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A second Central Africa diocese has witnessed a vote of no confidence in their bishop and calls for his resignation. Parishioners from three Mutare parishes have presented a petition to the Diocese of Manicaland calling for the dismissal of the Rt. Rev. Erick Ruwona for abuse of office and theft.
The latest turmoil in the Eastern Zimbabwe diocese follows a 2017 intervention by the Archbishop of Central Africa, the Most Rev. Albert Chama, between leaders of St Agnes Church and the bishop.
On Ash Wednesday the wardens of St Agnes Church Chikanga, Holy Name Church Sakubva, Mufudzi Wakanaka Parish Dangamvura presented a petition to the diocese and the media “demanding that Bishop Erick Ruwoma relinquish his position as BIshop of Manicaland with immediate effect.”
Extracts from the petition published by the Morning Post allege over $2 million has gone missing during BIshop Ruwoma’s tenure in office, including $1.1 million in school fees, $450,000 in loan proceeds and a $250,000 overdraft from Agribank, and the proceeds of special collections taken by the diocese.
Bishop Ruwoma responded by shuttering St Agnes Church on 17 March 2019, claiming the parish was the epicentre of unrest in the diocese.
In March 2017 Archbishop Chama ordered Bishop Ruwoma to rescind his excommunication of 40 members if St Agnes church and to restore to office the parish vicar, the Rev. Gilbert Mbona.
In 2016 Bishop Ruwoma suspended the rector of St Agnes on suspicion of having committed adultery and appointed the former Bishop of Harare, the Rt. Rev. Sebastian Bakare to serve as priest in charge of the parish. However, leaders of the congregation refused to accept Bishop Bakare, citing his involvement in the political campaign to unseat President Robert Mugabe.
When Bishop Bakare attempted to take possession of the church, protests ensued. In December 2016 Bishop Ruwoma excommunicated 40 members of the congregation and asked a civil magistrate to issue a restraining order against 26 members of the church for their role in the protests.. Supporters of the protesters told Anglican Ink they believed Bishop Ruwona and a lay leader of the church, Mrs. Portia Magada, were seeking to gain control of the church against the wishes of the congregation. They also charged Bishop Ruwona with financial misconduct and mismanagement, alleging that while he was receiving his stipend, other clergy had not been paid for several months.
A counter charge was made, however, that those in rebellion are supporters of former bishop Elston Jakazi. In 2007 the then Bishop of Harare, the Rt. Rev. Nolbert Kunonga, withdrew the diocese from the Church of the Province of Central Africa to form the Anglican Church of Zimbabwe after the province began ecclesiastical proceedings to investigate the controversial bishop on charges of fraud, heresy and attempted murder. Dr. Kunonga, who was an ally of the ruling ZANU-PF Party and President Robert Mugabe used the power of the state to expel congregations and clergy from churches that did not pledge their loyalty to him. Dr. Kunonga was joined by the Bishop of Manicaland, the Rt. Rev. Elston Jakazi in the schism. However in 2012 the Supreme Court ruled in favor the Province against the breakaway bishops and Bishop Jakazi lost control of St Agnes. The province appointed a new bishop in 2012, who abruptly resigned however in 2015, leading to Bishop Ruwona’s appointment.
In March 2017 Archbishop Chama met with Bishop Ruwoma and the Rt. Rev. Chad Gandiya, Bishop of Harare and president of the Zimbabwe Anglican Council. Archbishop Chama asked Bishop Ruwoma to restore Fr. Mbona to office, discontinue the civil litigation and rescind his excommunication of the 40 parishioners.
The truce has failed to hold, however, the Morning Post reports. The newspaper further reported the bishop had turned to leaders of the ruling ZANU-PF political party to enforce his authority by using the police to shut down lay protests around the churches.
Diocesan secretary, Edmond Samuteriko told local news outlets the bishop’s critics were supporters of the deposed bishops Jakazi and Kunonga. “This is the breakaway faction from the Anglican CPCA and they have their own agendas.”
A diocesan spokesman added: “Congregants know the correct channels of expressing their unhappiness. Those with concerns should come forward and present them with proper procedures.”
The post Lay push to remove Bishop of Manicaland from office appeared first on Anglican Ink © 2019.
The Federal Reserve's Federal Open Market Committee on Wednesday voted unanimously to keep the federal funds rate unchanged. Overall, the FOMC signaled it has made a dovish turn away from the promised normalization of monetary policy which the Fed has promised will be implemented "some day" for a decade. Although the Fed began to slowly raise rates in late 2016 — after nearly a decade of near-zero rates — the target rate never returned to even three percent, and thus remains well below what would have been a more normal rate of the sort seen prior to the 2008 financial crisis.
Much of the Fed's continued reluctance to upset the easy-money apple cart comes from growing concerns over the strength of the economy. Although job growth numbers have been high in recent years — and this has been assumed to be proof of a robust economy — other indicators point toward less strength. Workforce participation numbers, wage growth, net worth numbers, auto-loan delinquencies and other indicators suggest many Americans are in a more precarious position than headlines might suggest.
The Fed's refusal to follow through on raising rates, however, has highlighted this economic weakness, and today's front-page headline in the Wall Street Journal reads: "Growth Fears to Keep Fed on Hold"Abandoning Plans to Reduce the Balance Sheet
For similar reasons, the Fed has also signaled it won't be doing much about it's enormous balance sheet which ballooned to over four trillion dollars in the wake of the financial crisis. Faced with enormous amounts of unwanted assets such as mortgage-backed securities, the Fed began buying up these assets both to prop up — and bail out — banks and to produce an artificially high price for debt of all sort.
This kept market interest rates low while increasing asset inflation — all of which is great for both Wall Street and for the US government which pays hundreds of billions in interest on federal debt.
At best, "total balance sheet will be around $3.8 trillion, down from $4.5 trillion at its peak." Moreover, "the Fed will soon be a net buyer of Treasurys once again," analysts said, and some estimate "the Fed is on course to be buying $200 billion of net new Treasurys by the second half of 2020."
Put simply: the days of quantitative easing are back, and we're not even in a recession yet.
Some observers might simply respond with "big deal, the economy's growing, and better yet, the Fed has given us both growth and little inflation."
But things are not all as pleasant as they seem.Problems with Easy-Money Policy
First of all, even by the Fed's own measures, inflation isn't as subdued as the headline "core inflation" or CPI measure suggests. According to the Fed's "Underlying Inflation Gauge" which takes a broader view beyond the small basket of consumer goods used for the CPI, inflation growth over the past year has returned to the elevated levels found back in 2005 and 2006.
This hasn't been great for consumers, and it's been especially problematic when coupled with ultra-low interest rates. The low interest rates are a problem because people of ordinary means — i.e., the non-wealthy — don't have the ability to access the high yield investments that wealthier investors do.Rising Inequality
Earlier this week, finance researcher Karen Petrou explained the problem that comes from ultra-low rates which lead to yield-chasing for the wealthy:
When interest rates are ultra-low, wealthy households with asset managers acting on their behalf can play the stock market to beat zero or even negative returns. We’ve shown in several recent blog posts how wide the wealth inequality gap is and how disparate wealth sources help to make it so. However, even where low-and-moderate income households can get into the market, their investment advisers should not and often cannot chase yields. As a result, ultra-low rates mean negligible or even negative return.
Thus, ordinary people are faced with rising asset prices — driven in part by the Fed's balance sheet purchases — while also finding themselves unable to save in way that keeps up with inflation.
Meanwhile, the wealthy reap the most benefits from Fed policy as they're able to more effectively engage in yield-chasing.
Ordinary people get the short end of the stick from Fed policy in other ways. Petrou continues:
Historically, pension funds and insurance companies have invested only in the safest assets. These are now in scarce supply due in large part to QE and comparable programs by central banks around the world . Pension plans and life-insurance companies increasingly have two terrible choices: to play it safe and become increasingly unable to honor benefit obligations or to make big bets and hope for the best. Under-funded pension plans are so great a concern in the U.S. that the agency established to protect pensioners from this risk, the Pension Benefit Guaranty Corporation, faces its own financial challenges . Yield-chasing life insurers are also a prime source of potential systemic risk.
Middle class people who have been told for decades to rely on pensions are now imperiled by Fed policy as well.
Not surprisingly, this has led to rising income inequality. While some free-market advocates tend to dismiss inequality as an unimportant metric, this is not a good approach when we're talking about public policy. Fed policy — and resulting inequality — does not reflect natural trends arising from market transactions. Monetary policy is something imposed on markets by policymakers. And that's what's going on when we witness rising inequality due to the Fed's monetary policy.
This has been going on since the late 1980s when Alan Greenspan relentlessly opened the easy-money spigot to spur economic growth throughout the 1990s. But, there were problems that resulted, as noted by Daniell DiMartino-Booth:
[A]t the National Association for Business Economics recent annual conference, University of California-Berkeley economics professor Gabriel Zucman presented his findings on the widening divide between the “haves” and “have nots” in the U.S. His conclusion: “Both surveys and tax data show that wealth inequality has increased dramatically since the 1980s, with a top 1 percent wealth share around 40 percent in 2016 vs. 25 – 30 percent in the 1980s.” Zucman also noted that increased wealth concentration has become a global phenomenon, albeit one that is trickier to monitor given the globalization and increased opacity of the financial system.
Defenders of ultra-low policy tend to claim low rates aren't the real culprit here because even middle-class buyers can take advantage of easy money.
But experience suggests this hasn't been the case. Part of the problem is that banking regulations handed down by the Fed and other federal regulators make loaning to smaller enterprises and lower-income households less attractive. Writes Petrou:
But, wasn’t there a burst of lower-rate mortgage refinancings that allowed households to reduce their debt burden and thus accumulate wealth? Did low rates allow higher-risk households at least to reduce their mortgage debt through refinancings? Again, low-and-moderate income households were left behind. They continued to seek refis after the financial crisis ebbed, but subprime borrowers current on their loans regardless of loan-to-value (LTV) ratios were less likely than prime or super-prime borrowers to receive refi loans even though higher-scored borrowers may or may not have been current and lower rates enhance repayment potential.
The overall effect suggests the accelerating reliance on quantitative easing and near-zero interest rates has been great for some Wall Street hedge fund managers — but for those at the low end of the lending and saving apparatus, things are even more constraining than ever. It's hard to get a loan, and it's also hard to save.
But at least the aggregate numbers are great, right?
Well, the Fed can't brag about even that. A policy that favors billionaires might work on paper, of course, so long as the aggregate numbers point toward sizable growth. But even those numbers are so iffy as to prompt growth fears at the FOMC, and to ensure that the Fed puts an end to its promises to return policy to something that might be called normal.
As it is, it looks like we should expect a continuation of the policies which have coincided with both an unimpressive economy and rising inequality.
If that's not evidence of the Fed's failure, it's hard to imagine what is.
The parents’ uprising against the “No Outsiders” LGBT curriculum at Parkfield Community School in Saltley, inner-city Birmingham has spread to Anderton Park Primary School in Moseley, a Birmingham suburb after a 6-year-old boy from Year 2 told his parents he was forced to dress as a girl.
Muslim parents protesting outside the school yesterday and today from 3.15 to 3.45pm demanded the withdrawal of the “No Outsiders” programme and the resignation of headteacher Mrs Sarah Hewitt-Clarkson.
Shouting slogans like “Our Children our Choice,” “Let Kids be Kids” and “Hewitt-Clarkson step down,” parents and children of all ages held up posters saying “Adam and Eve, not Adam and Steve” and “Education not Indoctrination.”
Parents say the school has been teaching the pro-LGBT syllabus since November 2018 without any consultation. They insist their children are too young to be taught gay, lesbian, and transgender issues and there is no statutory requirement for the school to be teaching such subjects.
Parents became aware of LGBT textbooks being read to their children after the Parkfield Community School protests began in January 2019. There were reports that boys were being asked to dress as girls and children were being taught a story of a prince marrying another prince, leading parents to wonder if the same material was also being taught at Anderton, Mrs Shaida Rashid, mother of an 8-year-old in Year 3, told Rebel Priest.
Parents met after a 6-year-old boy went home in tears because he had been asked to dress as a girl the next day to participate in a play. “There are a few other books we found in the school that are ‘gay stories’ and they were also getting taught that it’s okay to have two mummies and two daddies,” another parent who wished to remain unidentified said.
Meanwhile, a mother contacted other parents after her 4-year-old daughter who came home from nursery and started playing with her doll said to her: “Mummy, can you come and be the second mummy.” The mother says she was angry and asked, “What do you mean? Mummy needs daddy, mummy doesn’t need another mummy.” The child responded, “No Mummy, it’s okay. We are allowed to have two mummies and you need to be the second mummy.”
The parents then issued a petition and collected over 200 signatures. They told to the Chair of Governors that the headteacher wasn’t taking their complaints on board. There have been two meetings at a local mosque and are a third meeting will soon be held, parents said.
Mrs Rashid says that Mr Richard Harris, a teacher, confirmed that the story “King and King” had been taught since last term. The story is about a prince who spurns a number of princesses and falls in love with another prince and the two get married. “I apologise if this story has made you angry, but I was told by the headteacher to teach the children this story,” Mr Harris reportedly told parents.
However, headteacher Hewitt-Clarkson denied the allegations in a letter dated 18 March 2019, insisting, “We do not teach children about sex, we never have and never will in future.” Parents said that this statement itself was problematic as the Relationships and Sex Education (RSE) would make pansexual education compulsory from September 2020.
“We do not have an LGBT programme or promote an LGBT ethos,” she stated. Nevertheless, she went on to explain that “we do promote understanding of all aspects of equality and talk to children about our society and the community we live in,” which, according to parents, is code for the “No Outsiders” lessons.
Hewitt-Clarkson also wrote that she and Mr Harris had a “great meeting with Mr Abdul Latif, an Imam from Evelyn Road Mosque about the issues that some people have currently.”
However, Mr Latif said he did not concur with Hewitt-Clarkson. “I am now seeing this letter sent to me via Whatsapp with my name on it which I gave no permission for, detailing and implying my agreement to what the school is doing overall—a matter of which I am obviously uninformed let alone agree with,” he wrote.
Mr Shakeel Afsar from Justice for our Children said that the parents have “tried their best to hold collective consultations with headteacher who refused to hold the meeting on the grounds of law and order situation” (sic). When parents have spoken individually to Mrs Hewitt-Clarkson she has repeatedly reassured them that “No Outsiders” was not being taught, they claim.
Sources told Rebel Priest that Mrs Hewitt-Clarkson called the police yesterday even though the demonstrators were protesting peacefully. Two police cars arrived just as the protests were ending and police said they would allow the protests to go ahead.
Many of the parents say their have written letters to the headteacher reminding her of the Human Rights Act 1998 which affirms that “The State must respect the rights of parents religious and philosophical convictions in respect of education and teaching.”
Parents say they intend to protest daily until “No Outsiders” is withdrawn or collective consultations are held with parents or Hewitt-Clarkson is removed as headteacher from the school. Sources say that Sikh and Romanian Christian parents are also supporting the protests.
Rebel Priest contacted the school by phone and email and was told the headteacher would call back. So far, there has been no response from the school. “There has been concerning behaviour from a few parents over the last few days and it must change,” reads a notice from the school’s newsletter dated 28 February 2019.
Rebel Priest has also contacted the Lambeth Palace for comment asking if Justin Welby, Archbishop of Canterbury, would support the parents after Welby spoke at an interfaith gathering stating: “For British Muslims who are feeling under threat, we are with you….We will work with Bishops in the Church of England to see how we can be more effective in visible signs of togetherness.”
