Blogroll: Mises Institute

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Updated: 2 hours 39 min ago

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

Tue, 20/10/2020 - 16:30

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

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

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

Comparing Latin America's Economic Models: Left vs. Right

8 hours 54 min ago

Twenty-first-century socialism, which has been so popular in Latin America for many years, has failed in a way that mirrors the failure of twentieth-century socialism in other parts of the world.

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

Original Article: "Comparing Latin America's Economic Models: Left vs. Right".

Categories: Current Affairs

Riots Only Help Fuel Urban Impoverishment

9 hours 24 min ago

In a recent interview Black Lives Matter (BLM) organizer Ariel Atkins argued that lootings are reparations for African Americans. Atkins denounced the suggestion that anything can be gained from peaceful protests. “Winning has come through revolts, winning has come through riots, ‘’ she said. Unfortunately, the belligerence of people like Atkins has been nurtured by mainstream intellectuals, who originally downplayed the malevolent intentions of dangerous activists. Therefore, as adults, we have no alternative but to remind these youngsters that sparking riots is an ineffective strategy to advance the cause of African Americans.

A striking case against riots is clearly expressed in the findings of Professor Mary C. King, whose research demonstrates “little relationship between regional progress for African Americans and relatively proximate race riots.” Riotous behavior often results in businesses fleeing minority communities, thus depriving residents of employment and income. Racism is an extremely sensitive matter; however, sensitivity must be tempered by logic. African Americans have experienced substantial progress over the past century. Eroding these gains is a possibility if rational adults refrain from correcting misguided activists. Such was the impact of the race riots of the 1960s. Examining the effects of civil disorder on small businesses in inner cities, sociologists Howard Aldrich and Albert Reiss found that riots not only inflicted serious property damages but in the long term they made it prohibitive to operate in inner cities, driving up insurance costs. As a result, businesses migrated to more nurturing environments. Low-income residents are the major beneficiaries of entrepreneurship in the inner city, so when emotions trump logic and businesses exit these communities, the losers are poor black people.

Current agitators also seem oblivious to the impact of riots on black property owners. Eminent economists Robert Margo and William Collins in their assessment of the effects of the riots following the assassination of Martin Luther King Jr. argue that “the riots depressed the median value of black-owned property between 1960 and 1970, with little or no rebound in the 1970s. Analysis of household-level data suggests that the racial gap in the value of property widened in the riot inflicted cities during the 1970s.” Housing is a contributor to the racial wealth gap, therefore if properties depreciate due to the risk of riots, how can African Americans make headway in closing the wealth gap? The long-term implication of riots is that they stigmatize African American communities as hotbeds of social unrest. Homes in such neighborhoods will not be purchased by progressive people interested in building wealth. What this means is that African Americans are deprived of the social capital and networks required to succeed in a competitive environment.

In another study, the authors indicate that riots reduced earnings for black employees in impacted cities; they write: “the findings suggest that the riots had negative effects on blacks’ income and employment that were economically significant and that may have been larger in the long run (1960–1980) than in the short run (1960–1970).” Their results are unsurprising. Inner-city businesses provide poor blacks with an opportunity to obtain employment and build relevant skills. Employment in a small business is a stepping stone to greater opportunities. When low-skilled citizens are robbed of these options, it becomes harder for them to establish themselves in a dynamic environment.

Another negative effect of riots is that they move public opinion to favor oppressive social control measures as a crime-fighting strategy, thereby establishing Republican hardliners as attractive candidates. As Princeton’s Omar Wasow notes in a recent study:

Evaluating black-led protests between 1960 and 1972, I find that nonviolent activism, particularly when met with a state of vigilante repression, drove media coverage, framing, Congressional speech, and public opinion on civil rights. Counties proximate to nonviolent protests saw presidential Democratic vote share among whites increase 1.3–1.6%. Protester-initiated violence, by contrast, helped move news agenda, frames, elite discourse, and public concern toward social control….In 1968, I find that violent protests likely caused a 1.6–7.9% shift among whites towards Republicans and tipped the election.

Kelly Anne Conway beautifully illustrated this point when she told Fox News that “the more chaos and anarchy and vandalism and violence reigns, the better it is for the very clear choice on who’s best on public safety and order.”

Evidently, the effects of riots on African Americans are destructive. Therefore, adults in the room must speak the truth—riots never redound to their benefit and neither does it make sense to enable the unrealistic demands of the BLM movement and its naïve supporters. It would be irresponsible for the American people to nurture the desires of activists seeking to destroy the fabric of their republic. We must reject not only vandalism, but also the radicalism of the BLM movement

Categories: Current Affairs

The Fed Is Planning Another Ultra-Long Period of Ultra-Low Rates

Thu, 17/09/2020 - 22:45

Jerome Powell fielded questions from reporters Wednesday, and he made it clear the Fed is a long, long way from abandoning its current dovish policy stance. The Fed plans to keep interest rates near zero, while monetizing US debt,  financing zombie companies, and pouring new dollars into the market through balance sheet purchases. But even that may not be enough, and the Fed is now hinting that even more fiscal support may be necessary.

Let's look at some of the details.

Interest Rates

When asked about interest rates, Powell replied:

With regard to interest rates, we now indicate that we expect it will be appropriate to maintain the current zero to 0.25% target range for the federal funds rates until labor market conditions have reached levels consistent with the committee’s assessments of maximum employment and inflation has risen to 2% and is on track to moderately exceed 2% for some time.

This basically means ultra-low rates from now until at least 2023. There’s no surprise there. Following the 2008 financial crisis and Great Recession, the Fed kept the target federal funds rate at 0.25 percent for 83 months, before slowly allowing rates to inch upward in 2015.

For the last five years of that period, the Fed generally maintained that the economy was “strong,” “strengthening” or generally doing well. The fact that the Fed refused to allow rates to move upward in this period hinted at the true weakness of the economy of that period, however.

targetrate.png tar

We’re now just six months into the current period of target rates at 0.25 percent, and its now more implausible than ever to claim the economy is doing well. There are still more than 12 million Americans currently collecting unemployment checks, and as of last week, nearly 800,000 workers filed new unemployment claims. As of late August, 30 to 40 million Americans were estimated to be at risk of eviction in coming months.

Not surprisingly, then, the fed expects it to be a while before “full employment” is again achieved, and as Powell notes: “We expect to maintain an accommodative stance of monetary policy until these outcomes, including maximum employment, are achieved.”

The Balance Sheet and Other Tools

But beyond forcing down interest rates for 6 or more years —as happened during the last cycle—what else can the Fed do?

Powell seems to believe there’s plenty:

First of all, we do have lots of tools, we’ve got the lending tools, we’ve got the balance sheet, we’ve got forward guidance. There’s still plenty more that we can do. We think that our rate policy stance is an appropriate to support the economy. We think its powerful....But again we have the other margins [that] we can still use. So no, certainty we’re not out of ammo.

Certainly, there’s no lack of lending tools available, and the Fed continues to be in the business of picking winners and losers using newly minted money. In many cases, these lending programs are simply bailout instruments, although these are officially regarded as “loans. ” They are essentially tools used to bailout zombie companies and other institutions that can’t cash flow in a normal market due to mismanagement, but which have been deemed too big to fail.

And then, of course, Powell is sure to mention the balance sheet.

This is certainly one of the areas where some of the most dramatic change can be seen, and the Fed’s balance sheet has again surged to over $7 trillion in recent days, reaching to 7.01 trillion as of September 9.

As we can see in the second graph, total Fed assets were under one trillion until late 2008 when the Fed began buying up assets no one wanted anymore in order to keep too-big-to-fail institutions afloat. It also bought assets such as US treasury debt to keep interest rates low. It made these purchases for its balance sheet primarily by creating new money out of thin air and spending it.

assets.png asse

In the decade following 2008, the Fed vowed it would reverse course and sell its assets, and pull those trillions of new dollars back out of the economy.

It’s obvious at this point that’s never going to happen, and the Fed is now in the business of monetizing the US government’s debt while creating artificial market demand for poorly-performing or non-performing assets held by the nation’s financial institutions.

Turning Toward Fiscal Policy

That’s where we are now, and its difficult to imagine the Fed diverging from this course under anything even resembling current conditions. Given the current fragility of the market—fragility created by the Fed’s long-term commitment to financialization and propping up financial institutions that made bad bets—the Fed can’t abandon its current policy of “easy money forever.” To do so would expose the sheer number of over-leveraged borrowers that absolutely rely on ultra-low interest rates to make their next debt payment and thus avoid default. Moreover, the Fed can’t allow interest rates to increase because this would lead to massive cuts to the Federal budget as Congress is forced to find ways to pay debt service on its rapidly growing $26-trillion debt.

But even with all this in place, there are fears in DC that it won’t be enough. Thus, the Fed is now being asked about how much “fiscal support” will be necessary from Congress. By “fiscal support,” we mean more unemployment checks, more direct bailouts and “forgivable loans” from Congress. We mean more US government spending in general, perhaps on infrastructure, military projects, wars, and other programs.

When Powell was asked about this yesterday, he replied:

My sense is that more fiscal support is likely to be needed. Of course, the details of that are for Congress, not for the Fed. But I would just say there are roughly 11 million people still out of work due to the pandemic and good part of those people were working in industries that are likely to struggle. Those people may need additional support as they try to find their way through what will be a difficult time for them.

Economists, especially Fed-enamored economists, have long pooh-poohed fiscal policy as inferior to monetary policy and as too slow. So the fact we’re now asking how Congress can support the Fed with fiscal policy suggests the Fed really is running out of options.

But is fiscal policy really all that distinguishable from monetary policy at this point?

After all, it’s not like Congress—should it wish to spend another trillion dollars—can come up with another trillion in tax revenues. Nearly all of the new stimulus spending being pushed by Congress in recent months has been paid for with deficit spending. This requires selling a lot of government bonds. And that should also mean rising interest rates for US debt as new debt floods the market. But why isn’t that happening? It’s because the Fed is buying up a lot of new debt to keep interest rates low.

Thus the line between monetary and fiscal policy becomes blurry. If new fiscal spending is mostly deficit spending—and a lot of that new debt is bought up by the Fed—fiscal policy just becomes another extension of monetary policy.

This may be where we're headed, but it is perhaps one of those taboos topics we’re not supposed to mentions on Capitol hill.

