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A Strong Euro Is A Headache for the ECB

Sat, 24/02/2018 - 17:00
By: Daniel Lacalle
euro_2.PNG

In recent weeks, the euro has been at its highest level, relative to the US dollar, that we've seen in the last three years. This is a movement that surprises when the European Central Bank is carrying out the most aggressive monetary expansion in the world after the Bank of Japan.

A strong euro is not a problem for any European citizen. European households keep a large part of their financial wealth in deposits. Additionally, a strong euro curbs inflation in imported products, mainly energy and food, generating a significant wealth effect.

If we look at the commodity index between January 6, 2017 and January 12, 2018, we can see that it has fallen by more than 12% in euros, while it is slightly up in US dollars. For the average European citizen, a stable or strong euro is a blessing, and one of the essential factors for the recovery of household disposable income.

A strong euro has not been a problem either for exports. Spain, for example, has increased by 53% the weight of exports in GDP in the last five years and Eurozone exports in 2017 marked a record, growing more than the average of global trade and with a record trade surplus, which is one of the decisive factors explaining the euro strength.

But a strong euro is bad news for central planners, indebted states and obsolete or low value-added sectors that need the hidden subsidy of devaluation. A strong euro destroys the ECB expectations of inflation, the increase in estimated profits of the low productivity sectors and puts in danger the debt reduction of inefficient states, which have been unable to reduce their deficits quickly enough. The ECB´s monetary policy, which becomes an assault on the savers and efficient sectors to subsidize the inefficient and indebted, does not work in a globalized world with open economies. And, ironically, that is good for European families, who see their wealth in deposits strengthen and stable disposable income because inflation is low.

Although the European Central Bank maintains ultra-low rates and monthly repurchases of 30,000 million euros, they are unable to devalue as they would like.

The European central planner must scratch its head thinking why. The US economy accelerates its growth, inflation expectations rise, the trade deficit is at decade-lows, the Federal Reserve is raising interest rates … And the US dollar does not strengthen. The main explanation lies in the trade surplus of China and the Eurozone. Central banks should know it is difficult to have rising trade profits and weakening currencies.

A weak dollar while the US economy grows as it is, means an opportunity for the Federal Reserve. It can raise rates and strengthen options ahead of a global slowdown without worrying about its currency. Will Powell use this opportunity?

The problem for the European Union is that if the ECB keeps trying to create inflation by decree it does not get it, and also creates greater imbalances. If it tries to contain the euro, it puts Europe in even worse risks, that may generate greater problems in the medium term. And if it the ECB tries to contain the increasing risks, the euro will revalue. This means goodbye to the ECB inflation expectations.

My estimates suggest that twelve consecutive months with the euro/US dollar above 1.21 would bring inflation expectations in the Eurozone to 1.3% compared to the 2% target, bring the Eurostoxx 100 earnings growth estimates from +8%, go to 0%, as low added-value exporters would suffer lower sales and banks see weaker margins due to low inflation and low rates.

Another factor is China, which tries to strengthen its global position by selling dollars. But China has increased its debt in 2017 by more than the UK’s GDP, and its trade surplus suffers from a weak US dollar and an artificially high yuan.

All this proves that currency wars are useless in open economies. Central planners and their batteries of Keynesian analysts are surprised that economies do not work as their Excel spreadsheets assume. Expected correlations and causations fail. But they do not admit their own mistakes. They do not attribute it to the fact that their correlations and estimates are obsolete and wrong, but that “not enough was done” and “it would have been worse” ( read Paul Romer ) and their religious faith in interventionism remains untouchable.

The ECB should be concerned about what it can really do, which is to monitor the risks of excess debt, bubbles, and disconnection between bond yields and reality. It should worry, for example, that the Greek two-year bond trades at a lower yield than the US 2-year bond, which is a monstrosity.

Do not worry. If it explodes, they will tell us that it was due to lack of regulation.



Categories: Current Affairs

We Need Bastiat's The Law More than Ever

Sat, 24/02/2018 - 12:00
By: Frank Hollenbeck
thelaw.PNG

High school students in the United States are usually required to take a course in government where they learn about the structure of government but rarely discover the appropriate role of government or the justifiable limits for the use of force in our society. If they did, one of their required readings would be Frédéric Bastiat’s essay, The Law, a seminal mid-nineteenth century work that describes eternal truths about life and how we pursue justice. These truths are just as valid today as they were then.

Bastiat states that individuals are born with natural rights of life, liberty, and property. From this notion, the only proper function of the use of force or the law is the collective organization of the natural right to self-defense of these rights:

Every individual has the right to use force for lawful self-defense. It is for this reason that the collective force — which is only the organized combination of the individual forces — may lawfully be used for the same purpose; and it cannot be used legitimately for any other purpose

He then defines any illegitimate use of force or of the law as legal plunder. This is an all-encompassing term which includes any unjustified violation of the life, liberty or property of others. Many examples abound today with regulations on labor (e.g. minimum wage laws), products (e.g. subsidies and tariffs), health care, education, or even the use of marijuana or any other drugs.

Legal plunder has two primary motivations:

  1. The first is stupid greed. For example, you would never think of robbing your neighbor, but are complacent if the government uses legal plunder to rob him on your behalf.
  2. The second is misplaced philanthropy. Many socialists fall into this category. For example, they constantly talk about fraternity, but not fraternity that is voluntary. They support a type of fraternity that is forced on everyone.  

Because legal plunder is so pervasive in society today, we often fail to distinguish the difference between justice and injustice. Just because something is legal, we assume it must be just, which is simply not true.

In the United States, for example, the Democrats will shortly spend billions of U.S. dollars to try to take control of Congress in the 2018 Midterm elections and will spend billions more on the next presidential election in 2020. The Republicans will do the same. But why spend so much time and energy trying to win elections? The answer is simple: each group is trying to protect itself from legal plunder. Or, are actively participating in the plundering.

But, as Bastiat explains, the purpose or law ought to be to protect people from this plunder:

It is not true that the function of law is to regulate our consciences, our ideas, our wills, our education, our opinions, our work, our trade, our talents, or our pleasures. The function of law is to protect the free exercise of these rights, and to prevent any person from interfering with the free exercise of these same rights by any other person.

When viewed properly, the law should be viewed as a negation; for those who don't violate the life, liberty, or property of others, legal and government institutions should be invisible. In this situation, it would be possible to be somewhat indifferent as to who is elected president.

When the law is properly defined, there is no more sense to blaming the government for one's misfortunes or crediting the government for one's successes.  There would be greater harmony and less reason for political revolts since the government’s jurisprudence would be well defined and limited. We would not see, as in France today, interest groups from different sectors of the economy constantly going on strike, paralyzing the country, and often demanding concessions from the government that are difficult or impossible to meet. Bastiat continues:

if you attempt to make the law religious, fraternal, equalizing, philanthropic, industrial, literary, or artistic — you will then be lost in an uncharted territory, in vagueness and uncertainty, in a forced utopia or, even worse, in a multitude of utopias, each striving to seize the law and impose it upon you. This is true because fraternity and philanthropy, unlike justice, do not have precise limits. Once started, where will you stop? And where will the law stop itself?

More important than left or right is the concept of liberty. The solution to the problem of human relationships is freedom, and it thrives most when the role of government is limited, the use of force is constrained, and the law is confined to the administration of universal justice. Or more precisely, the law is best when exclusively used as a roadblock to injustice.

Today, a person in the U.S. will either watch CNN or Fox News, but will probably never watch both. On Facebook, if a friend disagrees with you, you just unfriend him so that you are left with a group of people who hold similar opinions. We no longer have political discourse at the dinner table because of often opposite viewpoints. Everyone tries to avoid disharmony. This polarization can only ultimately lead to a form of civil war, very different, though, from the one fought over 160 years ago. We must recognize that we have a ticking social time bomb in our midst, and we must begin a serious discussion on the appropriate role of government or the just limits to the use of force by government. A good place to start would be to study Bastiat’s eternal truths found in The Law.



Categories: Current Affairs

Ryan McMaken on Privatized Approaches to Gun Violence

Fri, 23/02/2018 - 22:00
By: Ryan McMaken, Jeff Deist
Mises Weekends with Jeff Deist

The gun control debate is nothing more than a smokescreen: another divisive and emotional issue in a country obsessed with politicizing every human ill, all premised on the wildly irrational idea that we can get rid of 300 million firearms. But there is a market for safe schools and safe public spaces, a market security entrepreneurs could fill if government got out of the way. Mises.org editor Ryan McMaken joins Jeff to discuss private solutions to gun violence, the kind of solutions only available to private property owners with skin in the game. It's time to apply market incentives to school security.

Read more on this topic here, here, and here



Categories: Current Affairs

This Bishop Hates Capitalism so Much, He's Praising the Anti-Christian Chinese Regime

Fri, 23/02/2018 - 17:45
By: Kai Weiss
1280px-Sanchezsorondowikipedia.jpg

A re-occurring phenomenon surrounding socialism is that whenever a new project is being started, Westerners will visit the places and – supposedly at least – find paradise on earth. Socialism works in these countries, they always proclaim. It was the case in the 1920s when the Soviet Union started its seven-decade journey of despotism, it was true in Cuba, Maoist China, today’s Venezuela (all of it beautifully chronicled by the Institute of Economic Affairs’ Kristian Niemietz) – it was even true in North Korea.

So it shouldn’t be too shocking — but rather just another frustrating example of someone who ignores the impossibility of this system — when one consider the comments made by Marcelo Sánchez Sorondo two weeks ago. The big difference: Sarondo is a bishop. Or to be more precise, he's the chancellor of the Pontifical Academy of Social Sciences. The Catholic Church, throughout the misery communism brought in the twentieth century, stood tall in many of the countries which underwent these sick experiments, and was responsible for at least some of the tiny amount of hope remained in many Eastern Bloc states.

Nowadays, we have Bishop Sánchez Sorondo who praises the Communist Party-led China, saying that “China is the best implementer of Catholic social doctrine.” How the Chinese example can be seen as the best example of such Catholic social doctrines like human dignity, subsidiarity (i.e. decentralization of political power to the lowest level), or private property, all of it being developed over centuries of teaching (and profoundly written down for example by Pope Leo XIII in his Rerum Novarum), is a good question.

But hey, at least China is defending the Paris Climate Accord! “In that, it is assuming a moral leadership that others have abandoned,” the bishop said. Overall, as the Catholic Herald quotes him, the Communist state can be seen as nothing short of “’extraordinary,’ saying: ‘You do not have shantytowns, you do not have drugs, young people do not take drugs.’ Instead, there is a ‘positive national conscience.’”

Now, it is indeed true that Christianity is on the rise in China, and could overtake membership in the Communist Party soon, as this graph from the Council on Foreign Relations shows:

However, this is happening not because of the Chinese state, but despite it: Christian music, like Handel’s Messiah, is forbidden to be played. Chinese authorities have started to crack down on Christian communities in recent months, confiscating bibles, and arresting religious leaders. Just one month ago, the government blew up – yes, blew up – a Christian megachurch. The Chinese state is some areas has barred anyone under 18 from attending religious services. As The Independent wrote: “the surging popularity of non-state-approved churches has raised the ire of authorities, wary of any threats to the officially atheist Communist Party's rigid political and social control.” All of that not even mentioning the cruelties of forced abortion.

Of course, persecution of practicing believers is nothing new in socialist regimes. This was especially true at the beginning of Maoist China, where under Mao the state abolished all belief systems different than Communism. The Economist writes: “Communist revolutionaries saw these religious traditions as an impediment to progress and a reason why the country remained poor. So they set about destroying the entwined belief system of Confucianism, Daoism and Buddhism, and replaced it with the new trinity of Lenin, Marx and Mao. Only by doing so, they believed, could China be saved.”

The Communist’s dislike of religion was evident from the beginning, if not inherently needed for its own survival, as Ryszard Legutko writes: in The Demon in Democracy:

“Marx’s attitude well reflects the feelings that the socialists and communists have always had about religion: on the one hand, a profound hostility, often accompanied by an almost sadistic longing for a world in which religion would be wiped out without a trace; on the other, a wish that socialism become a genuine form of religion in the sense that it would satisfy needs, dreams, and desires similar to the way in which religion did and which apparently inhered in human nature.”

Only one religion is allowed in a Communist paradise: Communism itself.

Meanwhile, the Church has stood as the biggest barrier between Communists and their inhumane goals. Legutko continues: “The communists felt— quite rightly — that the Church and Christianity were the strongest barriers that protected the nation against the regime and its ideology, and that their power would not be secure until the Christians were totally subdued.”

to be sure, it is true that things could be — and have been — worse. Indeed, since the opening of the markets by Deng Xiaoping, significant improvements have occurred under what was once a Soviet-style regime. But a lot still needs to happen until the Chinese people can be considered free, especially when it comes to personal freedom (where the country ranks number 136 of 159 in the world in the latest Human Freedom Index). Religion could play a crucial play in this. But not through a state, as Bishop Sánchez Sorondo thinks – rather as a belief system pitted against state socialism.



Categories: Current Affairs

Stop Blaming Mexican Violence on American Guns

Fri, 23/02/2018 - 17:15
By: Ryan McMaken
mexico_0.PNG

2017 may have been the worst year for homicide in Mexico since the government began keeping track in the 1990s. 

It's a safe bet that the homicide rate isn't coming anywhere near what it was in the years surrounding the revolution. But it may be the worst rate in several decades. 

German news site DW reports: 

The Interior Ministry said authorities ... put the country's [2017] homicide rate at 20.5 per 100,000 inhabitants.

The highest figure ever recorded in Mexico before last year was in 2011, during the peak of the Mexican government's war on drugs. 

Unfortunately, some observers think the Mexican state is fudging the numbers:

Mexican security analysts Alejandro Hope told AP news agency that the [official] figure is based on the number of murder investigations opened last year, not the number of victims.

Hope added that it also doesn't take into account that a killing may result in more than one victim. He placed the homicide rate closer to 24 per 100,000 inhabitants.

According to the official stats in recent years, the homicide rate in Mexico hit 22.6 per 100,000 in 2011, and then declined after that. If critics are right, and the current rate is near 24 per 100,000, that would be a new peak.1 

By comparison, the homicide rate in the United States was 5.3 per 100,000 in 2016 (the most recent data available) ranging from 1.3 per 100,000 in New Hampshire to 11 per 100,000 in Louisiana. 

Homicide rates vary far more wildly in Mexico, with rates ranging from around 1 per 100,000 in Yucatan state to over 100 per 100,000 in Colima state. 

Why Are Rates So High?

Violent crime may be Mexico's largest problem for its economy, growth, and its standard of living. In recent decades, Mexico has moved beyond single-party political rule. It now has competitive elections in more than name only. It has several metropolitan areas which are — outside of the crime issue — considered good places to do business.  It is increasingly connected to the global economy. The UN ranks it "high" on its Human Development Index. Along with other rapidly modernizing Latin American Countries like Chile, Argentina, Uruguay, and Panama, it would be very wrong to call Mexico a "third world" country. 