Earlier, David Urquhart refused to support Muslim parents who approached him stating that l stated that the diocese expected church schools “to address the requirements of the Equalities Act, recognising that it is a requirement of the law to prepare our children to live in modern day Britain.”
The post Muslim parent revolt against LGBT syllabus spreads to more schools appeared first on Anglican Ink © 2019.
London suffragan leads prayers for victims of Cyclone Idai, days after returning from Mozambique visit
The Bishop of Edmonton, Rt Rev Rob Wickham, is leading prayers and support for the victims of Cyclone Idai, which has devastated parts of Mozambique and killed hundreds of people since making landfall last week.
Bishop Rob, who is an Angola, London, Mozambique Association (ALMA) Bishop, leads relations with Dioceses in the region through the organisation. He was in Mozambique just last weekend as the cyclone first struck land, for Bishop Manuel Ernesto’s enthronement as the new Missionary Diocese of Nampula, in the North of the country.
Since returning to London, Bishop Rob has been in close contact with Bishops on the ground in Mozambique and is leading prayers and support efforts.
He said: “It is hard to imagine the devastation caused by Cyclone Idai. On Thursday last week, I flew to Mozambique to celebrate with our Anglican brothers and sisters, and experienced the extraordinary excitement of inaugurating a new Diocese. At the same time Cyclone Idai was making landfall in Beira.
“Our thoughts and prayers are with our family in Mozambique. As family we must love and support each other in prayer and practical application through both feast and fragility, especially through the events of the past week. ALMA will be giving regular updates as to the Church’s response to this devastation”.
ALMA is the Diocese of London’s Companion Link with the Anglican Church in Angola and Mozambique, and part of the network of Companion Link Dioceses throughout the Anglican Communion.
Bishop Rob expressed the need for nurturing the partnerships between Diocese, to create opportunities for conversation and co-ordinate an effective response to the cyclone.
“As we reflect on how we use the world’s natural resources, we must measure our own impact on climate change. This is yet another wake up call for London and beyond to continue to review and change our everyday behaviours, and encourage others to do the same. Our consumption of energy is linked to these events,” he said.
The Bishop of Lebombo, an area which covers Beira, where Cyclone Idai hit, has requested financial aid be given towards the church’s response to the crisis.
Immediate donations to Mozambique will be made via MANNA (Mozambique and Angola Anglican Association), as friends able to respond immediately to need. ALMA will be working on a diocesan appeal through link parishes to assist Bishops and brothers and sisters in Mozambique to rebuild their churches and communities at Pentecost.
The Church of England has criticized the British Home Office for refusing to grant an Iranian convert to Christianity asylum, who argued his new Christian faith led him to repudiate the violence found in Islam. The Home Office rejected the applicants plea, holding the Bible was full of passages supporting violence. The Bishop of Durham, on behalf of the Church of England, has issued the following statement questioning the government’s findings.
Response to Home Office letter regarding Iranian asylum seeker
Speaking in response to the publication of an excerpt from a Home Office ‘reasons for refusal’ letter sent to a Christian convert who had applied for asylum The Bishop of Durham, Paul Butler said:
“I am extremely concerned that a Government department could determine the future of another human being based on such a profound misunderstanding of the texts and practices of faith communities. To use extracts from the Book of Revelation to argue that Christianity is a violent religion is like arguing that a Government report on the impact of Climate Change is advocating drought and flooding.
“It is good that the Home Office has recognised that this decision is inconsistent with its policies and that its staff need better training. But the fact that these comments were made at all suggests that the problem goes deeper than a lack of religious literacy among individual civil servants and indicates that the management structures and ethos of the Home Office, when dealing with cases with a religious dimension, need serious overhaul.
“I look forward to hearing what changes in training and practice follow from this worrying example.
“The Church of England has regularly raised the issue of the religious literacy of staff at all levels within the Home Office. This fresh case shows just how radically the Home Office needs to change in its understanding of all religious beliefs.”
Notes for editors
The Bishop of Durham leads for the Bishops in the House of Lords on matters relating to immigration, asylum and refugees.
The post CoE rejects Home Office exegesis of the Bible and violence appeared first on Anglican Ink © 2019.
For more than a century, one of the most popular economic doctrines in the world has been the exploitation theory. According to this theory, capitalism is a system of virtual slavery, serving the narrow interests of a comparative handful of businessmen and capitalists, who, driven by insatiable greed and power lust, exist as parasites upon the labor of the masses.
This view of capitalism has not been the least bit shaken by the steady rise in the average standard of living that has taken place in the capitalist countries since the beginning of the Industrial Revolution. The rise in the standard of living is not attributed to capitalism, but precisely to the infringements which have been made upon capitalism. People attribute economic progress to labor unions and social legislation, and to what they consider to be improved personal ethics on the part of employers.
By the same token, they tremble at the thought of unions not existing, of a society without minimum wage laws, maximum hours legislation, and child labor laws—at the thought of a society in which no legal obstacles stood in the way of employers pursuing their self-interest. In the absence of such legislation, people believe, wage rates would return to the minimum subsistence level; women and children would labor once more in the mines; and the hours of work would be as long and as hard as it is possible for human beings to bear—all for the benefit of the capitalists, precisely as Marx maintained.The Exploitation Theory and the Overthrow of Classical Economics
It is obvious that the exploitation theory is one of the most powerful factors that have been operating to lead the world down The Road to Serfdom —as the title of Prof. Hayek's book so aptly describes the trend toward socialism.1 Indeed, the pernicious influence of the exploitation theory goes far beyond the direct and obvious support it gives to socialism. It has contributed to the triumph of socialism in more subtle ways, as well. It played a major, perhaps the decisive, role in the overthrow of British classical economics. The system of Smith and Ricardo was perceived as inescapably implying the essential tenets of the exploitation theory. The opponents of the exploitation theory, therefore, quite understandably felt obliged to discard such a perverse system. And discard it they did.
Along with "the labor theory of value" and the "iron law of wages," they discarded such further features of classical political economy as the wages fund doctrine and its corollary that savings and capital are the source of almost all spending in the economic system. Two generations later, the abandonment of the classical doctrines on saving made possible the acceptance of Keynesianism and the policy of inflation, deficits, and ever expanding government spending. In similarly paradoxical fashion, the abandonment of the classical doctrine that cost of production, rather than supply and demand, is the direct (if not the ultimate) determinant of the prices of most manufactured or processed goods led, with just about the same time lag, to the promulgation of the doctrines of "pure and perfect competition," "oligopoly," "monopolistic competition," and "administered prices," with their implicit call for a policy of radical antitrust or outright nationalizations to "curb the abuses of big business." Thus, along these two further paths, the influence of the exploitation theory has served to advance the cause of socialism.
Indeed, so successful has the exploitation theory been in the discrediting of classical economics, that even to suggest that cost of production can be a direct determinant of price is to invite the censure both of being ignorant of all that economics has taught since 1870 and of being sympathetic to Marxism. Thus, it is important to point out in this connection that Böhm-Bawerk and Wieser were well aware of the fact that cost of production is often the direct determinant of price. They held merely that the determination of the prices that constitute the costs is based on supply and demand (a position very close to that of John Stuart Mill, incidentally) and thus on the operation of the principle of diminishing marginal utility.Cf. Eugen von Böhm-Bawerk, Capital and Interest, Huncke and Sennholz translation, 3 volumes (South Holland Illinois: Libertarian Press, 1959), Vol. II, pp. 168-76, pp. 248-56; Vol. III, pp. 97-115; idem, "Wert, Kosten und Grenznutzen," Jahrbuch für Nationalökonomie und Statistik, Dritte Folge, Vol. III, 1892, p. 328 [this essay has subsequently been translated by the present author as "Value, Cost, and Marginal Utility," Quarterly Journal of Austrian Economics, vol. 5, n. 3; see also, idem, my "Notes on the Translation"]; Friedrich von Wieser. Ursprung und Hauptgesetze des Wirtschaftlichen Werthes, Vienna, 1884, pp. 146-160; idem, Natural Value, London and New York, 1893, p. 78, p. 181n, p.183; John Stuart Mill, Principles of Political Economy, Ashley Edition (reprint, Fairfield, New Jersey: Augustus M. Kelley, 1976), Bk. III, Chaps. III - VI. See also, Reisman, Capitalism, pp. 200-201, 206-209, 414-416. (Please note: page numbers in the online, pdf edition of Capitalism add 58 pages of front matter.)" href="#footnote2_2khbpy3">2 Most of the followers of Böhm-Bawerk and Wieser seem, unfortunately, to be more influenced by Jevons on this subject than by Böhm-Bawerk and Wieser.3
My purpose here is to show how classical economics can easily cast off those aspects of it which in the past did contribute to the exploitation theory. And, more, to show how it can actually supply the basis for a fundamental and radical critique of the exploitation theory. If my effort is judged successful, then perhaps some interest can be reawakened in classical economics as an important source of knowledge, in particular in regard to the critique of Keynesianism and the currently dominant views on monopoly and competition. (The precise nature of these applications is a subject far too vast to be dealt with on this occasion. I have, however, attempted to explain it elsewhere.4The Conceptual Framework of the Exploitation Theory
There are three aspects of classical economics which contribute to the exploitation theory. The two best known are, of course, the labor theory of value and the iron law of wages. Somewhat less prominent, but no less important, is the conceptual framework within which the exploitation theory is advanced. This framework is the belief that wages are the original and primary form of income, from which profits and all other non-wage incomes emerge as a deduction with the coming of capitalism and businessmen and capitalists. The framework easily leads to the assertion of the wage earner's right to the whole produce or to its full value. It itself is based on the further belief that all income which is due to the performance of labor is wages and that all who work are wage earners. It is on the basis of these beliefs that Adam Smith opens his chapter on wages in The Wealth of Nations with the words:
The produce of labour constitutes the natural recompense or wages of labour. In that original state of things, which precedes both the appropriation of land and the accumulation of stock, the whole produce of labour belongs to the labourer. He has neither landlord nor master to share with him.
And Smith continues, a little further on:
But this original state of things, in which the labourer enjoyed the whole produce of his own labour, could not last beyond the first introduction of the appropriation of land and the accumulation of stock. It was at an end, therefore, long before the most considerable improvements were made in the productive powers of labour, and it would be to no purpose to trace further what might have been its effects upon the recompense or wages of labour.
As soon as land becomes private property, the landlord demands a share of almost all the produce which the labourer can either raise or collect from it. His rent makes the first deduction from the produce of the labour which is employed upon the land.
It seldom happens that the person who tills the ground has the wherewithal to maintain himself till he reaps the harvest. His maintenance is generally advanced to him from the stock of a master, the farmer who employs him and who would have no interest to employ him, unless he was to share in the produce of his labour, or unless his stock was to be replaced to him with a profit. This profit makes a second deduction from the produce of the labour which is employed upon land.
The produce of almost all other labour is liable to the like deduction of profit. In all arts and manufactures the greater part of the workmen stand in need of a master to advance them the materials of their work, and their wages and maintenance till it be completed. He shares in the produce of their labour, or in the value which it adds to the materials on which it is bestowed; and in this share consists his profit.5
In these passages, Smith clearly advances what I call the primacy of wages doctrine. That is, the doctrine that in a pre-capitalist economy—the "early and rude state of society"—in which workers simply produce and sell commodities and do not buy in order to sell, the incomes the workers receive are wages. Wages are the original income, according to Smith. All income in the pre-capitalist society is supposed to be wages, and no income is supposed to be profit, according to Smith, because workers are the only recipients of income. At the same time, of course, Smith advances the corollary doctrine that profit emerges only with the coming of capitalism and is a deduction from what is naturally and, by implication, rightfully wages.
These doctrines, as I say, constitute the conceptual framework of the exploitation theory. They are the starting point for Marx.
In a pre-capitalist economy, production, says Marx, is characterized by the sequence C-M-C. In this state of affairs, a worker produces a commodity C, sells it for money M, and then buys other commodities C. In this state of affairs, there is no exploitation, for there are no profits, no "surplus value"; all income is, presumably, wages. Surplus value, profit, emerges only with the development of capitalism, according to Marx. Here the sequence M-C-M? applies. Under this sequence, the capitalist expends a sum of money M in buying materials and machinery and in paying wages. A commodity C is produced, which is then sold for a larger sum of money, M?, than was expended in producing it. The difference between the money the capitalist expends and the money he receives for the product is his profit or surplus value.6
Profits, then, according to both Smith and Marx, come into existence only with capitalism, and are a deduction from what naturally and rightfully belongs to the wage earners.
This is not yet the exploitation theory itself, only the conceptual framework of the exploitation theory. It is a framework broad enough to include Marx, the leading proponent of the exploitation theory, and Böhm-Bawerk, its leading critic.
Within this framework, Marx applies the labor theory of value and the iron law of wages, and arrives at the exploitation theory. Within this same framework, Böhm-Bawerk applies the discounting approach, and arrives at a critique of the exploitation theory.7 Both men call upon their respective doctrines to explain what makes possible the alleged deduction of profits from wages and what determines the size of this deduction.
Böhm-Bawerk's explanation is that present goods are more valuable than future goods, and that the wage earner is justly treated in being given a smaller sum of present money than his future product will be worth. Marx's explanation is that the capitalist arbitrarily pays the wage earner a wage corresponding to the number of hours required to produce the wage earner's necessities and sells the wage earner's product at a price corresponding to the—larger—number of hours for which the wage earner works.
Now, in my view, the fundamental place to challenge the exploitation theory is not over the labor theory of value or the iron law of wages, but here, over its conceptual framework—over the doctrines of the primacy of wages and the deduction of profits from wages. Furthermore, it is precisely classical economics itself which provides the means for making this challenge. For classical economics implies that it is false to claim that wages are the original form of income and that profits are a deduction from them. This becomes apparent, as soon as we define our terms along classical lines:
"Profit" is the excess of receipts from the sale of products over the money costs of producing them—over, it must be repeated, the money costs of producing them.
A "capitalist" is one who buys in order subsequently to sell for a profit.
"Wages" are money paid in exchange for the performance of labor—not for the products of labor, but for the performance of labor itself.
On the basis of these definitions it follows that, if there are merely workers producing and selling their products, the money which they receive in the sale of their products is not wages. "Demand for commodities," to quote John Stuart Mill, "is not demand for labour."8 In buying commodities, one does not pay wages, and in selling commodities, one does not receive wages.
In the pre-capitalist economy, if such an economy ever in fact existed, all income recipients in the process of production are workers. But the incomes of those workers are not wages. They are, in fact, profits. Indeed, all income earned in producing products for sale in the pre-capitalist economy is profit or "surplus value"; no income earned in producing products for sale in such an economy is wages. For what the workers of a pre-capitalist economy receive are receipts from the sale of products. But they have no money costs of production to deduct from those sales receipts, for they have not acted as capitalists: They have not bought anything for the purpose of making possible their sales receipts, and therefore they have no money costs. The difference between receipts from the sale of products and zero money costs of production is the full magnitude of the sales receipts.
Thus, in the pre-capitalist economy, only workers receive incomes and there is no money capital. But all the incomes which the workers receive are profits, and none are wages. In the sequence C-M-C, everything is "surplus value"—one-hundred percent of the sales receipts and an infinite percentage of the zero money capital. In the sequence M-C- M?, a smaller proportion of the incomes is "surplus value"—in degree that M is large relative to M?.