Categories: Current Affairs

Inflation as a Tool of the Radical Left

Thu, 17/09/2020 - 17:00

“Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch its currency….Lenin was certainly right. There is no subtler, no surer way of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”1

Keynes does not provide a concrete source backing his words but deliberately used the phrase “is said to have declared.” For a good reason. As Frank W. Fetter (1899–1991) pointed out, there is no evidence at hand that Lenin actually said or wrote these words, and anyone quoting Lenin on inflation would be indeed be referring to Keynes’s opinion.2

Be that as it may, it is pretty obvious that Lenin had a good understanding of the evils of inflation caused by the issuance of large amounts of unbacked paper money. He writes:

There is another side to the problem of raising the fixed grain prices. This raising of prices involves a new chaotic increase in the issuing of paper money, a further increase in the cost of living, increased financial disorganisation and the approach of financial collapse. Everybody admits that the issuing of paper money constitutes the worst form of compulsory loan, that it most of all affects the conditions of the workers, of the poorest section of the population, and that it is the chief evil engendered by financial disorder.3

Indeed price inflation caused by the increase in the quantity of money does not only cause serious economic problems. It also brings severe sociopolitical problems. Inflation makes most people poorer, degrades their social status, destroys their dreams of a better life. People become desperate and open to radical political programs.

In times of high inflation, all too often political agitators succeed in making people believe that the free market, capitalism, is to be held responsible for their plight. They promise that the collectivist-socialist program offers the solution—like, say, imposing price stops or price controls, raising corporate taxes and taxing the “rich,” controlling capital flows, etc.

That said, it becomes clear that ramping up inflation is actually a proper tool for those political forces that wish to overthrow the existing economic and social order—to get rid of what little is left of the free market system, as desired especially by those inspired by Marxist or Neo-Marxist ideas.

In a nutshell, militant Marxism wants to topple capitalism by means of a bloody revolution. Neo-Marxism follows a different strategy. It wants its ideas to attain “cultural, moral and ideological hegemony.” Once this is achieved, people will have no other choice than adopting socialism.

The supporters of Neo-Marxism attack people's values—family, hard work, thriftiness—stir conflict among people, discredit Christianity, and manipulate language (via calling for “political correctness”) to estrange people from their societal order, moving them away from the capitalist economy.

Neo-Marxists blame all evils in the world—economic crises, unemployment, income gaps, racism, ecological damage, etc.—on capitalism. At the same time, socialism is said to fix things, to set things straight, and to create a better world: more peaceful, just, and fulfilling people's real needs.

Neo-Marxism is alive and kicking. It has increasingly found its way into the political mainstream. For instance, the so-called political elite in many countries advocates a “Great Reset,” a “new world order,” to transform the economies, steering them away from the free market system.

Of course, inflationary policy is already being used to finance the state and its expansion. However, in most advanced countries the rate of inflation has been kept relatively low, that is, at a level that has not been stirring up outright public unrest. Inflationary policy follows the motto “Milk the cows, don’t kill the cows.”

What if Neo-Marxism makes it into central banks’ monetary policymaking? Well, you could say that it has already succeeded in doing so, for the concept of central banking is essentially a Marxist one. In their Communist Manifesto, Karl Marx (1818–83) and Friedrich Engels (1820–78) set up a list of ten “means of entirely revolutionising the mode of production.”

Among them is “Centralisation of credit in the hands of the state, by means of a national bank with State capital and an exclusive monopoly.” However, Neo-Marxism has not yet mustered sufficient supporters of outright monetary destruction, that is, a policy of very high inflation, for triggering an economic and societal revolution.

This is no reason for relief, though. As noted earlier, Neo-Marxist ideas have been gaining ground in basically all kinds of policy—education, law and order, transportation, conservation, money and credit, you name it. And so it would be consistent if Neo-Marxism increasingly undermined the consensus that relatively low goods price inflation is beneficial.

It is in this context that the US Federal Reserve’s latest change to its inflation target deserves mentioning. In August 2020 the Fed announced that it aims to achieve its 2 percent inflation goal only on average in the long term. This means that the Fed will allow for inflation in excess of 2 percent if and when inflation is below 2 percent in preceding periods.

The reason is obvious: the Fed is monetizing debt on an epic scale, through which it increases the quantity of money heavily. By the end of August 2020, the US money stock M1 had grown 40 percent compared to last year, M2 by 23 percent. The increased quantity of money will, sooner or later, most likely to be reflected in higher prices, be it consumer and/or asset prices. polleit-rising_money_stock_meets_shrinking_production.png Rising Money Stock Meets Shrinking Production This may not be fueled by a deliberate Neo-Marxist creed, but the Fed—and this holds true for other central banks as well—is certainly playing into the Neo-Marxist goal to shatter civic order, to drive people into socialism, and this is achieved as Lenin allegedly suggested: through the debasement of the purchasing power of money.
  • 1. John Maynard Keynes, The Economic Consequence of the Peace (London: Macmillan and Co., Limited), p. 285.
  • 2. See Frank Whison Fetter, "Lenin, Keynes and Inflation," Economica 44, no. 173 (1977): 77–80.
  • 3. V. I. Lenin, The Impending Catastrophe and How to Combat It (1917; Moscow: Progress Publishers, 1975).
Categories: Current Affairs

Federal Judge: Pennsylvania's Stay-at-Home Order Is an Assault on Human Rights

Thu, 17/09/2020 - 16:30

A federal judge on Monday ruled the Pennsylvania Gov. Tom Wolf’s Covid-19 stay-at-home orders and forced business closures were unconstitutional.

US District Judge William Stickman IV of the US Distriuct Couty for the Western District of Pennsylvania ruled Wolf’s orders violated the constitution in three ways. They violated the First Amendment right to freedom of assembly, and they violated both the due process and equal protections clauses of the Fourteenth Amendment.

As a staunch decentralist, I don’t support the notion that federal courts have the authority to strike down state laws. Federal courts should rule only on federal laws, and federal laws ought to be few and far between. State laws are the business of the state’s supreme court. And if that court fails to rule against the despotic decrees of government agents, it is up to the citizens of that state to refuse compliance and make life very difficult and uncomfortable for the state’s politicians until they change their minds.

Moreover, I have no confidence that the US Supreme Court will side with Stickman if this case makes it to the Supreme Court. After all, Justice Roberts has already signaled that he is quite comfortable with states violating basic human rights so long as it is done for the sake of “public safety.”

But whatever is the ultimate fate of this ruling, there’s no denying that Stickman’s ruling offers a quite compelling and thorough takedown of the ruinous, cynical, and morally repugnant set of “laws” that are the state’s Covid-19 restrictions.

The Ruling

Stickman starts off introducing his ruling with some basic and solid conclusions about rights in general. He writes:

In an emergency, even a vigilant public may let down its guard over its constitutional liberties only to find that liberties, once relinquished, are hard to recoup and that restrictions—while expedient in the face of an emergency situation—may persist long after immediate danger has passed.

It’s hard to dispute this, based not just on the current situation, but on countless other “crises” that have come and gone while the regime’s powers and prerogatives have proliferated.

Stickman then summarizes how the Pennsylvania decrees and orders came about. The “process” employed by Governor Wolf and his buddies is surprisingly corrupt and contemptuous of the public, even to an old cynic like me.

As Stickman notes, the “committee” which Wolf slapped together to write all his new executive orders, was essentially secret. The members were not made public, the meetings were secret and closed to the public, and no minutes were kept. Stickman also points out that no members of the group “possess a medical background or are experts in infection control.”

Stickman also has a problem with the permanence of the decrees and orders. The Governor and his ruling junta insist that their decrees are permanent, and even as stay-at-home orders are scaled back, these restrictions are only “suspended.” The default position is total lockdown. That is, in the minds of the Wolf cadre, we are to assume stay-at-home orders are the rule, and anything less than a full shutdown is an exception. Moreover, Stickman points out that the regime doesn’t even have a plan for fully abandoning its emergency powers. Ever. The lowest “setting” on lockdown orders is nonetheless still a partial lockdown. The regime can’t even envision—and has provided no legal pathway whatsoever—to returning to a “normal” situation. Unerstandably, Stickman views this as a big red flag.

So, what we have in Pennsylvania is basically a small secret ruling committee which fancies itself the new permanent ruling authority of Pennsylvania indefinitely. There is no end date, no public rule-making process, and no transparency at all.

Clearly, nothing like this has been seen in any state government in the United States since the 17th century. The notion that this could be considered constitutional by any historical or established legal standard ought to strike one as absurd.

Moreover, the restrictions imposed by Wolf’s junta are unprecedented in their extreme nature. Stickman writes:

The stay-at-home components of Defendant’s orders were and are unconstitutional. Broad population-wide lockdowns are such a dramatic inversion of the concept of liberty in a free society as to be nearly presumptively unconstitutional unless the government can truly demonstrate that they burden no more liberty than is reasonably necessary to achieve an important government end. The draconian nature of lockdown may render this a high bar, indeed.

Stickman emphasizes the unprecedented nature of the decrees as well. Although many supporters of stay-at-home orders have attempted to claim these are all very similar to “quarantine” orders during the 1918 epidemic, the fact is nothing like a stay-at-home order was ever imposed in the United States at that time—or at any other time:

Never before has the government exercised such vast and immediate power over every business, business owner, and employee. Never before has the government taken a direct action which shuttered so many businesses and sidelined so many employees and rendered their ability to operate, and to work, solely dependent on government discretion.

Stickman notes the Pennsylvania orders have nothing to do with a “quarantine” as legally and historically understood. Quarantine orders are only imposed “equal to the longest usual incubation period of the disease” and only applied against people known to have been exposed or to have symptoms.

Months-long, open ended stay-at-home orders, Stickman notes, have nothing at all to do with the quarantines used in the past, and are “unprecedented.”

The Right to Assemble

Stickman ruled that the Pennsylvania restrictions violated the Frist Amendment’s free assembly provisions, in part because the restrictions are unnecessarily broad and open ended, with no expiration date. The restrictions were to remain in force “until further notice."

Moreover, the restrictions on public gatherings were selectively applied, apparently in line with the political whims of the governor who even attended protests which violated his own orders. There were no exceptions for protests, yet the governor allowed them when politically convenient.

The restrictions are also haphazard, allowing large gatherings if done in big-box stores, but gatherings in other settings—even outside—are prohibited. The rules appear to be ad hoc, selectively enforced, and placing excessive and unnecessary obstacles against the well-established right to assemble.

No Equal Protection

Among the unprecedented acts taken by Gov. Wolf was his creation of two classes for businesses. There were the “life-sustaining businesses” and the “non-life-sustaining” businesses. Stickman shows that the Pennsylvania junta could provide no objective standard for determining which businesses are in one category and which are in another. Moreover, many of the businesses deemed “non-life-sustaining” by Wolf’s committees sold the same products as "life-sustaining" businesses. Thus, the restrictions did nothing to end sales of “non-life-sustaining goods," but only steered consumers away from the small businesses targeted by the regime, and toward large “big box” stores.

The effect was little more than to favor huge corporations while imperiling small businesses. Moreover, the categories were modified over time, apparently based on nothing more than the whims of Wolf and his allies. Stickman notes there is no legal precedence for such actions.

Stickman recounts how the Governor’s lawyers admitted the phrase “life-sustaining” is “not defined in any Pennsylvania statute or regulation.” It’s just something the shutdown advocates invented at the last minute. With no public input.

