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Standard Open Market Operations: How the Fed and Commercial Banks "Create Money"

Mises Institute - Mon, 10/02/2020 - 20:00

[This article is part of the Understanding Money Mechanics series, by Robert P. Murphy. The series will be published as a book in late 2020.]

In this chapter we will define some of the conventional “monetary aggregates,” such as M1 and M2. Then we will summarize the textbook description of how the Federal Reserve and commercial banking system “create money” when the Fed buys assets and the commercial banks extend new loans.

Although the operations we describe in this chapter are somewhat simplistic, this type of baseline description is necessary for anyone who wants to understand how money is created (and destroyed) in modern economies. In chapter 7 we will discuss the new techniques that central banks have been using since the 2008 financial crisis, while in chapter 12 we will address critics who argue that the textbook approach given in this chapter doesn’t accurately reflect the causal relationship between bank reserves and new deposits.

Various Measures of “How Much Money” Is in the Economy

As we explained in chapter 2, a standard definition of money is that it’s a medium of exchange that is (nearly) universally accepted in trade among a given community of people. However, in practice there are different ways of applying this definition, because of the special economic nature of claims on money.

Think back to our discussion of the historical goldsmiths. In a town where everyone agrees that gold is the money, how should we treat a paper note issued by a reputable goldsmith that is an airtight and immediate redemption ticket entitling the bearer to a gold coin? If all of the merchants in town are just as willing to sell merchandise in exchange for these paper notes as they are for actual gold, then doesn’t that render the notes issued by the goldsmith a “universally accepted medium of exchange”? So if we’re trying to count up “how much money” is held by the townsfolk, shouldn’t we count the physical gold and the total number of paper notes issued by the reputable goldsmiths?

These are the complications that give rise to different monetary aggregates. The following list defines some of the most popular ones, with an application to the United States today.1

M0: The narrowest definition of money, M0 refers to the actual physical items, such as $20 bills and coins. (Note that some classifications consider M0 equivalent to the monetary base.)

Monetary Base: The monetary base includes paper currency and coins, as well as commercial banks’ (electronic) deposits at the Federal Reserve. Under current regulations, commercial banks in the US are required to keep some money “in reserve” in order to satisfy the demands of their customers who might show up to pull some cash out of their checking accounts. These “reserve requirements” can be satisfied by either literal paper currency in the banks’ vaults, or by commercial banks’ deposit balances with the Federal Reserve.

For example, suppose a particular bank had customers with total checking account balances of $1 billion. If the reserve requirement were 10 percent, then the bank would need to hold $100 million in reserves. It could satisfy this legal requirement if it held (say) $30 million in physical US currency in its own vaults on location and the Fed’s own computer system said that the bank had $70 million in its own account with the Fed.

M1: When going from the monetary base to M1, we need to be careful, because we don’t merely add another component, but also subtract two. Specifically, M1 consists of official US paper currency and coins held by the general public (but not in bank vaults, to avoid double counting), plus demand deposits and other checkable deposits (e.g., negotiable order of withdrawal (NOW) accounts), plus traveler’s checks issued by nonbank institutions. That means M1 does not include commercial bank reserves, whether they consist in notes and coins in the vault or electronic entries on the Fed’s books.

The intuition behind this classification is that M1 measures the amount of money and “very close money substitutes” held by the general public. A money substitute, as the name suggests, is an immediately redeemable claim on actual money that everyone in the market expects to be honored at par.

M2: Everything in M1, plus most savings account balances, so-called money market account balances, the balances on retail money market mutual funds, and small denomination time deposits (including bank certificates of deposit—CDs—of less than $100,000).

There are other popular aggregates, such as MZM (money of zero maturity) and M3, which of course is M2 plus some additional items that are claims on actual money that are not as “economically equivalent” to money as the components in the previous categories. (For example, the implied dollar value of certain repurchase agreements, or “repos,” is included in M3 but not in M1 or M2.) Fans of the Austrian school will be interested in the “true money supply” (TMS) aggregate developed by Murray Rothbard and Joseph Salerno, which corresponds to the Austrian theoretical definition of money.2

To avoid confusion, we should stress that moneyness is not the same thing as liquidity. If someone owns a $200,000 house and also has $200,000 in stocks, we would typically say that the stocks are more liquid than the house. What we mean is that the person can fairly quickly convert the stocks into $200,000 in actual currency (if so desired), whereas several months would be required to convert a house that’s “worth $200,000.”