This same conclusion, that in the pre-capitalist economy all income is profit, and no income is wages, can be arrived at by way of Ricardo's badly misunderstood proposition that "profits rise as wages fall and fall as wages rise." The wages paid in production, according to Ricardo, are paid by capitalists, not by consumers. If, as in the pre-capitalist economy, there are no capitalists, then there are no wages paid in production, and if there are no wages paid in production, the full income earned must be profits.
Smith and Marx are wrong. Wages are not the primary form of income in production. Profits are. In order for wages to exist in production, it is first necessary that there be capitalists. The emergence of capitalists does not bring into existence the phenomenon of profit. Profit exists prior to their emergence. The emergence of capitalists brings into existence the phenomena of wages and money costs of production.
Accordingly, the profits which exist in a capitalist society are not a deduction from what was originally wages. On the contrary, the wages and the other money costs are a deduction from sales receipts—from what was originally all profit. The effect of capitalism is to create wages and to reduce profits relative to sales receipts. The more economically capitalistic the economy—the more the buying in order to sell relative to the sales receipts, the higher are wages and the lower are profits relative to sales receipts.
Thus, capitalists do not impoverish wage earners, but make it possible for people to be wage earners. For they are responsible not for the phenomenon of profits, but for the phenomenon of wages. They are responsible for the very existence of wages in the production of products for sale. Without capitalists, the only way in which one could survive would be by means of producing and selling one's own products, namely, as a profit earner. But to produce and sell one's own products, one would have to own one's own land, and produce or have inherited one's own tools and materials. Relatively few people could survive in this way. The existence of capitalists makes it possible for people to live by selling their labor rather than attempting to sell the products of their labor. Thus, between wage earners and capitalists there is in fact the closest possible harmony of interests, for capitalists create wages and the ability of people to survive and prosper as wage earners. And if wage earners want a larger relative share for wages and a smaller relative share for profits, they should want a higher economic degree of capitalism—they should want more and bigger capitalists.
Historical confirmation of the theory I am propounding can be found in Prof. Hayek's Introduction to Capitalism and the Historians. There we find such statements as: "The actual history of the connection between capitalism and the rise of the proletariat is almost the exact opposite of that which these theories of the expropriation of the masses suggest." And: "The proletariat which capitalism can be said to have 'created' was thus not a proportion of the population which would have existed without it and which it degraded to a lower level; it was an additional population which was enabled to grow up by the new opportunities for employment which capitalism provided."9
The correct theory, as well as the actual history, is the exact opposite of the doctrine of the primacy of wages.Profits and Labor: The Productive Contribution of Businessmen and Capitalists
In a pre-capitalist economy, the income of labor is profit, and profit is thus obviously a labor income. In a capitalist economy, too, there are many instances in which profits are obviously a labor income: all the cases in which businessmen perform labor in their own enterprises, whether in a managerial or manual capacity. Yet the practice of economics—in disregard of that of accounting and of business itself—has been to classify all such income as wages, and to reserve the term profit (most of which it has come to call interest) for describing income received by virtue of the ownership of capital.
I shall argue that in a capitalist economy, no less than in a pre-capitalist economy, profit is still a labor income—an income attributable to the labor of businessmen and capitalists—and that this is so even though profits are for the most part earned as a rate of return on capital and tend to vary with the amount of capital invested.
The variation of profits with the size of the capital invested is perfectly compatible with their being attributable to the labor of those who earn them, because in a capitalist economy the labor of profit earners tends to be predominantly of an intellectual nature—a work of thinking, planning, and decision making. At the same time, capital stands as the means by which businessmen and capitalists implement their plans—it is their means of buying the labor of helpers and of equipping those helpers and providing them with materials of work. Thus, the possession of capital serves to multiply the efficacy of the businessmen's and capitalists' labor, for the more of it they possess, the greater is the scale on which they can implement their ideas. For example, a businessman who thinks of a better way to produce something can apply that better way on ten times the scale if he owns ten factories than if he owns only one. The fact that in the one case the same labor on his part leads to ten times the profit as in the other case is perfectly consistent with the whole profit still being attributable to his labor.
The compound variation of profits with the passage of time is also perfectly consistent with the fact that they are the product of the businessmen's and capitalists' labor. The relationship of profits to the passage of time derives from the fact that profits vary with the size of the capital invested per period of time. If one can earn profits in proportion to one's capital in any given period of time, then if investment for a longer period is to be competitive, one must earn the profits that one could have earned in the shorter period plus the profits one could have earned by the reinvestment of one's capital and its profits.
It should be realized that wages, too, which no one disputes are attributable to the labor of the wage earners, vary with things other than the expenditure of labor by the wage earners—for example, with the state of technology and the supply of capital equipment and with competitive conditions in other industries. For an income to be attributable to labor, it is by no means necessary that the performance of labor be the only factor determining its size. In fact, by such a standard, virtually nothing could be attributed to human labor beyond what people could produce with their bare hands. Income is to be attributed to the performance of labor, despite its variation with the means employed and with other external circumstances, on the principle that it is man's labor which supplies the guiding and directing intelligence in production. It is only on this basis that a worker using a steam shovel, for example, is to be credited with digging the hole he digs, no less than a worker using his bare hands, for he guides and directs the steam shovel.
Guiding and directing intelligence, not muscular exertion, is the essential characteristic of human labor. As von Mises says, "What produces the product are not toil and trouble in themselves, but the fact that the toiling is guided by reason."10 Guiding and directing intelligence in production is, of course, supplied by businessmen and capitalists on a higher level than by wage earners—a circumstance reinforcing the primary productive status of profits and profit earners over wages and wage earners.
I would like to note that the attribution of profits to the labor of businessmen and capitalists is also perfectly consistent with their simultaneously reflecting the general state of time preference in the economic system. Time preference operates to determine the general rate of return on capital, which businessmen and capitalists then earn or not on the basis of their individual productive accomplishments. Perhaps a useful analogy is the fact that consumer demand determines the general earnings of workers of a given degree of skill in comparison with those of workers of a different degree of skill. Yet, at the same time, each individual worker is responsible for his own earnings. This is merely a restatement of the principle that income is attributable to labor even though it varies with other factors as well. In the case of profit, one of those other factors, operating as a general determinant, is time preference.
The precise nature of the work of businessmen and capitalists needs to be explained. In essence, it is to raise the productivity, and thus the real wages, of manual labor by means of creating, coordinating, and improving the efficiency of the division of labor.
Businessmen and capitalists create division of labor in founding and organizing business firms and in providing capital. Business firms are the central units of the division of labor: they represent a division of labor externally, in the division of tasks between the different firms and industries, and internally, in the breakdown of tasks among different divisions, departments, and individual workers within the firms. The provision of capital is indispensable to the existence of the division of labor in its vertical aspect, that is, to a succession of workers each beginning his work where others leave off. In its absence, workers would have to wait to be paid by the ultimate consumers. In many cases, such as the production of durable equipment, the construction of buildings, and, still more, of factories producing durable equipment, including durable equipment for the further construction of such factories, this would entail a waiting time extending beyond the lifetimes of the workers, and even beyond the lifetimes of their children. The provision of capital, therefore, introduces a necessary division of payments, as it were, which permits producers to be paid within a reasonable period of time after performing their work. And the more capitalistic—the more capital intensive —the economic system, the larger is the proportion of the labor force which can be employed in the production of temporally more remote consumers' goods.11
Businessmen and capitalists coordinate the division of labor in seeking to avoid losses and to earn higher rates of return on their capital in preference to lower rates of return. For in so doing, they are led to try to avoid over-expanding any industry relative to other industries and, at the same time, to be sure that any industry that is insufficiently expanded relative to other industries is further expanded. This is a major aspect of the significance of the principle, so well developed by the classical economists, that there is a tendency toward a uniform rate of profit on capital invested in all branches of industry.12 In addition, the managerial activity of businessmen and capitalists represents a coordination of the internal division of labor in their firms.
Finally, businessmen and capitalists continuously improve the efficiency of production as the result both of their competitive quest for exceptional rates of profit and their saving and investment for the purpose of accumulating personal fortunes. The only way to earn an exceptional rate of profit where the legal freedom of competition prevails is by being an innovator in the production of better products or equally good but less expensive products. The exceptional profits from any given innovation then disappear as competitors begin to adopt it and make it into the normal standard of an industry. This requires that one introduce repeated innovations as the condition of continuing to earn an exceptional rate of profit. In this way, the entire benefit of every innovation tends to be passed forward to the consumers in the form of better products and lower prices, with exceptional profits being entirely transitory in the case of each particular innovation and a permanent phenomenon only insofar as improvement is continuous.13
The saving of businessmen and capitalists to accumulate personal fortunes operates to achieve economic progress by ensuring that a sufficiently high proportion of the economic system's ability to produce is devoted to the production of capital goods, with the result that each year's production can begin with the existence of more capital goods than were available the year before. Their saving and investment has this effect by virtue of raising the demand for capital goods relative to the demand for consumers' goods, and thus of making profitable the greater relative production of capital goods. (A further aspect of this saving and investment is that the demand for labor is raised relative to the demand for consumers' goods.)
In the light of these facts about the nature of the productive contribution of businessmen and capitalists, it is possible to revise the classical doctrine of the labor theory of value in a way that helps to explain a steady rise in real wages and which nullifies the so-called iron law of wages. And that is simply this: In steadily raising the productivity of manual labor, the businessmen and capitalists are constantly reducing the quantity of labor required to produce virtually every good. The effect of this is steadily to reduce prices relative to wages, i.e., to raise real wages.
It should be realized that the same result follows if we view both wages and prices as being determined by demand and supply in the classical sense— i.e., by the ratio of expenditure to quantity sold. Viewed in this light, a rise in the productivity of labor increases the supply of goods relative to the supply of labor and therefore reduces prices relative to wage rates. It should also be realized that this account of matters incorporates both the wages fund doctrine and Ricardo's doctrine of the distinction between "value and riches"— the former, in its implication of a distinct and given demand for labor; the latter, in its perception of the rise in real wages as proceeding not from a rise in money incomes but from a fall in prices, which is the natural consequence of a greater ability to produce.14 Thus, to admit that product prices are determined by the quantity of labor required to produce goods does not at all lead to the exploitation theory, provided one adds that businessmen and capitalists are responsible for the continuing reduction of that quantity and, therefore, for a continuing reduction in prices relative to wages.
Of course, it must be made crystal clear, which the classical economists never succeeded in doing, that the quantity of labor as a determinant of prices is strictly confined to the category of reproducible products. Major categories of prices are in no way determined by it—above all, wage rates. Such prices are determined by supply and demand—by marginal utility, including the utility of marginal products. Nor are wages connected even indirectly with the "cost of production of labor."
The growth of population in a division-of-labor, free-market society does not require the cultivation of progressively inferior soils under conditions of diminishing returns, until the point is reached where the productivity of labor on the "land last cultivated" yields only subsistence, as Ricardo often, but not always, maintained.15 On the contrary, in such a society (a society which is capitalistic in the full sense of the term, i.e., incorporating economic freedom), population growth means that the division of labor can be carried further and that those branches of it which are concerned with the discovery of new knowledge and its application to production can be carried on on a larger scale. Thus the effect of rising population in such a society is actually to raise the productivity of labor and real wages.
This conclusion, I believe, follows from Adam Smith's principle that "the division of labor is limited by the extent of the market."16 It also rests on the fact that private ownership of land and natural resources provides the incentive to steadily raise the productivity of the land, with the result that as time goes on the poorest farms and mines worked yield more than the best farms and mines previously worked, and the point from which returns diminish rises steadily higher.
Once it is recognized that money wages are determined strictly by supply and demand, then it becomes clear that the wage earner's presumable willingness to work for a subsistence wage rather than die of starvation, and the capitalist's preference, other things equal, to pay lower wages rather than higher wages, are both irrelevant to the wage the worker must actually be paid. That wage is determined by the demand for and supply of labor. It can fall no lower than corresponds to the point of full employment. If it drops below that point, a labor shortage is created, which makes it to the self-interest of employers able and willing to pay a higher wage to bid wages up, so that they do not lose employees to other employers not able or willing to pay as much.
Moreover, a fall in wages toward the full employment point does not represent the possibility of subsistence wages being achieved through the back door, as it were, because it is accompanied by a fall both in product prices and in the burden of supporting the unemployed. The fall in wages implies a fall in prices both on the principle of cost of production and on the principle of supply and demand, for the lower wages mean not only lower costs but also more employment, therefore, more production, and, therefore, a larger supply of goods coming to market. The fall in prices together with a reduction in the burden of supporting the unemployed almost certainly means a rise in real "take-home" wages.
The rising productivity of labor and correspondingly falling product prices that the businessmen and capitalists achieve take place in this context of wage rates that are determined by the independent supply of and demand for labor. Thus, as product prices fall, wage rates do not fall, and, therefore, real wages rise. (If, the quantity of money and volume of spending in the economic system remaining the same, there is a growing supply of labor while the productivity of labor rises, money wage rates fall, but prices fall by more.) Of course, to the extent that the quantity of money increases while the productivity of labor rises, the demand for labor and products both increase. As a result, the rise in real wages may be accompanied by rising money wage rates and by constant or even rising product prices. But the relationship between wages and prices will reflect the change in the productivity of labor, for that reduces product prices relative to wages, while the increase in the quantity of money operates to affect both of them more or less equally. (Under a gold standard, there would be a modest rate of increase in the quantity of money, which would probably be accompanied by falling prices and rising money wages.)
So much for the "iron law of wages" in all its variations.
Of course, even within the domain of reproducible products, quantity of labor is by no means the only determinant of price. As Ricardo himself explained in Sections IV-VI of his chapter on value, the period of time for which profits must compound on wages before the ultimate, final product is sold to consumers is a second major determinant of prices.17 (In my opinion, Ricardo's discussion of the time factor is in some respects more insightful even than Böhm-Bawerk's. Certainly, after reading those sections, there is every reason for believing that he would have been fully in accord with all of the essential points of Böhm-Bawerk's Karl Marx and the Close of His System.18 Indeed, many people may find remarkable Ricardo's statement to McCulloch: "I sometimes think that if I were to write the chapter on value again which is in my book, I should acknowledge that the relative value of commodities was regulated by two causes instead of by one, namely, by the relative quantity of labour necessary to produce the commodities in question, and by the rate of profit for the time that the capital remained dormant, and until the commodities were brought to market."19
In addition, wage rates themselves and prices of various materials determined by supply and demand are further factors entering into the determination of prices even in the domain where quantity of labor is relevant.20 And, as previously indicated, of course, determination of price by cost is never an ultimate determination, for the prices that constitute the costs are themselves determined by supply and demand and reflect the utility of marginal products, as Böhm-Bawerk so brilliantly explained.21 And, to be sure, there are product prices which have no connection whatever to quantity of labor or cost of production in any form, but are determined exclusively by supply and demand, as Ricardo himself pointed out.22A Radical Reinterpretation of Labor's Right to the Whole Produce
The fact that profits are an income attributable to the labor of businessmen and capitalists, and the further fact that their labor represents the provision of guiding and directing intelligence at the highest level in the productive process, suggests a radical reinterpretation of the doctrine of labor's right to the whole produce. Namely, that that right is satisfied when first the full product and then the full value of that product comes into the possession of businessmen and capitalists (which is exactly what occurs, of course, in the everyday operations of a market economy). For they, not the wage earners are the fundamental producers of products.