The regime’s actions in this regard as especially objectionable because they violate the basic human right to seek employment and make a living. Stickman concludes that the Governor’s orders did not provide the necessary justification for an order which trampled on the right of a resident to pursue employment in his chosen field. Stickman quotes Justice William O. Douglas who wrote:

The right to work, I had assumed, was the most precious liberty that man possesses. Man has indeed as much right to work as he has to live, to be free, to own property.

No Due Process

The fact that the Governor and his co-conspirators met in secret and allowed no public scrutiny of their meetings should be seen as an indicator that “due process” is sorely lacking in how the governor has handled his emergency powers.

Similarly, Stickman notes the state offered no reliable or public method for appealing the state’s decision to shut down any particular business. Stickman concludes the order to close all “non-life-sustaining businesses “was so arbitrary in its creation, scope and administration as to fail constitutional scrutiny.”

As with many states, the “emergency power” seized by the Governor amount to abolishing the basic concepts of due process established by centuries of political resistance to state abuse. The legislative process, public scrutiny, legal appeals processes: these are all established to provide a check on the powers of regimes. Wolf and his committeemen effectively abolished all of that.

The Immorality of Shutdowns

As a judge, Stickman naturally makes legal arguments here, relying on established precedents that themselves relay on the text of the Constitution itself.

But it's important to remember that Constitutional texts are only of any value if they are in the service of protecting human rights and providing a legal and institutional framework for doing so.

The strength in Stickman's ruling lies in the fact it provides a detailed account of the many ways the Pennsylvania stay-at-home orders —like similar orders in many other states—violate basic human rights.

Human beings have a right to not have their property effectively seized by the state without due process. Human beings have a right to not be targeted by a small cadre of politicians who have decided they can do whatever they want whenever there's an emergency. Human beings have a right to assemble in groups, whether for religious practice, for commerce, or to oppose the abuses of the state. Human beings have a right to look for work and be hired any agreeable employer.

While even staunch classical liberals might concede the utility of strictly limited emergency powers in certain extreme circumstances, we are now six months into what politicians claimed was "two weeks to slow the spread" with no end in sight. These enemies of human rights—with the support of at least a sizable minority of the population, have attempted to abolish all human rights "until further notice" in a way absolutely unprecedented in American history.

Stickman is right that the Pennsylvania lockdown cannot be defended by anyone who takes human rights seriously. 

Categories: Current Affairs

How Government-Owned Streets Prevent Effective Law Enforcement

Thu, 17/09/2020 - 15:00

“Taking back the streets” ought to mean privatizing them and enabling property owners to defend their property. This would be the surest way to end the riots.

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

Original Article: "How Government-Owned Streets Prevent Effective Law Enforcement".

Categories: Current Affairs

Damian Carabello on Surprise Billing: Through the Looking Glass

Thu, 17/09/2020 - 14:30

Dr. Damian Carabello discusses the depths insurance companies go to make sure they end up on top.

SHOW NOTES
  • Damian Carabello, MD: Twitter​

  • Anish Koka long read on surprise billing

  • Damian Carabello “Let’s end surprise billing without a Trojan horse” blog on KevinMD about the problems with benchmarking.

  • Twitter thread on the history of Ingenix

  • Andy Slavitt’s involvement with health insurance fraud case

  • Watch the episode on YouTube

Categories: Current Affairs

The Problem with "Predictive" Theories of Economics

Thu, 17/09/2020 - 12:00

[John Kay and Mervyn King
Radical Uncertainty: Decision-Making beyond the Numbers
Norton, 2020. xvi + 528 pages]

Kay and King are not Austrians, but in this important book, they lend aid and comfort to several key points of Austrian economics. Kay teaches economics at Oxford, and King, who was formerly governor of the Bank of England, teaches at NYU. (King in an earlier book, The End of Alchemy, that I had occasion to review warns against the dangers of fractional reserve banking in a way that will delight admirers of Murray Rothbard.)

Austrians hold that the dynamics of the market depend on profit-seeking entrepreneurs, whose judgments of appraisement are of necessity subjective, irreducible to monetary calculation. As Joseph Salerno explains,

Mises presents a penetrating critique of the Walrasian view that, in the plans of producers, prices substitute for knowledge of the economic data or, rather, for entrepreneurial understanding and appraisement of future variations of these data. Mises's critique is grounded on the incontrovertible fact that “The prices of the market are historical facts expressive of a state of affairs that prevailed at a definite instant of irreversible historical time.” As such, realized prices can never serve as an unambiguous guide to production; which is always aimed at supplying a market of the more or less remote future involving a different configuration of the eco­nomic data.

Mises’s argument depends on the distinction, made famous by Frank Knight, between risk and uncertainty. In a situation of risk, the actor knows the possible outcomes and can apply the probability calculus to them. In a situation of uncertainty, he cannot do so, either because he cannot use the probability calculus or because he does not know all the possible outcomes. He must rely on his judgment about the particular case. Mises calls this the distinction between class and case probability. He says in Human Action about case probability: “Case probability means: We know, with regard to a particular event, some of the factors which determine its outcome; but there are other determining factors about which we know nothing. Case probability has nothing in common with class probability but the incompleteness of our knowledge. In every other regard the two are entirely different.”

Mainstream neoclassicals do not accept this distinction. Milton Friedman says, “[I]n his seminal work, Frank Knight drew a sharp distinction between risk, as referring to events subject to a known or knowable probability distribution, and uncertainty, as referring to events for which it was not possible to specify numerical probabilities. I’ve not referred to this distinction because I do not believe it is valid….We may treat people as if they assigned numerical probabilities to every conceivable event.” If Friedman is correct, a key tenet of Austrian economics is wrong; entrepreneurial appraisement must exit the scene.

Mises acknowledges that you can say things like “I think there is a 50 percent chance the Republicans will win the coming election.” But this is just an expression of how confident you feel about this, and it is meaningless to use probability calculus here. He says,

On the eve of the 1944 presidential election people could have said:…(c) I estimate Roosevelt's chances as 9 to 1….This is a proposition about the expected outcome couched in arithmetical terms. It certainly does not mean that out of ten cases of the same type nine are favorable for Roosevelt and one unfavorable. It cannot have any reference to class probability. But what else can it mean? It is a metaphorical expression….For the comparison is based on a conception which is in itself faulty in the very frame of the calculus of probability, namely the gambler's fallacy. In asserting that Roosevelt's chances are 9:1, the idea is that Roosevelt is in regard to the impending election in the position of a man who owns 90 per cent of all tickets of a lottery in regard to the first prize. It is implied that this ratio 9:1 tells us something substantial about the outcome of the unique case in which we are interested. There is no need to repeat that this is a mistaken idea.

Knight has an amusing comment on this issue. He says, “The saying often quoted from Lord Kelvin…that where you cannot measure, your knowledge is meagre and unsatisfactory; as applied in mental and social science is misleading and pernicious…the Kelvin dictum very largely mean[s] in practice, if you cannot measure, measure anyhow!”

Friedman has an answer to this objection. It does not matter, he says, whether people actually do assign probabilities to every conceivable event. This is just an assumption economists make, and what counts for a good theory is not the realism of its assumptions. Rather, a good theory is one that generates good predictions.

Kay and King reject this view, and here they again render Austrian economics a service, though, to reiterate, they themselves aren’t Austrians. The method of Austrian praxeology is deductive, and unless your premises are true, you have no guarantee that the conclusions you deduce from them are also true. Thus, Austrians must reject Friedman’s position.

Kay and King reject Friedman’s methodology because there is almost never clear evidence that the predictions of a theory are false. You can always adjust something in the theory to make it come out true, and that is what all too many economists do:

Friedman’s article [on methodology] appeared in a brief period of intellectual history in which a version of Popperian falsificationism—the idea that a hypothesis acquires scientific status only if there is a possibility that it might be refuted was in fashion….The decisive rejection of this falsificationist view is encapsulated in what philosophers know today as the Duhem-Quine hypothesis: such refutation is rarely definitive, because any test requires a range of auxiliary assumptions, and it is always possible to argue that these assumptions have not been fulfilled.

There is an additional point that strengthens the argument against Friedman. It isn’t clear that his claim about probability estimates generates any predictions at all. If you make a series of bets that don’t conform to the principles he sets forward, he can show through what is called a “Dutch-book” argument that you will lose money. But that is hardly a prediction that anyone will in fact make a series of bets of this kind.

Kay and King suggest that, in fact, most people won’t make bets in the circumstances that Friedman assumes.

In a world of radical uncertainty, most people do not choose among lotteries, far less enter them, and for good reasons….They shun randomness. They are reluctant to make commitments in situations they do not understand, especially when other people may have a better understanding of them….Of course, there are people who will take a bet on anything, but that is a mark of weirdness, not rationality.

Friedman’s rejection of the risk-uncertainty distinction is part of a general effort of the Chicago school to judge the free market by external standards of “efficiency,” here again a point of divergence from the Austrian school. (By “Chicago school,” I refer to the period that began with Friedman's dominance; Knight and Henry Simons did not share Friedman’s views.) The authors give another example of this Chicago tendency. Herbert Simon criticizes the neoclassical view that people try to maximize their expected utility on the ground that, often, what is “good enough” suffices. If, for example, you are selling your house and you get an offer that seems satisfactory, you may take it. You won’t keep investigating to see if you can get a better offer. Simon called this “bounded rationality” or “satisficing.”

Simon’s point does not faze the Chicago economists. They argue that if you accept the offer, you are still maximizing, if account is taken of the search and transactions costs of looking for something better. Thus, they transform what Simon argues into its exact opposite. “Simon is reported to have joked that he should take legal action against his successors who misused his terminology and neglected his insights.”

Austrian school economists also reject the use of the conditions for general equilibrium as a standard to judge the free market, and here once more Kay and King agree. They tell us that Kenneth Arrow and Gerard Debreu, who first proved that competitive prices can under certain conditions result in a general equilibrium, realize that their model is unrealistic: “Arrow and Debreu recognized that they were describing an imaginary world akin to that of Through the Looking-Glass. And they interpreted that world as a rhetorical device, like those literary fictions, illustrative of propositions which might—or might not—be true in any real world.”

Kay and King have written an impressive and erudite book that ranges over many disciplines. It is often repetitious; though the book is about radical uncertainty, readers will rarely be uncertain what the authors are going to say. The book is filled with anecdotes, and I’ll close with one that illustrates the authors’ criticism of the neoclassicals: “The new macroeconomic theorists followed a different approach….Ronald Coase attributed a satirical description of it to the English economist Ely Devons: ‘If economists wished to study the horse, they wouldn’t go and look at horses. They’d sit in their studies and say to themselves, ‘What would I do if I were a horse?”’

Categories: Current Affairs

Joey Rothbard

Thu, 17/09/2020 - 11:00

Today would have been the ninety-second birthday of JoAnn Rothbard, the beloved wife of Murray Rothbard for forty-two years. In the dedication to America's Great Depression, he called her "the indispensable framework," and anyone who knew them could have no doubt why he said this.