So why the persistent violent crime? 

This is one of those issues that has no simple answer. Part of the problem is due to a lack of local control. Some is due to the Drug War — as is the case in the US and other countries. Part is due to demographics

This doesn't stop some commentators, though, from attempting to assign easy explanations to the problem. 

One such recent trend in polemics is found among gun-control advocates who attempt to blame Mexico's crime woes on the availability of small arms in the United States. 

This blame game results in part from the fact that Mexico is not exactly laissez faire when it comes to firearms. As Vox notes: 

Mexico maintains some fairly strict gun laws: All guns must be registered through the federal government, carrying a gun requires a license, sales are legally limited to one store in Mexico City, and carrying licenses can be taken away at the federal government's discretion.

Like much of Latin America, Mexico is a country with strict gun laws, but high homicide rates. 

So how to explain the problem? 

Well, in the case of Mexico, the answer for gun control activists is to blame the United States: "one way for Mexicans to get around their country's strict gun laws is to simply walk across the border." 

The logic proceeds accordingly: The presence of more guns means more homicide. And, although Mexico has strict gun laws, Mexico is unfortunately located close to the United States where guns can be easily purchased. Guns are then introduced into Mexico where they drive a higher homicide rate. 

There are some problems with this logic. Even if we account for all the black-market guns in Mexico, gun totals are still much higher in the US. That is, according to the 2007 Small Arms Survey, it is estimated that there are around 15 million privately-held guns in Mexico, on the high end. Even accounting for an additional increase since 2007, we're looking at a rate of fewer than 20 guns per 100 people in Mexico. In the United States, on the other hand, that total is around 100 guns per 100 people. 

So, if one is going to pin Mexico's violence problem on "more guns," they have to account for why there are more than five times as many guns in the US, with only a small fraction of the homicides. 

Moreover, the often-quoted statistic allegedly showing that as much as 70 percent, or even 90 percent, of guns seized in Mexico come from the US is not true. That statistic is based only on seized guns that are also traced by the ATF. How many of all guns seized in Mexico come from the US? According to Stratfor, "almost 90 percent of the guns seized in Mexico in 2008 were not traced back to the United States." Nor does the Mexican government ask the ATF to trace all guns seized in Mexico. This is because many of those arms can be traced back to the Mexican government itself. 

After all, it's not as if Latin America has no locally produced firearms. The 2012 Small Arms Survey notes: 

Latin America has a long tradition of gun production, with some manufacturers tracing their history back many decades. Brazil has the largest arms industry in the region, followed by Argentina. Firearms are also produced by private or government-owned industries in Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, and Venezuela. While most of the production is intended to equip the military and law enforcement institutions, some of the production is for private use."

The report also refers to "major exporters" of small arms in Argentina, Chile, Mexico, and Brazil. So we know Mexico contains local arms-producing manufacturers to the point that some are "major exporters" who also produce arms for government institutions. And government stockpiles are a source for black markets as well. 

Even worse, the same government institutions that work to keep firearms out of the hands of peaceful private citizens, are often in league with the cartels. As a recent New York Times article noted about local resistance in Michoacan to cartel-sown chaos, "Townspeople formed militias to eject both the cartel ... and the local police, who were seen as complicit."

In other words, there is often no clear line between law enforcement and the cartels themselves. 

Often, official law enforcement simply can't be bothered. Things are even worse when, as  one cartel member put it, "soldiers and cops are ... really on our side."

Thus, it shouldn't exactly be a surprise that many of the guns seized in Mexico are coming from official government sources.

It requires quite a bit of creativity to then take these facts and twist them into a narrative which concludes "too many guns in Texas leads to more Mexican homicide." If Texan guns are fueling homicide in neighboring jurisdictions, why aren't US states close to Texas experiencing similar problems? 

New Mexico, after all, is next to Texas. But New Mexico's homicide rate of 6.7 per 100,000 is a mere fraction of its neighbor to the south — Chihuahua state — where the homicide rate is over 40 per 100,000. Chihuahua is also next to Texas. 

Moreover, increases in gun totals over time in the United States have not shown increases in homicides. In fact, the opposite is true. According to statistics from the Bureau of Alcohol, Tobacco, and Firearms, new guns manufactured in the United States, since 2011, have been more than double what they were throughout most of the past thirty years. Total gun production rapidly increased from 2001 to 2013, yet, homicide rates were cut in half from the 1990s to today. Although homicide rates have trended up in the past two years, they remain near 50-year lows. 

Indeed, some American border towns have persistently low homicide rates, even by American standards. The homicide rate in El Paso, Texas, for example, was a very low 2.7 per 100,000 in 2016. Just across the Rio Grande, the city of Juarez is one of the murder capitals of the world. Moreover, 80 percent of El Paso residents are of Hispanic — primarily Mexican — origin, meaning we can't even resort to a bigoted explanation about how Mexican ethnicity leads to more violence. 

So, why should it be outlandish to conclude that Mexican gun control might be an important factor? After all, on the southern side of the border, guns are reserved for cartels and often-corrupt police officials. Has this situation improved things life for average Mexicans? It's hard to see how they have.



  • 1. Historical figures from the World Bank's data site: https://data.worldbank.org/indicator/VC.IHR.PSRC.P5

Categories: Current Affairs

Mexican Gun Control Ensures Cartels Outgun the Good Guys

Fri, 23/02/2018 - 17:15
By: Ryan McMaken
mexico_0.PNG

2017 may have been the worst year for homicide in Mexico since the government began keeping track in the 1990s. 

It's a safe bet that the homicide rate isn't coming anywhere near what it was in the years surrounding the revolution 100 years ago. But it may be the worst rate in several decades. 

German news site DW reports: 

The Interior Ministry said authorities across Mexico opened 29,168 murder cases, saying that it put the country's homicide rate at 20.5 per 100,000 inhabitants.

The highest figure ever recorded in Mexico before last year was in 2011, during the peak of the Mexican government's war on drugs. That year, authorities recorded 22,409 homicides.

Unfortunately, some observers think the Mexican state is fudging the numbers:

However, experts have cast doubt on the latest figures, saying the homicide rate is likely much higher.

Mexican security analysts Alejandro Hope told AP news agency that the figure is based on the number of murder investigations opened last year, not the number of victims.

Hope added that it also doesn't take into account that a killing may result in more than one victim. He placed the homicide rate closer to 24 per 100,000 inhabitants.

According to the official stats in recent years, the homicide rate in Mexico hit 22.6 per 100,000 in 2011, and then declined after that. If critics are right, and the current rate is near 24 per 100,000, that would be a new peak.1 

By comparison, the homicide rate in the United States was 5.3 per 100,000 in 2016 (the most recent data available) ranging from 1.3 per 100,000 in New Hampshire to 11 per 100,000 in Louisiana. 

Homicide rates vary far more wildly in Mexico, with rates ranging from around 1 per 100,000 in Yucatan state to over 100 per 100,000 in Colima state. 

Why Are Rates So High?

Violent crime may be Mexico's largest problem for its economy, growth, and its standard of living. In recent decades, Mexico has moved beyond single-party political rule. It now has competitive elections in more than name only. It has several metropolitan areas which are — outside of the crime issue — considered good places to do business.  It is increasingly connected to the global economy. The UN ranks it "high" on its Human Development Index. Along with other rapidly modernizing Latin American Countries like Chile, Argentina, Uruguay, and Panama, it would be very wrong to call Mexico a "third world" country. 

So why the persistent violent crime? 

This is one of those issues that has no simple answer. Part of the problem is due to a lack of local control. Some is due to the Drug War — as is the case in the US and other countries. Part is due to demographics

This doesn't stop some commentators, though, from attempting to assign easy explanations to the problem. 

One such recent trend in polemics is found among gun-control advocates who attempt to blame Mexico's crime woes on the availability of small arms in the United States. 

Unlike the United States, though, Mexico has relatively strict gun laws. As Vox notes: 

Mexico is one of the few countries that, like the US, guarantees the right to bear arms in its constitution. Still, Mexico maintains some fairly strict gun laws: All guns must be registered through the federal government, carrying a gun requires a license, sales are legally limited to one store in Mexico City, and carrying licenses can be taken away at the federal government's discretion.

So, like much of Latin America, Mexico is a country with strict gun laws, but high homicide rates. 

So how to explain the problem? 

Well, in the case of Mexico, the answer for gun control activists is to blame the United States: "one way for Mexicans to get around their country's strict gun laws is to simply walk across the border." 

The logic proceeds accordingly: The presence of more guns means more homicide. And, although Mexico has strict gun laws, Mexico is unfortunately located close to the United States where guns can be easily purchased. Guns are then introduced into Mexico where they drive a higher homicide rate. 

There are some problems with this logic. Even if we account for all the black-market guns in Mexico, gun totals are still much higher in the US. That is, according to the 2007 Small Arms Survey, it is estimated that there are around 15 million privately-held guns in Mexico, on the high end. Even accounting for an additional increase since 2007, we're looking at a rate of fewer than 20 guns per 100 people in Mexico. In the United States, on the other hand, that total is around 100 guns per 100 people. 

So, if one is going to pin Mexico's violence problem on "more guns," they have to account for why there are more than five times as many guns in the US, with only a small fraction of the homicides. 

Moreover, the statistics allegedly showing that as much as 70 percent or even 90 percent of guns seized in Mexico come from the US is not true. That statistic is based only on seized guns that are also traced by the ATF. How many of all guns seized in Mexico come from the US? According to Stratfor, "almost 90 percent of the guns seized in Mexico in 2008 were not traced back to the United States." Nor does the Mexican government ask the ATF to trace all guns seized in Mexico. This is because many of those arms can be traced back to the Mexican government itself. 

After all, it's not as if Latin America has no locally produced firearms. The Small Arms Survey notes: 

Latin America has a long tradition of gun production, with some manufacturers tracing their history back many decades. Brazil has the largest arms industry in the region, followed by Argentina. Firearms are also produced by private or government-owned industries in Bolivia, Chile, Colombia, Ecuador, Mexico, Paraguay, Peru, and Venezuela. While most of the production is intended to equip the military and law enforcement institutions, some of the production is for private use. Research shows that, "[w]ith the important exceptions of major exporters led by Argentina, Chile, Mexico, and above all Brazil, [Latin America’s] small arms producers tend to be niche manufacturers, serving captive local markets."

So Mexico contains local arms-producing manufacturers to the point that some are "major exporters" who also produce arms for government institutions. And government stockpiles are a source for black markets as well. 

Even worse, the same government institutions that work to keep firearms out of the hands of peaceful private citizens, are often in league with the cartels. As a recent New York Times article noted about local resistance to cartel-sown chaos, "Townspeople formed militias to eject both the cartel, which effectively controlled much of Michoacán, and the local police, who were seen as complicit."

In other words, there is often no clear line between law enforcement and the cartels themselves. 

Often, official law enforcement simply can't be bothered. Things are even worse when, as  one cartel member put it, "soldiers and cops are ... really on our side."

Thus, it shouldn't exactly be a surprise that many of the guns seized in Mexico are coming from official government sources.

It requires quite a bit of creativity to then take these facts and twist them into a narrative which concludes "too many guns in Texas leads to more Mexican homicide." If Texan guns are fueling homicide in neighboring jurisdictions, why aren't US states close to Texas experiencing similar problems? 

New Mexico, after all, is next to Texas. But New Mexico's homicide rate of 6.7 per 100,000 is a mere fraction of its neighbor to the south — Chihuahua state — where the homicide rate is over 40 per 100,000

Moreover, increases in gun totals over time in the United States have not shown increases in homicides. In fact, the opposite is true. According to statistics from the Bureau of Alcohol, Tobacco, and Firearms, new guns manufactured in the United States, since 2011, have been more than double what they were throughout most of the past thirty years. Total gun production rapidly increased from 2001 to 2013, yet, homicide rates were cut in half from the 1990s to today. Although homicide rates have trended up in the past two years, they remain near 50-year lows. 

Has Gun Control Helped Mexico? 

It's difficult to see how greater gun restrictions have helped Mexico. In practice, the restrictions discourage ownership by peaceful people while ensuring that cartels and official state agencies are the only armed groups. And both groups are often in league with each other. Ordinary people are then caught defenseless in the crossfire. 

Attempts at blaming Mexican violence on American guns ignores the fact that there are several times more guns in the US, but without the Mexico-like homicide rates. 

Indeed, some American border towns have low homicide rates, even by American standards. The homicide rate in El Paso, Texas, for example, was a very low 2.7 per 100,000 in 2016. Just across the Rio Grande, the city of Juarez is one of the murder capitals of the world. Moreover, 80 percent of El Paso residents are of Hispanic — primarily Mexican — origin, meaning we can't even resort to some bigoted conclusion about how Mexican ethnicity leads to more violence. 

Thus, why should it be outlandish to conclude that Mexican gun control might be an important factor? After all, on the southern side of the border, guns are reserved for cartels and often-corrupt police officials. Has this situation increased the quality of life of average Mexicans? It's hard to see how. 



  • 1. Historical figures from the World Bank's data site: https://data.worldbank.org/indicator/VC.IHR.PSRC.P5

Categories: Current Affairs

How Central Banks Stoke Stock Prices

Fri, 23/02/2018 - 12:00
By: Thorsten Polleit
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Reading through Security Analysis, the roadmap for investing first published in 1934 by Benjamin Graham and David L. Dodd, I learned something quite interesting: The basis of stock valuation had changed quite drastically in the period between 1927 and 1929. The stock buying public “departed more and more from the factual approach and technique of security analysis and concerned itself increasingly with the elements of potentiality and prophecy”, write Graham and Dodd.1

What they mean is that in the pre WWI world, stocks were typically valued on the basis of a three-part concept: (i) a decent track record of firms' dividend returns, (ii) a stable and satisfactory earnings record, and (iii) a strong balance sheet, with sufficient backing by tangible assets. The “New-Era” theory of stock valuation reads, summarized in one sentence, as follows: “The value of a common stock depends entirely upon what it will earn in the future.”

Current dividends should only have a slight impact upon a stock’s valuation, and as firms’ asset values did not have an apparent relationship with their earning power, asset values were said to be devoid of importance when it comes to calculating a stock’s “fair price.” A firm’s earnings record was only relevant to the extent that it might indicate what changes in a firm's future earnings were likely to be expected. In other words, the New-Era theory of stock valuation was quite a break compared to the valuation technique employed in the past.

A Sea Change in Pricing Stocks

According to Graham and Dodd, there were two significant causes why such a change in the approach to stock valuation occurred. First, accounting data of a firm's past proved to be increasingly unreliable as a guide for making wise investment decisions. The reason for this was rapid changes in demand structures and product and process technologies. Second, the expectation of future rewards became increasingly attractive to many investors, in fact, "irresistibly alluring."

The New-Era theory of stock valuation, which people followed in the hot phase of the 1927-1929 stock market rally, turned out to suffer from two weaknesses, according to Graham and Dodd. First, it encouraged people to speculate heavily: stock prices were driven by expected future profits, detached from "the facts of the established past." Second, established standards of valuation were thrown overboard. Any prevalent valuation level could easily be interpreted to be the new standard of valuation.