By the standard of attributing results to those who conceive and execute their achievement at the highest level, one must attribute to businessmen and capitalists the entire gross product of their firms and the entire sales receipts for which that product is exchanged. Such, indeed, is the accepted standard in every field outside of economic activity. For example, one attributes the discovery of America to Columbus, the victory at Austerlitz to Napoleon, the foreign policy of the United States to its President (or at most a comparative handful of officials). These attributions are made despite the fact that Columbus could not have made his discovery without the aid of his crewmen, nor Napoleon have won his victory without the help of his soldiers, nor the foreign policy of the United States be carried out without the aid of the employees of the State Department. The help these people provide is perceived as the means by which those who supply the guiding and directing intelligence at the highest level accomplish their objectives. The intelligence, purpose, direction, and integration flow down from the top, and the imputation of the result flows up from the bottom.
By this standard, the product of the old Ford Motor Company and the Standard Oil Company are to be attributed to Ford and Rockefeller. (In many cases, of course, the product must be attributed to a group of businessmen and capitalists, not just to a single outstanding figure.) In any event, labor's right to the full value of its produce is fully satisfied precisely when a Rockefeller or Ford, or their less known counterparts, are paid by their customers for their products. The product is theirs, not the employees'. The help the employees provide is fully remunerated when the producers pay them wages.
This view of the nature of labor's right to the full produce leads to a very different view of the payment of incomes to capitalists whose role in production might be judged to be passive, such as, perhaps, most minor stockholders and the recipients of interest, land rent, and resource royalties. If the payment of such incomes did represent an exploitation of labor, it would not be an exploitation of the labor of wage earners. Such incomes are paid by businessmen—by the active capitalists; they are not a deduction from wages but from profits. If any exploitation were present here, it would be this group, not the wage earners, who were the exploited parties. What this would mean in practice is that individuals like Rockefeller and Ford were exploited by widows and orphans, for it is such individuals who make up a large part of the category of passive capitalists.
In fact, however, the payment of such incomes is never an exploitation, because their payment is a source of gain to those who pay them. They are paid in order to acquire assets whose use is a source of profits over and above the payments which must be made. Furthermore, the recipients of such incomes need not be at all passive; they may very well earn their incomes by the performance of a considerable amount of intellectual labor. Anyone who has attempted to manage a portfolio of stocks and bonds or real estate should know that there is no limit to the amount of time and effort which such management can absorb in the form of searching out and evaluating investment possibilities, and that the job will be better done the more such time and effort one can give it. In the absence of government intervention in the form of the existence of national debts, loan guarantees, and deposit insurance, (not to mention "transfer payments"), the magnitude of truly unearned income in the economic system would be quite modest, for almost every other form of investment would require the exercise of some significant degree of skill and judgment. Those not able or willing to exercise such skill and judgment would either rapidly lose their funds or would have to be content with very low rates of return in compensation for safety of principal and, possibly, reflecting the deduction of management fees by trustees or other parties.
It should also be realized that in a laissez faire economy, without personal or corporate income taxes (a real exploitation of labor) and without legal restrictions on such business activities as insider trading and the award of stock options, the businessmen and active capitalists are in a position to own an ever increasing share of the capitals they employ. With their high incomes they can progressively buy out the ownership shares of the passive capitalists.
In this way, under capitalism, those workers—the businessmen and active capitalists—who do have a valid claim to the ownership of the industries in fact come to own them. Again and again, penniless newcomers appear on the scene and by virtue of their success secure a growing influence over the conduct of production and ultimately obtain the ownership of vast personal fortunes. An ironic consequence of Adam Smith's errors in this area, to be counted among all the other absurdities of socialism, is that the socialists want to give the ownership of the industries to the wrong workers! And to do so, they want to destroy the economic system which gives it to the right workers. They want to give it to the manual laborers, while capitalism gives it to those who supply the guiding and directing intelligence in production.
Not surprisingly, the socialists and their fellow travelers, the contemporary "liberals," denounce capitalism's giving ownership to the right workers. They denounce it when they denounce large salaries and stock options for key executives.Exploitation and Socialism
As a final irony it turns out not only that capitalism is not a system of the exploitation of labor, but that the actual system of the exploitation of labor is socialism. Socialism establishes the very kind of exploitation for the alleged existence of which people seek to overthrow capitalism.
The socialist state holds a universal monopoly on employment and production. Its citizens are economically powerless in their capacity both as workers and as consumers. No economic factor compels the socialist state to take account of their wishes. From an economic point of view, the rulers of the socialist state need be concerned with the values of the citizens only insofar as it needs them to have the health and strength required to work.
Moreover, the leading moral-political principle of the socialist state is that the citizen is not an end in himself, as he is acknowledged to be under capitalism, but is a means to the ends of "society." Since society does not inhabit any known mountain top, and cannot be communicated with in any direct way, its ends can be made known only through the rulers of the socialist state. Thus, the principle that the individual is the means to the ends of society necessarily means, in practice, that he is the means to the ends of society as divined, interpreted, and determined by the rulers of the socialist state. And what this means is that he is the means to the ends of the rulers. A more servile arrangement can hardly be imagined.
Thus, the position of the individual under socialism is that he must spend his life in toil for the ends of the rulers, who have no reason voluntarily to supply him with anything more than minimum physical subsistence. They will provide more (assuming they have the ability to do so) only if it is necessary to prevent riots or revolution or as a means of providing special incentives for the achievement of their own values, such as, above all, the power and prestige of the regime. Thus, they will provide a relatively high standard of living for rocket scientists, secret police agents, and such intellectuals and athletes whose accomplishments help to reflect glory on the regime. The average citizen, however, is fortunate if they provide him with subsistence. He is fortunate, because, as Mises and Hayek have shown, the economic discoordination and chaos of socialism is so great that in the absence of an outside capitalist world to turn to for aid, socialism would lead to the destruction of the division of labor and hence to a reversion to the primitive economic conditions of feudalism. To borrow some of the clichés of Marxism and use them truthfully for once, socialism "cannot even maintain its slaves in their slavery"; left to its own devices, it causes the average worker "to sink deeper and deeper into poverty," until mass depopulation occurs.23Summary and Conclusion
Despite the support which it historically gave to the exploitation theory, classical economics provides the basis for turning the exploitation theory upside down. On the basis of Ricardo's concept of profit and J. S. Mill's proposition that "demand for commodities is not demand for labour," it makes it possible to show how profits, not wages, must be regarded as the original and primary form of income, from which other incomes emerge as a deduction. And, further, not only how profits are a labor income (despite their variation with the size of the capital invested and the period of time for which it is invested), but how the labor of businessmen and capitalists has more fundamental responsibility for the production of products than the labor of wage earners, with the result that "labor's right to the whole produce" should mean the right of businessmen and capitalists to the sales receipts—a right which is honored every day, in the normal operations of a capitalist economy. In addition, the classical doctrines of supply and demand, the wage fund, the distinction between value and riches, and even the labor theory of value (appropriately modified along lines suggested by Ricardo and J. S. Mill and incorporating the advances in price theory made by Böhm-Bawerk) make possible an explanation of real wages based on the productivity of labor, which it is the economic function of businessmen and capitalists steadily to increase. Finally, it can be shown how socialism, with its universal state monopoly on employment and supply, is the economic system to which the exploitation theory actually applies.
* * * * *
This essay originally appeared in The Political Economy of Freedom Essays in Honor of F. A. Hayek, Edited by Kurt R. Leube and Albert H. Zlabinger (München and Wien: Philosophia Verlag, The International Carl Menger Library, 1985). In its original form, it is available as a pamphlet from The Jefferson School of Philosophy, Economics, and Psychology. Apart from a few changes in wording and the addition of a few paragraphs, the present version differs mainly in that endnote references have been updated to refer to works not in existence in 1985. This refers in particular to the author's book Capitalism: A Treatise on Economics (Ottawa, Illinois: Jameson Books, 1996), hereafter referred to simply as Capitalism, and his translation of Böhm-Bawerk's essay "Value, Cost, and Marginal Utility." The author wishes to note that Capitalism contains a far more comprehensive and detailed treatment of the subjects dealt with here (see in particular, Chapters 11 and 14).
- 1. F. A. Hayek, The Road to Serfdom (Chicago: University of Chicago Press, 1944).
- 2. >Cf. Eugen von Böhm-Bawerk, Capital and Interest, Huncke and Sennholz translation, 3 volumes (South Holland Illinois: Libertarian Press, 1959), Vol. II, pp. 168-76, pp. 248-56; Vol. III, pp. 97-115; idem, "Wert, Kosten und Grenznutzen," Jahrbuch für Nationalökonomie und Statistik, Dritte Folge, Vol. III, 1892, p. 328 [this essay has subsequently been translated by the present author as "Value, Cost, and Marginal Utility," Quarterly Journal of Austrian Economics, vol. 5, n. 3; see also, idem, my "Notes on the Translation"]; Friedrich von Wieser. Ursprung und Hauptgesetze des Wirtschaftlichen Werthes, Vienna, 1884, pp. 146-160; idem, Natural Value, London and New York, 1893, p. 78, p. 181n, p.183; John Stuart Mill, Principles of Political Economy, Ashley Edition (reprint, Fairfield, New Jersey: Augustus M. Kelley, 1976), Bk. III, Chaps. III - VI. See also, Reisman, Capitalism, pp. 200-201, 206-209, 414-416. (Please note: page numbers in the online, pdf edition of Capitalism add 58 pages of front matter.)
- 3. Jevons held that the only possible connection between cost of production and price was through the intermediary of variations in supply. Cf. W. S. Jevons, The Theory of Political Economy, Fourth Edition, (London: Macmillan and Co., 1924), p. 165.
- 4. Chapters, 15 and 18 of my book Capitalism deal exhaustively with Keynesianism and its foundations, while Chapter 10 does likewise with the currently prevailing views on monopoly and competition; on this last, see also my "Platonic Competition," The Objectivist, August and September, 1968 (reprint, Laguna Hills, California: The Jefferson School of Philosophy, Economics, and Psychology).
- 5. Adam Smith, The Wealth of Nations, Cannan Edition, Bk. I, Chap. VIII.
- 6. Karl Marx, Das Kapital, Vol. I. Pt. II, Chap. IV.
- 7. Ibid., passim; Böhm-Bawerk, Capital and Interest, op. cit., Vol. I, pp. 263-71; Vol. II, pp. 259-89, passim.
- 8. John Stuart Mill, Principles of Political Economy, op. cit., Bk. I, Chap. V, Sec. 9.
- 9. F. A. Hayek, editor, Capitalism and the Historians (Chicago: University of Chicago Press, 1954), pp. 15f.
- 10. Cf. Ludwig von Mises, Human Action, Third Revised Edition (Chicago: Henry Regnery Company, 1966), p. 142.
- 11. Cf. Böhm-Bawerk, Capital and Interest, op. cit., Vol. I, pp. 263-71; Vol. II, pp. 105ff; Hayek, Prices and Production, revised edition, (London: Routledge & Kegan Paul, 1935; reprint, Fairfield, New Jersey: A. M. Kelley, 1967), passim.
- 12. Cf. Adam Smith, op. cit.,Bk. I, Chap. X, Pt. I; David Ricardo, Principles of Political Economy and Taxation, Third Edition, (London: 1821), Chap. IV. See also Reisman, Capitalism, pp. 172-180.
- 13. Successful anticipation of changes in consumer demand ahead of others is also an important way to make an exceptional rate of profit, and serves greatly to increase the benefits derived from economic progress. On this subject, see Capitalism, op. cit., p. 179.
- 14. Ricardo, op. cit.,Chap. I, Sec. VII; Chap. XX.
- 15. Ibid., Chap. V.
- 16. Smith, op. cit.,Bk. I, Chap. III.
- 17. Cf. Ricardo, op. cit.,Chap. I.
- 18. Eugen von Böhm-Bawerk, Karl Marx and the Close of His System, translated by Alice Macdonald (New York: The Macmillan Company, 1898; reprint, New York: Augustus M. Kelley, 1949). This essay is also reprinted under the title "Unresolved Contradiction in the Marxian Economic System" in Shorter Classics of Böhm-Bawerk (South Holland, Illinois: Libertarian Press, 1962).
- 19. Cf. The Works and Correspondence of David Ricardo, Piero Sraffa, Editor (Cambridge, England: The Syndics of the Cambridge University Press, 1952), Vol. VIII, p. 194.
- 20. John Stuart Mill comes very close to an accurate statement of all the relevant factors in his chapter on the ultimate analysis of cost of production. Cf. Mill, op. cit., Bk. III, Chap. IV.
- 21. Cf., above, note 2.
- 22. Cf. Ricardo. op. cit.,Chap. I, Sec. I.
- 23. Cf. von Mises, Socialism (New Haven: 1951; reprint, Indianapolis: Liberty Classics, 1981), pp. 113–42, pp. 211–20, pp. 516–-21; Human Action, op. cit., pp. 698–715; Hayek, The Road to Serfdom, op. cit., pp. 48–50; idem, editor, Collectivist Economic Planning (London: George Routledge & Sons, 1935); Reisman, Capitalism, pp. 275-278, 288-290.
In the wake of the March 15 New Zealand shootings, advocates for new gun restrictions in New Zealand have pointed to Australia as "proof" that if national governments adopt gun restrictions like those of Australia's National Firearms Agreement, then homicides will go into steep decline.
"Exhibit A" is usually the fact that homicides have decreased in Australia since 1996, when the new legislation was adopted in Australia.
There are at least two problems with these claims. First, homicide rates have been in decline throughout western Europe and Canada and the United States since the early 1990s. The fact that the same trend was followed in Australia is hardly evidence of a revolutionary achievement. Second, homicides were already so unusual in Australia, even before the 1996 legislation, that few lessons can be learned from slight movements either up or down in homicide rates.A Trend in Falling Rates
As noted by legal scholar Michael Tonry,
There is now general agreement, at least for developed English-speaking countries and western Europe, that homicide patterns have moved in parallel since the 1950s. The precise timing of the declines has varied, but the common pattern is apparent. Homicide rates increased substantially from various dates in the 1960s, peaked in the early 1990s or slightly later, and have since fallen substantially.
This was certainly the case in the United States. US homicides hit a 51-year low in 2014, falling to a level not seen since 1963. This followed the general trend: peaking in the early 1990s, and then going into steep decline. And yet, we can't point to any new national gun-control measure which we can then claim caused the decline. In fact, the data suggests gun ownership increased significantly during this period.
Australia followed the same pattern, although national homicide data collection was spotty before the early 1990s:
Source: Standardized homicide rates per 100,000 population, four English-speaking countries, various years to 2012. See "Why Crime Rates Are Falling Throughout the Western World" by Michael Tonry.
Part of the reason that the collection of homicide data in Australia is so recent a phenomenon is because it has tended to be so rare. Politically, it simply wasn't a national priority. Australia is a small country, with only a few more million people than Florida, spread out over an entire continent. In the relatively high homicide days of the early 1990s, Australia's homicides totaled around 300. This means in a bad crime year, in which homicides increase by only 20 or 30 victims, it could swing overall rates noticeably.
This brings us to our other problem with using post-1996 homicide data as definitive proof of anything. The numbers are too small to allow us to extrapolate much. As data analyst Leah Libresco wrote in 2017 in The Washington Post:
I researched the strictly tightened gun laws in Britain and Australia and concluded that they didn’t prove much about what America’s policy should be. Neither nation experienced drops in mass shootings or other gun related-crime that could be attributed to their buybacks and bans. Mass shootings were too rare in Australia for their absence after the buyback program to be clear evidence of progress. And in both Australia and Britain, the gun restrictions had an ambiguous effect on other gun-related crimes or deaths...
This doesn't stop many reporters in mainstream outlets from claiming that any decline in homicides can with certainty be attributed to whatever the most recent gun-control restrictions were.