Yet even though shares of corporate stock (especially those listed on major exchanges) are very liquid, we don’t include them in the definition of money. This is because a share of stock is a claim on ownership of the corporation, not a claim on a certain amount of dollars. The price of a share of stock—quoted in dollars—can fluctuate rapidly, meaning that your “$200,000 in stocks” could fall to zero depending on the news. In contrast, if you have traveler’s checks, those are claims denominated in dollars. They are not literally the same thing as money—if you’re trying to pay a cab driver, it’s better to have a $50 bill than a traveler’s check entitling you to a $50 bill—but traveler’s checks are nonetheless much better money-substitutes than shares of stock.

The following chart from the St. Louis Fed’s website displays the monetary base, M1, and M2 for the United States since 1984. The rapid expansion of the base and M1 following the financial crisis in 2008 is evident:

Monetary Aggregates Chart 1984-2019 Source: St. Louis Federal Reserve. (monthly data, not seasonally adjusted, May 1984–December 2019) How Commercial Banks “Create Money” under Fractional Reserves

As explained in chapter 3, our current monetary system is based on fiat money; there is nothing “backing up” the US dollar. The ability of the federal government/Federal Reserve to create new money simply by printing up green pieces of paper—or nowadays just through electronic activities that don’t even involve physical currency—might lead some people to believe that it is only in a fiat money system that this type of money creation “out of thin air” is possible. However, if they maintain less than 100 percent reserves on their checking accounts (demand deposits), commercial banks also have the ability to create money through their lending decisions.

To see how this works, let’s first imagine a town where the banks keep 100 percent reserves. Suppose there are 100,000 gold coins held by the townsfolk. Out of concerns for safety and convenience, the people deposit (say) 80,000 of the gold coins with the bankers, for which they receive paper notes entitling them to their 80,000 coins.

Banker Exchange Paper for Coin

Now suppose the banks do not practice fractional reserve banking, but instead maintain 100 percent reserves. That is to say, for every paper banknote held by someone in the town, there is an actual gold coin in a bank vault to “back it.”

Four people and bank vault

In this arrangement, notice that the public’s decision to hold some of their money in the form of banknotes rather than physical gold coins does not affect the total amount of money in the town. The townsfolk still hold 20,000 of the gold coins in their direct physical possession, and they also have 80,000 banknotes entitling them to gold coins. So, if each person reports how many gold coins he or she effectively has, their answers will sum up to 100,000 gold coins, which is the same amount they would have reported before using the banks.

Incidentally, we should point out that 100 percent reserve banking is possible, whether or not one thinks that it is desirable. Banks can charge a fee for the warehousing of their customers’ money, just as the owners of storage units manage to stay in business even though they don’t rent out their clients’ furniture. Furthermore, remember that we are here talking about demand deposits (think checking accounts), where the depositors believe they are entitled to obtain their money upon demand. If instead a customer buys (say) a one-year bank certificate of deposit (CD), the bank can lend that money out to a borrower even while practicing 100 percent reserve banking, because the CD is not a promise for immediate redemption.

But now suppose that the bankers in our hypothetical town don’t maintain 100 percent reserves but instead practice fractional reserve banking. The bankers realize that the public has come to trust the redeemability of the banknotes, and that most of the 80,000 in gold coins in their vaults will just sit there. Perhaps the bankers look at the history of transactions and conclude that so long as they always have enough gold coins in the vault to satisfy just 10 percent (say) of their total outstanding banknotes, they should be safe. In other words, the bankers reason that it would be very unlikely that the public would show up at the same time to demand more than 10 percent of the total paper notes that they’d issued.

In this case, the bankers see a great new way to earn income. Rather than “uselessly” keeping so many gold coins in their vaults, they lend some of the coins out to new borrowers. The borrowers then spend the money in the town, and the recipients in turn deposit the coins back into their own checking accounts at the banks. The process plays out until each gold coin sitting in a bank vault “backs up” ten paper banknotes held by people in the town. (See the endnote for links to methodical explanations of this process.3)

Fourty people and bank vault

In this new scenario, in which the banks only keep 10 percent reserves, what happens to the “total amount of money” in our town? If we calculate M0, the answer is still the same: there are 100,000 gold coins in the town, period. Issuing paper notes and making loans doesn’t alter that fact.