“Fantastic reasoning” fueled the stock market bubble because people did not have to concern themselves with the question of the "fair price" of a stock any longer. With the New-Era theory of valuation, people would buy "good" stocks, regardless of their price, in the hope of having found a get-rich-scheme, given that there was the possibility of the new level of standard valuation in the future being higher than the level of standard valuation seen in the past. We all know how tragic this doctrine turned out to be.

Then, the New-Era theory of valuation developed into a somewhat more elaborate doctrine. In his book The Theory of Investment Value, published in 1937, John Burr Williams, presented the "dividend discount model." It says that the value of a firm's stock – and thus its “fair” price – is equal to the present value of all its future dividends. Williams’ dividend discount model has become the standard valuation formula for stocks. However, it stands in the tradition of the New-Era theory of valuation doctrine.

The dividend discount model caters to speculative frenzies. For instance, it might justify a high price of a firm’s stock even if the firm has not delivered any dividend so far — just by referring to a firm’s earnings power that is hopefully going to unfold in the future. At the same time, however, the dividend discount model clearly rests on a sound economic idea. It epitomizes a category of human action, namely time preference: One US dollar today is — and logically so — valued more than a buck to be received in one year's time.

Assume an investor calculates that the “fair” stock price based on the dividend discount model to be 100 US$. He realizes that the stock trades in the market at 80 US$. In this case, the dividend discount model would recommend buying the stock. If, however, the “fair” stock price turns out to be, say, 60 US$, the investor is advised to refrain from buying the stock. Likewise, if the investor finds that the fair value of the stock he bought for 80 US$ has fallen to, say, 60 US$, the recommendation is selling the stock.

In addition to estimating a firm's future dividends, the investor must also come up with an estimate of the interest rate with which future dividends are discounted to the present. If using too high (low) a discount rate, the investor will underestimate (overestimate) a stock's "fair" price. As a result, the investor will miss attractive investment opportunities (or buy an overpriced stock, yielding an unsatisfactory return). As it turns out, the interest rate plays a particularly critical role in this context.

This is because in a world of unfettered paper — or fiat — money, the interest rate is controlled by the central bank. In the US, for instance, the Federal Reserve (Fed) controls short-term interest rates. In doing so, the Fed determines commercial banks’ funding costs and governs, more or less, all other interest rates in the market as well. Against this backdrop, it becomes clear that the Fed exerts an enormous influence on stock prices and valuations if and when investors make use of the dividend discount model.

How the Fed Pushes Up Stock Prices

There are two important ways through which the central bank and its effectively inflationary machinations influence stock prices. First, a lowering of Fed interest rates reduces the discount rate with which investors discount expected future dividends, thereby increasing the “fair” values of stocks. Second, lowering the Fed interest rates brings down firms’ credit costs. This, in turn, lowers firms’ interest expenditures, translating into higher profits, thereby also increasing a firm’s present value and thus its stock price.

While the Fed can pump up stock prices by way of bringing its interest rate down, such a market intervention has, without doubt, seriously negative side effects. This is what the Austrian Business Cycle Theory (ABCT) unmistakably reveals. If the central bank facilitates the increase in the quantity of money through bank credit expansion, the market interest rate will inevitably and artificially be depressed below its "natural level" – the impact of which will not be lost upon consumers, entrepreneurs, banks, and states.

The economy will embark upon a debt-financed “boom.” Artificially lowered interest rates cause consumption and investment to go up and savings to go down. The economy starts living beyond its means and is put on an unsustainable path. The credit-fueled economic expansion can only be upheld if and when the central bank succeeds in pushing interest rate to ever lower levels. Pushing down the interest rate to an unnaturally low level is a policy of preventing the boom from turning into “bust.”

As long as investors remain confident that the central bank will succeed in keeping the economy going by bringing interest rates down over time, monetary policy itself will cause “fair” stock prices to go up. This is all the more a delicate insight because central banks’ policies of artificially lowering the interest rate inevitably lead to malinvestment. Firms are tempted to embark upon investment projects many of which cannot be realized profitably — investments that in the end won’t increase but decrease the value of many firms.

Why a Bust Follows the Boom

For central banks’ inflationary machinations lead to a squandering of scarce resources and cause a great deal social and political problems. As Ludwig von Mises was well aware of the consequences of the boom. He noted: “The boom produces impoverishment. But still more disastrous are its moral ravages. It makes people despondent and dispirited. … In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils which inflation and credit expansion have brought about.”2

As soon as firms realize that their profits fall short of expectations, they cut production. Jobs created in the boom will be lost. The artificial boom collapses. Businesspeople and investors find themselves misled by central banks' downward manipulation of interest rates. Stocks, hitherto traded at seemingly justified high valuation levels, crash. In an attempt to fend off the economic and financial crisis, the central bank brings interest rates to even lower levels, thereby postponing economic adjustment and causing even more malinvestment.

Fiat money and central banking are the reasons why the economies experience the rather unpleasant boom-bust-cycle phenomenon, most notoriously accompanied by wild swings in stock prices and stock valuation levels. It is by no means an exaggeration to say that it is the Fed that makes the stock market a risky place. This becomes pretty obvious when we combine the insights about the history of the doctrines of stock valuation and sound economics in the form of the ABCT.



  • 1. Graham, B., Dodd, D. L. (1940), Security Analysis, p. 349.

  • 2. Mises, L. v. (1998), Human Action, p. 574.

Categories: Current Affairs

Why Revisionist History Is Important

Thu, 22/02/2018 - 17:00
By: Chris Calton
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In the early 1990s, historian Eric Foner and Lynne Cheney were interviewed on the talk show Firing Line about the National History Standards, which was enjoying some national attention at the time regarding what account of history was being included in public school textbooks. During the interview, Cheney accused Foner of being an historical revisionist.

The next day, a reporter from Newsweek called Foner up to ask him about the accusation. “Professor Foner, when did all this revisionism begin?”

Foner answered (according to his account of the phone call): “Probably with Herodotus.” Herodotus, for those who may not be aware, is the ancient Greek historian generally considered to be the father of the discipline of history.

The Newsweek reporter responded, “Do you have his phone number?”

I don’t know if the story is true, since we only have Foner’s account of his personal wit, but I certainly hope it’s true. Whether or not Foner is coloring the story to make it more comical, it does provide a good opportunity for instruction on what it means to be a “revisionist” historian.

In another interview Foner gave, he put the matter more bluntly:

It’s hard for people not versed in history to get the point on why historical interpretation changes. In the general culture “revisionist historian” is a term of abuse. But that is what we do. Revising history is our job. So every historian is a revisionist historian in some sense.

Revisionist history is a label that the Mises Institute does not shy away from, nor should it. Mises scholar and historian Jeff Riggenbach has an entire book devoted to the subject of American revisionist history. Murray Rothbard himself wrote an essay on the importance of revisionist history. But of course, the label of “revisionist” will probably always be levied against Mises scholars as a pejorative, just as Lynne Cheney used it against Eric Foner.

So why is revisionism so important to the discipline? As Mises explains in Theory and History, our knowledge of historical events is not and can never be perfect. Documentary evidence is always necessarily incomplete, and no historian is capable of acquiring all of the potentially relevant evidence that does exist. The best that historians can do is to try to uncover new evidence and reexamine old evidence informed by sound theory so new interpretations can be offered.

And if an historian is doing his or her job, then the natural result will be a revision to history. To contribute to the scholarship on the subject, historians cannot simply restate the narrative that already exists; they must expand, refute, or revise the existing narrative according to new evidence and new analyses. This is exactly what the profession of history entails.

A bad work of history is rarely the product of incorrect or fabricated evidence (though the recent hack job by Nancy McClean demonstrates that such histories can still receive wide praise as long as they support the approved ideological bias). More often, though, as Jeff Riggenbach reminds us, a bad history is one that omits relevant evidence or lacks sound theory with which to properly interpret the evidence and accurately weight its relevance. A good history is that which improves on these human errors through sound revision.

So why does the Mises Institute tout revisionism so much?

Mises offered the historian an additional tool for our scholarly toolbox that few professional historians have taken advantage of: praxeology. History, as Mises tells us and Rothbard reminds us in the previously linked writings, is not an a priori science. But when analyzing the empirical evidence of history – the primary tool of the historian is documentary evidence – the Misesian historian can apply the a priori knowledge gained from praxeology to the analysis. Armed with proper theory, then, a Misesian historian is able to offer a new interpretation of history that fits both the empirical evidence and the sound theory of human action.

Equipped with the theoretical insights offered by Mises, Murray Rothbard was able to offer a revision to the history of the Great Depression that was compelling enough that acclaimed historian Paul Johnson wrote the forward to the later edition. Rothbard revised the history in a way that made an important contribution to our understanding of these events.

America’s Great Depression is only one of Rothbard’s great historical revisions, of course. Another great Misesian scholar, Robert Higgs, applied similar insights to revise our understanding of the relationship between the Great Depression and World War II. The examples could continue almost ad infinitum, but I list these two because they served as among of the most important revisions to my own personal understanding of the way Misesian insights can improve our understanding of history.

The label of “revisionist history,” then, should be neither a pejorative nor a compliment; it should be a redundancy. History that offers no revision is not history at all – it is merely regurgitation of another person’s contributions (for pedagogical purposes, this can have its own value, if somebody is able to take complex ideas and make them available to a wider audience, of course). But to call somebody a revisionist historian, if the claim is true, is to merely call them an “historian” at all.

It is important to keep in mind that revisionism is no more a compliment than it is an insult because it takes more than “revision” to make a good historian. Tom Woods makes this clear in his introduction to 33 Questions About American History You’re Not Supposed to Ask.  He tells the famous story of H.L. Mencken’s bathtub hoax, in which Mencken intentionally published a fake history of the bathtub in 1917. Mencken was – as always – being funny, but he was surprised to find that his story was enthusiastically received, and he was even letters by people offering corroborating “evidence” to his fake history!

For many years, Mencken’s fake history of the bathtub “revised” the history of the bathtub – a consequence that Mencken himself did not anticipate. When this historical narrative was corrected, the correction was also a revision – a revision of the history that Mencken fabricated as a joke. For history to be good history, it has to be more than merely “revisionist;” it must also be honest and accurate.

The Mises Institute proudly embraces the revisionist history of its scholars, but it does this because the scholars recognize that there is more that can be done to improve our understanding of accurate history by applying the lamentably neglected insights of Ludwig von Mises to the field of history. As long as mainstream history neglects sound economic theory – or more specifically, Austrian economic theory – there will be history in need of corrective revision.

 



Categories: Current Affairs

Do Public Unions Make Police More Dangerous?

Thu, 22/02/2018 - 12:00
By: Tate Fegley
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Of all the factors that contribute to police brutality and misconduct, one that has been relatively neglected but has received a growing amount of attention is police unions. Their influence became harder to ignore after all of the anecdotes of police unions making it more difficult to investigate and discipline misconduct.

Notable examples include Pittsburgh officer Paul Abel, who, after being sucker-punched through his car window while driving under the influence, took off in pursuit of whom he thought had punched him, pistol-whipped him and accidentally shot him in the hand while doing so. He was fired but later reinstated through arbitration as allowed by his union contract. Oakland officer Hector Jimenez shot and killed two unarmed men on separate occasions, one of them in the back. Even though Oakland paid a $650,000 settlement and Jimenez was fired, he was reinstated by an arbitrator, who also decided he should be given back pay. The Baltimore officers involved in the killing of Freddie Gray, according to Maryland’s Law Enforcement Officer Bill of Rights which unions successfully lobbied for, could not be interrogated in the five business days after the death occurred. Obviously, this is very different from how any non-police officer is treated in the course of a homicide investigation.

While these stories may be anecdotal, more systematic research is supporting the idea that police unions contribute to greater amounts of officer misconduct. Earlier this month, Dhammika Dharmapala, Richard McAdams, and John Rappaport of the University of Chicago Law School provided an early draft of their research suggesting that collective bargaining among police agencies is associated with increases in the number of citizen complaints.

They exploited a legal change in Florida that provided a natural quasi-experiment to measure the effect that allowing collective bargaining among policing agencies has on complaints against the police, among other things. Prior to 2003, sheriff’s deputies (but not municipal police officers) in Florida were prohibited from engaging in collective bargaining, as they were considered appointees rather than employees. This changed with Coastal Florida Police Benevolent Association v. Williams, where the court decided that sheriff’s deputies do have the right to engage in collective bargaining, any prior statute or legal decision notwithstanding. Thus, Dharmapala et al. had a treatment group (sheriff’s offices) that was affected by this legal change to compare with a control group (police departments) that was not affected.

The Williams decision led to substantial unionization among sheriff’s offices within three years, after which it stabilized. Using a difference-in-difference estimation lagged for three years and controlling for agency and year fixed effects, as well as an extensive set of other controls, Dharmapala et al. found that collective bargaining rights led the typical sheriff’s office to have a 27% increase in the number of complaints received.

The magnitude of this result is notable, given that Florida has a Law Enforcement Officer’s Bill of Rights (LEOBOR), which already provided substantial protections to sheriff’s deputies, and Florida is a right-to-work state, thus requiring unions to rely on voluntary dues from members. Florida’s LEOBOR provides officers and sheriff’s deputies a number of protections, including a 180-day statute of limitations on internal affairs investigations, a requirement that officers be provided all of the evidence against them prior to an interrogation, delays such interrogations until all other witnesses have been interviewed, limits the number of interrogators to one, prohibits that interrogator from using “offensive language” or threats of discipline or promise of reward, and prohibits civilian participation on complaint review boards. With such privileges, how can collective bargaining have such a large effect on misconduct?

Dharmapala et al. suggest that a possible causal mechanism is that some of Florida’s sheriff’s offices’ collective bargaining agreements go beyond Florida’s LEOBOR by providing sheriff’s deputies the ability to appeal disciplinary action to an arbitrator, thus decreasing management’s ability to discipline officers. As well, some collective bargaining agreements require that disciplinary records be expunged after a certain amount of time. This can be crucial, as arbitrators consider an officer’s work history when making their decisions on whether to uphold or overturn disciplinary actions.

Given the anecdotal evidence we have seen regarding the ability of arbitrators to allow police officers with demonstrably questionable decision-making ability to keep their jobs, perhaps it should not be surprising that they found collective bargaining agreements to have such a large effect. Those hoping to reform policing ought to keep this in mind. 



Categories: Current Affairs

Guns and Schools: Can the Market do Better?

Wed, 21/02/2018 - 20:15
By: Jeff Deist
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There is no epidemic of gun violence in America; quite the opposite in fact. But last week’s shooting at a high school in Florida was a grim and jarring reminder of deep cultural problems lurking just beneath the veneer of our materially comfortable society. Those problems are beyond the scope of libertarianism per se, but again we see that greater liberty will require a renaissance in civil society: nihilism and hopelessness among any segment of the population is far more dangerous than “assault rifles.” The less we are governed internally, the more we invite external governance from the state.1

Millions of guns already exist everywhere in American households, so enacting laws “like Europe” won’t work. Voluntary turnovers of guns to police won’t even scratch the surface, much less entice criminals. Involuntary confiscation is both a political and practical nonstarter.  