But it rarely works in the opposite direction. For example, during the 1990s, many American states liberalized gun laws considerably, allowing more conceal-carry provisions and lessening controls in general. Needless to say, The New York Times doesn't point to this and say "American homicide rates decreased in response to loosening of state gun laws."
Of course, I'm not saying that these changes in gun laws by themselves indisputably "prove" that more conceal carry laws reduce homicides. But, if I subscribed to the same standards of rigor as most mainstream journalists, I'd likely have no scruples about doing this, in spite of what other factors ought to be considered.
Faced with a lack of evidence that 1996's law caused Australia to follow the same trend in homicides as both the US and Canada, advocates for laws like Australia's then fall back on the strategy of pointing out that Australia's homicide rates are lower than the US's. The problem with this strategy, of course, is that Australia's homicide rates were not comparable to those in the US either before or after 1996. The causes of the difference in rates between the two countries obviously pre-dates modern gun regulation measures in both countries. (We might also point out that several US states — some of which have very lax gun laws — have very low homicide rates comparable to Australia's.)
Attempts to explain this away have been numerous, and in many ways, justifying gun control policy has come down to endless attempts at using regression analysis to find correlations between gun policy and homicide rates. These can often be interesting, but their value often rests on finding the right theoretical framework with which to identify the most important factors.
Those who work in public policy, and who lack a good foundation in broader issues around criminality tend to just go directly to legal prohibitions as the key factor in homicide rates. But this isn't exactly the approach taken by those who engage in more serious study of long-term trends in homicides.
Famed crime researcher Eric Monkonnen, for example, in his essay "Homicide: Explaining America's Exceptionalism," identified four factors which he thought most likely explained the higher rates in the United States: the mobility of the population, decentralized law enforcement, racial division caused by slavery, and a generally higher tolerance for homicide. Monkonnen concludes: "To assume that an absence of guns in the United States would bring about parity with Europe is wrong. For the past two centuries, even without guns, American rates would likely have still been higher."
Monkonnen's conclusions on this matter don't necessarily make him laissez-faire on gun control. But they do illustrate his recognition of the fact that factors driving differences in homicide rates between two very different societies go far beyond pointing to one or two pieces of legislation. And if gun control laws are to be posited as the cause of declines in homicide, there need to be a clear "before and after difference" in the jurisdiction in which they are adopted. Comparisons with other countries miss the point.Suicide Rates Are Back at Pre-1996 Levels
Perhaps recognizing that homicide rates haven't actually changed all that much in the wake of 1996, some defenders of Australia's gun legislation have tried to gild the lily by claiming that an additional benefit of legislation has been a decline in suicide rates. This is a common strategy among gun control advocates who often like to claim gun control is a suicide prevention measure.
[RELATED: "Guns Don't Cause Suicide"]
For example, it's not difficult to find media headlines proclaiming "suicide figures plummeted" in Australia after the adoption of the 1996 law. But Australia runs into a similar problem here as with gun control: suicide rates fell substantially during the same period in Canada, the US, and much of Europe.
Moreover, in recent years, suicide rates in Australia and the US have climbed upward again. There's little doubt that suicide rates fell from 1995 to 2006, dropping from 12 per 100,000 to under 9 per 100,000. But after that, suicide rates climbed to a ten-year high in 2015, rising again to 12 per 100,000, or a rate comparable to what existed before the 1996 gun measure. In other words, suicides are back to where they were. But as recently as 2017, we're still hearing about how gun control also makes suicides decline.
Overall, this is just the level of discourse we should expect from the media and policymakers on this matter. Even the flimsiest correlation to the passage of a gun control law is assumed to have been the primary factor behind a decline in homicides. Meanwhile, any easing of gun laws that coincides with declining homicides (as happened in the US) is to be ignored. In both cases, the situation is more complicated than reporters suggest.
But don't expect this to be a restraining factor on the drive for new gun laws in New Zealand. In Australia, the 1996 gun-control measure was passed only 12 days after the massacre used to justify the new legislation. New Zealand politicians look like they're trying to take an even more cavalier attitude toward deliberation and debate. Meanwhile, in Norway, where Anders Brevik murdered 77 people in 2011 — 67 of them with semi-automatic firearms — the national legislature didn't pass significant changes to gun control regulations until 2018.
Bashing the rich is all the rage these days. In a clear appeal to envy, Democratic leaders are trying to outdo each other with escalating bids on how much of rich’s wealth should be stolen by government.
In one tweet, Elizabeth Warren called out a billionaire NFL owner for paying $100 million for a “superyacht,” insisting that instead he should be paying Warren’s proposed “Ultra Millionaire Tax” to those less wealthy.
The wealthy’s purchase of luxury items invites scorn from statists looking to tax their wealth, as well as those believing it is crass consumerism to indulge in such unnecessary extravagance.How Luxury Goods Benefit Everyone
But the wealthy’s purchase of “luxury goods” serves a social purpose.
For starters, as Ludwig von Mises wrote, today’s luxuries turn into tomorrow’s necessities.
Indeed, years ago, people would say ‘nobody needs such luxuries’ about things like air conditioning, air travel, telephones, color TV, refrigerators, and other items that are common household items now owned by the masses. Never mind modern items like the internet, laptops and smartphones that sci-fi writers a generation ago couldn’t have conjured up in their wildest imaginations that are now taken for granted and virtually considered necessities for the common man.
As Mises related in a passage from his 1962 book Economic Freedom and Interventionism:
About 60 years ago Gabriel Tarde (1843–1904) the great French sociologist, dealt with the problem of the popularization of luxuries. An industrial innovation, he pointed out, enters the market as the extravagance of an elite before it finally turns, step by step, into a need of each and all and is considered indispensable. What was once a luxury becomes in the course of time a necessity.
With the progress enabled by capitalism, the process by which luxuries turn into necessities is drastically shortened. “There was in the past a considerable time lag between the emergence of something unheard of before and its becoming an article of everybody's use,” wrote Mises. “It sometimes took many centuries until an innovation was generally accepted at least within the orbit of Western civilization,” he continued, adding “Centuries passed before the fork turned from an implement of effeminate weaklings into a utensil of all people.”
Compare that to more modern times, when the “evolution of the motor car from a plaything of wealthy idlers into a universally used means of transportation required more than twenty years,” Mises noted.
The demand for these “luxury goods” created by the wealthy attracts the additional investment in their production that results in them becoming far more readily available for the common man.
Furthermore, no small part of the criticism of luxury goods comes from the fixed pie fallacy, which states that wealth is a fixed pie. As such, according to this fallacy, the more money the wealthy spend on luxuries, the less money others have for their basic needs.
We know, however, that wealth is clearly not fixed because there are far more items of value available to satisfy our wants today than there was 100, 50 or even 25 years ago.
For instance, 50 years ago common household items like dishwashers, air conditioning and televisions were very rare — found in about 10 to 20 percent of households. These were considered luxury items as only high-income households could afford them.The Democratization of Luxury
Today, not only do virtually all households have these items, but the average household also has much more, such as cell phones and personal computers.
These items are in such great abundance that even low-income households own them in high percentages. Clearly, over time productivity gains enabled the production of more items of value, making them accessible to more households. The wealthy didn’t hoard these household items, leaving none for the poor. Rather, over time the wealth of society (i.e., goods of economic value) increased so that rich and poor alike could afford a growing number of household items.
Finally, critics of luxury expenditures allow their loathing of the rich to blind them to the fact that many of their working class neighbors are employed making luxury items.
Recall the “yacht tax” of 1990? In an effort to soak the rich deciding to buy an expensive boat, the federal government imposed a 10 percent tax on the purchase of boats valued over $100,000. Predictably, the sale of such boats plummeted, and an excess of 100,000 blue collar jobs were eliminated. The rich were still rich, but many working class people were driven to the unemployment line.
Envy-driven people allow themselves to be outraged by the “crass consumerism” of the purchase of luxury items. But today’s luxuries become the necessities of tomorrow, if progress is not stifled by government interference. Hindering luxury shopping by the wealthy will serve to hamper the process by which these luxury items become goods enjoyed by the majority of people in all income levels.
Why should we allow envy to deny the common man access to a greater abundance of goods that improve their lives?
Human action and the interest rate
People value present goods more highly than future goods. For instance, an apple available today is considered more valuable than the same apple available in, say, one month. This is expressive of time preference – which is an undeniable fact, a category of human action.
The sentence “Humans act” is a logically irrefutable truth. It cannot be denied without causing a logical contradiction. By saying "Humans can not act”, you act and thus contradict your very statement.
From the true insight that humans act we can deduce that human action takes place in time. There is no timeless human action. Were it otherwise, people’s goals would be instantaneously reached, and action would be impossible – but we cannot think that we cannot act.
The market interest rate is expressive of time preference, and as such, it is also a category of human action. If determined in an unhampered market, the (natural) market interest rate denotes the discount that future goods are subject to relative to present goods.
If one US-dollar available in a year is trading at, say, 0.95 US-dollar, it means that the market interest rate is 5.0% (the calculation is: [0.95 / 1 – 1]*100).
Should people start valuing present goods more highly than future goods – which is expressive of a rise in time preference –, the discount on future goods vis-à-vis present goods and thus the market interest rate go up.
If peoples’ time preference declines, the discount on future goods vis-à-vis present goods drops, and so does the market interest rate – meaning that people wish to save more and consume less out of their current income.
The interest rate and central banking
In an unhampered market, the market interest rate reflects peoples’ time preference. Nowadays, however, the market interest rate is no longer determined in an unhampered market. It is dictated by the central bank.
Central banks set short-term interest rates by providing commercial banks with credit. In doing so, they exert a strong influence on short-term interest rates. In more recent years, central banks have also been determining long-term interest rates through bond purchases.
The rather uncomfortable truth in this context is that central banks, in close cooperation with commercial banks, keep issuing new money produced through bank credit that is not backed by real savings.
The purpose of such a money-increase-through-credit-creation-scheme is to bring down the interest rate: to deliberately suppress it to a level that is lower than the level of the market interest rate determined in a free market.
This has far-reaching consequences. The artificially lowered market interest rate tempts people to save less and consume more – compared to a situation in which the market interest rate had not been artificially lowered.
As savings decline and consumption increases, the lowered market interest rate causes new investment, and the result is an artificial economic upswing. However, such a “boom” is not sustainable, and at some point it will have to turn into a recession (“bust”).
This is, in a nutshell, what the Austrian Business Cycle Theory (ABCT) says about the consequences of the central banks' meddling with the market interest rate. However, there is much more that the ABCT reveals.
Central banking and valuation
In fact, the ABCT tells us that central banks, by manipulating the market interest rate, tinker with humans’ valuation scales. Pushing down the market interest rate does not only result in declining borrowing costs or rising stock and housing prices.
These are merely symptoms of a more profound and most elementary cause – namely central banks influencing the way people value the present satisfaction of wants relative to the future satisfaction of wants and act accordingly thereupon.
Through artificial depression of the market interest rate, people are compelled to value present consumption higher than future consumption. In fact, they are compelled to care less about the future and more about the present.
Saving for future needs is discouraged, consuming in the present is encouraged. Furthermore, artificially lowered interest rates persuade people to give up a debt-free life and run into credit to bring forward future consumption to the present.
The disconcerting insight is that such an increased valuation of present needs relative to future needs affects all fields of human action – such as peoples' valuation of, e.g. education, family, manners, you name it.
The artificially lowered market interest rate makes it less attractive for the individual to spend hours learning, as it would mean reducing present consumption in the form of leisure time. As a result, the quality of general education can be expected to decline.
Starting a family appears to become more self-sacrificing and burdensome – as parents have to forego present consumption. Also, divorce increasingly seems to be an appealing way out of current relationship problems.
Having good manners – getting out of somebody's way, saying good morning, helping a stranger across the street, and so on – is considered less rewarding, as it often means restricting present consumption, forgoing potentially higher consumption in the future.
Valuation and human action
By directly influencing peoples' valuation scales through the manipulation of market interest rates, central banks affect every aspect of peoples' lives. It amounts to a "Revaluation of all Values", to use a term coined by the German philosopher Frederick Nietzsche.
It should be easy now to see that the root cause of many severe defects in social matters can be directly or indirectly traced back to central banking. There should not, actually cannot, be any presumption of innocence as far as central banking is concerned.
As a final point, let us address the issue of “speculative bubbles” in financial markets. Of course, prices sometimes overshoot or undershoot, inflate and then deflate, as investors try to bring a financial assets' price in line with its estimated value.
Fear and greed, panic and optimism, stupidity and wisdom, all play a role in forming financial asset prices – as people are what they are. However, it is central banking that drives peoples' dispositions and actions to extremes.
By pushing down the market interest rate below its natural level – which becomes chronic if and when the money supply is increased through bank credit expansion not backed by real savings –, central banks inevitably coax investors into becoming overly high-spirited.
In that sense, central banks are to be held responsible for aggravating, or even inducing, speculative bubbles. To make it even worse: Once the speculative bubble pops, people become dispirited. They blame the free market or capitalism for their plight.
They do not see – often misguided by mainstream economics - that the root cause of the trouble is central banks' downward manipulation of market interest rates in the first place, which is made possible by central banks running an unbacked paper money system.
To conclude: The indisputable insight that central banking brings about a "Revaluation of all Values", which is neither in the economic interest of the people nor ethically justifiable, should encourage efforts to put an end to central banking.
Any such effort must propagate the intellectual insight that central banking is very harmful to the society, and it also requires truly bold and determined action, for "We know that no one ever seizes power with the intention of relinquishing it,” as George Orwell put it.1
- 1. Orwell, G. (2008 ), Nineteen Eighty-Four, Penguin Books, p. 276.
In a three-part series, Dr Joe Boot (Wilberforce Academy, Ezra Institute for Contemporary Christianity) argues that liberal democracy – the dominant view in political philosophy - is a form of heresy springing from beliefs that should not be held by Christians. In part two, Dr Boot looks at the origins of liberal democracy and how it has evolved to shape today’s political philosophy.
The Code Napoleon, embodying the codification of the laws of France, was officially adopted on March 21st, 1804, this day 215 years ago. Until then different laws, many of them feudal in nature, had been applied to different parts of France. The new Code provided a unified set of laws for the whole country, written in plain language and within a rational framework. It drew heavily on the Sixth Century compilation of the Byzantine Emperor Justinian, which set out laws on property, the family and the individual.
The Code is a type of civil law, relying on legislation and statutes to determine rights, and is in contrast to a common law system, such as England, where the laws embody traditional rights and follow the legal precedent of previous cases. Under the Napoleonic Code, judges are investigators, whereas in common-law traditions they arbitrate between contending parties that argue their case in front of them.
The Napoleonic Code was criticized in common law countries for its de facto presumption of guilt, and for the way it combined magistrate and prosecutor in one person. It was also criticized for making it possible for those accused to be detained for long periods ahead of trial.
It actually took away some rights women had gained under the Revolution. The man was empowered as head of the household, and women were not allowed to trade in possessions or property without asking his permission. He could also disinherit children and imprison them for a month.
The fundamental philosophical difference is that civil law sets out what a citizen's rights are, whereas common law assumes that a person has the rights not specifically prohibited by statute. In popular parlance, civil law tells you what you can do, whereas common law tells you what you cannot do, and assumes you are free to do everything else.
There is a strong tradition in England that your rights are not given to you from on high, but ones that you are entitled to simply by being English. The laws in England have recognized and codified those rights from time to time. Supporters of common law like the fact that much of it comes from below, reflecting the traditional rights that people have enjoyed since ancient times. And they point out that it is more flexible, and quicker to adapt without the need for legislation.