However, if we use a broader aggregate such as M1, then the banks’ actions do affect the total. Specifically, there are 20,000 gold coins still held by the public, plus 800,000 banknotes held by the public, each entitling the holder to a gold coin. In other words, the public’s decision to keep 80,000 gold coins in the banks’ vaults, combined with the bankers’ decision to issue additional loans until the point at which they only held 10 percent reserves, caused M1 to grow from 100,000 gold coins to 820,000 gold coins. (Note that the actual unit of money would be something like a gold ounce rather than “gold coin.”)

We have deliberately worked with an example of commodity money—in our example, gold—in order to isolate the role played by fractional reserve banking. Because the broader monetary aggregates (M1, M2, etc.) include not just the base money but also very reliable and quick claims on it, the actions of banks can expand or contract the total amount of money when measured in the broader sense of these aggregates. In the modern United States, the base money is actual US dollars. But if someone has $100 in a checking account at Citibank, she really thinks she has $100, even though Citibank might only be holding (say) $10 in its vault (proportionate to each customer) to back her checking account balance.

How the Central Bank Can Affect the Total Quantity of Bank Reserves

For a community whose base money is hunks of gold, the reserves held in bank vaults would of course be determined by how much of the yellow metal had been mined (and fashioned into bars or coins). Yet today in the United States, because the underlying base money is the US dollar itself—meaning that it currently has no redemption option but is simply fiat money—the reserves held in bank vaults are green pieces of paper featuring US presidents. In addition, a commercial bank in the US can also satisfy its reserve requirements by having (electronic) balances on deposit with the Federal Reserve. Legally speaking, a commercial bank can itself hold a “checking account” with the Fed, and its deposit balance is “as good as” currency that the commercial bank holds in its own vaults.

Because of this situation, the Federal Reserve is able to affect the monetary base through its actions. Suppose that Fed officials want to adopt an “easier” policy that increases the quantity of money in the system and also (other things equal) tends to push down short-term interest rates. To accomplish these goals, the Fed can simply buy assets, writing checks on itself.

To give a specific example, suppose the Fed buys $10 million worth of Treasury bonds originally held by a dealer in the private sector. The Fed obtains the $10 million in bonds, adding them to its balance sheet. The seller of the bonds, in turn, receives payment in the form of a check written on the Federal Reserve. Legally, the Fed can’t “bounce a check”—there are no limits operationally on how much it can spend. When the dealer that sold the bonds deposits the check into its own bank account (at Citibank, say), the dealer’s checking account balance goes up, of course, by $10 million.

Now here is the important part of the story: Citibank passes along its customer’s deposited check to the Fed, which then credits Citibank’s account with the Fed by $10 million as well. At this initial stage, Citibank itself is just treading water; its liabilities have gone up by $10 million (because the bond dealer now thinks it has an extra $10 million in its checking account with Citibank), but its assets have also gone up by $10 million—represented by Citibank’s higher account balance with the Fed.

Yet look at what has happened. From Citibank’s perspective, a customer effectively just deposited $10 million in new base money that entered the financial system at the moment the Fed wrote the initial check. It is as if new gold coins had suddenly entered our hypothetical town from the earlier discussion and customers had deposited the new coins with the bankers. As we saw earlier, an influx of newly deposited base money sitting in the vaults of the commercial banks allows for new lending by the banks.

The same process happens here. Because Citibank’s reserves have gone up by $10 million, while its total outstanding customer deposit balances have also gone up by $10 million, it is now holding more than it needs to. Citibank can effectively lend out some of the newly deposited money, because it doesn’t need to hold the entire $10 million in new reserves to back up the $10 million in extra checking account funds now held by its customers.

If the commercial banks follow a 10 percent reserve rule and the system becomes “fully loaned up” after the Fed’s injection of $10 million, then the total increase in M1 will ultimately be $100 million. To sum up: the Fed’s decision to buy $10 million in bonds created $10 million in new (base) money, but then the banking system itself effectively creates $90 million in new (broader) money on top of it.