There are no top-down political solutions available from Washington. Gun control doesn't actually prevent crime, but it does provide the political class and media with another diversionary bitter cultural debate. Americans are deeply divided on guns, just as they are deeply divided on abortion and climate change and scores of other issues. And why should we expect otherwise, in a far-flung country of 320 million people with wildly diverse geographies, economies, and cultures?

Real federalism, long abandoned by progressives and conservatives alike, is one approach with the potential to reduce political conflicts over guns. Manhattan and Montana might have different perspectives here, and both can manage things without Congress. Contrary to popular belief, the Second Amendment neither “federalized” gun laws nor created a right to private ownership of firearms. It simply enshrined the notion that “the people” need to be armed to defend themselves potentially against the state itself.

We don’t need a constitution to recognize all humans have an innate and pre-existing right to self-defense. To make that right effective (especially for weaker members of society) tools must be employed. Guns are simply those tools, inanimate objects that cannot be imbued with innate qualities of good or evil. The right to own guns flows naturally from self-ownership of our bodies.

The libertarian response to mass shootings, in particular school shootings, is to allow teachers and other personnel to carry weapons on campus. In fact, the broader libertarian program is to have most people armed, or at least potentially armed, to create a safer (not to mention more polite) society. If we cannot snap our fingers and produce crime-free cities and neighborhoods where nobody needs to carry a gun, then at least we allow everyone the ability to dissuade or defend against criminal shooters.

This is all well and good, but ignores the market impulse to outsource services to specialists. This is why neighborhoods hire private security patrols, and why celebrities hire professional bodyguards. Not everyone wants to carry a gun or train themselves in gun proficiency. And there is the issue of scale, where individuals might find themselves arrayed against organized criminal gangs.     

Rather than endlessly debate the fraught political process of crafting illiberal gun control laws, we ought to think about private-market solutions that focus on controlling crime. We should think in terms of market economics, where private property and correct incentives give us what government and laws cannot: a mechanism to determine possible harms and the cost of protecting against or preventing those harms. People want safe neighborhoods and schools, which is just another way to say there is a market for them.

Generally speaking, the US legal system imposes premises liability on property owners whose negligence (or willful conduct) results in someone getting injured on that property. This arose conceptually through common law courts and juries applying general negligence concepts,

We accord different degrees of legal responsibility (“duty”) to landowners based on the identity of the injured party: a trespasser, for example, has less recourse to sue for injury than a business invitee (i.e., a customer). The law considers whether the injured party had a legitimate purpose being there, and in some cases whether they contributed to their injury through their own negligence.

Generally speaking, the duty to make one’s property safe from a particular harm relates to the foreseeability of that harm. Leaving spilled milk in a grocery aisle too long could well subject the owner to paying damages for a shopper who suffers a fall — a fall that was quite predictable and clearly caused by the wet floor. But intentional criminal acts by a third party, much like acts of God, generally absolve the property owner of liability. After all, no shooter ever entered the grocery before, so why must the owner guard against this most unlikely event?

But should a public school district have a higher duty to keep students safe than the grocer for shoppers? Arguably yes, in that society values children’s lives, well-being, and innocence perhaps more than adults. And we force children into school attendance via truancy laws and meddling protective services agencies.

Furthermore, are school shootings now foreseeable even though they remain exceedingly rare? Does the media attention and notoriety given to such shootings change the calculus? At some point, perhaps today, school shootings could become foreseeable in the eyes of a jury.

We can’t necessarily draw conclusions here, but the question is whether the owners of public schools — generally municipal or county school districts — should be immune from lawsuits for school shootings simply because they are political subdivisions of states? Should sovereign immunity apply to them, or should they be forced to consider security measures just as private owners must? After all, it seems clear that a mass shooting at a prestigious private school would result in litigation.

It seems clear that imposing tort liability on school owners and operators, even government owners, would both improve security and provide a ready source of compensation for the families of victims. Private security agencies, which have a market reputation to develop or protect, almost certainly would provide more efficient service than government police — for the simple reason that more crime punishes their bottom line, while it often creates calls for increased police budgets. And private security models like Disneyland benefit from wanting to create a peaceful and happy environment, where security forces have every incentive not to escalate situations or incur liability.

Furthermore, private insurance models could help schools rationally allocate funds relative to the risks involved. Since school shootings are rare, premiums to cover such an event should be constrained. But other lesser types of crime in schools could be insured against as well, helping administrators better understand what they’re up against. And insurance companies would bend over backward to offer advice on avoiding shootings, since they would bear the cost of liability payments.

Admittedly, public schools using taxpayer funds to hire private security and pay insurance premiums muddies the waters. But at least it moves all of the parties involved — school districts, administrators, teachers, security providers, and parents — toward a market-based approach to safer schools. Tort liability, however imperfectly administered by government courts, offers one way to align the interests of parents and school owners in preventing further horrific events.

A rational system of private security and criminal control would focus on market solutions that actually reduce crime generally and provide meaningful compensation to victims. In other words, it would focus prevention and restitution. The marketplace can provide both far better than the state, with its amorphous and broken system of criminal justice and mass incarceration — paid for by the taxpayers it claims to represent as “the people” in criminal cases. 



  • 1. Surprisingly, the late Murray Rothbard did not write as copiously on guns or gun culture as he did on many subjects. In For a New Liberty he attacks gun control both conceptually and empirically, characterizing it as a snobbish impulse for those fortunate enough to live in safe areas and wealthy enough not to worry much about the loss of property (such as losing their wallet in a mugging or having their car stolen). And in Making Economic Sense he decries a Clinton-era proposal to radically increase federal permit fees for gun dealers.

Categories: Current Affairs

Central Bank Musical Chairs

Wed, 21/02/2018 - 20:00
By: Doug French
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If recent stock market volatility is interrupting your sleep, Jim Bianco and CNBC’s Rick Santelli are saying, get used to it.  The total assets of all central banks hit $16.4 trillion plus (an all-time high) and these banks now, collectively, own 33 percent of all the world’s sovereign bonds (someone/something had to buy ‘em).

Santelli’s question to Bianco was, if the aggregate size of the world’s central banks is at an all-time high, and these bank’s have purchased a third of all government paper, will these banks be able to “normalize in size” (shrink) without “going through a lot more stock market anguish?” Bianco’s response was a flat, “no.”  

Reversing trillions of dollars worth of securities purchases will create market turmoil.  And now that price inflation has entered the equation, the ride is bound to be bumpy. So, who should 401k investors be worried about and keeping an eye on? Bianco and Santelli agree, that person is ECB head man Mario Draghi. Santelli believes Draghi may be caught without a chair in this game of monetary musical chairs. By the way, it’s not all about the Fed any more. “All central bank stimulus is fungible,” says Bianco, “it doesn’t matter who does it.”  

The patron saint of central bankers, John Maynard Keynes, wrote in The General Theory,

“For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs — a  pastime in which he is victor who says Snap neither too soon nor too late, who passed the  Old Maid to his neighbour before the game is over, who secures a chair for himself when  the music stops. These games can be played with zest and enjoyment, though all the players know that it is the Old Maid which is circulating, or that when the music stops  some of the players will find themselves unseated.”

Surely central bankers aren’t just speculating with funds created from nowhere? However, the once “lenders of last resort” are now engaging in social policies, boosting the collective wealth effect, while keeping the under-capitalized, over-leveraged, and less than competent operators in business.

While the Fed is loaded with Treasuries and Mortgage-Backs, the Swiss National Bank is “in a very risky position. Some 94 percent of its balance sheet assets lie outside the country. According to SNB data, about 20 percent is invested globally in equities, including $88 billion in U.S. stocks,” wrote Mark Grant for Bloomberg last last year.  

Draghi’s ECB has a taste for even gamier paper. “According to UBS, the ECB holds 26 bonds rated below investment grade, or “junk,” amounting to $21.2 billion in notional debt,” Grant wrote.

Writing in early December, Mr. Grant, a managing director and chief global strategist at the investment bank B. Riley FBR Inc., concluded, “Regardless of the protestations made by the Fed, and the other central banks, the flow of ‘pixie-dust money’ has not relented. I remind you of the Wall Street adage: ‘Act on what they do and not on what they say.’”

The latest volatility reflects the worry that inflation make cause Draghi to stop the presses (not just talk about it), creating a market event.   

Lord Keynes continued in Chapter 12 of General Theory,

“Thus the professional investor is forced to concern himself with the anticipation of  impending changes, in the news or in the atmosphere, of the kind by which experience  shows that the mass psychology of the market is most influenced. This is the inevitable result of investment markets organised with a view to so-called ‘liquidity’. Of the maxims  of orthodox finance none, surely, is more anti-social than the fetish of liquidity, the  doctrine that it is a positive virtue on the part of investment institutions to concentrate their resources upon the holding of ‘liquid’ securities. It forgets that there is no such thing  as liquidity of investment for the community as a whole.”

On the issue of liquidity Evariste Lefeuvre, Chief Economist for Natixis North America and Global Head of Cross Asset Research Expertise in international management, wrote an illuminating piece for Seeking Alpha in 2015. Stepping beyond Murray Rothbard’s “Mystery of Banking” Lefeuvre wrote,

traditional banks engage in credit intermediation between ultimate savers and borrowers. Modern banks engage, as dealer banks, in collateral intermediation: financing bond portfolios with insured money markets instruments. The list of actors involved is quite long: investment banks, brokerage houses, MMMFs, asset back conduits, SIV, hedge funds…

He (again, writing in 2015) concluded,

The longer sovereign yields remain low and the longer the scarcity of safe assets (something very likely given that there is no sign of reduction of the size of the balance sheets of many central banks and, meanwhile, fiscal imbalances are being corrected - see chart below), the most likely is a rise in the percentage of illiquid assets in the portfolios of many investors. Given that the collateral absorption of dealer is dwindling and that repo and MMMFs remain quasi-money claims, the divergence between investors' needs (yield pickup), central bank policy targets (safe asset negative yields) and regulation outcome (asset light and lower security inventories), the next crisis might not be driven by credit and funding scarcity but rather by illiquid assets and collateral freeze.

If you’re tossing and turning; you should be.   



Categories: Current Affairs

The State's Odd Definition of "Consent"

Wed, 21/02/2018 - 17:15
By: Thomas Eckert
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Most people consider consent to be a straightforward concept. Parties voluntarily agreeing beforehand to the actions taking place between them sounds simple enough, right? Unfortunately, life — and more specifically, the state — has a way of overcomplicating situations. For example, last year a woman claimed she was raped by two NYPD detectives after being pulled over and detained while with her friends. Now, given the detectives’ DNA were both identified through a rape kit, the implications seem pretty obvious; except that in court they’re attempting to claim that she consented. Which ultimately leads us to this question: can someone consent in a forced scenario?

Let’s set aside the arbitrary notion that in certain states it’s “legal” for police officers to partake in sexual acts with people in their custody, and break down what we mean by “forced scenario.” No matter their feelings toward the police, most people avoid contact with them in their day-to-day lives. If we do happen to encounter them, it’s usually due to our plans being involuntarily altered — either being involved as the accused or as the victim of a situation that didn’t go as planned. With other scenarios we may not enjoy (a bad date for example), we can simply withdraw our consent and remove ourselves from undesired situations. But with the state’s monopoly on violence, this introduces a problem. How does consent function here?

It’s important to remember that consent is only made valuable through the capacity to withdraw it completely, and only from that recognition are we led to the proper conclusion. For instance, in the earlier example, upon realizing the woman was placed in that situation involuntarily and could not withdraw consent, the answer is obvious that the officers’ claim of consent is nonsensical. When examining it further, we can see that what’s ultimately being deliberated is the overall subjectivity of value.

That’s because all that can be deduced from the encounter is that police had sex with a woman who was not free to leave. The accused claim the encounter was consensual because they offered to let the woman go if she would have sex with them. This is no different, however, than a person being held against his will by an armed criminal in an alley. In such a situation, if I surrender my wallet at knife point, it would be absurd to claim I consented to giving my wallet to the assailant. It is only true if I valued not being stabbed more than I valued the contents of my wallet. And this premise holds true whether the aggressor explicitly tells me he wants the wallet, or implicitly, by accepting it as an alternative form of coercion after I offer it.

Depending on your audience, there is a glaring criticism that will arise at this point. In the example of the woman being held by the police, as opposed to the attacker in an alley, some argue that the woman put herself in this situation by doing something illegal (speeding, trespassing, etc.), and therefore consented to the situation. This criticism is fallacious, however, as it relies on the arbitrary notion of legality vs illegality to enforce an objective principle. What is legal in one place may not be legal elsewhere. Likewise, what is speeding on one road may not be speeding on another. Because we are dealing with public (unowned) property by the state, issues come into play that otherwise wouldn’t in the case of private property.

Today, there are an innumerable amount of laws on the books, many of which are completely nonsensical and carrying no basis other than arbitrary notions of being “bad.” The problem thus arises that claiming an arbitrary act — such as going 35 mph — as legal while saying another is illegal — going 36 mph — on an unowned piece of property, cannot be logically equated to a person consenting to the resulting choice between different means of coercion. Put another way, the claim of waiving one’s self-ownership (consent) due to “deserving” a punishment over arbitrary rules is no more valid than a bum claiming you consented to a choice between surrendering your wallet or being stabbed simply because you trespassed through an alleyway he doesn’t own.

This is because issues regarding violations of rules governing private property can be related a priori to self-ownership, whereas public property cannot. If I own property (a road, house, etc.), and I voluntarily agree with someone to give them access under certain conditions, breaking those rules is a violation of my rights. And, as I’ve laid out previously, this is not the case with public property.

So as we see, the state has a way of muddying the waters on what is otherwise cut and dry issues in an attempt to establish its own legitimacy. Property violations become complicated when “public” property is involved, and consequently consent leads to a grey area when the state’s monopoly on force comes into play. If we hope to remedy these needlessly overcomplicated situations and thereby stop creating victims where none otherwise would exist, we must remove the exceptions given to government regarding rights and authority, and emphasize an objective take on morality and private property.



Categories: Current Affairs

Filibuster in Nicaragua, Part 4: War in Nicaragua

Wed, 21/02/2018 - 15:30
By: Chris Calton
 Season 2

William Walker and his American filibusters find themselves in the middle of an even greater conflict in Latin America as the countries of Costa Rica, Honduras, El Salvador, and Guatemala form an alliance with Walker’s opposition in Nicaragua to defeat him. This episode is Part 4 of 6 in the story of William Walker’s attempt at establishing his own Republic of Nicaragua.



Categories: Current Affairs

Is Money Creation Fueling the Stock Market Surge?

Wed, 21/02/2018 - 12:00
By: Frank Shostak
stocks.PNG

Is it true that changes in money supply are an important driving force behind changes in the stock price indexes?