Some commentators have asserted out that the civil law systems of many Continental nations, often derived from the Code Napoleon, do not sit easily with the English common law system, and have led to disputes and disagreements between the two, and a widespread feeling in England that a foreign system was being imposed on them via the European Union. This may have played a role in determining the UK's decision to leave it.
Apparently it’s now possible to build perfect artificial surfing lakes where once stood golf courses. This is a result of a change in technology:
Putting greens and fairways from London to Edinburgh are being sized-up for conversion to inland surfing parks by a new breed of non-Pringle wearing entrepreneur.
Advances in computing have - after decades of trying - finally made it possible to create an endless supply of perfect surf waves in inland lakes and dozens are now being planned and built across the world.
Well, how do we decide which should be converted? Or none or all?
We could allow those who did PPE at Oxford to decide for us. Yet there’s a certain hesitance to thinking that those who did PPE at Oxford know how many people would prefer to surf than golf. The only really logical method we’ve got is to allow people who wish to spend their money doing so try it out and see. That is, just leave it to the market.
Of course, this is true of all such things. What is technically possible is something that changes day by day - that white hot heat of the technological revolution. Given that what can be done changes we need to have a system which allows continual trying out of those possibilities. That is, run the world not through PPE but through markets.
There is one more part to this though. We have more than a sneaking suspicion that these golf courses, while they might be worth more to the surfer dudes, might be best used as places to put housing. As has been noted, there’s more of Surrey under golf courses than dwellings. A market system should - must - therefore be a proper market system, one that allows people to try out what is really the best use of an asset given all circumstances. That is, until we have a properly market based planning system - ie, near none but that market - we’ll never really find out what is the best use of all that land.
ABSTRACT: In exalting the subjectivity of value, the marginalist revolution posed a fundamental problem for economic theory. Each person chooses how to allocate his means and thereby, economize his actions by rank ordering the value of alternatives. Being interpersonally incomparable, ordinal ranks cannot serve directly to economize means within a division of labor. Neoclassical economists solved this problem by foregoing an explanation of the division of labor grounded in the reality of human persons and instead, constructed formal, mathematical models. F.A. Hayek’s subjectivist response to the neoclassical project was to augment formal, mathematical models with select characteristics of human persons. In contrast, Ludwig von Mises grounded economic theory in the reality of human persons. He demonstrated how voluntary exchange of goods for and against money generate cardinal numbers from ordinal ranks. Actual money prices emerging from actual human choices constitute the necessary condition for economizing resources across the division of labor. Unlike subjective valuations, which cannot be compared interpersonally, and barter exchange ratios which are incommensurate, money prices can be compared. Economic calculations of net income and net worth, furthermore, are a phenomenon of the market economy alone. Mises’s approach not only solved the problem of economizing resources in a division of labor, but provides a robust framework for economic research.KEYWORDS: economic calculation, subjectivism, economizing, general equilibrium, socialism JEL CLASSIFICATION: B13, B14, B24, B25, P11, P21, P51
Jeffrey Herbener (email@example.com) is chair of the Department of Economics and Sociology at Grove City College.
Quarterly Journal of Austrian Economics 21, no. 3 (Fall 2018) full issue, click here.
It is probably no exaggeration to say that every important advance in economic theory during the last hundred years was a further step in the consistent application of subjectivism (Hayek, 1955, p. 52).INTRODUCTION
F.A. Hayek (1955, pp. 52–53) appended the following footnote to his famous maxim concerning subjectivism quoted above:
This is a development which has probably been carried out most consistently by Ludwig von Mises, and I believe that most peculiarities of his view which at first strike many readers as strange and unacceptable trace to the fact that in the consistent development of the subjectivist approach he has for a long time moved ahead of his contemporaries. Probably all the characteristic features of his theories—from his theory of money (so much ahead of the time in 1912) to what he calls his a priorism—his views about mathematical economics in general and the measurement of economic phenomena in particular, and his criticism of planning all follow directly (although, perhaps, not all with the same necessity) from this central position. See particularly his Grundprobleme der Nationalökonomie (1933) and Human Action (1949).
One achievement of the Salerno camp in the second calculation debate was to demonstrate that Hayek, at least, leaves the wrong impression of the relationship between Mises’s work and his own. By referring to “the subjectivist approach,” Hayek seems to imply that his approach and that of Mises are fundamentally the same. Although Hayek admits to some differences in particulars, since Mises’s views, as he puts it, “all follow directly (although, perhaps, not all with the same necessity) from this central position.”
Mises, however, did not accept the subjectivist approach of Friedrich von Wieser, on which Hayek patterned his own framework, but instead worked within the causal-realist approach of Carl Menger and Eugen von Böhm-Bawerk.1 In discussing the two traditions in Austrian economics, Joseph Salerno (1999, p. 37) wrote:
It is important to note that even at this early stage, the Austrian school was deeply divided on a crucial issue of basic theory. On the one hand, Böhm-Bawerk fully absorbed Menger’s causal-realist approach to price theory and endeavored to develop it further and apply it to new areas. Wieser, on the other hand, seized narrowly on Menger’s “subjectivism” as embodied in the principle of marginal utility and, while usefully elaborating some of the implications of this principle, completely ignored the structure of reality-based price theory that Menger had labored to build upon it. Wieser’s purpose was to construct his own peculiar ideal of social welfare based on a state of general equilibrium that he called “natural value,” and to link it through the concept of marginal utility to foundations in human psychology.
With his acceptance of general equilibrium and emphasis on human psychology, Hayek belongs to the Wieserian wing of the Austrian school. Hayek attempted to graft onto the neoclassical general equilibrium conception his own insights into human learning, knowledge, and other “subjectivist” elements. In discussing the main contributions to modern price theory for an entry in The New Palgrave: A Dictionary of Economics in the early 1980s, which remained unpublished at the time, he wrote (Hayek, 1992, pp. 53–54):
Equally important is what may well be regarded as the final formulation of the marginal utility analysis by J.R. Hicks of the marginal utility analysis of value in the concept of the marginal rate of substitution, based on the indifference curve technique introduced by Irving Fisher and F. Y. Edgeworth. This conception of varying rates of substitution or equivalence, wholly independent of any conception of measurable utility, may well be regarded as the ultimate statement of more than half a century’s discussion in the tradition of the Austrian school….
Arguably, Hayek’s claim about Mises leading the advance of subjectivism may not be mistaken per se, however, Mises’s approach to grounding economic theory on a proper subjectivist foundation differed dramatically from that of Wieser and his followers.ECONOMIC CALCULATION AND SUBJECTIVISM IN HUMAN ACTION
In his magnum opus, Human Action, Mises subsumes subjectivist aspects of catallactics within the concept of economic calculation. The book is organized into seven parts containing 39 chapters. He devotes one entire part of the book, part 3, to economic calculation. It contains three chapters. In one of those chapters, Valuation without Calculation, we find Mises’s discussion of the subjectivity of value. He did not offer insights about how the advance of the concept of subjectivity can make the general equilibrium framework more suitable to economic theorizing. Instead Mises focused on two fundamental principles concerning the subjectivity of value.
First, he juxtaposed the ordinal ranking inherent in valuation with cardinal numbers in which the goods being ranked are measured. He did this to demonstrate a principle of economic calculation. He wrote (Mises, 1998, p. 201):
The immediate goal of acting is frequently the acquisition of countable and measurable supplies of tangible things. Then acting man has to choose between countable quantities; he prefers, for example, 15 r to 7 p; but if he had to choose between 15 r and 8 p, he might prefer 8 p…. This is tantamount to the statement that he prefers a to b and b to c…. It certainly does not render reckoning with cardinal numbers possible. It does not open a field for economic calculation and the mental operations based upon such calculation.
Second, he referenced the principle he (Mises, 1998, p. 699) would call in his critique of socialist schemes to provide a method of economic calculation, “the fundamental theorem of modern economics,” namely diminishing marginal utility. His purpose was, again, to make a fundamental point about economic calculation. Mises (1998, p. 206) wrote:
There is no method available to construct a unit of value. Let us remember that two units of a homogeneous supply are necessarily valued differently. The value attached to the nth unit is lower than that attached to the (n–1)th unit.
Mises (1998, p. 206) concluded this line of argument with the following words:
It is a fictitious assumption that an isolated self-sufficient individuals or the general manager of a socialist system, i.e., a system in which there is no market for the means of production, could calculate. There is no way which could lead one from the monetary computation of a market economy to any kind of computation in a nonmarket system.
In the subsection that closes out this section of the book, which Mises titled, “The Theory of Value and Socialism,” Mises (1998, p. 207) wrote the following about subjectivism:
The illusion that a rational order of economic management is possible in a society based on public ownership of the means of production owed its origin to the value theory of the classical economists and its tenacity to the failure of many modern economists to think through consistently to its ultimate conclusion the fundamental theorem of the subjectivist theory.ECONOMIC CALCULATION AND THE PROBLEM OF ECONOMIZING
As noted above, Mises considered the “fundamental theorem of modern economics” diminishing marginal utility, which can be deduced from a person economizing with homogeneous units of a good. Although diminishing marginal utility is accepted by all modern economists, Mises was the first to perceive the implication of its reasoning for making economizing decisions about the use of resources in society and its application to this problem in socialism. Concerning the proposal of mathematical economists to solve the problem of economizing in socialism, Mises (1978, p. 112) wrote:
They failed to see the very first challenge: How can economic action that always consists of preferring and setting aside; that is, of making unequal valuations, be transformed into equal valuations, and the use of equations? Thus the socialist came up with the absurd recommendation of substituting equations of mathematical catallactics, depicting an image from which human action is eliminated for the monetary calculation in the market economy.2
The deficiency in economic theory that needed correcting, according to Mises, was a fallacy economists held concerning economic calculation. Mises (1998, p. 202) wrote:
The elaboration of economic theory is heuristically dependent on the logical processes of reckoning to such an extent that the economists failed to realize the fundamental problem involved in the methods of economic calculation…. They misconstrued economic calculation. They took it for a category of all human action and ignored the fact that it is only a category inherent in acting under special conditions…. But they did not comprehend that money prices are the only vehicle of economic calculation. Thus most of their studies are of little use. Even the writings of the most eminent economists are vitiated to some extent by the fallacies implied in their ideas about economic calculation.
Contrary to Hayek, who thought that general equilibrium theory could be corrected by grafting subjectivist insights onto it, Mises perceived that the deficiency of the general equilibrium construct stemmed from its fallacious treatment of money. He identified two mistakes. First, the general equilibrium construct conceived of a market economy with only direct exchange and concomitantly asserted the neutrality of money. He wrote (Mises, 1998, pp. 203–204):
A serious blunder that owes its origin and its tenacity to a misinterpretation of this imaginary construction [a market with direct exchange] was the assumption that the medium of exchange is a neutral factor only…. This is, of course, what the fable of money’s neutrality implies. The whole theory of catallactics, it was held, can be elaborated under the assumption that there is direct trade only. If this is once achieved, the only thing to be added is the “simple” insertion of money terms into the complex of theorems concerning direct exchange. However, this final completion of the catallactic system was considered of minor importance only. It was not believe that it could alter anything essential in the structure of economic teachings. The main task of economics was the study of indirect exchange.
Only later economists realized that some of the most important and most intricate problems of catallactics are to be found in the field of indirect exchange and that an economic theory which does not pay full regard to them is lamentably defective.
Second, Mises noted a more momentous error drawn from the imaginary construct of a fictitious barter world, namely, that value is objective and can be measured by money.3 He wrote (Mises, 1998, p. 205):
Even Friedrich von Wieser and Irving Fisher took it for granted that there must be something like measurement of value and that economics must be able to indicate and to explain the method by which such measurement is effected. Most of the lesser economists simply maintained that money serves as “a measure of values.”
Mises’s corrective of the deficiencies of general equilibrium theory was based on his integration of money into subjective-value theory. He demonstrated (Mises, 1953) in 1912 how ordinal ranks are transformed into cardinal numbers suitable for economic calculation in a market economy. Buyers and sellers have preferences for a good they intend to exchange relative to money. They exchange to acquire the mutual benefit latent in the reverse ordering of their preferences. Competitive bidding by the buyers and competitive offering by the sellers results in a market-clearing price. As Rothbard (1991, p. 65) recounts it:
In the course of that notable integration of monetary theory and “micro” marginal utility theory, Mises was one of the very first to realize that subjective valuations of the consumer (and of laborers) on the market are purely ordinal, and are in no way measurable. But market prices are cardinal and measurable in terms of money, and market prices bring goods into cardinal comparability and calculation (e.g., a $10 hat is “worth” five times as much as a $2 loaf of bread).
Mises did not fully work out this integration and its implications until the German-language predecessor of his magnum opus, Human Action.4 In that work, he demonstrated that the market economy is the only solution to transforming rank orders of value into cardinal numbers suitable for making economizing decisions in a division of labor. Only three alternatives to the market solution of monetary prices exist, according to Mises.
One is inter-personal value comparisons among the participants in the division of labor. Yet, modern economists all agree that inter-personal comparisons of value are impossible and therefore, this alternative is not entertained by modern economists as a solution to the economizing problem. A second alternative is imputation of value across the division of labor by a single person. Valuation, Mises argued, can be applied only to a self-sufficient economy, i.e., an economy in which a person is the producer of everything he consumes.5 In this case, a single mind can integrate the use of its resources across the entire array of producer goods with which it acts. It does this by imputing the value of lower-order goods to those of higher order. According to Mises, however, a single mind cannot decompose the value of the end achieved into the value of each factor’s contribution. He wrote (Mises, 1998, p. 332):
Valuation as it can be practiced by an isolated actor (Robinson Crusoe or a socialist board of production management) can never result in a determination of such a thing as quotas of value…. It is permissible to declare that, due allowance being made for time preference, the value attached to a product is equal to the value of the total complex of complementary factors of production. But it would be nonsensical to assert that the value attached to a product is equal to the “sum” of the values attached to the various complementary factors of production. One cannot add up values or valuations. One can add up prices expressed in terms of money, but not scales of preference…. The process of value imputation does not result in derivation of the value of the single productive agents from the value of their joint product. It does not bring about results which could serve as elements of economic calculation.
Mises insisted that in making economizing decisions about the use of resources in an extended division of labor, it is necessary to disentangle the contribution of each complementary factor of production used in producing each good. The necessity arises because factors of production are neither perfectly specific to each good nor perfectly non-specific among all goods. Absent either of those extreme conditions, economic calculation cannot be done by knowing only the value of goods of first order and the technical conditions of production of these goods. Which raises the third alternative: using the cardinal numbers of production possibilities as the basis for economic calculation. Although technical consideration allow the decomposition of the physical contribution to output made by each factor, these numbers have no connection to value of the ends attained. Mises wrote (1998, p. 208):
[The fact that] the various means allow for various uses, set man the tasks of allocating them to those employments in which they can render the best service. Here the computation in kind as applied by technology is of no avail. Technology operates with countable and measurable quantities of external things and effects; it knows causal relations between them, but it is foreign to their relevance for human wants and desires…. [Technology] ignores the economic problem: to employ the available means in such a way that no want more urgently felt should remain unsatisfied because the means suitable for its attainment were employed—wasted—for the attainment of a want less urgently felt.
