needed much more time to improve their methods of production, transportation, and communication.

It is impossible to understand the course of world affairs and the development of the relations between West and East in the last centuries if one does not comprehend the importance of this large-scale transfer of capital. The West has given to the East not only technological and therapeutical knowledge, but also the capital goods needed for an immediate practical application of this knowledge. These nations of Eastern Europe, Asia, and Africa have been able, thanks to the foreign capital imported, to reap the fruits of modern industry at an earlier date. They were to some extent relieved from the necessity of restricting their consumption in order to accumulate a sufficient stock of capital goods. This was the true nature of the alleged exploitation of the backward nations on the part of Western capitalism about which their nationalists and the Marxians lament. It was a fecundation of the economically backward nations by the wealth of the more advanced nations.

The benefits derived were mutual. What impelled the capitalists of the West to embark upon foreign investment was the demand of the consumers. Consumers asked for goods that could not be produced at all at home and for a cheapening of goods that could be produced at home only with rising costs. If the consumers of the capitalist West had behaved in a different way, or if the institutional obstacles to capital export had proved insurmountable, no capital export would have occurred. There would have been more longitudinal expansion of domestic production instead of lateral expansion abroad.

[This article is excerpted from chapter 18 of Human Action: The Scholar's Edition and is read by Jeff Riggenbach.]

  • 1. Cf. F.A. Hayek, The Pure Theory of Capital (London, 1941), p. 48. It is awkward indeed to attach to certain lines of thought national labels. As Hayek remarks pertinently (p. 47, n. 1), the classical English economists since Ricardo, and particularly J.S. Mill (the latter probably partly under the influence of J. Rae) were in some regards more "Austrian" than their recent Anglo-Saxon successors.
  • 2. Cf. W.S. Jevons, The Theory of Political Economy (4th ed. London, 1924), pp. 224–229.
  • 3. This implies also equality in the quantity of nature-given factors available.
     
Categories: Current Affairs

Why Friedman Was Wrong About Booms and Busts

Tue, 27/07/2021 - 17:00

In his attempt at explaining what business cycles are all about, Milton Friedman held that the economy’s output is bumping along the ceiling of maximum feasible output except that every now and then it is plucked down by a cyclical contraction. He attributed this contraction to various shocks.

He was of the view that economic contractions involve declines in the economy’s output below its full potential ceiling or maximum level.

Friedman held that similarly to a guitar string the harder the economy is plucked down the stronger it should come back.

In the Friedman’s plucking model, a large contraction in output follows by a large business expansion. A mild contraction, by a mild expansion.1

Following the plucking model Friedman had also concluded that there appears to be no systematic connection between the magnitude of an economic expansion and the extent of the following economic contraction. 

Various studies seem to have vindicated Friedman’s plucking model. On November 4, 2019, a Bloomberg article by Noah Smith titled “Milton Friedman Got Another Big Idea Right” referred to a study by Tara Sinclair that employed advanced mathematical techniques that appeared to confirm Friedman’s hypothesis that in the US large recessions are followed by strong recoveries – but not the other way around. According to Bloomberg, some other researchers obtained similar results for other countries.

On this way of thinking, views such as those presented by Ludwig von Mises and Murray Rothbard that the extent of an economic bust is related to the magnitude of the previous boom is false.

The main problem with the Friedman’s framework of thinking, however, is that it lacks the fundamental definition of what boom-bust cycles are all about. Note that a fundamental definition identifies the essence of the subject of analysis.

Boom-Bust Cycles and the Central Bank

To establish the fundamental definition of the boom-bust cycle phenomenon we must trace it back as to how this phenomenon had emerged.

According to Murray Rothbard,

Before the Industrial Revolution in approximately the late 18th century, there were no regularly recurring booms and depressions. There would be a sudden economic crisis whenever some king made war or confiscated the property of his subjects; but there was no sign of the peculiarly modern phenomena of general and fairly regular swings in business fortunes, of expansions and contractions.2

The boom-bust cycle phenomena is somehow linked to the modern world. However, what is the link? The source of the recurrent boom-bust cycle turns out to be the alleged "protector" of the economy — the central bank itself.

The central bank's ongoing policies that are aimed at fixing the unintended consequences that arise from its earlier attempts at stabilizing the so-called economy are key factors behind the recurrent boom-bust cycles.

Fed policy makers regard themselves as being the responsible entity authorized to bring the so-called economy onto the path of stable economic growth and stable prices. (Policy makers decide what the “right” stable growth path should be).

Consequently, any deviation from the stable growth path sets the Fed’s response in terms of either a tighter or a looser stance.