Intuitively it makes sense to argue that an increase in the growth rate of money supply should strengthen the growth rate in stock prices.

Conversely, a fall in the growth rate of money supply should slow down the growth momentum of stock prices. 

Some economists who follow the footsteps of the post-Keynesian (PK) school of economics have questioned the importance of money in driving stock prices.1 It is held that rises in stock prices provide an incentive to liquidate long-term saving deposits, thereby boosting the money supply.

The received money then employed in buying stocks and other financial assets. According to the PK the trend is reversed when stock prices are falling. Hence, changes in stock prices cause changes in money supply and not the other way around.

The Definition of Money Supply

In today’s monetary system, coins and notes constitute the standard money, known as cash. At any point in time part of the stock of cash is stored, that is, deposited in banks. Once an individual places his money in a bank’s warehouse he is in fact engaging in a claim transaction. In depositing his money, he never relinquishes money with a bank, he continues to have an unlimited claim against it and is entitled to take charge of it at any time. These deposits, labelled demand deposits, are part of money. Thus, if in an economy people hold $10,000 in cash, we would say that the money supply of this economy is $10,000. But, if some individuals have stored $2,000 in demand deposits, the total money supply will remain $10,000: $8,000 cash and $2,000 in demand deposits—that is, $2,000 cash is stored in bank warehouses. Finally, if individuals deposit their entire stock of cash, the total money supply will remain $10,000, all of it in demand deposits.

This must be contrasted with a credit transaction, in which the lender of money relinquishes his claim over the money for the duration of the loan. Credit always involves a creditor’s purchase of a future good in exchange for a present good. As a result, in a credit transaction, money is transferred from a lender to a borrower.

The distinction between a credit and a claim transaction serves as an important means of identifying the amount of money in an economy. Following this approach, one could easily note that, notwithstanding popular practice, money invested with money market mutual funds (MMMF) must be excluded from the money supply definition.

Investment in a money market mutual fund is in fact an investment in various money-market instruments. The quantity of money is not altered as a result of this investment; only the ownership of money has temporarily changed. Including investment in MMMFs in the money definition will only lead to a double-counting thereof.

If Joe invests $1,000 with an MMMF, the overall amount of money in the economy will not change as a result of this transaction. To incorporate the $1,000 invested with the MMMF into the definition of money would therefore amount to double-counting.

The crux in identifying what must be included in the money supply definition is to adhere to the distinction between a claim transaction and a credit transaction. Following this principle, it is questionable whether savings deposits should be part of the money supply.

According to popular thinking, the inclusion of savings deposits into the money supply definition is justified on the grounds that money deposited in saving accounts can always be withdrawn on demand. But the same logic should also be applied to money placed with an MMMF. The nub, however, is that savings deposits do not confer an unlimited claim. The bank could always insist on a waiting period of thirty days during which the deposited money could not be withdrawn.

Savings deposits should therefore be considered credit transactions with depositors relinquishing ownership for at least thirty days. This fact is not altered just because the depositor could withdraw his money on demand. When the bank accommodates this demand, it sells other assets for cash. Buyers of assets part with their cash, which in turn is transferred to the holder of the savings deposit. The same logic is applicable to fixed-term deposits like CDs, which are credit transactions.

Mainstream thinking currently excludes from the money supply government deposits held in banks and the central bank . Consequently, if the government taxes people by one billion dollars, money is transferred from their deposits to the government’s deposit. This is viewed just as if the money supply fell by one billion dollars. In reality, however, the money is now available for government expenditure, meaning that money held in government deposits should be part of the definition of money. Incorporating all the above arguments, the money supply is defined as follows:

Cash+demand deposits with commercial banks and thrift institutions+government deposits with banks and the central bank.

If changes in savings deposits does not alter money supply obviously, changes in various savings deposits i.e. including long term have nothing to do with changes in the stock of money as suggested by the PK. 

Furthermore, contrary to the PK, is it possible that prices of assets in general will increase without a preceding increase in money supply? After all a price of a good is the amount of money per unit of the good. In order then to have a general increase in prices, all other things being equal, there must be an increase first in the money supply.

Given, that the key source of monetary expansion is the central bank monetary policies and the fractional reserve banking we can conclude that it is these that drive the stock prices.



  • 1. See the exposition of post Keynesian thinking by L.Randall Wray Modern Money, Working Paper No.252 September 1998, The Jerome Levy Economics Institute.

Categories: Current Affairs

Mises and His Methods

Tue, 20/02/2018 - 20:00
By: Roger W. Garrison
Mises Statue.jpg

Over the past several years, I have participated in a number of short courses on Austrian economics, and for some I was involved in the planning stages. The one aspect of such planning that stands out in my memory has to do with the issue of methodology.

How should we present the methodological precepts that underlie Austrian theory? There seemed to be three possibilities: We could deal head-on with the methodological issues in the first lecture, in which case we would spend the remainder of the course trying to put methodology behind us in order to deal with the substantive issues; we could postpone discussion of methodology to the very end, in which case we would spend most of the course anticipating the arguments to be presented in that last lecture; or we could simply exclude methodology from our schedule of lectures, in which case every lecture that we did schedule would quickly transform itself into a discussion of the methodological underpinnings. 

I have some concern that my present discussion of Mises and his methods may propel me into the "black hole of methodology." Economists who allow themselves to become totally immersed in methodological issues rarely escape to do substantive work. In an attempt to keep one foot outside of the black hole, I propose to steer clear of the loftier issues of metaphysics, epistemology, and philosophy of science. I will deal instead with the workaday methods used by Mises and by those who have followed his lead. How did Mises go about doing economics? How do his methods compare with those of the modern mainstream? 

The issues have become standard: the appropriateness of mathematical formulations, the relationship between theory and statistical data, and the role of assumptions in economic theorizing. Recent developments in econometric methods and in mathematical modeling techniques allow the contrast between Mises and the more modern practitioners to be sharpened. 

I. Mathematical Economics and the Eclipse of Causality 

Appearing two years before the initial publication of Mises's Human Action (1949) was Paul Samuelson's Foundations of Economic Analysis (1947), the title page adorned with a pronouncement by J. Willard Gibbs: "Mathematics is a Language." Samuelson mastered that language in the course of his training at the University of Chicago and then at Harvard. According to Fischer [1987, p. 234], "Samuelson more than anyone else brought economics from its pre-1930s verbal and diagrammatic mode of analysis to the quantitative mathematical style and methods of reasoning that have dominated for the last three decades." The techniques of the physical sciences are so dominant today that an economist who prefers not to use mathematics in his economic theorizing is held in the same regard as a sculptor who prefers not to use a chisel or a welder who prefers not to use a torch. 

Economists who choose to work within the tradition begun by Menger and firmly established by Mises may be tempted to take issue directly with Willard Gibbs. But there is no justification for insisting upon a narrow conception of language. Mathematics is a language. We can respond to Samuelson in a more telling way with the claim that so too is music. There is no reason for economists to observe a categorical prohibition against either mathematical formulation or musical expression. The relevant question is: What sort of language— music, mathematics, or, say, English — allows economists best to communicate their ideas? Which language serves the economist without imposing constraints of its own upon his subject matter? 

The answer to the question just posed depends, of course, upon what the economist takes his subject matter to be. And in particular the answer turns— both for Mises and for modern mathematical economists on—  whether or not causality in economics is a worthy concern. For Mises causality was the central concern. His methodological individualism has as its goal the establishment of a causal linking of individual actions to observed economic phenomena. The very title of Mises's magnum opus identifies his starting point. Human action is the root cause of all economic phenomena. The task of the economist, in Mises's view, is to draw out the historically relevant implications of the fact that individuals act — that they employ means to achieve ends. Alternatively stated, the economist's task is to devise a logic of action — a praxeology, to use the Misesian term.1

For Mises and the Austrians, cause and effect in economic theory manifest themselves as human action and its consequences. By human action Mises simply meant purposeful behavior; by consequences he included both the intended consequences and the unintended consequences but maintained a sharp distinction between the two categories. Many of his theories, in fact, involved a contrast between the intentions of market participants or policy makers and actual consequences that flow from the market process. 

Systems of equations can be suitably employed to describe the consequences of human action, but such mathematical descriptions are inherently blind to notions of intentionality and causality. In the words of Mises [1966, p. 356], "[The] equations and formulas [of mathematical economics] are limited to the description of states of equilibrium and nonacting." Until recently, mathematical economists saw the eclipse of causality as one of the virtues of the mathematical method. Four decades ago, for instance, George Stigler [1946, p. 181] wrote approvingly that the profession had abandoned the "older concept of cause and effect" in favor of the "concepts of mutual determination" and accused those still concerned with causality with "fail[ing] to understand some of the most essential elements of modern... theory."2

Philosophical insight into the meaning of causality is not at issue here. The point is that some modes of expression make nonsense out of the question of cause and effect. An orange — or other spheroid — placed in a large rounded bowl will come to rest at the very center of the bowl. Gravity, we might be inclined to say, is the "cause" of this result. But suppose that two oranges are placed in the bowl. Which one of the oranges causes the other to be displaced from the center? The question itself is nonsensical. We can describe the loci of possible resting points of the two oranges, however, by manipulating the mathematical expressions representing the sizes and shapes of the oranges and the bowl. The two points of contact, of course, would be mutually determined. 

In economics, it is possible to phrase questions about causality which are equally — but maybe not obviously — nonsensical. Under a variety of circumstances, real wage rates and real interest rates are inversely related to one another. But does a low interest rate cause the wage rate to be high, or does a high wage rate cause the interest rate to be low? The question simply makes no sense; the two rates are analogous to the two resting points of the oranges. 

This particular example of the eclipse of causality is not a frivolous one. The inverse relationship between the wage rate and the interest rate forms the bedrock of Ricardian distribution theory.3 For neo-Ricardians who adopted the mathematical method, the question of which rate was the cause and which the effect gave way to the question of which rate is "exogenous" to the relationship, or predetermined, and which is "endogenous," or determined by the relationship? Those who believed that the interest rate is predetermined (by social convention) became Cambridge capital theorists; those who believed that the wage rate is predetermined (by the requirements for subsistence) became Marxists. Agnosticism about the true locus of exogeneity was also a respectable position — one that provided a half-way house for neo-Ricardians making a conversion in one direction or the other. 

Mathematics can describe the various combinations of wage and interest rates but cannot answer or even make sense of questions about which caused which or about which one is, in reality, determined exogenously. The mathematical economist, however, is content to remain agnostic on the issue of causality; the two rates are mutually determined. The praxeologist, by contrast, seeks to identify the plans and actions of individuals in the marketplace which constitute the ultimate cause of the pattern of wage and interest rates. 

While mathematical economists may not deny that the ultimate cause is to be found in the actions of market participants, they proceed untroubled by the fact that mathematics is inherently silent on the issue of cause and effect. This disadvantage of the mathematical method was Mises's concern [1966, p. 350] when he remarked that "[i]ts syllogisms are not only sterile; they divert the mind from the study of the real problems and distort the relationships between the various phenomena." 

The claim is sometimes made that any relationship, including presumably causal relationships, can be expressed mathematically. John Egger's attempt to give plausibility to this claim by offering a far-fetched example is noteworthy because the particular example he chose provides, if only inadvertently, a sound basis for rejecting the claim. Egger [1978, p. 29] translates the old saw "absence makes the heart grow fonder" into f'(x)>0. (The first derivative of fondness with respect to absence is greater than zero.) Tellingly, the word "makes," which indicates the direction of causality, is unavoidably lost in the translation. The exact same mathematical expression would result from a translation of the converse: "growing fonder makes the heart absent." 

At best, Egger's equation can describe the equilibrium relationship between "absence" and the "growth rate of fondness." More likely, however, such a wanton use of mathematics would invite attempts to quantify inherently unquantifiable concepts. And worse, the very fact that the expression involves a derivative suggests the appropriateness of the calculus operators. Egger could hardly argue against those who might want to integrate the equation in order to determine the absolute level of fondness that corresponds to an absence of a given duration. The real lesson in his curious exercise is not that any idea can be expressed mathematically but rather that mathematical economists have tortured economics in the same way that Egger has tortured a piece of romantic prose.

II. "Causality" in Modern Empirical Economics 

Considerations of technique prevent the modern economist from addressing the full range of economic questions. As mathematician, he can shed no light on issues of causality, but as economist, he is continually confronted with such issues. The melding of classical statistics with formal mathematical modeling, which establishes a link between theoretical abstractions and historical experience, does not close the gap between issues and answers. All respectable texts on statistics and econometrics acknowledge that statistical inference can never identify cause and effect; they warn against interpreting correlation as causation. 

In recent years it has become acceptable within the economics profession to ignore all such acknowledgments and warnings and to make claims about cause and effect on the basis of empirical tests. For a hypothetical example, the claim that a rising interest rate causes the wage rate to fall may be supported by time-series analysis in which an inverse relationship between wage rates and lagged interest rates is demonstrated. The long-respected strictures against reading causality into statistical patterns are flouted. Empirical causality tests are increasingly common in the professional literature. 

Only in the early phase of this empirical innovation was it made clear that such tests are based upon a newly stipulated definition of the word "cause." Stripped of all its subtle and difficult philosophical content and of its etymological link with reason, the word "cause" is used to describe observed temporal patterns in time-series data. In the judgment of Clive Granger and Paul Newbold [1977. p. 225], "A better term might be temporally related, but since cause is such a simple term we shall continue to use it." It is interesting to note that, though this usage is defended on the basis of simplicity of expression, economists who employ empirical techniques developed by Granger use the decidedly unsimple and unaesthetic term "Granger-cause," as in: Falling interest rates Granger-cause wage rates to rise. 

Christopher Sims, most widely known for his development and use of techniques suggested by Granger, is explicit about the nature of his enterprise. "The method of identifying causal direction employed here does rest on a sophisticated version of the post hoc ergo propter hoc principle" [1972, p. 543]. "After this, therefore because of this," of course, is not a principle at all, but a fallacy. And sophistication cannot convert fallacy into principle. 

The linguistic technique introduced by Granger is nothing short of a scandal. (A better term might be career enhancing innovation, but since scandal is such a simple term I shall continue to use it.) Publishers and editors are not likely to be interested in research that yields limp conclusions about the temporal relationships in the movements of economic variables; they are interested in research that demonstrates that one thing causes another. .

Granger-inspired research is often reported guardedly in the section on the testing procedure and then unguardedly in the summary section. Gerald P. Dwyer, Jr. [1982], for instance, conducts Granger-causality tests to determine whether or not federal budget deficits Granger-cause inflation. Failing to find any statistically significant post-hoc relationship, he tentatively reports in his summary that "...there is no reason to predict that a reduction of deficits has a causal role in any policy to reduce inflation." 

The economist's audience is interested in the issue of causality; his mathematical and econometric techniques are not up to the task. The result — for those who confine themselves to mathematical and statistical methods — is a scandalous abuse of the English language. For Mises the notion of cause and effect as used by economists is presupposed by the notion of means and ends, where both cause and means are to be understood in terms of the purposes and plans of acting individuals. None of these notions are adequately illuminated by the methods of mathematical economists or econometricians. 