In an extended division of labor, individual factors of production can be shifted from one line of production to another and configured in various combinations with other complementary factors of production in each production process. Therefore, to know whether or not a particular configuration of complementary factors of production will be more economizing for society than another configuration, prices of individual factors of production must exist. Mises (1998, pp. 209–210) wrote:
[The practical man] must know whether what he wants to achieve will be an improvement when compared with the present state of affairs and with the realizable projects which cannot be put into execution if the project he has in mind absorbs the available means. Such comparisons can only be made by the use of money prices…. Where there are no money prices, there are no such things as economic quantities. There are only various quantitative relations between various causes and effects in the external world. There is no means for man to find out what kind of action would best serve his endeavors to remove uneasiness as far as possible.
Mises concluded this line of inquiry by returning to the starting point in Robinson Crusoe, i.e., production in self-sufficiency instead of a division of labor. Crusoe could compare the value of output with the value of the complementary factors used because the possible combinations he can exploit are simple enough for him to impute value adequately for economizing.6 He wrote (Mises, 1998, p. 210):
There is no need to dwell upon the primitive conditions of the household economy of self-sufficient farmers. These people performed only very simple processes of production. For them no calculation was needed, as they could directly compare input and output. If they wanted shirts, they grew hemp, they spun, wove, and sewed. They could, without any calculation, easily make up their minds whether or not the toil and trouble expended were compensated by the product. But for civilized mankind a return to such a life is out of the question.ECONOMIC CALCULATION AND THE SCHEMES OF SOCIALISM
With his theory of economic calculation in hand, Mises critiqued the schemes of socialists to rationally allocate resources in chapter 26 in Human Action. Both the title of the chapter, “The Impossibility of Economics Calculation under Socialism,” and the summary list of schemes indicate Mises’s emphasis on economic calculation. He wrote (Mises, 1998, pp. 699–700):
The various schemes proposed can be classified in the following way:
1. Calculation in kind is to be substituted for calculation in terms of money....
2. Starting from the ideas of the labor theory of value the labor-hour is recommended as the unit of calculation….
3. The unit is to be a “quantity” of utility….
4. Calculation is to be made possible by the establishment of an artificial quasi-market….
5. Calculation is to be made with the aid of the differential equations of mathematical catallactics….
6. Calculation is to be made superfluous by resorting to the method of trial and error….
All of these socialist schemes, except number 6, are attempts to have economic calculation under socialism. And Mises’s critique of the socialist director using the method of trial and error to make economizing production and investment decisions relies on his views of economic calculation. He argued (Mises, 1998, p. 700) that economizing decisions fall into a category of trial and error in which “the only mark of the correct solution is that it has been reached by the application of a method considered appropriate for the solution of the problem.” His example is solving a multiplication problem. He wrote (Mises, 1998, p. 700):
One may try to guess the correct result by trial and error. But here the method of trial and error is no substitute for the arithmetical process. It would be quite futile if the arithmetical process did not provide a yardstick for discriminating what is incorrect from what is correct.
In the case of economizing decisions, the only way to discover if trial and error has succeeded is by a computation of profit and loss. Mises wrote (1998, p. 701):
The problem of socialist economic calculation is precisely this: that in the absence of market prices for the factors of production, a computation of profit and loss is not feasible.
We may assume that in the socialist commonwealth there is a market for consumers’ goods and that money prices for consumers’ goods are determined on this market…. But the characteristic mark of the socialist system is that the producers’ goods are controlled by one agency only in whose name the director acts, that they are neither bought nor sold, and that there are no prices for them. Thus there cannot be any question of comparing input and output by the methods of arithmetic.
Concerning the socialist scheme for a quasi-market, Mises noted that it represents the triumph of his approach to economics. He wrote (Mises, 1998, p. 702):
It is therefore nothing short of a full acknowledgement of the correctness and irrefutability of the economists’ analysis and devastating critique of the socialists’ plans that the intellectual leaders of socialism are now busy designing schemes for a socialist system in which the market, market prices for the factors of production, and catallactic competition are to be preserved. The overwhelmingly rapid triumph of the demonstration that no economic calculation is possible under a socialist system is without precedent in the history of human thought. The socialist cannot help but admitting their crushing final defeat.
Finally, Mises made it perfectly clear that the defeat of socialism owed nothing to the mathematical economics of general equilibrium. The problem of directing the use of resources in an economizing manner must start with existing conditions, which are not those of equilibrium but have been brought about by both successes and failures of the past. Even if the final equilibrium configuration of resource allocation is known, the economizing problem remains: how to move step-by-step from existing conditions to those of final equilibrium. For the solution to this problem, the mathematical expression of the state of final equilibrium is of no use. Mises wrote (1998, p. 709):
Even if, for the sake of argument, we assume that a miraculous inspiration has enabled the director without economic calculation to solve all problems concerning the most advantageous arrangement of all production activities and that the precise image of the final goal he must aim at is present to his mind, there remain essential problems which cannot be dealt with without economic calculation. For the director’s task is not to begin from the very bottom of civilization and to start economic history from scratch. The elements with the aid of which he must operate are not only natural resources untouched by previous utilization. There are also the capital goods produced in the past and not convertible or not perfectly convertible for new projects. It is precisely in these artifacts... that our wealth is embodied. Their structure, quality, quantity, and location is of primary importance in the choice of all further economic operations…. [The director] must try to take advantage of every piece of the already available capital goods in the best possible way.CONCLUSION
Mises’s integration of money into the subjective theory of value did more than put monetary theory on solid ground. It set the entire body of economic theory on the causal-realist foundation laid by Carl Menger. Doing so required a reconstruction of price and production theory. Not merely grafting subjectivist elements onto general equilibrium theory, but rebuilding this theory from the bottom up. No better evidence of the soundness of this approach exists than Mises’s demonstration that central planners cannot allocate resources in an economizing manner in socialism for lack of economic calculation.
Since the second calculation debate made apparent Mises’s achievement in providing a truly general theory of economics, the causal-realist approach has been advancing on several fronts. To mention just a few: business cycle theory has been refined (Salerno, 2012); the theory of entrepreneurship and organizational theory has been developed (Klein, 2010); the theory of cost has been reconsidered (McCaffrey, 2018); the theory of interest has been further considered (Herbener, 2011); and Mises’s concept of entrepreneurial appraisement has been extended (Herbener and Rapp, 2016).
- 1. On Wieser’s approach, see Bostaph (2003).
- 2. Quoted in Salerno (1999, p. 58).
- 3. Mises (1998, pp. 697–699) repeats his indictment of the general-equilibrium framework in chapter 26 in which he criticizes mathematical economists for perpetuating the fallacy that economic calculation was possible in socialism.
- 4. See Rothbard (1991, p. 65) and Salerno (1999, p. 56).
- 5. As Mises (1998, p. 210) concedes, valuation is adequate to economizing resources within a family economy or that of a small tribe as well as a single person.
- 6. All of the combinations of factors of production can be valued by Crusoe through his own experience. Such cannot be done by a single person in a division of labor, especially the extended division of labor in a modern, capitalist economy.
Ludwig von Mises’s contributions stood out against the background we outlined previously in mainstream international economic theory. Mises did not employ an analytical distinction between domestic and international trade, and unlike his contemporary scholars, he did not separate the real and monetary realms of the economy in his analysis. Quite the contrary, his lifelong research program was centered on bridging what he believed to be an artificial theoretical separation. Moreover, Mises also focused on placing entrepreneurship — understood as judgment, or decision-making under uncertainty, a view fully reconcilable with the classical principles of international trade—at the heart of his analysis of international economic phenomena. Albeit scattered throughout his works and weaved into the general economic analysis — thus falling short in terms of systematic and orderly presentation — Mises’s contributions to international economics are nevertheless original, wide-ranging, and eloquent.
Mises began his analysis of the particular aspects of international economics from the fundamental and overarching economic phenomenon of the division of labor. Throughout his works, numerous references were made to the merits of the principle of comparative advantage and the economic benefits of international trade, first explained by Adam Smith and David Ricardo. However, Mises stressed the fact that the adherents of the classical school were mistaken in their belief that the law of comparative costs represented the starting point for a separate theory of value in international trade. In accord with 19th century French liberals, Mises argued that
with regard to the determination of value and of prices there is no difference between domestic and foreign trade. What makes people distinguish between the home market and markets abroad is only a difference in the data, i.e. varying institutional conditions restricting the mobility of factors of production and of products (Mises 1998 , 163).
Consequently, in Human Action, Mises revised the principle of comparative advantage into the law of association, a broader concept that incorporated the more particular law presented by Ricardo. The Misesian law of association indicated that unrestricted production and market exchange take advantage of the more propitious conditions, leading to the specialization of individuals and geographical areas according to their comparatively more suitable characteristics for one branch of production or another. If capital and labor are bound to the national soil, it is goods that move across borders; when capital and labor are free to move between countries,
the tendency inheres to draw labor forces and capital to the locations of the most favorable natural conditions of production without regard to political and national boundaries. [Therefore], unrestricted free trade must lead to a change in the conditions of settlement on the entire surface of the earth: from the countries with less favorable conditions of production capital and labor flow to the countries with more favorable conditions of production” (Mises 1983 , 92).
The analytical coup of Mises’s revised version of the principle of comparative advantage lay primarily in the incorporation of money prices into the analysis of comparative costs, and thus in placing monetary calculation at the heart of understanding cost differences and trade pattern tendencies in international trade. Mises argued that
Monetary calculation… affords us a guide through the oppressive plenitude of economic potentialities. It enables us to extend to all goods of a higher order the judgment of value, which is bound up with and clearly evident in, the case of goods ready for consumption, or at best of production goods of the lowest order. It renders their value capable of computation and thereby gives us the primary basis for all economic operations with goods of a higher order. Without it, all production involving processes stretching well back in time and all the longer roundabout processes of capitalistic production would be groping in the dark” ( Mises 1990 , 14).
This set the foundation for Mises’s overall approach to economic phenomena, both in their domestic and international aspects, which put the concept of money at the heart of the matter. As a result, Mises also explained in detail the causes and consequences of a change in the supply of or the demand for money, and thus gave a complex but operational definition of Cantillon effects, with its manifold aspects concerning prices, production, wealth, and business cycles. Mises wrote:
The essence of monetary theory is the cognition that cash-induced changes in the money relation affect the various prices, wage rates, and interest rates neither at the same time nor to the same extent. If this unevenness were absent, money would be neutral; changes in the money relation would not affect the structure of business, the size and direction of production in the various branches of industry, consumption, and the wealth and income of the various strata of the population. Then the gross market rate of interest too would not be affected either temporarily or lastingly by changes in the sphere of money and circulation credit. The fact that such changes can modify the rate of originary interest is caused by the changes which this unevenness brings about in the wealth and income of various individuals. The fact that, apart from these changes in the rate of originary interest, the gross market rate is temporarily affected is in itself a manifestation of this unevenness (Mises 1998 , 552-3).
As a result of their gradual progress through the economy, from one individual cash balance to another, changes in the money relation thus affect the structure of prices, the structure of production (size and direction of production, and by extension, the size, direction, and composition of trade), the pattern of consumption, and the distribution of income and wealth in an economy. One particularly important instance of these effects is thus the case of the business cycle, when the change in the money relation first takes place on loan markets. In this case, the initial decrease in the gross market interest rates leads primarily to the unsustainable lengthening of the structure of production, which reallocates labor and resources toward the higher order stages of production, but which also revolutionizes prices and redistributes wealth among different groups of the population.
Money occupies in international transactions the same position as all other commodities being exchanged: once a general medium of exchange is selected on the market, barter exchange ratios between the goods imported and exported disappear in a monetary economy, superseded by money prices.
Internationally, therefore, Mises pointed out that “if no other relations than those of barter exist between the inhabitants of two areas, then balances in favor of one party or the other cannot arise” (Mises 1953, 182). Consequently, “the volume of foreign trade is completely dependent upon [money] prices; neither exportation nor importation can occur if there are no differences in prices to make trade profitable” (Mises 1953, 250). By extension, Mises also reached the conclusion that the balance of payments is consequently determined “by the price level and the purchases and sales induced by the price margins” (Mises 1953, 244 ), making money the active element of the balance of payments, and not an accommodating flow of the movement of ‘real’ goods across borders.
By exposing this indelible connection between the demand for money and the demand for goods (sides of the same coin) which drive the equilibration of the international monetary system through changes in individual cash-balances, Mises was able to argue that the separation between the monetary and real economy in the economic analysis was both artificial and pernicious. Throughout the 20th century, Mises remained one of the singular voices to argue that “money without a driving force of its own [...] would not be money at all” and that “money is neither neutral nor stable in purchasing power” (Mises 1998 , 415-6).
What happens then with the purchasing power of money, and subsequently with the exchange rate, when there is a change in the demand for or supply of money? Mises based his arguments—and his definition of money non-neutrality, or Cantillon effects—on the insight that any changes in the supply and demand for money cannot run their course through the economy without first and foremost modifying the levels of individual cash-balances. He argued that if individual cash-balances cannot be increased or decreased simultaneously, the purchasing power of money also cannot be altered instantaneously following a change in the money relation. For example, an increase in the supply money is necessarily distributed step-by-step, from one individual money holder to another, spent and re-spent within and across borders “in a sequence of monetary changes” (Salerno 2010, 155) which drive down the purchasing power of the monetary unit. This process goes on until cash balances, the purchasing power array, and the exchange rate between currencies are established, uno acto, at the new levels. Consequently, argued Mises, individual prices never change at the same time and to the same extent following a change in the money supply. The economic and social consequences taking place during this adjustment process represent the Cantillon effects of a monetary expansion.
What are the welfare effects of change in the money supply? According to Mises, such monetary changes will necessarily lead to the redistribution of wealth on a general scale. The reason for these social changes, Mises argued, is twofold: on the one hand, “all economic agents are in a sense dealers” in currency (Mises 1953, 206), such that changes in its value affect the economic position of every individual. On the other hand, he continued,
the economic consequences of variations in the value of money are determined by the nature of their slow progress, from person to person, from class to class, and from country to country. [...] The fact that these variations occur one after the other is the sole reason for their remarkable economic effects (Mises 1953, 210; emphasis in the original).
First, only some people will initially have higher cash-balances (the first receivers of the new money); given decreasing marginal utility, they will value each currency unit less, so they will be willing to pay higher prices for the goods they prefer. As “a lower subjective valuation of money [will be] then passed on from person to person” (Mises 1953, 208), individual money prices will rise or fall depending on the path in which the additional money is spent, thus depending on the pattern consumer preferences. This process, which gradually drives the equilibration of the purchasing power array to the new money relation, does not affect commodity prices at the same date and to the same extent, i.e. prices do not change simultaneously or proportionally to the change in the money relation.
As a result, argued Mises, “while the process is under way, some people enjoy the benefit of higher prices for the goods and services they sell, while the prices of the things they buy have not yet risen to the same extent” (Mises 1998 , 409-10). Wealth is thereby necessarily redistributed towards the first receivers of money from those who receive it last, or never, and who have to pay higher prices in the meantime. In other words, Mises defined Cantillon effects as the economic phenomenon in which modifications of the money supply gradually and unevenly percolate through the structure of money prices, and more importantly, modify the distribution of resources and wealth in an economy in the short run and on the long term.
More importantly, this changes are permanent. Each change in the money supply takes a different course through the economy toward establishing the new purchasing power array, such that the process will arbitrarily create winners and losers, i.e. benefitting and affecting different individuals each time, and to different extents. This means that the social changes brought about by monetary changes cannot be undone: the redistribution of wealth caused by an increase in the money supply cannot be offset by a subsequent decrease, or by a concurrent increase in the money demand.