As before, we point interested readers to the endnotes for further reading that spells out this process more exhaustively. For our purposes here, there are two crucial takeaway messages:

  1. In our current fiat money system, the Federal Reserve creates new base money when it buys assets by writing checks on itself. Going the other way, the Federal Reserve destroys base money by selling assets (or by letting its assets mature and refraining from rolling over the proceeds). These actions do not require a literal printing press, as they can be achieved through electronic operations.
  2. When the Fed injects new base money into the system, it will often be deposited into commercial banks, where it will add to reserves. Under fractional reserve banking, the new reserves give the commercial banks the ability to pyramid new money (as measured by M1, M2, etc.) on the system through the process of granting new loans. Going the other way, when the commercial banks restrict their loan portfolios or the public withdraws base money from the banks, it causes the broader aggregates (M1, M2, etc.) to shrink.
  • 1. The description of various monetary aggregates is a condensed version of this article by the same author: Robert P. Murphy, “The Definition of Various Monetary Aggregates,” Mises Wire, Sept. 1, 2016, https://mises.org/library/definition-various-monetary-aggregates.
  • 2. Joe Salerno explains the “true money supply” aggregate, and compares it with other popular measures, in this 1987 article: Joseph T. Salerno, “The ‘True’ Money Supply: A Measure of the Supply of the Medium of Exchange in the U.S. Economy,” Austrian Economics Newsletter, Spring 1987, pp. 1–6, https://cdn.mises.org/aen6_4_1_0.pdf.
  • 3. For a more methodical explanation (including balance sheet analysis) of fractional reserve banking and central bank open market operations, see Murray N. Rothbard, The Mystery of Banking, 2d ed. (Auburn, AL: Ludwig von Mises Institute, 2008), chaps. 7, 9, 10, and 11, https://cdn.mises.org/Mystery%20of%20Banking_2.pdf. (Note that Rothbard is hostile towards fractional reserve banking and central banking, but his explanation of how these processes actually work is still very helpful even to readers who do not share his attitude.) For a video presentation of similar material, see Robert P. Murphy, "The Theory of Central Banking," Mises Academy, lecture presented on Jan. 16, 2011, YouTube video, https://youtu.be/6HAEPSt_12U.
Categories: Current Affairs

Humans Have Goals. And They Value Goods and Services Accordingly.

Mises Institute - Mon, 10/02/2020 - 17:00

Why do individuals value bread less than gold, when bread is obviously more “useful” than gold? To provide an answer to this question economists refer to the law of diminishing marginal utility.

Mainstream economics explains the law of diminishing marginal utility in terms of the satisfaction that one derives from consuming a particular good. For instance, an individual may derive vast satisfaction from consuming one cone of ice cream. However, the satisfaction he will derive from consuming a second cone might also be great, but not as much as the satisfaction derived from the first cone. The satisfaction from the consumption of a third cone is likely to diminish further, and so on.1

From this mainstream economics concludes that the more of any good we consume in a given period, the less satisfaction, or utility, we derive out of each additional, or marginal, unit. From this it is also held that if the marginal utility of a product declines as we consume more and more of it, the price that we are willing to pay per unit also declines.

Since various goods generate different magnitudes of utility, mainstream thinkers have concluded that consumers should allocate their money income in such way that the marginal utility per dollar spent is the same for all goods purchased.

Now, according to mainstream thought, since gold is relatively scarcer than bread it follows then that the price of gold should be higher than the price of bread, because the marginal utility derived from bread is going to be much lower than the marginal utility derived from gold. On the same basis we can also derive that notwithstanding that air is essential for human life, due to its almost unlimited supply individuals are likely to assign to air a much lower price than to bread.

Utility in this way of thinking is presented as a certain quantity that increases at a diminishing pace as one consumes or uses more of a particular good. Given that utility is presented as some total quantity, also called total utility, it becomes possible to introduce mathematics here to ascertain the addition to this total, which is referred to as additional utility or marginal utility. However, does it make sense to discuss the marginal utility of a good without referring to the purpose that it serves?

Menger’s Explanation

According to Carl Menger, the founder of the Austrian school of economics, individuals assign priorities to the various goals that they wish to achieve. As a rule, according to Menger, the highest priority will be assigned to life maintenance. The various ends that an individual will find useful for his life maintenance will be assigned a descending rank in accordance with his own preferences:

As concerns the differences in the importance that different satisfactions have for us, it is above all a fact of the most common experience that the satisfactions of greatest importance to men are usually those on which the maintenance of life depends, and that other satisfactions are graduated in magnitude of importance according to the degree (duration and intensity) of pleasure dependent upon them. Thus if economizing men must choose between the satisfaction of a need on which the maintenance of their lives depends and another on which merely a greater or less degree of well-being is dependent, they will usually prefer the former.2

Consider John the baker, who has produced four loaves of bread. The four loaves of bread are his resources, or the means that he employs to attain various goals.