III. Mathematical Economics in Perspective 

To recognize that the notion of causality cannot be expressed mathematically or tested-for empirically is to suggest that, for the economist, the language of mathematics and econometrics is too confining. Systems of equations can be used to describe abstract states of general equilibrium, and econometrics can provide some quantification of actual economic magnitudes. There should be no objection to this.4 In fact, the appropriateness of mathematics for describing an economy in general equilibrium or for describing the evenly rotating economy, to use Mises's own construction, derives precisely from the fact that there is no human action in such states. The Austrian economist, however, is interested primarily in the give and take of market processes. This is where the action is. But his task of making those processes intelligible by identifying the plans and actions that give rise to them is not facilitated by the mathematical method. 

There is no justification for insisting that mathematical formulations be expunged from economics in some wholesale fashion. The appropriate imperative is much milder in both substance and tone: Do not allow the applicability of mathematical and statistical methods to define the scope of economics. Most economists if confronted explicitly with this recommendation would, I suspect, accept it, many believing that it simply goes without saying. Implicitly, however, the recommendation is systematically rejected — as judged by the extent to which the applicability of these methods have in fact been allowed to dictate subject matter. 

It is convenient to describe the current state of economics with the aid of a simple Venn diagram consisting of two overlapping circles (see Figure 1). Let one circle M represent mathematics; let the other E represent economics. The overlap ME represents mathematical economics and includes all those aspects of economics that actually are — even in the Austrian view— susceptible to a mathematical treatment. Descriptions of equilibrium states, for instance, fall in this overlap. Mises's only complaint about such exercises [1966, p. 355] is that they have unduly dominated the attention of economists: "A superficial analogy [i.e. the imaginary construction of the final state of rest translated into algebraic symbols] is spun out too long...." 

 
Figure 1: Venn Diagram

The very construction of the Venn diagram suggests that economists who use the mathematical method should take precautions of two sorts. First, they should guard against allowing mathematical exercises to take them across the border separating M from ME, where the equations cease to express relationships having any relevance to economics. Second, they should strive continuously to maintain free passage across the other border, which separates ME from E. They should willingly make excursions into any area of economics  — even if they have to abandon the vehicle of mathematics at the border. Anyone familiar with today's economics profession will quickly realize that the border guards are misdeployed. Dissatisfaction with the state of the profession stems largely, I think, from the work of economists who are oblivious to the border that should not be crossed but who instinctively retreat from the border that should be ignored. 

The professional journals are filled with technically sophisticated articles in which mathematical formulations and manipulations have no clear relevance to economic reality. The problem is not abstractness per se. The most fundamental and broadly applicable propositions of economics are inherently abstract. Nor is the realism of assumptions directly at issue here.5 The problem is the failure to maintain a distinction between mathematical economics and mathematical gymnastics. 

Charles L. Schultze [as quoted by Herron, 1987] recognized the problem of the unguarded border in his assessment of modern technical economics. The profession tends to engage itself in what Schultze calls "finger exercises — you can't tell where the mathematics ends and the economics begins." More typically, the crossing of the unguarded border occurs in the opposite direction (i.e., from ME into M) from that suggested by Schultze's lament. Mathematical economists begin by associating their symbols with economic magnitudes: k is capital; l is labor; q is output, etc. They proceed, then, to manipulate mathematical equations without concern about the economic meaningfulness — or the possible meaninglessness — of the resulting relationships. 

One of the clearest examples of this mathematical procedure is the infamous Cambridge Controversy over capital and the production function. Polynomials that purportedly described multiperiod production processes yielded pro forma solutions suggesting the possible existence of multiple pure rates of interest, technique reswitching, and capital reversing. Without question these odd-sounding phrases were descriptive of the mathematical results obtained by Cambridge capital theorists; but they are not meaningful in the context of any known economic process. Demonstrations that the results have economic significance are nonexistent, and even the recognition of this lacking is less than sincere. The final sentence of an article on capital reswitching appearing in the profession's most prestigious journal reads: "What now remains is to establish the economic significance of the constraints imposed to allow us to get these results" [Galloway and Shukla, 1974, p. 358]. But more than a decade later, that task, which should have been preliminary to the publication of the mathematical results, still remains. The results themselves have become and continue to be the subject matter of further study.6

The problem of the unguarded border is compounded by a problem of the opposite sort on the other side of the overlap. It has become standard practice in the profession today to make assumptions — sometimes bizarre assumptions — in order to render an economic issue mathematically tractable, i.e., to avoid crossing from ME into E. An analysis of the give-and-take of the market process is often precluded or trivialized by some assumption that focuses attention on the end result of that process. Examples of assumptions that guard against plunging head-long into non-mathematical economics are easy to find. The Walrasian auctioneer has come to serve as one such border guard. Invoking this piece of fiction allows the mathematical economist to pass over the question of how the economy actually gropes towards an equilibrium and to neglect the consequences of transactions involving disequilibrium prices. A single auctioneer substitutes for competing entrepreneurs, making it unnecessary for market participants to engage in monetary calculation in any nontrivial way or to formulate and implement economic plans. All the issues that captured the attention of Mises and the Austrians are held at bay while the mathematical economists describe the pattern of prices and the allocation of resources associated with a general equilibrium. 

The Friedmanian helicopter does for monetary theory what the Walrasian auctioneer does for value theory. Mathematical tractability is preserved if it can be assumed that monetary injections are accomplished by helicopter drops of newly created money. It is often further assumed in the Monetarist literature that individuals gather up the new money in direct proportion to the amount that they already possess. Propositions about the neutrality of money follow trivially: production functions are homogeneous of degree zero with respect to the medium of exchange. Again, the issues of interest to the Austrians—injection effects, monetary distortions of the production process, monetary calculation during periods of inflation—are all swept aside by assumptions that make the remaining issues mathematically tractable. 

In the writings of the New Classicists, the analytical technique introduced by Walras and extended by Friedman has been pushed to the limits. The goal of a "fully articulated artificial economy" and the insistence on the complete absence of so-called "free parameters" is easily interpreted in terms of our Venn diagram: The border separating mathematically tractable issues from all other economic issues should be sealed once and for all.7

Modeling techniques introduced by Edmund Phelps [1970] and developed by Robert Barro [1981] require that the border guards stand elbow to elbow. The world about which they theorize consists of a number of island economies. No trade occurs between islands. There is only one commodity being supplied and demanded. The commodity is nondurable in the extreme — a service, actually, indistinguishable from the labor that renders it. Demanders possess the same information as suppliers. Technical considerations require that the service is such that one individual must render it to another. (This feature is needed to prevent the model from collapsing into a model of complete autarchy.) The full specification of such models taxes the imagination, but Barro [1981, p. 83] achieves a degree of concreteness by suggesting that we think in terms of "back-scratching" services. 

New-Classical models of this type allow for no substitutability or complementarity among goods or among factors of production; no capital and hence no heterogeneity of capital; no information flows, entrepreneurial activities, production plans, or market processes except in the most trivial senses. Yet the purpose of such models is to facilitate the analysis of monetary shocks or of alternative monetary policy regimes. (The substantive conclusions derive from a stipulated difference in the cost of acquiring global as opposed to local information about price changes.) But what significance could the implications of such models possibly have for real-world economies? 

Thomas Sargent [1987, p. 7] is aware that the techniques of New Classicism have questionable validity: "[I]n order to make general equilibrium models tractable enough for macroeconomic work, their preferences, technology, and endowments have typically been so simplified, and so much has been abstracted, that it is often difficult to take their predictions in some directions seriously." Research efforts within the New Classicist camp, however, are directed toward further extension of this modeling technique. Questions about validity are neither answered nor seriously contemplated. According to Sargent [1987, p. 7], the technique "rests on faith that insights about the laws of motion of economic aggregates can be acquired by building models of economies that are internally consistent. Such faith perseveres despite the fact that internal consistency is always purchased with simplification and abstraction." 

In the view of Robert Lucas this faith is strong enough to establish a new method of achieving understanding and a new meaning for the word "theory." Writing about economic fluctuations, Lucas [1981, p. 219] asserts that "One exhibits understanding of business cycles by constructing a model in the most literal sense: a fully articulated artificial economy which behaves through time so as to imitate closely the time series behavior of actual economies. The Keynesian macroeconomic models were the first to attain this level of explicitness and empirical accuracy; by doing so they altered the meaning of the term 'theory' to such an extent that the older business cycle theories could not really be viewed as 'theories' at all." 

The spinning continues on the superficial analogy that in Mises's judgment had been spun out too long several decades ago. Economic understanding in Mises's own view in achieved by identifying cause-and-effect relationships between individual actions in the marketplace and the economic phenomena to which they give rise. No amount of faith can transform the articulation of an artificial economy into an understanding of a real one. The mathematical modeling that characterizes New Classicist literature is not a means of achieving economic understanding but is rather a substitute for it. 

IV. Concluding Remarks 

Studies of Mises and his methods and comparisons of his praxeological reasoning with the more modern econometric and mathematical modeling techniques are fruitful pursuits. Such studies, of course, provide no pat formulas for devising economic theories or for establishing their validity and relevance, but they do provide some valuable guidance. 

It has become popular to insist that no methodological taboos be issued...except for the taboo against issuing taboos. I propose as a second exception the taboo issued earlier in this paper: "Do not allow the applicability of mathematical or statistical methods to define the scope of economics." In terms of the Venn diagram depicting the overlap between mathematics and economics, the taboo translates into the imperatives: Redeploy the border guards. Accept responsibility for demonstrating that mathematically derived results have economic relevance; refrain from drawing conclusions about real-world economies that hinge critically on some assumption made for the sake of mathematical tractability. 

In one sense these imperatives are weak ones. Who could explicitly reject them and expect to maintain intellectual respectability? In another sense they are not so weak. Their implicit rejection pervades modern economic literature. The actual observance of these imperatives would require a radical — and salutary — change in the way modern economists go about their business. 

Published in The Meaning of MisesBibliography:

Barro, Robert J., "Rational Expectations and the Role of Monetary Policy," in Barro, Money, Expectations and Business Cycles. New York: Academic Press, 1981, pp. 79-110.

Dwyer, Gerald P., Jr., "Inflation and Government Deficits," Economic Inquiry, vol. 20, no. 3 (July) 1982, pp. 315-29.

Egger, John B., "The Austrian Method," in Louis M Spadaro, ed., New Directions in Austrian Economics. Kansas City: Sheed Andrews and McMeel, Inc., 1978, pp. 19-39.

Galloway, Lowell, and Vishwa Shukla, "The Neoclassical Production Function," American Economic Review, vol. 64, no. 2 (June) 1974, pp.348-58.

Garrison, Roger W., "Waiting in Vienna," in Mario J. Rizzo, Time Uncertainty and Disequilibrium. Lexington, MA: D. C. Heath and Co., 1979, pp. 215-26.

Fischer, Stanley, "Paul Anthony Samuelson," John Eatwell, Murray Milgate and Peter Newman, eds, The New Palgrage: A Dictionary of Economics. London: Macmillan Press, 1987, vol. IV, pp. 234-41.

Granger, C. W. J., and P. Newbold, Forecasting Economic Time Series. New York: Academic Press, 1977.

Hayek, Friedrich A. "The Theory of Complex Phenomena," in Hayek, Studies in Philosophy, Politics and Economics. Chicago: University of Chicago Press, 1967, pp. 22-42.

Herron, Caroline Rand, "Economist to Economist, in English," New York Times, Sunday, September 27, 1987, sec. 3, p. 4.

Klamer, Arjo, Conversations with Economists. Totowa, NJ: Roman and Allanheld, Publishers, 1984.

Lachmann, Ludwig M., Macro-economic Thinking. Studies in Economics No. 6. Menlo Park, CA: Institute for Humane Studies, 1978.

Lucas, Robert E. Jr., Studies in Business Cycle Theory. Cambridge, MA: M.I.T. Press, 1981.

Mises, Ludwig von, Human Action, 3rd rev. ed. Chicago: Henry Regnery Company, 1966. (First edition: 1949)

Musgrave, Alan, "'Unreal Assumptions' in Economic Theory: the F-Twist Revisited," Kyklos, vol. 34, no. 3, 1981, pp. 377-87.

Phelps, Edmund S., "The New Microeconomics in Employment and Inflation Theory," in Phelps et al., Microeconomic Foundations of Employment and Inflation Theory. New York: W. W. Norton and Company, Inc., 1970, pp. 1-23.

Rothbard, Murray N. Man, Economy, and State: A Treatise on Economic Principles. Los Angeles: Nash Publishing Co., 1970.

Samuelson, Paul A., Foundations of Economic Analysis. New York: Atheneum, 1974. (Originally published in 1947)

Sargent, Thomas J., Dynamic Macroeconomic Theory. Cambridge MA: Harvard University Press, 1987.

Sims, Christopher A., "Money, Income, and Causality," American Economic Review, vol. 62, no. 4 (September) 1972, pp. 540-52.

Stigler, George J., Production and Distribution Theories. New York, Macmillan and Co., 1946.

Yeager, Leland B., "Capital Paradoxes and the Concept of Waiting," in Mario J. Rizzo, Time Uncertainty and Disequilibrium. Lexington, MA: D. C. Heath and Co., 1979, pp. 187-214. 



  • 1. Praxeology can be interpreted as "action logic" in which it is recognized that actions (a) transpire through time and (b) are motivated by perceived cause-and-effect relationships. In Mises' own words [1966, p. 99], "What distinguishes epistomologically the praxeological system from the logical system is precisely that it implies the categories of time and causality."

  • 2.  For an illuminating contrast between "cause and effect" and "mutual determination" in the context of production theory, see Rothbard [1970, pp. 277-80].

  • 3. Ludwig Lachmann [1978] provides an insightful critique of this relationship. His own dissatisfaction with the neo-Ricardian theory derives from the absence of an adequate microeconomic foundation. In particular, the neo-Ricardians are in clear violation of Lachmann's second rule: "In discussing a system of action..., we are not entitled to abstract from the springs of human action, the purposes sought by individuals and the plans in which they find their expression by assuming their modus operandi to be known and therefore predictable" [1978, p. 6].

  • 4. The mathematician in his limited role as "pattern maker" and the statistician in his similarly limited role are discussed by Hayek [1967].

  • 5. Assumptions are often made for the sake of conceptual rather than mathematical tractability. Mises, for instance, never hesitated to invoke the ceteris paribus assumption--even when
    it was clearly unrealistic. Debate in recent years about the merits of realism per se has been particularly unproductive. See Musgrave [1981] for a fruitful recasting of this methodological issue.

  • 6.  For a critical exposition of the Cambridge controversy and a methodological treatment of the specific issues, see Lachmann [1978, pp. 15-17], Yeager [1979, pp. 187-93], and Garrison [1979, pp. 221-24].

  • 7. Arjo Klamer's conversations with Lucas, Sargent, and Townsend [Klamer, 1984] lend support to this interpretation.