Mises’s contributions represented a serious blow to the theoretical integrity of the classical dichotomy—which he often referred to as the ‘barter fiction’—, and implicitly to that of the money neutrality postulate. First, his analysis showed that once a commodity surfaces as the general medium of exchange in an economy, there no longer exist barter transactions and thus barter prices cannot exist either. All exchange ratios are necessarily money prices. Second, it illuminated the fact that the geographical equalization of the purchasing power of money throughout the world is accomplished as part of the same market process that creates the structure of money prices, and brings about the division of labor, thereby making monetary analysis an integral element of economic analysis. Third, it underscored the insight that money is redistributed among individuals according to their individual preferences for cash holdings in a sequential process of monetary exchanges, dispensing with the classical aggregate approach to monetary matters and proposing a disaggregate, ‘microeconomic’ approach.
For international trade in particular, Mises’s insights showed that money is embedded in the economic phenomenon of cross-border exchange. Money makes economic calculation possible by overcoming the drawbacks of direct and indirect exchange, and allows entrepreneurs to judge and plan transactions and extensive production processes (Mises 1990 ). International movements of goods, services, and factors of production are necessarily guided by monetary calculation, and require above all the use of money and the judgement of the entrepreneurs. As Mises pointed out in Socialism, “in foreign trade, just as in internal trade—there is no difference between them—no rational production could proceed without money reckoning and the formation of prices for the means of production” (Mises 1951, 232). A general medium of exchange begets complex and roundabout division of labor, within and across national borders.
Last but not least, Mises’s contribution showed there is no difference in the effects on the distribution of income and wealth whether the variations in the purchasing power of money occur within a single national economy or within internationally connected market economies, or whether it’s the case of metallic money or fiat money (Mises 1953, 208). Just like in the case of a single national currency, the “interrelated variations in the complex of individual cash balances, incomes and prices” (Salerno 2010, 156 ) drive toward the equilibration of the purchasing power of money internationally as well, in a sequence of monetary changes — and it is these individual, microeconomic changes which constitute the focus point of an analysis of Cantillon effects on a national and global level. In other words, the process which brings the balance of payments to its equilibrium, works in a similar way in the case of a change in the money supply: money will move, internationally, from one money holder to another until the new purchasing power array is established together with the desired level of individual cash-balances. Therefore, the inherent social transformations accompanying all such monetary changes will concurrently take place across borders as well: wealth will be redistributed towards the first receivers of money from the last receivers, as the transfer of wealth is parallel, and of opposite sense, to the inflow of new money in the global economy.
Following the victories at Forts Henry and Donelson, Grant’s commanding officer still wanted to remove him from command. During this time, he formed a strong friendship with William Tecumseh Sherman. As the Union army was amassing troops at Pittsburg Landing, the Confederate forces in the West were concentrating at Corinth. The Confederates decided that they should take the initiative in the coming battle.
Chris Calton recounts the controversial history of the Civil War. You may support this podcast financially at Mises.org/SupportHC. Subscribe today at Spotify, Google Play, iTunes, SoundCloud, Stitcher, or via RSS.
Murray Rothbard was a genius. One aspect of this was his writing as an American historian. He was every bit as significant a scholar here as he was as an economist and philosopher.
For example, there is his stunning four-volume history of early America from Jamestown to the end of the American Revolutionary War. His brilliance and originality are on display, as he deftly handles a huge amount of research including a vast array of hitherto unknown facts.
Murray is, as always, a power-elite analyst, and looks at family and financial interests of famous men, as well as their motivations and real ideologies. Standard historians shun this as politically incorrect, but in Murray’s hands, it explains so much.
Murray writes, of course, from a libertarian perspective, and also brings to light little-known libertarian writers and activists. History has seldom been this exciting.
But there is one tragic note. Conceived in Liberty was supposed to be a five-volume work, ending with the adoption of the Constitution. And, indeed, Murray wrote the fifth volume, the most revisionist of all. He did it in longhand on legal yellow pads, and used a dictating machine a friend had given him. His wife Joey would use the recording to type the manuscript.
I know that sort of machine, since my father had one. As you spoke into the microphone, it would inscribe clear plastic discs with your recorded words. Murray dictated the entire book, but when he finished it over many days, all the discs were gibberish.
Even experts couldn’t fix the disaster, so Murray — frustrated — put his huge handwritten manuscript aside, to take up other projects. He intended to get back to the fifth volume, but died before he could do so.
Murray left all his papers and books to the Mises Institute, honoring me as his literary executor. But I was never able to decipher his handwriting; not even Joey could do so, nor others I consulted. I hated the situation, but saw no way out of it. Then the young professor and Rothbardian Patrick Newman came upon the manuscript while he was doing other work in the Mises Institute archives, and astoundingly, he was able, with great difficulty, to read Murray’s handwriting.
So you can imagine the celebration that ensued. We were all thrilled with the book. It is compelling, radical, original, brilliant. It revivifies the first four volumes of Conceived in Liberty, and is a delight to read, with a great introduction by Patrick, who also edited Murray’s hitherto unpublished book, The Progressive Era. As you can imagine, we’re very proud of our former student. I can almost hear Murray exclaiming, “Attaboy, Patrick!”
The fifth volume, entitled The New Republic, 1784–1791, charts the course from the freeing of the 13 states from British mercantilism to their shackling with a new American form of it.
For Murray sees the Constitution, not as a document enshrining liberty, but as the charter of a new, powerful, centralized government designed by Madison, Hamilton, and their cohorts in a coup at Philadelphia.
The centralizers convinced the Continental Congress to wage a traditional, centrally planned, hugely expensive war, rather than a volunteer, libertarian guerrilla action. This ensured many evils, from paper money inflation to high taxes, from conscription to price controls and seizure of goods. Ironically, it was the guerrilla leaders who actually won the war, and not General Washington, as Murray demonstrates.
Even the post-war Articles of Confederation mixed centralizing provisions with libertarian ones. The centralizers dishonestly dubbed themselves “Federalists,” and their libertarian opponents “Antifederalists.”
They proved to be effective propagandists in lying to the people of the 13 states, and intimidating their leaders. Eventually the Constitution was ratified by 12 states, with only little Rhode Island refusing. So the central government threatened a trade war, and Rhode Island succumbed.
The Antifederalists, a minority, became strict constructionists to fight for freedom under the Constitution. But virtually all their predictions about future power grabs came true.
To get the Constitution passed, however, the opponents were able to demand a Bill of Rights. But the wily Madison made them as weak as possible, ignoring the stronger protections that the opponents wanted.
The fight for freedom continues to this day, of course, despite our giant warfare, welfare, and police state. As the fifth volume, like the rest of Conceived in Liberty, makes clear, we have an extraordinary American heritage. Heroes, known and unknown, are our inspiration. Villains, too, we must know about.
The fifth volume completes Murray’s great work, lost for decades, yet as relevant as the day he finished it. Regular American historians, ignorant of non-Keynesian economics and biased by statism, are a bane. Won’t you help us publish this corrective? It must be priced for students, sturdily bound, and widely distributed.
Your tax-deductible donation of any amount to the fifth volume will help. Donors of $100 or more will receive a free copy of the book. If you can make a $500 donation, you will be listed in the front of this handsome work as a Donor; $1,000 as a Patron; $5,000 as a Benefactor.
You’ll love the Foreword by Judge Napolitano and Preface by Tom Woods.
Help us with your generous donation to fill in this gap in American history. Help us honor Murray. Help us teach real history, instead of the usual pap.
Austrian economist Peter Klein talks with Bob about his unusual (for a Rothbardian) career path, including his time working for the Council of Economic Advisors to Bill Clinton. They discuss Klein’s work on entrepreneurship, and how his views differ from those of Israel Kirzner.
In a three-part series, Dr Joe Boot (Wilberforce Academy, Ezra Institute for Contemporary Christianity) argues that liberal democracy – the dominant view in political philosophy - is a form of heresy springing from beliefs that should not be held by Christians. In part one, Dr Boot looks at authority – what is a Christian understanding of knowledge and how does it help us assess differing views of political life?
On March 20th, 1915, Albert Einstein published his General Theory of Relativity. Already in 1905 he had proposed the equivalence of mass and energy in his Special Theory of Relativity. Now the General Theory offered a description of gravity as a property of space and time, which had previously been considered to be independent of matter and motion. Spacetime is curved, depending on the energy and momentum of the matter and radiation present.
Many of the General Theory’s predictions have been confirmed experimentally. When light is bent by gravity, for example, it can lead to gravitational lensing, in which multiple images of an object can be seen as its light is bent by massive objects. This has been observed to happen as predicted. And the gravitational waves predicted by the theory have recently been detected.
Gravity in particular, and the universe in general, turn out to be far more complex than had previously been supposed. Quantum Mechanics later showed it to have even greater levels of complexity. That we can achieve this degree of understanding is remarkable, given that humankind has evolved over 3 million years with the skills required to throw spears and rocks, rather than to fathom the complexities of subatomic particles.
We now know that human societies are also far more complex than we once supposed, and that this also applies to their economic systems. Scholars have come a long way from simple assumptions that primitive savages once came together to sign a contract for their greater security. And most scholars no longer suppose that a functioning economy can be reduced to a few basic principles that explain it.
The economy emerges from the way in which people deal with each other. It has the inputs of billions of people and trillions of transactions. These interact with each other to produce its outcomes, but the outcomes are transitory, replaced in a trice as other decisions produce other outcomes to supplant them. Some academics try to simplify things in order to be able to describe it, but in doing so, they often assume away some of its vital elements. ‘Perfect competition’ never happens, nor does ‘perfect information.’ In the real world people do the best they can with the limited amount of information they have access to.
Mathematical models might purport to explain and predict the economy, but they fall short because the economy is not a thing that can be modelled; it is a process, one of unimagined complexity. We can observe generalizations and tendencies about the way most people behave, but we do so in the knowledge that these are about what usually happens. In the world of science the theory has to cover every case that happens. This universal coverage is not to be found in the world of economics, which has the habit of surprising us with unpredicted, and often unpleasant, outcomes.
When the Queen asked the bankers and economists, “Why did none of you see the crisis coming?” they might well have replied, “Because the economy is more complex than the General Theory of Relativity.”
When Britons voted on June 23, 2016 on whether or not to leave the EU there was no discussion of a "hard or soft Brexit". These terms were invented after Brexit passed by a surprisingly large margin and the mostly anti-Brexit Tory Party government, especially its leadership, decided that it needed to negotiate the terms of leaving. Brexit supporters regard such terms as betraying the 2016 Brexit referendum itself. These 17.4 million Britons undoubtedly believed that Brexit would mean exactly that: Britain would no longer be governed by any EU laws, regulations, etc. Nevertheless, all that the world has heard since that day in June 2016 is a debate over the terms of leaving, with any so-called terms being labeled as a "soft Brexit" and leaving without any agreement as a "hard Brexit".
In a "hard Brexit," Britain just leaves and all EU regulations, etc. are null and void. It's pretty clear cut. A "soft Brexit" can mean almost anything that is not a "hard Brexit"; i.e., Britain would agree to continue some or all of the manufacturing regulations, tariffs, and intergovernmental agreements — such as ceding jurisdiction to the European Court of Justice — that apply to EU countries. The list is almost endless and the time frame very nebulous, a perfect playground for those who wish to have a Brexit In Name Only. If there is to be Brexit of any sort, however, Parliament must act. Experts in British constitutional law claim that only Parliament can actually take Britain out of the EU and only Parliament can decide under what terms, if any, it will do so. Of course, one of the terms of separation could be that there are no terms of separation — thus, a "hard Brexit."The Effect on Effects on Imports
The current government has been exploring the possibility of dropping all import tariffs to zero except on "sensitive industries". This would be very good for consumers, because the EU imposes tariffs on almost all imports from nations not in the EU itself. Most notably in its attempt to insulate inefficient European farms from worldwide competition, the EU imposes onerous tariffs on non-EU agricultural products via the Common Agricultural Policy (CAP). Eliminating these and many other tariffs would significantly lower the cost of living for the British people. The success of Brexit may depend entirely on whether Britain does in fact eliminate tariffs on most goods. It is a golden opportunity. The EU itself is very export oriented, so it is unlikely that it would impose any restrictions on member countries selling goods to Britain. So far so good!The Effect on British Exports
Exports are another matter entirely. No longer in the tariff free customs union, it is assumed that the EU would impose tariffs on British products as it does on any other non-EU country, raising their cost to EU buyers, which one must assume would result in fewer British sales. The real harm would not fall on British exporters but on Britain's EU customers, who now are forcibly prohibited from buying British goods at the previously advantageous price. On the other hand since it no longer must meet onerous EU manufacturing regulations, British industry might enjoy lower manufacturing costs which would enable it to sell more to non-EU countries. Although it might take time for Britain to develop new markets for its goods, some countries, led by the U.S. itself, have stated that they are ready to sign free trade agreements with Britain as soon as it leaves the EU.The Effect on the City of London
The City of London is a massive global hub. Its banking and insurance companies are dominant in the EU and likely to remain so for reasons of depth of market knowledge and a high reputation for honesty and fair dealing. Although some companies have moved some operations to Frankfurt, it is unclear if these moves are significant in number and may be simply part of normal market flux. The same fears about the fate of the City were raised when Britain secured an opt-out from the 1992 Maastricht Treaty which formally created the euro. Unless the EU imposes some special tax or regulation prohibiting EU members from utilizing London firms, it is unlikely that the City will be much affected by a "hard Brexit".The Effect on Controlling borders
Uncontrolled illegal Immigration into the EU became a key issue for passing the Brexit referendum. There had been much concern for decades over loss of British sovereignty to unelected bureaucrats in Brussels and the economic cost of belonging to a closed customs union with high tariffs and onerous regulations, but the movement to leave came to a head over border controls or lack thereof. One of the four pillars of the EU is freedom of movement of people within the EU. (The other three were freedom of movement for goods, services, and capital.) Illegal immigration came to a head following the crisis of refugees from the Arab world. Once inside the EU, these refugees could migrate anywhere within the bloc, including Britain, raising the cost of providing social services and disrupting settled life. Britain was not the only EU country that opposed this unforeseen migration. In fact immigration control may yet break apart the EU, as the elite in Brussels insist that every EU country not only accept a dictated number of refugees but also that every country then allow refugees to migrate freely within the EU. A "hard Brexit" would remove the requirement that Britain accept more refugees than it believes it can assimilate. Uncontrolled border crossings would end as modest checkpoints are reinstated.
A separate border issue pertains to the relationship between Northern Ireland and the Republic of Ireland over goods. Northern Ireland is part of the United Kingdom of Great Britain and Northern Ireland and there has been much concern over continuing the free flow of goods into and out of the Republic of Ireland. This seems to be much ado about little. Most probably goods to and from the Republic of Ireland would be subject to random checks with very little hindrance on trade. The EU has lobbied for an "Irish backstop", whereby Northern Ireland would remain in the EU for some period of time. Naturally this has incensed loyal British subjects, especially in Northern Ireland, and has almost no chance of being part of a "soft Brexit" deal.A Positive Conclusion
In conclusion the effect of a "hard Brexit" on Britain itself should be overwhelmingly positive, especially if Britain does in fact remove all tariffs and conclude free trade pacts with the rest of the world fairly quickly. Naturally my advice to Britain is to unilaterally remove all tariffs on all goods, including "sensitive industries." Free trade deals then become irrelevant. Britain could lead the way in showing the world the benefits of unilateral free trade, just as it did in the nineteenth century with the abolition of the Corn Laws. Perhaps this outcome is what the EU fears the most, because it would call into question the benefit of belonging to a closed customs union and would spell the end of the EU itself.