Murray discussed all his ideas with her, and she was a gifted historian in her own right—I recall in particular an excellent talk she gave on Lincoln's economic policies. She was totally devoted to Murray, and she regarded it as a principal task to shield him from those who tried to exploit him. She had hilarious stories about some of these people.

During the 1979 convention of the Libertarian Party at the Bonaventure Hotel in Los Angeles, someone took the occasion to get Murray to speak at her supper club.  She said to me, "Do you know what she paid him? Zip."

Once you were her friend, though, you were her friend for life. She had an amazing number of stories about people she had known. No one kept up with people as much as she did; and, as she once said to me, "There's a lot I know that I don't tell anyone."

The memory of her that is clearest in my mind is the kind look in her eyes. This stays with me, "in thinking of the days that are no more."

Categories: Current Affairs

The Economics of Destutt de Tracy

Wed, 16/09/2020 - 20:00
Destutt de Tracy

Antoine Louis Claude Destutt de Tracy (1754–1836), a French philosopher and economist, is worthy of attention as a contributor to French liberal thought in the tradition of Condillac. Tracy's deductive methodology, his liberal approach to governmental affairs, and his subjectivism qualify him as a proto-Austrian economist who enjoyed considerable influence not only in France but also around the world. This essay will briefly examine Tracy's thought, concentrating on his theory of money and banking and his ideas on government. We will conclude with a review of the effect Tracy had on American Jeffersonian thought.

Ideology and Ideologists, Method, and Subjectivism

Destutt de Tracy's economics were an outgrowth of his philosophy of "ideology." Ideology, a term coined by Tracy about 1796, was to be a "science of the formation of ideas,"1 a comprehensive study of human action that began with a Lockean antisubstantialism and sensationalism. Tracy envisioned ideology as a superscience that would tie political, economic, and social issues together through the universal application of its insights into human behavior, "the greatest of arts, for the success of which all the others must cooperate, that of regulating society in such a way that man finds there the most help and the least possible annoyance from his own kind."2

In this, ideology sought to replace theology as the dominant unifying system, and, further, to exclude all religious studies whatsoever from the ideological system. Tracy's magnum opus was his Elémens d' idéologie (1801–1815), a four-volume treatment of methodology and philosophy, which consisted of Idéologie proprement dite (1801), Grammaire (1803), Logique (1805), and Traité de la volonté et de ses effets (1815). His Traité de la volonté, or treatise on the will, was enthusiastically accepted by Thomas Jefferson and became the only volume of Tracy's Elémens to be translated into English, under the title A Treatise on Political Economy.

Tracy's colleagues called themselves "ideologists," though the derisive title of "ideologues," given them by Napoleon, stuck. These ideologues included Cabanis, Garat, Wenceslas Jaquemont, Jean-Baptiste Say, François Thurot, and others. Among Tracy's friends were also Dupont de Nemours and the Marquis de Lafayette, through whom he communicated with Thomas Jefferson.

The inception of ideology was at a time of political upheaval in France. Tracy's attempts at riding the fence between royalist and Republican were largely unsuccessful. Tracy barely escaped execution during the Reign of Terror, having been imprisoned for nearly a year (November 1793–October 1794). The emergence of the Napoleonic empire did not provide the ideologues with lasting security. Though Napoleon courted the ideologues for some time, he began in 1802 to show open hostility to this group whose liberalism stood in opposition to his dictatorial policies. However, the success of ideology was not strictly limited by this domestic opposition, as Tracy's ideas found enthusiastic sponsors in the rest of Europe and the Western Hemisphere.

Destutt de Tracy and the ideologues were heavily influenced by Abbé de Condillac. Condillac's liberalism and deductive methodology were the foundation of much of Tracy's work on economics.3 John Locke's influence is present in the ideologues' thought, notably in Tracy's writings on property rights. Clearly, Tracy also followed Jean-Baptiste Say, especially in the subjective-value tradition, but Tracy perhaps anticipated him in his attack on calculation or algebraic expression in the social sciences. In this, Tracy can be effectively distinguished from the French positivists, who, unlike the ideologues, were attempting to employ tools from the physical sciences in the field of social science.

It would be a misunderstanding of ideology to say that its purpose was to unify the physical and social sciences. The ideologues recognized that social sciences were fundamentally different from physical sciences, but they applied deductive methods to both. Daniel Klein writes,

The mode of analysis is the same in all endeavors: to establish primary principles which come from the most simple ideas…which in turn come directly from our sensations. What distinguishes the different sciences is the object being investigated, and the ideologues definitely believed that the social sciences give way to a very differently structured body of thought than do the physical sciences.4

Upon the foundation of sensibility, many of Tracy's predecessors had hoped to establish an exact mathematical science of human thought. Tracy, however, breaking with Condorcet's social mathematics and Condillac's langue des calculs, believed with Locke that much of reality could not be reduced to mathematical constructs. Emmet Kennedy writes,

Through observation and deduction, not calculus or geometry, one could discover the other propositions contained in the original truth, "man is a sensitive being," and thereby reduce all the human sciences to a few basic truths. This science of observation and deduction, the "analysis of ideas," all ideas, not just mathematical ideas, was "ideology" to which all the other sciences could be reduced. "Ideology" itself reducible to none, guaranteed the unity of the sciences.5

Destutt de Tracy was also part of the catallactic and subjective-value tradition, which proceeded from Turgot and Say. In his Traité de la volonté, he writes,

Society is purely and solely a continual series of exchanges. It is never anything else, in any epoch of its duration, from its commencement the most unformed, to its greatest perfection. And this is the greatest eulogy we can give to it, for exchange is an admirable transaction, in which the two contracting parties always both gain; consequently society is an uninterrupted succession of advantages, unceasingly renewed for all its members.6

Tracy further reinforces the idea of subjective value in exchange, saying that "[w]henever I make an exchange freely, and without constraint, it is because I desire the thing I receive more than that I give; and on the contrary, he with whom I bargain desires what I offer more than that which he renders me."7 In the Traité, in the chapter "Of the Measure of Utility or of Values," he writes that "the measure of the utility of a thing…is the vivacity with which it is generally desired."8 Tracy follows that statement with an argument that the free-market price is the best way to find out what that value is. Tracy emphasizes the benefits to society of free exchange, acknowledging the Smithian concentration on the division of labor, but criticizing Smith for failing to investigate exchange as the driving force behind the division of labor.9

"Labour" was instead upheld as highly productive as compared to land. Furthermore, "labour" for Tracy was largely the work of the entrepreneur in saving and investing the fruits of previous labor. The entrepreneur, he pointed out, saves capital, employs other individuals, and produces a utility beyond the original value of his capital. Only the capitalist saves part of what he earns to reinvest it and produce new wealth. Dramatically, Tracy concluded, "Industrial entrepreneurs are really the heart of the body politic, and their capital is its blood."10

Tracy had avid followers in Italy, Russia, Britain, and elsewhere in Europe. His shadow, as we shall see below, even extended across the Atlantic to South America and to the American Jeffersonians. However, despite the international influence which Destutt de Tracy wielded, and the impact which he had on the French liberal school, Tracy has been neglected in investigations into the history of economic methodology. Daniel Klein argues that Nassau Senior, John Stuart Mill, and others have "received much attention in this literature," while "the forerunners Condillac and Tracy…have been almost entirely overlooked."11 Joseph Salerno shows that the influence of Tracy and other French liberal writers has extended to "economists as diverse in analytical approach and ideological preference as Eugen von Böhm-Bawerk, Vilfredo Pareto, Francesco Ferrara, Gustav Cassel, and Othmar Spann…."12

In an effort to obtain a better grasp of the quality of Tracy's writings, we shall briefly examine his work in the area of political economy. Tracy's Traité de la volonté is of particular interest, and we shall look at Tracy's insights in monetary and political theory using this work and others.

Destutt de Tracy on Money and Banking

Tracy begins his chapter on money in the Traité by referring the reader back to his exposition on value, and makes it clear that he is writing of "the conventional value, or market price," all of which "are measured the one by the other."13 Tracy then proceeds to present the problem of the double coincidence of wants, and to detail the characteristics of an ideal money:

We can give hay for corn, or corn for wood; a cart-load of potters clay, or of brick earth, for some plates or tiles, etc.; but it is evident that this is very inconvenient, that it occasions removals so troublesome as to render most affairs impracticable….14

This problem is resolved by money, Tracy tells us, but he specifically refers to precious metals. Destutt de Tracy was a hard-money advocate of the first order, believing that a silver standard was ideal, "because it is this which is best adapted to the greatest number of subdivisions, of which there is need in exchanges. Gold is too rare, the other metals too common."15

After defending the use of a silver standard over other metallic standards, Tracy almost immediately launches into an attack on the governmental manipulation of the currency. Tracy claimed that the very naming of currencies (livres, sous, deniers, etc.) was used by the state to divorce the value of the currency in exchange from the value of the metal in the coin itself. His ruthless assault on inflation is worth quoting at length:

"[T]hese arbitrary denominations being once admitted and employed in all the obligations contracted, we should take great care to make no change of them; for when I have received thirty thousand livres and have promised to pay them at a certain time, if, in the interval, the government says that the quantity of silver which was called three livres shall be called six, or which is the same thing, if it makes crowns of six livres, which do not contain more silver than was contained in the crowns of three, I who pay with these new crowns do not really return but the half of what I had received. This is merely an accommodation of which an indebted legislator wishes to avail himself with his numerous creditors….In spite of this deception, let us speak plainly, this is permitting every one to rob to enable himself to rob….16

Tracy shows clearly that inflation (he did not make a distinction between expected and unexpected inflation) enriches debtors and impoverishes creditors. He also mentions what might be called today a rational expectation of future inflation:

[T]he…effect…is to cause a fear that at every moment [currency debasement] may recommence, and that no further reliance can be had in plighted faith; to excite by this mean inquietude in all relations, and eventually to diminish all industrious and commercial speculations.17

Tracy's next target was unbacked paper money, which he argued was "the most culpable and most fatal of all fraudulent bankruptcies."18 Those who claimed that the commodity contained in the currency was unimportant, that only the state's stamp or seal was valuable, were subject to Tracy's incisive response:

One might [have] answered them, if silver has no value, why do you retain that which you owe? You have no occasion for it. Give it to us first, then you may put your impression on pieces of wood if you please, and you will see the effect it will produce. It does not seem necessary to be very sharp sighted to devise this overwhelming answer.19

Of course the government would not do this, and Tracy explains the resulting legal-tender laws, and the concomitant destructive results of inflation—a "general want," the devastation of industry, price controls, difficulties in calculation, and the increasing poverty of those on incomes denominated in paper notes.