Let us say that his highest priority or highest end is to have one loaf of bread for himself. The loaf of bread is of utmost importance for John in order to sustain his life. This means that John will retain for his personal consumption one loaf of bread.

The second loaf of bread helps John secure his second most important goal, as far as life is concerned, which is to consume five tomatoes.

Let us say that John was successful and finds a tomato farmer who agrees to exchange his five tomatoes for a loaf of bread.

John exchanges his third loaf of bread to achieve his third most important end, which is to have a shirt. Finally, John decides that he will allocate his fourth loaf toward feeding wild birds.

To attain the second and the third ends John had to exchange his resources—loaves of bread—for the goods that would serve to achieve his ends.

To secure the end of having a shirt, John had to exchange his loaf of bread for the shirt. The loaf of bread is not suitable in itself to provide the services that the shirt does.

Ends Determine the Value of Means

A given end dictates or establishes, so to speak, the specific means or resources that the individual will choose for its attainment. For instance, to secure the end of having a shirt John must decide whether it is going to be a leisure shirt or a work shirt.

John will have to select from among various shirts the most suitable for his specific end—let us say that it is to have a work shirt.

Being a baker, John may conclude that the shirt must be of a white color and made of a thin rather than thick material to keep him comfortable while working next to a hot oven.

Feeding wild birds is ranked lowest among the ends that John is aiming at given his pool of resources—four loaves of bread.

Observe that the first loaf of bread is employed to secure the most important end, the second loaf of bread the second most important end, etc. From this we can infer that the end also assigns an importance to the resource employed to secure the end.

This implies that the first loaf of bread carries much higher importance than the second loaf, because of the more important end that the first loaf secures.

The Value of Each Unit of Resources Is Determined by the Least Important End

Now, because John regards each of the four loaves of bread in his possession as interchangeable, he assigns to each loaf the importance as imputed from the least important end, which is feeding wild birds. Why does the least important end serve as the standard for valuing the loaves of bread?

Imagine that John uses the highest end as the standard for assigning value to each loaf of bread. This would imply that he values the second, third, and fourth loaves much more highly than the ends he secures.

However, if this is the case, what is the point of trying to exchange something that is valued more for something that is valued less? We have seen that to satisfy his second end, to obtain five tomatoes, he would exchange one loaf of bread. If, however, John values a loaf of bread more than five tomatoes, obviously no exchange will take place.

Since the fourth loaf of bread is the last unit in John's total supply, it is also called the marginal unit, i.e., the unit at the margin. This marginal unit secures the least important end. Alternatively, we can also say that as far as life is concerned, the marginal unit provides the least benefit.

If John had only three loaves of bread, it would mean that each loaf would be valued according to the end number three—having a shirt. This end is ranked higher than the end of feeding wild birds.

From this we can infer that as the supply of bread declines the marginal utility of bread rises. This means that every loaf of bread will be valued more highly now than before the decline in the supply of bread.

Conversely, as the supply of bread rises, its marginal utility falls and each loaf of bread is now valued less than before the increase in the supply took place. The law of declining marginal utility is derived here from the fact that individuals use means to secure various goals or various ends.

However, ends are not set arbitrarily but graded in accordance with their importance in maintaining life. If John had ranked his ends randomly, then he would have run the risk of endangering his life. For instance, if he had allocated most of his resources to clothing and feeding wild birds and very little to feeding himself, he would have run the risk of weakening his body and becoming seriously ill.