These responses to the effects of previous policies on economic data give rise to the fluctuations in the growth rate of the money supply out of “thin air” and in turn to the recurrent boom-bust cycles. (Note that money out of “thin air” is the result of the central bank loose monetary policy).

Observe that loose central bank monetary policy, which results in an expansion of money supply out of “thin air” sets in motion an exchange of nothing for something, which amounts to a diversion of wealth from wealth-generating activities to non-wealth-generating activities.

In the process, this diversion weakens wealth generators, and this in turn weakens their ability to grow the overall pool of wealth.

The emergence of activities on the back of a loose monetary policy is what an economic "boom" is all about. Observe that these activities cannot stand on their “own feet”. These activities are also labelled as bubble activities.

Also note that once the central bank's pace of monetary expansion strengthens the pace of the diversion of wealth towards bubble activities also strengthens.

Once however, the central bank tightens its monetary stance, this slows down the diversion of wealth from wealth producers to bubble activities.

Bubble activities that sprang up on the back of the previous loose monetary policy are now getting less support; they fall into trouble — an economic bust emerges.

Strength of the Boom Determines the Strength of the Slump

Both Mises and Rothbard had shown that the economic boom dictates the strength of the following economic slump. Note that it is not possible to have an economic bust without the previous boom.

Observe that during the economic slump the liquidation of bubble activities that emerged during the previous boom is taking place. Note again that bubble activities emerged on the back of increases in the money supply out of “thin air”.

Hence, the more of such activities that were generated during the economic boom, the greater the cleansing of such activities is required in order to revitalize the economy – consequently the greater the economic recession is going to be.

So how then we are to respond to various sophisticated studies, which support Friedman’s plucking theory, that large recessions are following by stronger economic booms – but not the other way around?

Now, according to Friedman, definitions that are linked to the facts of reality are not the key for the acceptance of a model. What is required is the model’s ability to make accurate predictions.

Friedman wrote that,

The ultimate goal of a positive science is the development of a theory or hypothesis that yields valid and meaningful (i.e., not truistic) predictions about phenomena not yet observed…. The relevant question to ask about the assumptions of a theory is not whether they are descriptively realistic, for they never are, but whether they are sufficiently good approximation for the purpose in hand. And this question can be answered only by seeing whether the theory works, which means whether it yields sufficiently accurate predictions.3

The reason for Friedman’s reliance on mathematical and statistical methods is to validate his model by means of these methods.

In short, Friedman’s method relies on “curve fitting” to prove his hypothesis that was derived from a guitar string analogy.

Note that without ascertaining the essence of the subject of investigation one could come up with all sorts of models, which could be “validated” by means of statistical and mathematical methods. This however, proves nothing. (By means of data torturing one can prove anything).

Observe again without ascertaining the essence of boom-bust cycles any so-called validation is of a questionable nature. Again, for Friedman anything goes as long as the model can make accurate predictions.

Given that Friedman did not define the essence of boom-bust cycles, it is questionable that his framework can establish the causes behind these cycles.

Consequently, Friedman’s conclusion that strong recessions precede strong booms and not the other way around is questionable.

Conclusions

Various studies that employed advance mathematical techniques have supposedly confirmed Milton Friedman’s hypothesis that strong economic recessions follow by strong economic booms. However, strong economic booms do not precede strong economic busts.

On this way of thinking, views such as those presented by Ludwig von Mises and Murray Rothbard that the extent of an economic bust is related to the magnitude of the previous boom is false.

Given that Friedman did not define the essence of boom-bust cycle phenomena his framework does not explain the causes of boom-bust cycles. The Friedman’s framework is about a “curve fitting” exercise in order to validate his hypothesis that was designed from a guitar string analogy. Consequently, Friedman’s conclusion that strong recessions precede strong booms and not the other way around is questionable.

We have shown that the economic boom is about the formation of bubble activities on account of loose monetary stance of the central bank. Whilst the economic bust, is the demise of bubble activities in response to the tighter monetary policies of the central bank. On this way of thinking the longer the boom is, the more severe the bust is going to be, since a larger number of bubble activities would have to be liquidated.

The central bank's ongoing policies that are aimed at fixing the unintended consequences that arise from its earlier attempts at stabilizing the so-called economy are key factors behind the recurrent boom-bust cycles.

  • 1. FRIEDMAN, M. (1964): “Monetary Studies of the National Bureau,” at (1993): “The "Plucking Model" of Business Fluctuations Revisited,” Economic Inquiry, 31, 171–177.
  • 2. Rothbard The Austrian Theory of the Trade Cycle and other essays, The Mises Institute,1983.
  • 3. Milton Friedman, Essays in Positive Economics, Chicago: University of Chicago Press, 1953.
Categories: Current Affairs

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