Bankers fared no better than governments in Tracy's hands. Tracy noted the cartelization of fractional-reserve banks for the purpose of reducing competition, and contended that government encouraged such a process, giving the banks numerous privileges, for the purpose of having a ready supply of funds. "[S]oon the government, which has created it but for this purpose, asks of this company enormous loans; it dares not and cannot refuse them…."20 Tracy then explained the origin of government-declared bank holidays as the result of runs on the bank following overissue of paper bank notes, and concluded that all such government-supported, "privileged companies" were "radically vicious."

In keeping with his laissez-faire thought on money and most other issues, Tracy was generally against the setting of interest rates by the civil authority, arguing that

Since we rent horses, coaches, furniture, houses, lands, in a word whatever is useful and has a value, we may well rent money also….This rent of money is what is called interest. It is as legitimate as every other rent. It ought to be equally free. There is no more reason why public authority should determine its rate, than that of the lease of a house or a farm.21

Tracy did make an exception for "legal interest," which a judge might set for delinquent debtors and the like, but noted that no other reason would be sufficient for government intervention in this area.

Tracy's Thoughts on Government

Destutt de Tracy's antagonism toward government intervention in the marketplace was not limited to the money and banking arena. Throughout Tracy's Traité, we find evidence of his liberal thinking on government, including his support of rights to private property, his disdain for government regulation, and his relatively isolationist stance on foreign-policy issues of his day.

Tracy's chapter "Of the distribution of our Riches amongst individuals" employs a Lockean ethic of property rights that would be particularly familiar to modern readers of Hans-Hermann Hoppe. Tracy writes, "We have seen that property exists in nature: for it is impossible that every one should not be the proprietor of his individuality and of his faculties."22 Tracy next dealt with the communistic egalitarianism of Revolutionary France when he wrote,

[W]e should see as many quarrels for a greater share of the common goods, or a smaller part of the common trouble, as can exist among us for the defence of the property of individuals; and the only effect of such an order of things would be to establish an equality of misery and deprivation, by extinguishing the activity of personal industry.23

When discussing government regulation, Tracy is decidedly laissez-faire in his approach, as Condillac was before him. When writing of government subsidization of the arts and sciences, Tracy contends,

For it is very certain that in general the most powerful encouragement that can be given to industry of every kind, is to let it alone, and not to meddle with it. The human mind would advance very rapidly if only not restrained; and it would be led, by the force of things to do always what is most essential on every occurrence. To direct it artificially on one side rather than on another, is commonly to lead it astray instead of guiding it.24

John Maynard Keynes would have found an opponent in Destutt de Tracy. Consumption, Tracy argues, is unproductive, as it is the "destruction of labor," and this includes government consumption. Tracy uses an example very similar to Henry Hazlitt's famous "broken window" example to illustrate the fact that consumption cannot be productive: "[F]or if to destroy is so good a thing, it seems that we cannot destroy too much, and that we ought to think with the man who broke all his furniture, to encourage industry."25 Later, Tracy adds, "In effect, he who names luxury, names superfluous and even exaggerated consumption;—consumption is the destruction of utility. Now how conceive that exaggerated destruction can be the cause of riches—can be production? It is repugnant to good sense."26

Tracy's assessment of consumption as "the destruction of utility" is curious, and rather the reverse of modern thinking on utility. Consumption is the creation of utility and the goal of all production. Tracy might have more properly said that there is an opportunity cost to all consumption, so that the net effect of destruction merely to encourage consumption is a loss to society. As to the government as a consumer, Tracy adds (over 100 years in advance of Keynes),

The question is, to know what effects these revenues, and these expenses, produce on the public riches and national prosperity. To judge of them—since government is a great consumer, and the greatest of all,—we must examine it in this quality, as we have examined the other consumers….

A first thing very certain is, that government cannot be ranked amongst the consumers of the industrious class. The expenditure it makes does not return into its hands with an increase of value. It does not support itself on the profits it makes. I conclude, then, that its consumption is very real and definitive; that nothing remains from the labour which it pays; and that the riches which it employs, and which were existing, are consumed and destroyed when it has availed itself of them.27

Tracy's distaste for government-enforced monopolies is plain:

Monopoly, or a sale exclusively by the state, is odious, tyrannical, contrary to the natural right which every one has of buying and selling as he pleases, and it necessitates a multitude of violent measures. It is still worse when this sale is forced, that is to say when government obliges individuals, as has sometimes been done, to buy things they do not want, under pretext that they cannot do without them, and that if they do not buy them it is because they have provided themselves by contraband.28

Tracy even includes reference to rent-seeking behavior on the part of special-interest groups. Opposing groups are defined and their interests made clear

…every one fears competition in his own way, and would wish to be alone in order to be master. If you pursue further the complication of these different interests, in the progress of society, and the action of the passions which they produce, you will soon see all these men implore the assistance of force in favour of the idea with which they are prepossessed; or, at least, under different pretexts, provoke prohibitive laws, to constrain those who obstruct them in this universal contention.29

Even with regard to "public-works" projects, infrastructure, and the like, Tracy favored private control. With regard to "bridges, ports, roads, canals, and useful establishments and monuments," Tracy writes that "we must conclude that individuals could have done the same things, on the same conditions, if they had been permitted to retain the disposal of the sums taken from them for this same use; and it is even probable that they would have employed them with more intelligence and economy."

Tracy was unequivocal in his remarks upon the practice of obstructing one's exit from a country: "I know nothing more odious, than to prevent a man from emigrating from his country, who is there so wretched as to wish to quit it, in spite of all the sentiments of nature, and the whole force of habits, which bind him to it. It is moreover absurd…."30 Tracy did believe that immigration barriers were sometimes called for, because most immigrants brought little useful knowledge with them, Tracy thought, so that the benefits of their coming were canceled out by the added burden of their persons.

One point upon which Tracy appears to deviate from his overwhelmingly liberal stance is his tolerance of government ownership of cultivated lands, especially forested lands. His position upon this point seems to contradict not only his arguments elsewhere, but also good economic sense. It is true that he does remark upon the "much unskilfulness" which must accompany government management of land, but he maintains that this is "no very great inconvenience."31 He bases this assertion upon the beliefs that (1) the time preference of individuals will not allow for the long planting-to-harvest cycle of timber farming, (2) the government has better knowledge and faithfully serves the public interest, (3) the supply of land on the market will fall, raising its price and thereby (somehow) lowering the general rate of interest, and (4) it is not necessary to collect in taxes what the government receives in revenue from these lands.

Tracy discusses taxation at length, detailing various types of taxes and their incidence, as well as their various negative effects. Some taxes arouse Tracy's intense disapproval:

[A]ll these taxes whatsoever on merchandise occasion an infinity of precautions and embarrassing formalities. They give place to a multitude of ruinous difficulties, and are necessarily liable to be arbitrary; they oblige actions indifferent in themselves to be constituted crimes, and inflict punishments often the most cruel. Their collection is very expensive, and calls into existence an army of officers, and an army of defrauders, men all lost to society, and who continually wage a real civil war, with all the grievous economical and moral consequences which it brings on.32

Tracy also shows how taxation of the most inelastically demanded commodities is the most effective for generating revenue:

[A]n impost displays all its force when the article is very necessary and costs very little, as salt for example: there all is profit for the treasury; accordingly its agents have always paid a particular attention to salt….Air and water, if they could have appropriated them would have been objects of taxation very heavy and very fruitful for the treasury; but nature has diffused them too widely. I do not doubt but, in Arabia, revenue farmers would draw great profit from a tax on water, and so that no one should drink without their permission. As to air the window tax accomplishes as much on that as is possible.33

Destutt de Tracy's Worldwide Impact

Destutt de Tracy enjoyed considerable influence upon scholars in his own nation, but perhaps more remarkable is the influence Tracy had in other countries. His writings were translated into Italian and he attracted several followers in elevated positions in the Italian government. In Great Britain, James Mill may have been influenced somewhat by Tracy and the ideologues. Murray Rothbard notes that in 1825, an attempt on the life of the dictator Czar Nicholas I was made by "one of the leading liberal Decembrists, Pavel Ivanovich Pestel, who considered Tracy's Commentary [on Montesquieu, (1807)] as his Bible…."34 In 1817, Dom Manuel Maria Gutierrez, who would be a leader of the liberal Spanish revolution three years later, translated Tracy's Traité de la volonté into Spanish. Two other revolutionaries were responsible for translating two other works by Tracy. The president of Argentina, Berardino Rivadavia, was a follower of Tracy. In two other South American countries, Brazil and Bolivia, Tracy also enjoyed widespread popularity.

Tracy had a profound impact upon President Thomas Jefferson, who saw to it that Tracy's Commentary on Montesquieu and his Traité de la volonté were translated into English, the latter's translation being titled A Treatise on Political Economy. Jefferson had been a minister to France in the 1780s and had known and admired the ideologues since that time. Jefferson enthusiastically promoted Tracy's work, and expressed his desire to have the Treatise accepted as the primary economic text in America. In a letter to the publisher, Jefferson wrote,

The merit of this work, will, I hope, place it in the hands of every reader in our country. By diffusing sound principles of Political Economy, it will protect the public industry from the parasite institutions now consuming it, and lead us to that just and regular distribution of the public burthens from which we have sometimes strayed. It goes forth therefore with my hearty prayers, that while the Review [Commentary] of Montesquieu, by the same author, is made with us the elementary book of instruction in the principles of civil government, so the present work may be in the particular branch of Political Economy.35

Jefferson's friend John Adams was also enamored with the Treatise. Adams, who wrote that "Our whole banking system I ever abhorred, I continue to abhor, and shall die abhorring…." believed that Tracy's chapter on money contained "the sentiments that I have entertained all my lifetime."36 He believed the book to be "a magazine of gun powder placed under the foundation of all mercantile institutions."

In a letter to Lafayette, a mutual friend of Jefferson's and Tracy's, Jefferson asks Lafayette to bear the message to Tracy that

his Political economy has got into rapid and general circulation here, that it is already quoted in Congress and out of Congress as our standard code; and that the naming him in that as the author of the commentary on Montesquieu has excited a new demand for that work….These two works will render more service to our country than all the writings of all the saints and holy fathers of the church have rendered.37

Jefferson appears to have overestimated the success of Tracy's work, however. Michael O'Connor writes that, in comparison with Say's Traité d'Économie Politique, Tracy's work "found little recognition in the colleges."38 Although Tracy's works did not find the general acceptance that Say's work did, he had no small influence on the future of American political economy, especially in the South. Salerno writes,

After the Civil War, there appeared on the scene a catallactic and subjectivist-oriented movement in American economics which was heavily indebted to liberal economic doctrines, especially as presented in the works of Say, Destutt de Tracy, and Bastiat. Adherents of this approach included such notable economists as Amasa Walker, Arthur Latham Perry, and the former's son, Francis Amasa Walker.39

Through John Taylor, to whom Salerno refers as "the leading Jeffersonian political economist,"40 Tracy's French liberal views on money and banking were also heard during the American debate over centralized fractional-reserve banking.