Utility Is Not Some Sort of Quantity That Can Be measured

Marginal utility is not, as the mainstream perspective presents it, an addition to a total utility but rather the utility of the marginal end. There is no such thing as the addition to total utility as a result of an additional unit of a good. As we have seen, utility is not about quantities, but about priorities—the rankings that each individual sets with respect to his life.3

Obviously one cannot sum priorities up as such. Since total utility does not exist, the various mathematical methods that were introduced in economics based on it are questionable. According to Rothbard,

Many errors in discussions of utility stem from an assumption that it is some sort of quantity, measurable at least in principle. When we refer to a consumer’s “maximization” of utility, for example, we are not referring to a definite stock or quantity of something to be maximized. We refer to the highest-ranking position on the individual’s value scale. Similarly, it is the assumption of the infinitely small, added to the belief in utility as a quantity, that leads to the error of treating marginal utility as the mathematical derivative of the integral “total utility” of several units of a good. Actually, there is no such relation, and there is no such thing as “total utility,” only the marginal utility of a larger-sized unit. The size of the unit depends on its relevance to the particular action.4

Menger’s Marginal Utility Theory Is Drastically Different from the Mainstream

Both the mainstream approach and Menger’s emphasize the importance of the relative quantity of a good in its price determination. The difference, however, is that the mainstream relies on psychology while Menger emphasizes the importance of the purpose that a good helps to achieve.

The mainstream approach regards utility as some kind of quantity which can be subjected to the rules of mathematics. This is not so in Menger’s framework, where utility refers to the ranking of goods with respect to life and well-being.

Given that goods are evaluated with respect to various ends (with life assigned as the highest priority), the marginal utility theory as developed by Menger is drastically different from the mainstream approach.

In addition, in the mainstream approach there is a strong emphasis on indifference curves, which supposedly can be helpful in understanding individuals’ choices. Indifference, however, has nothing to do with individuals’ purposeful conduct. In pursuing purposeful actions, individuals cannot be indifferent to various goods. When confronted with various goods an individual makes his choice based on their suitability to be employed as means to various ends. (Note again that the ends are ranked with respect to his life.)

It does not make sense to discuss the marginal utility of a good without referring to the purpose that it serves. The marginal utility theory as presented by popular economics describes an individual without any goals, and who is driven by psychological factors. This individual is not aiming consciously to reach his goals. In this sense, popular economics describes not a human being but a human robot.

  • 1. Karl E. Case and Ray C. Fair, Principles of Microeconomics, 7th ed. (Amsterdam: Prentice Hall, 2003).
  • 2. Carl Menger, Principles of Economics, trans. James Dingwall and Bert F. Hoselitz (1976; Auburn, AL: Ludwig von Mises Institute, 2007).
  • 3. Murray N. Rothbard, Man, Economy, and State with Power and Market, scholar's ed., 2d ed. (Auburn, AL: Ludwig von Mises Institute, 2009), pp. 302–10.
  • 4. Ibid., pp. 305–6.
Categories: Current Affairs

Lessons from Ireland

Adam Smith Institute - Mon, 10/02/2020 - 13:01

The Irish Election has been a shock to the previous two party system. The former political wing of the IRA (Sinn Fein) secured 24.5 percent of first preferences in Ireland’s system of single transferable votes with Fianna Fáil on 22.2 percent and Fine Gael on 20.9 percent. Sinn Féin registers as the most popular among all but the over-65 age group (those who lived through the brunt of the Troubles). This is up from 13.8% of the vote and only 23 seats in the 157 seat lower house. 

The former political wing of the IRA put housing at the centre of their campaign and manifesto - aiming for younger votes part of Generation Rent. They promised a three-year rent freeze, tax credits worth an average one month’s rent and a large state-led building project through local authorities. As the polls showed, it worked and—according to some—almost all roads currently lead to them eventually participating in government. 

While it gives warning about how Brexit can quickly drop from the mind of the electorate the key lesson coming from the election is that housing and the desire for change are top priorities for the young (and also bottom end of the middle aged). Housing came in as top priority for 42 percent of 18-24 year olds and 51 percent for 25-34 year olds. The socially liberal policies of Fine Gael - from gay marriage to legalising abortion - have either been forgotten or matters little compared to the state of their material wealth. 

Like the UK, the Irish government has primarily used demand side interventions and state-led building efforts. Their Help to Buy initiative may have looked good on paper, but pumped up demand and failed to address underlying supply issues in areas where the housing crisis actually is. Their pledge to build 25,000 new homes each year also sounds like a similar promise -- both failed. These policies not only require vast sums of money but also struggle to deliver. 

Now Ireland faces even worse policies from Sinn Fein, with more restrictions on the percentage of social and affordable housing in developments. Of course, it is easier to make the case for further government intervention if you tie private developers arms behind their backs. Complex planning bureaucracy reduces the amount of development, further limiting expansions on supply that is needed to deliver wide ranging real affordable housing for all. 