Categories: Current Affairs

With Inequality, Some Is Fair and Some Is Unfair

Tue, 20/02/2018 - 17:00
By: Sascha Klocke
cigar.PNG

Should we care about inequality? Interventionists and egalitarians of all stripes would answer with a resounding “yes.” They argue that, in the words of former president Obama, inequality is “the defining challenge of our time,” and their criticisms of high and growing inequality such as Occupy Wall Street’s protests against the (symbolic) “1%,” Piketty’s Capital in the Twenty-First Century, or the annual Oxfam report on wealth inequality manage to draw a lot of public attention.

Conversely, free market advocates and proponents of capitalism appear to often categorically reject the notion, as illustrated by Daniel Lacalle’s recent Mises Wire article. Instead of focusing on inequality trends, Lacalle and others argue, we should focus on the achievements of capitalism with regard to the staggering increase in (material) living standards across the globe, and not worry too much that growth has not been evenly distributed. Inequality is seen as a natural outcome of the market process and economic development, provides positive economic incentives, and rewards individuals according to their efforts and services rendered to society at large. Public and political focus on inequality just serves as justification for continued interventionism, which is threatened by steady retreat of absolute poverty across the world. To quote Lacalle: “If the world eradicates poverty, the bureaucrat’s job is gone.”

Inequality, however, is a complex phenomenon, encompassing wealth and income as well as within — and between — country inequality, not all of which move in the same direction (global income inequality, for example, is now falling). More importantly, it is important to analyze what causes inequality. Whether inequality is good, bad, or indifferent is ultimately a moral judgment.1 It is here that the free-market position would benefit from a more nuanced analysis.

Despite different judgments concerning inequality, interventionists and free-market advocates seem to agree that, for the most part, inequality is a natural outcome of the market process or “capitalist development.” Throughout history and across the globe, however, the causes of inequality have been multi-faceted and lie not only in economic processes, but stem also from the institutional realm. It is the latter — inequality caused by (state) intervention — which the supporters of the free market might also find objectionable and in opposition to their ideals.

RELATED: "How Money Production Can Worsen Income Inequality" by Jörg Guido Hülsmann

One example, which should speak to Austrian economists and libertarians and addresses one of the most potent symbols of contemporary social movements, “the fight against the 1%,” is that of modern central banking and monetary policy. As Louis Rouanet and others argue, central bank policy, notably the creation of asset bubbles and Cantillon effects which redistribute income from the bottom to the top via inflation, has played an important part in increasing wealth and income inequality in the US over the last decades. This development has continued unabated in the aftermath of the financial crisis of 2007/08 and the subsequent “unconventional monetary policy,” and does not constitute a “normal” outcome of the market process, but a significant intervention in it (with policies such as bail-outs effectively eliminating one important half of the market’s profit and loss mechanism). It has also not resulted in unevenly distributed “improvement for all,” but in great material improvements for some and stagnation for many others.

Free-market advocates are, of course, often at the forefront of criticizing such policies and interventions. However, it would appear that linking such criticism explicitly to the inequality debate, acknowledging the concerns over rising inequality, and differentiating between “fair” and “unfair” inequality depending on its sources is a better strategy for the advocates of free markets than categorically dismissing that inequality is anything to be concerned with at all.



  • 1. Of course, there are also attempts to make value-free arguments for why inequality is “bad,” such as the proposition that certain levels of inequality harm “growth.” These, however, seem reminiscent of the “neoliberal” pattern where policy recommendations are declared to be “objective” on the grounds that growth or “efficiency” are somehow “objectively” desirable.

Categories: Current Affairs

End the Drug War for These Very Practical Reasons

Tue, 20/02/2018 - 12:00
By: Mark Thornton
opiates.PNG

Timothy Hsiao recently made the rather startling case that libertarians should support the War on Drugs by claiming that recreational drug use undermines a critical precondition for freedom, namely, the ability to think clearly and to choose wisely. Hsiao notes that:

Accordingly, since the government has a responsibility to protect personal freedom, it must also protect and promote a culture that is conducive to clear thinking and discourages impaired thinking. The government, therefore, has a responsibility to restrict activities that impair, destroy, or otherwise undermine clear thinking.

There are many types of libertarianism. They range from the strong version, which is grounded in the non-aggression principle and prohibits any coercion by government, to the weak or impaired version where government can use force to foster particular freedoms and activities. Hsiao’s argument obviously rests on a weak version of libertarianism.

The argument that alcohol and drugs alter our ability to think clearly and therefore need to be restricted is not new. In fact, it can likely be traced back thousands of years, and was a common argument in the modern American movement to prohibit alcohol during the 19th century and during the War on Drugs of the 20th century. Recall, for instance, the “Reefer Madness” hysteria of the 1930s, when the use of cannabis (marijuana) was said to cause insanity, violence, rape, and murder, and acts of superhuman strength.

The larger point here is that Hsiao’s use of libertarianism shows just how popular libertarian thinking has become. In fact, demographically speaking libertarianism and libertarian-conservativism seem to be the wave of the future. However, drug and alcohol prohibition is a policy usually connected to the ideology of progressivism and even fascism.

For the sake of argument, let us grant Professor Hsiao his own version of libertarianism. Let us also grant that alcohol, marijuana, cocaine, heroin and many other drugs impair clarity of thought, choice, and action. Finally, let us further grant that certain drugs are so powerful and addictive that they can take over individuals’ lives and lead to improper actions, violence, accidents, and overdose deaths.

The Opioid Crisis is a painful reminder of these abnormalities. Here we have thousands of Americans becoming new addicts and thousands dying from drug overdoses each month. Furthermore, the crisis involves “normal” Americans, who would never otherwise consider trying heroin, becoming heroin addicts and overdosing.

Professor Hsiao does not discuss this crisis, but surely it is the best evidence for his case that certain drug use impairs individuals in a way that undercuts their self-interest by short circuiting their ability to reason and act rationally. However, this crisis is mostly about the changes in pain prescription guidelines rather than prohibition.

Two Pragmatic Objections to the Drug War

The two objections that I wish to raise to his libertarian case for drug prohibition are pragmatic, not libertarian per se. In fact, I firmly believe, like Professor Hsiao, that society must somehow impose itself on individuals to induce improved clarity of thought and individual responsibility.

The first objection raises the question of whether or not drug prohibition works to achieve its goal. This objection is not a cost-benefit issue, so that achieving even a small fraction of the goal at a high cost is enough to successfully counter this objection.

In my second objection, I ask the questions: What is the general reason why we have such a large problem with alcohol and drugs and what is the best response for dealing with these problems?  

Drug Prohibition Does Not Work

Alcohol and drug prohibition creates more problems than it solves. During alcohol prohibition, circa 1920–1933, beer and wine were virtually non-existent on the black market while spirits of very high potency and high levels of impurities flooded the market. Crime and corruption were rampant. The murder rate nearly doubled. Bribery of public officials was endemic and respect for the rule of law plummeted. It is true that teetotalers and many moderate drinkers did obey the law. However, they were not part of the problem alcohol prohibition was designed to address.

The same is similarly true of the War on Drugs. The Reefer Madness hysteria is now widely considered hokey propaganda, much like the more recent “This is your brain on drugs” campaign. When President Nixon started his War on Drugs, the government measurement of the potency of cannabis was a mere 0.4%. Twelve years later it was ten times as high. The potency has continued to increase and the reason is prohibition itself, not consumer demand. The Iron Law of Prohibition states that prohibition increases drug potency and makes the product more dangerous.

That does not matter much with cannabis because consumers can always use a lower quantity. However, with so much legal pressure on cannabis, drug cartels have increasingly turned to cocaine, heroin, and methamphetamine as the drugs of their choice. The potency of these drugs makes it easier to smuggle a far greater number of doses in a given container compared to bulky cannabis.

The Gateway Theory of drugs has been thoroughly discredited, but the history of the War on Drugs has mimicked the theory because over time law enforcement effort and legal penalties have increased and consequently drugs have become more potent and dangerous to consume.

The War on Drugs has also spread crime, corruption, and violence. The US has the world’s largest prisoner population and highest rate of incarceration. The most salient factor in this is the War on Drugs. America is also home to the largest gang population in the world, largely financed by selling illegal drugs. Our War on Drugs has caused failed states in Central America and is a leading vehicle for financing terrorism.

Why Drug Abuse?

To help solve a problem, it helps to know what is causing the problem. Inner city minorities, war veterans, people with mental illnesses and young males have much higher rates of alcohol and illegal drug use and abuse. What all these groups have in common is that they tend to be marginalized in society and to experience a general condition of hopelessness and anxiety for their future.

We can also see this marginalization and hopelessness in the general population. In the US there are haves and have nots. As an economist I see the group of the “haves” as having a special advantage through government. Think of all the professions that require a government license rather than a good reputation or some form of professional certification to succeed. Think of all the government contractors. Think of all the people employed through government and unions. All these people hold a privileged position in society. They generally work less for greater pay and fringe benefits and have greater job security compared to the “have nots” or unprivileged population. These advantages are typically secured through access to government backing or at least tacit appeal to government coercion.

The unprivileged population has no such advantages. They participate in tight labor markets that do not have restrictions on entry. Therefore, they have a hard time getting and keeping jobs which ultimately pay less and have fewer fringe benefits compared to the privileged groups. They also have a far lower level of job security and rates of employment. Not surprisingly, a great deal of alcohol and illegal drug use and abuse occurs in this group, which can keep the unprivileged people stuck in their dead-end jobs. Alcohol and drugs help them cope with their marginalization and hopelessness. Unlike the privileged, this group also is far less likely to have health insurance which might pay for addiction treatment services. It is government interference, and not drugs themselves, which is the indispensable element in this cycle of despair.

An important solution to this situation would therefore be to eliminate government privileges and allow everyone to compete on a level playing field. Attacking drugs is bound to fail to alleviate societal problems, because the drugs are not the root cause of those problems. If Professor Hsiao’s recommendations were followed, one could anticipate the government becoming even more powerful, which would actually harm, and not help, the very people whom Professer Hsiao seeks to help.

Just as Professor Hsiao’s arguments are not novel, neither are mine. Even Milton Friedman, who structured his entire body of thought on a weak version of libertarianism, openly opposed the War on Drugs for over 34 years and he did so for the pragmatic reason that prohibition did not work, but the marketplace did. Moving from prohibition to legalization does not just make the drugs cheaper; it changes everything for the better.



Categories: Current Affairs

Security Works at Disney — But Can't Work at a Public School?

Mon, 19/02/2018 - 17:30
By: Ryan McMaken
gunfree.PNG

An odd thing has happened. Advocates for gun control have actually begun arguing against practical measures addressing school security. Rather than take strategies that can be implemented virtually immediately, and which address the dangers in a specific place in a common-sense way, gun control advocates would rather focus on a political victory at some point in the future and continue to leave schools without proper security measures. 

The general argument is that any effort at meaningful security is unacceptable because it turns schools into "fortresses." Numerous examples of this line of reasoning can be found on Twitter. They are often remarkably similar in message which is "forget school security, just ban guns!" Ah yes, the "ban guns" solution. It certainly worked in Latin America. And, of course, as soon as they're banned, everyone will immediately turn theirs in to the authorities and no one will have them anymore. Security of any sort will immediately and forever be rendered unnecessary. At least, this is how the thinking goes. 

RELATED: "Shootings: Why Don't Schools Have Better Security?" by Ryan McMaken 

Others are filled with reasons why security is useless. They point out that Columbine High School had security cameras, and this therefore proves that all security measures have no effect. 

Gun control advocates in social media have also begun passing around this article (by Bryan Warnick, Benjamin Johnson, and Sam Rocha) titled "Why security measures won't stop school shootings." The article, however, only briefly asserts (without argumentation) that that security won't work and barely touches on the tactics of so-called "target hardening." Most of the article is actually devoted to a sociological discussion of how a kinder, gentler, school environment will make school shootings less likely. It looks more at the effects of security on student attitudes. Not even the article's sources much support the theory that greater security makes a school more "scary." A prominently cited-study within the article, called "Predicting Perceptions of Fear at School and Going to and From School for African American and White Students" does not support the idea. Indeed, the study found that when security is applied "aggressively," within the school, students report feeling less fearful.1 

But, the overall strategy here is startling. Gun control advocates are in a way holding school children hostage to their message by shooting down calls for better school security. Their essential position is "no security for children until we get the gun control legislation we want!"

Security at Theme Parks

Most of the talk about schools being turned into dreary "fortresses" is pure sentimentalism, of course. But, it's the sort of thing we should expect from panic-prone Americans, many of whom routinely overestimate the threats to their safety

Meanwhile, many responsible owners of private facilities — i.e., not public schools — have already implemented just the sort of security measures that anti-security advocates now denounce as measures that turn schools into "prisons." 

Disney theme parks in California, for example, implemented metal detectors in 2015. Orlando theme parks, including Sea World, and the Universal Parks have implemented metal detectors and other security measures as well. 

The theme parks have implemented just the sort of security that we're told turns the place into a "fortress" and will make everyone feel as if he is in inside "a prison." But, the park owners want greater security lest they are subject to lawsuits that might result from a mass-shooter situation. Theme parks — especially Disney — are famous for keeping security unobtrusive, but it is most certainly present. At the same time, theme park owners are motivated to make security as pleasant an experience as possible. This is why security personnel is trained to be friendly and professional. 

Meanwhile, Disney reported a 13% increase in theme park revenue in 2017. It seems that the "fortress" isn't keeping all that many visitors away. 

Security at a State Legislature 

Theme parks aren't the only places where security is done better than at public schools.

Early in my career, I was a lobbyist at the Colorado state capitol in Denver. Prior to 2007 — except for a short period following the 9/11 attacks in New York and Washington — the building had unrestricted access, with on-site, armed security. 

In 2007, a man armed with a handgun entered the building and threatened personnel in and around the governor's office. He was shot dead by on-site security. Building access was heavily restricted after that. 

Nowadays, all visitors must go through a basic security screening unless they are members of the legislature, or are pre-approved personnel subjected to background checks. Hundreds of people pass through the building each day. 

But, even those of us who had go through the screening would enter and exit the building multiple times per day. This meant going back through the screening. It was marginally inconvenient, and we questioned the need given the presence of on-site security personnel. But in general, it wasn't a big deal. 

Moreover, school kids regularly visited the building for field trips. They moved freely and exuberantly through the building. They sat in the gallery. They noisily ate their lunches in the rotunda. 

And yet, the "experts" would have us believe that by merely being in a building with armed security the children were in fact being tormented psychologically, having been given the message that the building was, to use the words of Warnick, et al, a "scary, dangerous and violent place." In reality, none of us who worked in the building daily cared anything at all about the presence of the guards. I certainly never hesitated to invite family members there. 

It's a Matter of Priorities

For places like amusement parks, concert venues, city halls, county courthouses, state legislatures — and of course — the US capitol, security measures have already been implemented. Is there evidence that everyone working in these building regards them as "prisons"? After all, the private owners — people who are potentially liable for violence on their premises — want security, and you hear few of them resort to a knee-jerk declaration of "it won't work!"  when their lawyers and stockholders advise them to implement security solutions. 