Destutt de Tracy's Modern-Day Influence

The general level of quality of Destutt de Tracy's writings make it difficult to explain why this philosopher and economist has been so often overlooked in modern studies of the history of economic thought. Certainly his influence has not been so slight as to discredit his contributions entirely. We might say in conclusion, however, that Tracy's deductive methodology, his subjectivism, his catallactics, and his opposition to governmental monetary fraud and regulation have been carried through to the modern-day Austrian school in the tradition of Ludwig von Mises and Murray Rothbard.

Timothy Terrell is associate professor of economics at Wofford College and an adjunct scholar of the Ludwig von Mises Institute.

Acknowledgements: Thanks are due to Bob Ekelund, Scott Kjar, and James Yohe for comments and criticism. All errors and omissions are, of course, not to be charged to their account. Comment on the blog.

  • 1. Emmet Kennedy, A Philosophe in the Age of Revolution (Philadelphia: American Philosophical Soc. 1978), 45.
  • 2. Kennedy, 47.
  • 3. See Daniel Klein, "Deductive Economic Methodology in the French Enlightenment: Condillac and Destutt de Tracy," History of Political Economy 17, no. 1 (1985): 51–71.
  • 4. Klein, 53, 54.
  • 5. Kennedy, 50.
  • 6. Destutt de Tracy, A Treatise on Political Economy (1817; repr., New York: Center for Health Education, 1970), 6.
  • 7. Tracy, 8.
  • 8. Tracy, 27.
  • 9. See Kennedy, 198.
  • 10. Murray N. Rothbard, An Austrian Perspective on the History of Economic Thought, vol. 2, Classical Economics (Brookfield, VT.: Edward Elgar, 1995), 6.
  • 11. Klein, 51.
  • 12. Joseph T. Salerno, "The Neglect of the French Liberal School in Anglo-American Economics: A Critique of Received Explanations," Review of Austrian Economics 2 (1988): 113.
  • 13. Tracy, 75.
  • 14. Tracy, 75, 76.
  • 15. Tracy, 79.
  • 16. Tracy, 82.
  • 17. Tracy, 84.
  • 18. Tracy, 94.
  • 19. Tracy, 85, 86.
  • 20. Tracy, 104.
  • 21. Tracy, 95.
  • 22. Tracy, 111, 112.
  • 23. Tracy, 112.
  • 24. Tracy, 234.
  • 25. Tracy, 176.
  • 26. Tracy, 176.
  • 27. Tracy, 196, 197.
  • 28. Tracy, 204, 205.
  • 29. Tracy, 42.
  • 30. Tracy, 145.
  • 31. Tracy, 198.
  • 32. Tracy, 205, 206.
  • 33. Tracy, 219.
  • 34. Rothbard, 11.
  • 35. Thomas Jefferson, frontispiece in Destutt de Tracy, A Treatise on Political Economy.
  • 36. Quoted in Michael O'Connor, Origins of Academic Economics in the United States (New York: Garland. 1974), 26.
  • 37. Gilbert Chinard, The Letters of Lafayette and Jefferson (New York: Arno. 1979), 397.
  • 38. See O'Connor 27.
  • 39. Salerno, 132.
  • 40. Salerno, 142.
Categories: Current Affairs

Governments Will Impose New Lockdowns If they Think they Can Get Away with It

Wed, 16/09/2020 - 18:45

This year’s stay-at-home orders and lockdowns imposed by governments on their populations represent a watershed moment in the history of the modern state.

Before March 2020, it is unlikely that many politicians—let alone many ordinary people—thought it would be feasible or likely for government officials to force hundreds of millions of human beings to “self-isolate.”

But, it turns out governments were indeed able to force a sizable portion of the population to abandon jobs, religious practices, extended families, and community life in the name of “flattening the curve.”

Whether through fear manufactured by the news media, or through outright threats of punishment, business owners shuttered their shops and offices, churches closed down, and schools abandoned their students.

Over time, most governments lessened their restrictions, largely out of fear that tax revenues would collapse and out of fear that the public would become unwilling to obey lockdown edicts indefinitely.

Those fears—not scientific objectivity—have been guiding the gradual loosening of lockdowns and lockdown-related restrictions in recent weeks. After all, in many jurisidictions—both in the USA and in Europe—cases and case growth are far above what they were back in March and April when we were told that high case totals absolutely required strict lockdowns. If case numbers are higher now than during the previous peak, why no new lockdowns?

Make no mistake, many politicians would love to impose lockdowns again, and indefinitely. After all, the power to micromanage the behavior of every business and household in the manner of Covid lockdowns is a power undreamed up by even the most despotic emperor of old. It's not a power a regime would abandon lightly.

But could they get away with it? This is a question every pro-lockdown politician is asking. To the extent that lockdowns have been scaled back and lessened, we cannot thank any enligtenment or change of heart on the part of politicians. If lockdowns now seem to be receding it's because policymakers fear another round of lockdowns would be greeted with resistance rather than obedience. In short, the retreat of lockdowns is a result of an uneasy truce between the anti-lockdown public (which is by no means the whole public) and the pro-lockdown politicians. The politicians have conceded nothing in terms of their asserted authority, but they nonetheless fear greater resistance in the future.

Regimes Continue to Threaten More Lockdowns

Although they're slowly backing off on full lockdowns for now, governments have been very careful to maintain that they retain the power to re-impose thems—including full-on strict and ruthless lockdown—at any time. In some areas, this has already been done, such as in southern Australia and in New Zealand. In Victoria state of Australia, for instance, residents in recent weeks have been subject to strict curfews and even road closures preventing residents from traveling more than a few miles form their homes. Those who dissent—such as a pregnant mother who was arrested for merely discussing an upcoming protest —are brutalized. Meanwhile, military personnel enforce martial law, dragging people from their cars and demanding they show their “papers.”

China continues to impose regional and partial lockdowns. Belgium, meanwhile, insists it may yet still impose “total lockdown.” Back in July, the UK’s Boris Johnson told the nation’s residents they had better follow the social-distancing rules now, or face harsher lockdowns in the future. Last week, Boris Johnson’s government announced strict new social distancing rules, prohibiting any gatherings of more than six people in most cases.

Nor have American politicians abandoned these newfound powers. In Utah, which did not impose a lockdown in March or April, the authorities are still threatening a possible future “complete shutdown." Governors in states including Texas, Pennsylvania, Illinois, New York, and Michigan have all threatened new lockdowns if the residents don’t do as they’re told.

(Only two governors, to my knowledge, have said they will not impose future lockdowns. Earlier this month, Gov. Ron DeSantis of Florida vowed “we will never do any of these lockdowns again." Meanwhile, Gov. Kristi Noem of South Dakota, which has never imposed a lockdown at all, has also said lockdowns are not on the table.)

In many cases politicians have substituted face masks and targeted lockdowns (of bars and nightclubs, etc.) in lieu of full stay-at-home orders. This limits public dissent by limiting the number of businesses and industries where workers are thrown out of work and business owners effectively robbed of their property. Fewer destitute or jobless voters likely translates into less active dissent.

This permanent embrace of emergency power is to be expected. Governments have long used crises as an excuse to expand government power, often with the glowing approval of the electorate. After the end of World War II, for example, the party platform for the British Labour Party explicitly sought to extend wartime economic planning indefinitely. The idea was that central planning had won the war, and now it would “win the peace.” This meant a host of boards and commissions that would control everything from farming to housing.

But that’s just one example. As Robert Higgs has shown in his book Crisis and Leviathan, using wars and other crises to permanently expand state power is just standard operating procedure for countless regimes. It’s what governments do.

Governments Are Limited Only by the Public's Resistance

On the other hand, governments are limited by how much the public is willing to tolerate. As Étienne de La Boétie has shown, all regimes—even authoritarian ones—are ultimately limited by public approval and obedience. Without public opinion on its side, regimes become constrained, even in a police state.

Ludwig von Mises built on this notion when he noted in his book Liberalism:

there has never been a political power that voluntarily desisted from impeding the free development and operation of the institution of private ownership of the means of production. Governments tolerate private property when they are compelled to do so, but they do not acknowledge it voluntarily in recognition of its necessity. Even liberal politicians, on gaining power, have usually relegated their liberal principles more or less to the background. The tendency to impose oppressive restraints on private property, to abuse political power, and to refuse to respect or recognize any free sphere outside or beyond the dominion of the state is too deeply ingrained in the mentality of those who control the governmental apparatus of compulsion and coercion for them ever to be able to resist it voluntarily. A liberal government is a contradictio in adjecto. Governments must be forced into adopting liberalism by the power of the unanimous opinion of the people; that they could voluntarily become liberal is not to be expected.

In other words, governments don't refrain from exercising ever more power unless they are prevented from doing so. But what did he mean by a government being "forced into adopting liberalism by the power of the unanimous opinion of the people"? Mises was very much a man who understood how states work in the real world. So it's a safe bet he didn't think that the public's "unanimous opinion" was somehow magically transformed into a government limiting itself.

Rather, Mises understood that governments are limited by pressures applied from groups external to the state apparatus itself. These could take the form of widespread noncompliance, peaceful protests, or even armed resistance. But to think that governments will limit themselves without at least the fear of some form of resistance would be fanciful, to say the least.

And this is likely what is limiting governments in their dreams of ever-harsher lockdowns right now. We've already seen this dynamic in action in Serbia, for example, where the regime attempted to reimpose a nationwide lockdown. This proposal was greeted with both peaceful and violent protests. The state partially retreated and opted instead for much weaker regional lockdowns. Protests also continue to grow in Germany, and protests have evern cropped up in London.

In the US, of course,  protests of various types have appeared since April, and given the volume of anger over lockdowns and business closures expressed across a wide variety of media, it's easy to see why state and local govenments should expect trouble if they try another full-scale lockdown. One need only step out one's front door in many areas to see countless examples of passive concompliance and resistance to masks orders and social distancing decrees.

Complicating matters is the low state of public approval of police forces. It's true that police tend to receive public support when the police are seen battling rioters and thugs. But public support would likely wither quickly were the police unleashed on middle class suburbanites who fail to follow stay-at-home orders.

If American governors and mayors try a new set of lockdowns, just how far are they willing to go to enforce them? Will they call in the national guard and open fire on middle-class dissenters? If police attempt to break into homes in the manner we have witnessed in Australia, things might turn out quite differently here. In situations like that, at least some residents will defend themselves with firearms.

Ensuring compliance will become especially difficult as lockdowns also empty the public purse. As the economy weakens, so will tax revenues, and public welfare programs can't subsist on newly printed money forever. As local, state, and federal amenities and free-money programs come up short of funds, it will become harder to buy off the voters with yet another government check.

Admittedly, governments can always double down on enforcement by imposing strict police states. This can work in the short term. But then what? Outside of places like China and Australia, it appears many regimes aren't yet prepared to find  out. But they're not willing to concede defeat, either. The lockdown state will press the issue as far as the voters and taxpayers are willing to let it go.