Along with this is the tragic irony that young voters will be shifting the cost of their rent onto those younger than them - as rent controls benefit those already renting at the cost of those trying to get into the market.

So what can we learn from this? Help to buy and government-led building are expensive failures; lifting restrictions on building new homes and extending existing ones are far better. Not only do these changes not cost as much, but they are policies that will deliver far superior results. 

The Conservatives cannot rely upon younger voters turning conservative as they grow older if they are still renting (at astronomical prices) aged 45. Thatcher’s dream of creating a nation of homeowners kept the Conservatives in power for years. Pushing forward and going further on efforts to streamline the planning system is the correct solution to the problem and one that will look good not only on the balance sheet but also at the ballot box.

Categories: Current Affairs

Europe Can't Afford a New "Green Deal"

Mises Institute - Mon, 10/02/2020 - 12:00

Today’s brand of the left-leaning politician is all about substituting what sounds good for what actually works. Modern politics, whether in the US or Europe, is about taking a chainsaw to everything that produced even a modicum of success to appease the deities espousing progressive orthodoxy. There is no better example of this than fossil fuels, an energy source that has lifted us out of destitution and darkness, and given us incredible wealth that the world had never witnessed. What is the Left interested in doing? Using confiscation, cronyism, centralization, and coercion to combat climate change. The European Union will achieve these objectives through the boondoggle-in the-making Green Deal (GD).

What is the Green Deal?

The European counterpart is a bit more realistic than the American version, aiming for net-zero emissions within thirty years rather than in a decade. But that is probably the best thing you can say about the proposal, which was approved by the European Parliament—though some policymakers had requested even greater ambitions to be inserted into the climate change scheme. Overall, the Green Deal is bad economics that will affect the already dreary conditions of Europe and exacerbate the slowdown.

The Green Deal begins with the European Commission examining every European Union law and regulation and then modifying it to align with the bloc’s new climate objectives. If you thought the EU’s regulations were already egregious, just you wait until March 2021, when the bureaucrats will submit a package containing all the statist goodies. At least Great Britain will not have to.

Policymakers want to implement a circular economy, one that emphasizes the sustainability factor in how the Continent produces goods. Its objective is to consume fewer materials and ensure that there is more concentration on reusing and recycling.

Like the Green New Deal (GND), the EU’s flagship program is to “at least double or even triple” the renovation rate of buildings. Today, this figure stands at about 1 percent, so bumping it up would require a concoction of interventions and mandates to ensure buildings are more efficient.

One provision is to introduce carbon tariffs for nations that refuse to reduce their greenhouse gas emissions at a comparable rate to Europe. Another aspect that has cronyism written all over it is the Green Deal's amplification of public-private partnerships to support research and innovation in technologies that lead to low-carbon steel generation, green batteries, and better nutrient management by farmers.

A common word used throughout the commission’s plan is “promotion.” Officials want to promote alternative sustainable fuels. They want to promote electric vehicle use. They aim to promote deforestation-free agricultural products. They desire to promote a reduction in air travel and more rail and water transportation of freight. Promotion is a kinder word for coercion.

European Commission president Ursula von der Leyen believes this is the region’s “moon moment”:

We do not have all the answers yet. Today is the start of a journey. This is Europe’s man on the moon moment. Our goal is to reconcile the economy with our planet and to make it work for our people.

Euros and Cents

So, how much will all this cost? Over in the US, the GND has a price tag of around $93 trillion. The GD is estimated to receive EU support funding of $100 billion. This is a steal until you realize that this is not the total cost that will be required to reach the EU’s objectives. It is essentially seed money to get things going, a so-called transition mechanism. The final tally will likely be a lot higher.

The other potential cost is the industries that could be impacted by this initiative. Analysts are sounding the alarm that established businesses would be seriously affected by the decarbonization push and the greater focus on renewable sources. An example of this would be coal.

Coal is indeed dying a slow death, with the primary assailant being the free market. However, coal’s demise is being accelerated by the state, even though it continues to be an important market in eastern Europe—in terms of consumption and production. Although coal has been gradually diminishing, it still employs tens of thousands of people, and the latest estimates say that as many as 160,000 people could be out of work within the next decade or so because of the EU.