Indeed, what we often hear as a objections to "security" are really just objections to the incompetence and unpleasantness of public schools. We're told that greater security at schools will encourage more abuse of student rights via random searches, drug tests, and aggressively unpleasant encounters with security personnel. 

In other words, we're being warned that public-school security reflects the quality of public schools in general. If greater security automatically leads to abusive behavior by security, then why do we not see this behavior at the Magic Kingdom or at baseball stadium? The answer lies in how public schools function. 

Those places that actually value the safety and quality-of-experience for the people present have a much different attitude about security than public schools do. And, no doubt, part of the reason that public schools and their supporters can continue to get away with their dismissive attitude toward real security is because no matter how many shooting take place on school property, the schools are never held legally accountable. It's much easier for the counties and the school boards to shrug and say "there's not enough money." 

But why is the security experience at some non-school government facilities so much better than at public schools? The answer lies in the fact that schools simply aren't a public-policy priority. The grown-up lobbyists and politicians and other visitors who must visit a legislature will complain bitterly, and possibly even sue, if treated the way public-school children are treated. They also demand real security that they can see for themselves. Thus, meaningful yet unobtrusive measure are implemented — even if they are costly. The attitude for public schools is quite different. For them, the plan is to slap up a few security cameras or hire a tiny handful of ill-tempered, unprofessional security personnel poorly trained in dealing with students. 

Those who oppose security will continue to claim it can't work. Outside the tiny echo-chamber of public-school thinking, though, practical security measures are already common and the results have been nothing like we associate with school security. Perhaps there's a reason why the public schools, and not theme parks, continue to be primary targets for homicidal maniacs. 



  • 1. But the study itself doesn't even really relate to the type of security being discussed in relation to school shootings. The study is mostly about internal security for day-to-day bullying, etc. But in relation to application of security, the study concludes: "In all of the models, there was a negative relationship between school environments that more aggressively and fairly enforced the rules and perceptions of fear." 

Categories: Current Affairs

Bag Searches Work at Disney — But Can't Work at a Public School?

Mon, 19/02/2018 - 17:30
By: Ryan McMaken
gunfree.PNG

An odd thing has happened. Advocates for gun control have actually begun arguing against practical measures addressing school security. Rather than take strategies that can be implemented virtually immediately, and which address the dangers in a specific place in a common-sense way, gun control advocates would rather focus on a political victory at some point in the future and continue to leave schools without proper security measures. 

The general argument is that any effort at meaningful security is unacceptable because it turns schools into "fortresses." Numerous examples of this line of reasoning can be found on Twitter. They are often remarkably similar in message which is "forget school security, just ban guns!" Ah yes, the "ban guns" solution. It certainly worked in Latin America. And, of course, as soon as they're banned, everyone will immediately turn theirs in to the authorities and no one will have them anymore. Security of any sort will immediately and forever be rendered unnecessary. At least, this is how the thinking goes. 

RELATED: "Shootings: Why Don't Schools Have Better Security?" by Ryan McMaken 

Others are filled with reasons why security is useless. They point out that Columbine High School had security cameras, and this therefore proves that all security measures have no effect. 

Gun control advocates in social media have also begun passing around this article (by Bryan Warnick, Benjamin Johnson, and Sam Rocha) titled "Why security measures won't stop school shootings." The article, however, only briefly asserts (without argumentation) that that security won't work and barely touches on the tactics of so-called "target hardening." Most of the article is actually devoted to a sociological discussion of how a kinder, gentler, school environment will make school shootings less likely. It looks more at the effects of security on student attitudes. Not even the article's sources much support the theory that greater security makes a school more "scary." A prominently cited-study within the article, called "Predicting Perceptions of Fear at School and Going to and From School for African American and White Students" does not support the idea. Indeed, the study found that when security is applied "aggressively," within the school, students report feeling less fearful.1 

But, the overall strategy here is startling. Gun control advocates are in a way holding school children hostage to their message by shooting down calls for better school security. Their essential position is "no security for children until we get the gun control legislation we want!"

Security at Theme Parks

Most of the talk about schools being turned into dreary "fortresses" is pure sentimentalism, of course. But, it's the sort of thing we should expect from panic-prone Americans, many of whom routinely overestimate the threats to their safety

Meanwhile, many responsible owners of private facilities — i.e., not public schools — have already implemented just the sort of security measures that anti-security advocates now denounce as measures that turn schools into "prisons." 

Disney theme parks in California, for example, implemented metal detectors in 2015. Orlando theme parks, including Sea World, and the Universal Parks have implemented metal detectors and other security measures as well. 

The theme parks have implemented just the sort of security that we're told turns the place into a "fortress" and will make everyone feel as if he is in inside "a prison." But, the park owners want greater security lest they are subject to lawsuits that might result from a mass-shooter situation. Theme parks — especially Disney — are famous for keeping security unobtrusive, but it is most certainly present. At the same time, theme park owners are motivated to make security as pleasant an experience as possible. This is why security personnel is trained to be friendly and professional. 

Meanwhile, Disney reported a 13% increase in theme park revenue in 2017. It seems that the "fortress" isn't keeping all that many visitors away. 

Security at a State Legislature 

Theme parks aren't the only places where security is done better than at public schools.

Early in my career, I was a lobbyist at the Colorado state capitol in Denver. Prior to 2007 — except for a short period following the 9/11 attacks in New York and Washington — the building had unrestricted access, with on-site, armed security. 

In 2007, a man armed with a handgun entered the building and threatened personnel in and around the governor's office. He was shot dead by on-site security. Building access was heavily restricted after that. 

Nowadays, all visitors must go through a basic security screening unless they are members of the legislature, or are pre-approved personnel subjected to background checks. Hundreds of people pass through the building each day. 

But, even those of us who had go through the screening would enter and exit the building multiple times per day. This meant going back through the screening. It was marginally inconvenient, and we questioned the need given the presence of on-site security personnel. But in general, it wasn't a big deal. 

Moreover, school kids regularly visited the building for field trips. They moved freely and exuberantly through the building. They sat in the gallery. They noisily ate their lunches in the rotunda. 

And yet, the "experts" would have us believe that by merely being in a building with armed security the children were in fact being tormented psychologically, having been given the message that the building was, to use the words of Warnick, et al, a "scary, dangerous and violent place." In reality, none of us who worked in the building daily cared anything at all about the presence of the guards. I certainly never hesitated to invite family members there. 

It's a Matter of Priorities

For places like amusement parks, concert venues, city halls, county courthouses, state legislatures — and of course — the US capitol, security measures have already been implemented. Is there evidence that everyone working in these building regards them as "prisons"? Where's the evidence? After all, the private owners — people who are potentially liable for violence on their premises — want security, and you hear few of them resort to a knee-jerk declaration of "it won't work!"  when their lawyers and stockholders advise them to implement security solutions. 

Indeed, what we often hear as a objections to "security" are really just objections to the incompetence and unpleasantness of public schools. We're told that greater security at schools will encourage more abuse of student rights via random searches, drug tests, and aggressively unpleasant encounters with security personnel. 

In other words, we're being warned that public-school security reflects the quality of public schools in general. If greater security automatically leads to abusive behavior by security, then why do we not see this behavior at the Magic Kingdom or at baseball stadium? The answer lies in how public schools function. 

Those places that actually value the safety and quality-of-experience for the people present have a much different attitude about security than public schools do. And, no doubt, part of the reason that public schools and their supporters can continue to get away with their dismissive attitude toward real security is because no matter how many shooting take place on school property, the schools are never held legally accountable. It's much easier for the counties and the school boards to shrug and say "there's not enough money." 

But why is the security experience at some non-school government facilities so much better than at public schools? The answer lies in the fact that schools simply aren't a public-policy priority. The grown-up lobbyists and politicians and other visitors who must visit a legislature will complain bitterly, and possibly even sue, if treated the way public-school children are treated. They also demand real security that they can see for themselves. Thus, meaningful yet unobtrusive measure are implemented — even if they are costly. The attitude for public schools is quite different. For them, the plan is to slap up a few security cameras or hire a tiny handful of ill-tempered, unprofessional security personnel poorly trained in dealing with students. 

Those who oppose security will continue to claim it can't work. Outside the tiny echo-chamber of public-school thinking, though, practical security measures are already common and the results have been nothing like we associate with school security. Perhaps there's a reason why the public schools, and not theme parks, continue to be primary targets for homicidal maniacs. 



  • 1. But the study itself doesn't even really relate to the type of security being discussed in relation to school shootings. The study is mostly about internal security for day-to-day bullying, etc. But in relation to application of security, the study concludes: "In all of the models, there was a negative relationship between school environments that more aggressively and fairly enforced the rules and perceptions of fear." 

Categories: Current Affairs

Martin Van Buren: America's Most Underrated President

Mon, 19/02/2018 - 17:00
By: Bryan Rothman
mvb.PNG

Martin Van Buren is probably one of most maligned, and paradoxically one of the most forgotten United States presidents. However, in his time, he was one of the biggest forces to occupy the Democratic Party. While most historians tend to dismiss him in favor of more "activist" presidents, I wish to afford his proper place as one of the centerpieces of the Jacksonian movement of the 1830s and 40s.

Martin Van Buren was the first president to be born an American citizen despite his first language being Dutch. Working from humble beginnings, he passed the bar without any formal education and eventually came to dominate the NY political machine, and more specifically the infamous Tammany Hall. While it would become a haven of corruption and bribery under William "Boss" Tweed's tenure, at this time, it was mainly an organization that appealed to the new Irish immigrants.

Van Buren was not simply a career politician, however. He was able to transform the political scene away from the mushy (and often fractious) centrism that characterized the mislabeled Era of Good Feeling, and towards the reemergence of ideological polarization. While many would count this as a negative, I would argue that it allowed for the public to be able to make clearer choices when it came to candidates, and allowed for the hardcore Jeffersonians to have a home again after Madison and Monroe's flip flopping.

It was Van Buren that was one of the principal architects of the Democratic Party, a new coalition of Old Republicans, Irish immigrants, and the working class. And while there is much to critique about their first candidate Andrew Jackson, Van Buren's presidency would be altogether different from the tempestuous and nationalistic general. While he was short and rapidly balding/graying, he was one of our most level-headed and respectful occupiers of the White House. In contrast to Jackson and Calhoun, he sought to maintain alliances and friendships. While men like John Randolph were more consistent, Van Buren, unlike Jefferson when his time came for the presidency, maintained a more consistently antistatist line during his time in office. While one can disagree with his political ideology, he provides a useful model for how one can maintain their principles even after you get into office.

So let's review some of his achievements in office. The first, and most laudatory, was his peaceful foreign policy. Unlike others who sought to expand the U.S. influence and territory, Van Buren opposed any further empire building. He was also successful in preventing two wars with Mexico and the U.K. by maintaining a neutral stance that promoted free trade over mercantilist conflict. He also opposed the annexation of Texas for fear it would divide the party over the slavery question (and boy was he right about that!). This was a trait seen during the Jackson administration, when he successfully negotiated a trade settlement with the British West Indies, and prevented a war with France over Jackson's hot temper. He was also a strong opponent of nationalizing state militias and was encouraged by the trend towards voluntary rather than compulsory service.

Van Buren stated that, "We have a character among the nations of the earth to maintain. [While] the lust of power, with fraud and violence in the train, has led other and differently constituted governments to aggression and conquest, our movements in these respects have always been regulated by reason and justice" (Charles Sellers, The Market Revolution. Jacksonian America, 1815 — 1846 [New York Oxford University Press 1991], p. 415). However, Americans were enthralled by expansion to the Southwest and into Canada, and it would be Van Buren's refusal to start a war that would be a huge cost to him politically during the election of 1840.

Domestically, Van Buren was much more mixed. While most historians would point to his inability to control the Panic of 1837 as a strike against him, looking into the issue deeper reveals a much different picture. Van Buren, contrary to popular misconception, was not at the mercy of a financial meltdown due to a lack of "modern presidential tools." His diagnoses of the situation resembled that of William Leggett and the Locofocos. In sum, it was due to the 2nd BUS' inflationary policies that caused over-speculation and turned boom into bust. While the complex financial situation is too detailed for this post, I recommend that the reader check out H.A. Scott Trask's essay on the Panic of 1837 for details. Van Buren's advocated an Independent Treasury system that would separate banking from state, and would allow for a more stable economic system. If one looks at the evidence, the "free banking" era as it's known among economic historians, it was the most stable of any period in U.S. history. The only major panic in 1857 was due to the non-adoption of this system by the various state "pet" banks.

This is not to say there aren't some major issues with his presidency. For one thing, Van Buren continued Jackson's policy of Native American removal from the Southeast in direct defiance of John Marshall's ruling that they possessed private property to the land they occupied. He also became entrenched in the vicious and expensive Second Seminole War that his predecessor had started. By continuing the Trail of Tears, he solidified his place in history as someone who did not fully embrace all people's natural rights. 

In terms of the slavery question, Little Van has an even more unfortunate legacy. Early on, Calhoun and his supporters had attacked him as an abolitionist (a smear used against any threat to the institution). Van Buren, while personally anti-slavery but always wanting to keep political alliances, denied this and stated explicitly he would go along with the "gag rules" active in Congress and not attempt to abolish slavery in D.C.

This undertook a dramatic turn in the 1841 case of Armistead v. U.S. In the case, the Supreme Court had freed the captured Africans aboard a Spanish ship that they had grounded and successfully mutinied on. Van Buren, before the case was decided, was very willing to give up the slaves back if it meant continued peace with Spain. Pragmatism overrode natural rights once again. However, it is important to keep in mind that Van Buren was not a James Buchanan in the way that he dealt with the Southern section of his party. He was very willing to defy them and side with blacks when it came to minor incidents. However, when it came to major issues, he would not go as far as John Quincy Adams in defending African American rights.

Van Buren was deflated by his defeat to the Whig general William Henry Harrison, who used "log and hard cider" populist tactics and fake news to win the Presidency (although his early death allowed the Jeffersonian John Tyler to continue many of the same policies as his predecessor). While he would have a run in 1848 for the anti-slavery free soil party, his vindication for his peaceful and pragmatic policies would never come. 

All in all, what can historical hindsight make of Van Buren's legacy. There is a notion in public choice economics called the median voter model whereby most presidents will cater to the center while in  office. Van Buren defies this model by advocating for a radical laissez-faire position. Compared to other similarly forgotten presidents like Grover Cleveland and John Tyler, he remained the most consistent in the face of heavy political pressures. While the negatives are certainly a major drag (but not unique among both men of his and later times), The Little Magician's positive political accomplishments are worth taking seriously, and should serve as inspiration for those who care deeply about principles and advancing causes they believe in. He was able to bring clarity and consistency in the laissez-faire faction of the Democratic Party, and reinvigorated the Old Jeffersonians and the new Locofocos into coming together. To conclude, Martin Van Buren is America's most underrated president, and one of its best to boot.

Reprinted with permission. 



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