Categories: Current Affairs

Michael Rectenwald on Recovering from Marxism and His New Book Beyond Woke

Wed, 16/09/2020 - 18:00

Dr. Michael Rectenwald was a professor of liberal studies at NYU from 2008 to 2019. Although at one point he was a committed Marxist, he gradually lost faith, and is now an outspoken critic of campus activists. Bob asks Rectenwald about apparent contradictions in the current cultural Marxist / postmodern movement, and they discuss several themes from his new book, *Beyond Woke*.

Mentioned in the Episode and Other Links of Interest:

For more information, see BobMurphyShow.com. The Bob Murphy Show is also available on iTunes, Stitcher, Spotify, and via RSS.

Categories: Current Affairs

What the Trade Balance Means for a Currency's Purchasing Power

Wed, 16/09/2020 - 17:30

Since the trade balance has nothing to do as such with either the supply of money or the demand for money, we can conclude that trade balances do not determine the purchasing power of money of respective countries.

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

Original Article: "What the Trade Balance Means for a Currency's Purchasing Power​".

Categories: Current Affairs

1920: The Crash That Cured Itself

Wed, 16/09/2020 - 17:00

The Spanish flu of 1918 is an event that, unsurprisingly, is being revisited by many observers today. And yet, at the same time, another major event occurred a century ago which we would also do well to remember: namely the largely forgotten economic depression of 1920.

We all hear, from time to time, about the ghost of the 1929 crash, of the dreadful decade of the thirties, of the Great Depression from which the world (supposedly) only recovered at the cost of a new world war. In the covid-19 context of today, it is even likely that many people believe that unless all national and international governments and organizations move ahead with drastic measures, we are condemned to a similar fate. Nonetheless, the depression of 1920 can provide us with a starkly different picture.

The end of World War I was followed by some months of high profits and renewed expectations. Unfortunately, due to the gigantic inflation and government controls introduced during the war, as well as the deaths caused by that same war and the pandemic that followed, a great economic readjustment was unavoidable, which eventually came along in 1920.

Renowned financial analyst James Grant, author of the book The Forgotten Depression: 1921: The Crash That Cured Itself, provides shocking data for the United States. Grant tells us that the Federal Reserve index of industrial production fell by 31.6 percent from 1920–21. In comparison, in the crisis years 2007–09, it “only” fell by 16.9 percent. Grant estimates that the unemployment rate may have reached as high as 15.3 percent.

Meanwhile, “over the course of 12 months, wholesale prices plunged by 36.8 percent, consumer prices by 10.8 percent and farm prices by 41.3 percent (for speed of decline, not even the Great Depression would match the break of 1920–21). The Dow Jones Industrial Average, then comprising 20 stocks rather than today’s 30, crested in November 1919 at 119.62 and bottomed in August 1921 at 63.9, for a peak-to-trough decline of 46.6 percent.”

It seems abundantly clear that the situation was dire. Profits drastically fell, companies were liquidated and taken over in a wave of bankruptcy procedures until…it all reverted. As professor, banker and “Austrian” fellow traveler Benjamin M. Anderson (1886–1949) described it in his memoirs, “in 1920–1921 we took our losses, we readjusted our financial structure, we endured our depression, and in the month of August, 1921, we started up again. By the spring of 1923 we had reached new highs in industrial production and we had labour shortages in many lines.” Historian Thomas E. Woods Jr. concurs: “by the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and was only 2.4 percent by 1923.” The economy was ready for the Roaring Twenties.

What had happened? What did the government do to push the economy out of the ground? The answer is: nothing. Or better still: it cut spending to balance the budget and reduce public debt. There were no massive liquidity “bazookas” shot by central banks, no giant stimulus programs from the Ministry of Economy, no price or profit margin controls. President Wilson had suffered a severe stroke at the end of 1919, which left him practically disabled for the rest of his presidency, while his successor, Warren G. Harding, declared the following in his 1920 acceptance speech for the Republican presidential nomination:

Let us call to all the people for thrift and economy, for denial and sacrifice if need be, for a nationwide drive against extravagance and luxury, to a recommittal to simplicity of living, to that prudent and normal plan of life which is the health of the republic. There hasn’t been a recovery from the waste and abnormalities of war since the story of mankind was first written, except through work and saving, through industry and denial, while needless spending and heedless extravagance have marked every decay in the history of nations.

Thus, the federal budget was reduced from $18.5 billion in 1919 to $3.7 billion dollars in 1922, and public debt fell from $26 billion at the end of 1919 to $22.3 billion dollars in June 1923. One can easily see why Grant described this depression as “the crash that cured itself.” As he ironically notes, “by the lights of Keynesian and monetarist doctrine alike, no more primitive or counterproductive policies could be imagined.”

But wouldn’t it have been better if the government had “softened” things a little bit? That would probably have been achieved at the cost of stagnation, as in the case of the thirties, and of greater problems in the future, as in the case of Japan, described by Anderson:

early in 1920, the great banks, the concentrated industries, and the government got together, destroyed the freedom of the markets, arrested the decline in commodity prices, and held the Japanese price level high above the receding world level for seven years. During these years Japan endured chronic industrial stagnation and at the end, in 1927, she had a banking crisis of such severity that many great branch bank systems went down, as well as many industries. It was a stupid policy. In the effort to avert losses on inventory representing one year’s production, Japan lost seven years, only to incur greatly exaggerated losses at the end. The New Deal began in Japan in early 1920.

The First World War was seen by the state bureaucracies of the West as definitive proof of how tasteful an extensive state control of the capitalist engine could be. On the other hand, the disintegration of the classical gold standard and the return to a blatant use of central banks to finance war debts at the cost of inflation had marked the end of the classical liberal world order based on international commerce and financial discipline. Still, some traces of the cultural values and traits that had led to its extraordinary ascension could still be found, especially in the American population. One need only remember that both the Federal Reserve and the income tax as we know it today had only been established in the United States a few years before, in 1913.

Since then, much has changed, including, of course, the legal, institutional, and even cultural context of our economies. Economy means people—and modern society does not seem to have the cultural and institutional “anchors” that would allow it to endure, like in the 2020–21 shock, so drastic a recipe as that circumstantially applied a century ago. And yet the “forgotten depression” can still teach us important lessons: that there was once a time when individuals and communities used to overcome even the worst depressions, by making use of their freedoms, and that the interventionist and spendthrift state is often more part of the problem than it is of the solution. These are important insights we need to keep in mind especially today.

Originally published by the Austrian Economics Center.

Categories: Current Affairs

Hayek's Plan for Private Money

Wed, 16/09/2020 - 16:45

Hayek’s last proposal for monetary reform calls for privately issued, competing fiat currencies. It's debatable whether or not this is a good idea.

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

Original Article: "Hayek's Plan for Private Money".

Categories: Current Affairs

From 9/11 to Covid-19: Nineteen Years of Permanent "Emergency"

Wed, 16/09/2020 - 14:30

Whether we're commanded to trust the experts, abandon the rule of law, or venerate government for "keeping us safe," the 9/11 panic and our current crisis have many things in common.

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

Original Article: "From 9/11 to Covid-19: Nineteen Years of Permanent 'Emergency'".

Categories: Current Affairs

Mandatory Covid-19 Vaccination Is Unethical and Unscientific

Wed, 16/09/2020 - 12:30

We are fortunate to have vaccines as options in many cases. But mandatory vaccination can never be justified. If a vaccine were clearly 100 percent efficacious and 100 percent safe, there would be no need for coercion; people would voluntarily line up to take it.

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

Original Article: "Mandatory Covid-19 Vaccination Is Unethical and Unscientific".

Categories: Current Affairs

"Monopoly" Is No Excuse for Government Intervention

Wed, 16/09/2020 - 12:00

Chapter 10 of Rothbard’s Man, Economy, and State with Power and Market ([1962, 1970] 2009), “Monopoly and Competition,” proffers a compelling reelaboration of monopoly theory: it highlights, indeed, some inconsistencies within the neoclassical analysis conventionally held as true and taught in undergraduate and graduate microeconomics classes.

Rothbard’s monopoly analysis differs from the neoclassical one in (at least) three main elements. First, it adopts a different definition of monopoly. Second, it lays out the pointlessness of contrasting monopoly with “pure” (or perfect) competition—whose theoretical framework rests upon fallacious premises. Third, it dismantles the “monopoly’s loss of efficiency” argument—consumers retain their sovereignty over production.

Monopoly: Define It Properly

The conventional neoclassical definition of monopoly is quite blurred insofar as it identifies the monopolist as “the sole seller of the good”: however, what constitutes a particular good is hard to tell. In fact, such a definition would make it difficult—if not impossible—to discern monopoly (defined as such and earning an alleged monopoly rent) from consumers voluntarily distinguishing between two goods that they do not perceive as homogeneous (thus voluntarily paying different prices and a premium).

As Rothbard clearly explains,

only consumers can decide whether two commodities offered on the market are one good or two different goods. This issue cannot be settled by a physical inspection of the product. The elemental physical nature of the good may be only one of its properties….No one can ever be certain in advance—least of all the economist—whether a commodity sold by A will be treated on the market as homogeneous with the same basic physical good sold by B. (pp. 665–66)

So, the simple fact of being “the sole seller of a given good” is not sufficient to identify a monopolist—it’s too vague a criterion and would lead to paradoxes such as “every single producer is potentially a monopolist.” Hence, Mises approached the subject from a different perspective:

If conditions are such that the monopolist can secure higher net proceeds by selling a smaller quantity of his product at a higher price than by selling a greater quantity of his supply at a lower price, there emerges a monopoly price higher than the potential market price would have been in the absence of monopoly. (Human Action, [1949] 1998, p. 278)

The idea here is pretty much straightforward: a monopolist firm, if consumers’ demand so permits, can sell an allegedly suboptimal quantity—compared with “pure” competition (see below)—while nonetheless reaping profits higher than it would earn under “pure” competition. However, as we shall see below, the very idea of a comparison with the “pure” competition scenario makes no sense and invalidates the whole concept of monopoly.

Monopoly, “Pure” Competition, and Consumers’ Demand

The idea underlying “pure” competition is that firms are small enough to individually face a locally horizontal demand curve—each one being individually negligible, or “infinitesimal,” when it comes to the total supply—thus being able to increase supply without reducing the output’s price (cf. Rothbard [1962, 1970] 2009, p. 720). Thus, under “pure” competition, any firm can supposedly increase revenues simply by increasing output, without facing a tradeoff between greater quantities supplied (positively influencing revenues) and lower prices paid by consumers for these quantities (negatively influencing revenues). More formally this is the idea of constant marginal revenues (marginal revenue is how much revenue varies—positively or negatively—overall if the firm produces and sells a marginal—i.e., further—unit of output).

However, the whole idea of “pure” competition so defined makes little sense. Human action, including demand and production, indeed, does always occur in discrete units, never in infinitesimal ones: hence, it is absurd to think of a firm small (“infinitesimal”) enough to make no difference whatsoever whether it produces one further unit of output or not. As Rothbard ([1962, 1970] 2009, p. 721) puts it,

there can be no such thing as a firm without influence on its price….If the producers attempt to sell a larger amount, they will have to conclude their sale at a lower price in order to attract an increased demand. Even a very small increase in supply will lead to a perhaps very small lowering of price. The individual firm, no matter how small, always has a perceptible influence on the total supply.

Because of the law of decreasing marginal utility, indeed, any further (“marginal”) unit of output available will be valued less than the previous ones—since it will satisfy a less urgent want—and will thus command a lower price on the market. It doesn’t matter whether the marginal unit is bidden by a marginal consumer—who was not consuming earlier—or satisfies a person already consuming previously produced units of that same good: the further unit will always be subjectively valued less.

But if pure competition does not even exist, then why bother contrasting it with monopoly? One possible answer could be that pure competition is sort of a useful abstraction, helpful in order to expose monopoly’s inefficiencies. However, looking more closely at monopoly, such inefficiencies—often labeled “market failures”—can always be perfectly settled, in the free market economy, by consumers’ spontaneous action and preferences.

Monopoly, Efficiency, and Consumers’ Sovereignty

The reason why “pure” competition is thought to be more efficient than monopoly can be seen in figure 1. The idea is that whereas a monopolist firm faces a decreasing marginal revenue curve—i.e., the abovementioned tradeoff between the greater quantity sold and the lower price this quantity is sold at—which it equates to its marginal cost, the same would not obtain under “pure” competition.

Figure 1

ferrari-price_marginal_cost_marginal_rev.png Price, Marginal Cost, Marginal Revenue

In fact, under “pure” competition it’s assumed that firms would earn on every further unit supplied the price that consumers are willing to pay, thus neglecting that all the units producers could have sold at a higher price will now be sold at the same lower price as the last one. In other words, the assumption is that the demand curve and the marginal revenue curve coincide—but that’s impossible, because any further unit produced and sold will lower the price of all the previous units produced and sold!

So, we are left with two questions: Is there any loss of efficiency under monopoly? Are consumers deprived of their sovereignty?

First, if the industry is such that a monopolist emerges—say, because of strongly decreasing average cost and scale economies—there is no way to allocate resources more efficiently. Any resource allocation different from QM sold at PM (figure 1) would be tantamount to squandering scarce means of production to satisfy not-so-needed consumers’ wants. In fact, between QM and QPC any further unit of output sold costs the (monopolist) producer firm more than consumers overall are willing to compensate it for.

That said, the argument brought forth by the neoclassical analysis of monopoly is: “Okay, the monopolist firm can produce efficiently; however, by doing so, it reduces consumers’ surplus1 more than it increases its profit. (In figure 1 the reduction in consumers’ surplus amounts to the orange and yellow areas, while the increase in firm’s profit amounts to the positive difference between the yellow and blue areas). Hence, there is inefficiency in terms of lost social welfare (equal to the orange area) and room for government intervention—which should fix the price at its purely competitive level P PC.”

And this brings forth the answer to the second question. Consumers, in fact, do not need government intervention to fix the price. Instead, they can command the price they want simply by changing their own demand—thus shifting the demand curve and increasing the opportunity cost for the firm of restricting production. As a matter of fact, were consumers not so willing to pay higher prices while scrambling for the reduced available output (or were they willing to pay more than they do for an even slight increase in output), the monopolistic firm would face a huge incentive not to reduce output (or to increase it). In other words, the demand curve would flatten—and so consequently would the marginal revenue curve, thus dampening the tradeoff between higher production and lower prices (cf. Rothbard [1962, 1970] 2009, pp. 634–35).

Hence, even under monopoly, consumers are sovereign and their demand steers production. There is no inefficiency issue that government should intervene to settle .

Conclusion

In the unhampered, free market economy, monopoly there is no framework distinguishable from “pure” competition. In fact, inefficient monopolies arise only in cases of government interventionism (e.g., through requirement of patents, licenses, etc.). In the free market, consumers willing to access a larger quantity of (technologically producible) goods are always enabled to do so provided that they are willing enough to increase their demand—thus increasing the opportunity cost for the monopolist in “restricting” supply.

  • 1. The idea behind consumers’ surplus is simple: consumers who value the good more than its market price gain additional benefit from its purchase.
Categories: Current Affairs

The Saving Problem in America: Alternatives and Reforms

Tue, 15/09/2020 - 20:00

Since before covid-19 and the lockdown, I have written articles that touch on the purpose and importance of personal savings, and more importantly, why the lack of personal savings was going to make an economic crisis in the year 2020 potentially tragic for most Americans.

As a result, I have been interviewed a couple of times specifically on the topic of personal savings. These interactions have indicated to me that people do not understand the importance of savings and rather believe the demonization of savings as a “leakage” from the economic system and that hoarding money is one of the greatest threats to the economy.

Even more importantly, I discussed the reasons why Americans save so little and the related dangers, and I discussed how you can get around those government interventions with alternative strategies. I thought most people knew these strategies, but apparently that is not the case and thus the rationale for this article.

The Importance of Saving

In order for the hunter-gatherer society to become settled and civilized with sedentary agriculture, people must have saved provisions or found themselves in an area of superabundance, i.e., a Garden of Eden. It is savings that sustained group members while structures were built and fields were plowed, seeded, and harvested.

Economics teachers use the story of Robinson Crusoe, who toiled to catch extra fish or gather extra coconuts in order to sustain himself while he built a fishing net or coconut-harvesting tool that could bring him many times the daily output from just working with his hands. His new higher productivity allowed Crusoe to pursue other projects like building a hut, fashioning a rescue signal, or just enjoying more tropical leisure.

Of course, personal and business savings are just as important for a modern economy to grow in a stable fashion. Money is deposited in bank, brokerage, and retirement accounts. Banks make money available for car loans, home mortgages, and for businesses to make payroll and to finance accounts receivable. Brokerage and retirement accounts are used to fund larger businesses, allowing them to expand and to implement new technologies. Therefore, saving is the fuel for the engine of economic growth and higher standards of livings, the free market.

For individuals, this process is what increases real wage rates, decreases hours worked, and increases life expectancy. For business, it is what allows companies to grow, to become more productive, and to produce improved and brand-new products. Again, all of this seemed to be unknown or unrealized by many smart people.

Why No Saving?

When an economy enters an industrial or technological revolution, wage rates rise and saving increases. In post–World War II America the personal saving rate was at least 10 percent every year. In more recent decades, there has been a downward trend that began when the US was taken off the gold standard in August 1971 and continued to the end of the housing bubble, when the personal saving rate was almost zero. Since then, the trend has been positive and there was a giant spike to over 30 percent when the pandemic hit, along with a record pay-down in credit card debt.

Unfortunately, this upward trend has been offset by significant increases in debt by individuals and governments. Individuals borrow money on their credit cards, mortgage refinance, student loans, and other forms of debt. Levels of household debt have increased, but the measure relative to income or GDP actually decreased prior to the lockdown. The massive increase in the national debt has been disastrous waste.

Higher levels of personal saving and lower levels of debt would have allowed many more people to ride out the lockdown and maintain their independence instead of becoming dependents of and subject to the whims of our dysfunctional Congress.

Here are some of the reasons why the personal saving rate has decreased in recent decades:

1. Price inflation: if the Fed continues to print money, then the purchasing power of money will decline. On the gold standard the purchasing power of the dollar generally increased, so that the purchasing power of your savings appreciated rather than depreciating, plus you earned interest.

2. The Fed also has kept its policy interest rates ultralow, often near zero. The interest rate on my savings account is .01 of 1 percent, so if I had $100 in my savings account for a year, I would get one penny in interest. Not much of an incentive there!

3. Taxation: even if you were to earn a decent amount of interest income on your savings, it would be taxed as personal income by the IRS.

4. Social safety net: Given the fact that we have unemployment insurance and around a hundred welfare programs, there is far less reason to save to protect yourself against economic downturns and unemployment. The $600 per week in extra unemployment benefits works out to more than $30,000 on an annual basis. This incentive actually had people with jobs trying to become unemployed and even getting covid-19 to avoid work.

Alternatives to Saving

There are plenty of alternatives to traditional savings accounts. You can invest in bonds and stocks that pay dividends. The problem here is that the interest rate on bonds and the dividends on stocks are relatively low; even junk bonds now offer historically low rates. Plus, given that bond and stock markets are extremely overvalued and poised to correct or crash, these traditional alternatives are risky. The same is true for real estate and land.

One alternative that once was a traditional investment is precious metals. Today, it is an alternative investment to cash, because to the extent that their value moves in the opposite direction to the US dollar you can hedge against your risk of a falling dollar. There are some precious metal mining stocks that offer dividends, but I am not qualified to make such recommendations and this whole sector is volatile.

The one alternative that everyone should be aware of, but apparently is not, involves your shopping behavior. This alternative is in fact the rationale for this article.

Every pay period do your shopping as you normally do, except purchase a couple of items in bulk at a discount store. The per unit price advantage of the discounted bulk purchase over normal purchase is typically significant.

For example, if you compared purchasing a three-pack of large Crest mouthwash from Sam’s Club to purchasing one regular-sized bottle from CVS Pharmacy, the price difference is ten cents per ounce at Sam’s Club compared to forty cents per ounce at CVS. There are plenty of qualifiers here. You could buy the large bottle at CVS and reduce the price differential, and both stores occasionally offer discounts of this product; and of course you have to buy an annual membership at Sam’s Club.

There are three qualifiers or restrictions to this type of bulk discount shopping.

First, it must be restricted to nonperishable goods such as paper goods, toiletries, canned goods, drugs and supplements, soaps and cleaning products, office supplies, wine and spirits, etc. Do not stock up on cherries, for example.

Second, it must be goods that you already use on a regular basis. Three cases of canned beets are no good if you don’t like canned beats. Also, don’t accumulate more than one year's worth of inventory of a product. Unexpected job changes, moving locations, or family dynamics could leave you holding the bag. Speaking of bags, they are an important category of bulk buying, including lawn bags, trash bags, freezer bags, sandwich bags, etc.

Third, you have to have the space to store your inventory safely and the ability to rotate the inventory (last in, first out).

All told, this alternative earns a hefty return similar to or much greater than interest income. Plus, it means fewer trips to the store or unexpectedly running out of items that you need at the last minute.

An unexpected bonus was that during the lockdown the prospect of seeing the toilet paper and baby diaper aisles empty and the meat counters stocked with only a few pieces of meat with triple the normal prices seemed to me a lot less traumatic than it otherwise might have been.

Of course, the solution is fixing the problems listed above: get the Fed out of the money–printing and interest rate–rigging businesses, stop the taxing of (interest) income, and repeal or at least cut and reform the social safety net welfare programs.

Categories: Current Affairs

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