And you have to think that this is also a jab at Russia. In the last few years, Russia has been supplying the rest of Europe with a lot of energy. Moscow’s dominance in the energy industry has been so immense that it is constructing more pipelines to gain a greater market share of Europe’s gas market. However, should the GD become the law of the land, the pipelines may be demolished or out of order, since they would no longer adhere to the standards of the climate strategy.

The greatest cost might be the lost economic growth.

“The Green Deal is the most fundamental shift in European energy policy we have seen in 20 years. Companies in the sector should not underestimate the disruption it will bring,” Nick Butler wrote in the Financial Times.

Clear, Simple, and Wrong

Every proposal to fight climate change and save the planet is based on the concentration of power and the aggressive expansion of regulatory implementation and enforcement. Policymakers refuse to allow the free market to create innovative solutions to environmental problems, effectively admitting that the planet is too important to leave up to the inhabitants. Only the government, and those it handpicks to receive the benefits of public spending, can be Mother Nature’s best friend. Unfortunately, this reckless abandon of innovation and industry, which is far too common in the region, will be another step toward Europe’s ruin. As H. L. Mencken wrote, “For every complex problem there is an answer that is clear, simple, and wrong.” The EU knows this all too well.

Originally published at Liberty Nation.

Categories: Current Affairs

No, not really

Adam Smith Institute - Mon, 10/02/2020 - 07:01

A useful and possibly even important start to understanding the world is to get things the right way around. To be clear about what is happening out there in reality so as to be able to consider how to deal with it.

A new European Union carbon border tax could lead to tariffs being slapped on British imports of steel, cement and aluminium in a climate change trade war after Brexit.

No, not really. In fact, not at all.

British imports are the things imported into Britain. What tariffs, carbon or otherwise, are going to be on them is something that will be decided by the British government, not the European Union.

What is actually meant is the opposite, that British exports of such into the European Union will have such a carbon border tax added to them. But even that’s not correct.

Tariffs are paid by the consumers of the items - the importers - not the producers or exporters. Thus the actual claim here is that the citizens of the European Union are going to be taxed by the European Union for their temerity in buying British steel. An event which is considerably less scary - they’re getting taxed by their rulers, not us by our or even us by their.

We can even strip this back. Forget why they don’t want to buy British steel and think on that basic fact that they don’t. We’d better stop making steel in Britain for foreigners then, hadn’t we? There’s no point in going to all that effort to make something that no one wants, is there? We should devote those resources to making something else. Either that foreigners do want to purchase from us, or, something that will raise our own living standards, something that we ourselves want.

The correct answer to someone saying they don’t want our exports is shrug, we’ll do something else then.

Categories: Current Affairs

Scottish primus’ statement on Brexit

Anglican Ink - Sun, 09/02/2020 - 20:04

Statement on the United Kingdom leaving the European Union from the Most Rev Mark Strange, Bishop of Moray, Ross & Caithness and Primus of the Scottish Episcopal Church, on behalf of the College of Bishops

“Today [31 Jan 2020] the United Kingdom will leave the European Union. The decision taken by the people of these islands in 2016 has led us along a path that often seemed unclear. Since that referendum, we have spent a great deal of time as a country engaged in a debate that spanned three national elections and which at times seemed to be about much more fundamental issues than our membership of the European Union.

“That debate does not end today. There is still a conversation to be had about how best to ensure we protect those who are vulnerable. There are still questions to be answered about how we address major global issues, including the climate crisis, and there is still uncertainty and division within the country about what the future holds for us all.

“Over the previous months and years members of the College of Bishops have collectively and individually expressed deep concerns about the way the debate was conducted. At times the rhetoric used in the negotiations caused significant anxiety and distress to various parts of society: European citizens, industry workers, the NHS, those who rely on medication to live their daily lives and the poorest in our communities. The Withdrawal Agreement negotiated between the UK the EU has prevented us from leaving with no-deal at this stage, but it has not taken away entirely the significant risks to society posed by that outcome. We call on the Government to do everything in its power to avoid a no-deal conclusion at the end of the transition period, and to negotiate in good faith towards a future partnership that works to assuage the legitimate fears held by many and that serves to benefit all parts of society.

“We hold in prayer all those for whom today is a day of joy, and all those for whom today is a day of regret. We pray that as a society we do not see today as an end in itself, but a chance to work to improve the lives of the people of these islands and to play a positive role in the life of the global community.

“We hold in prayer especially those who have been excluded from the conversation such as European citizens denied a voice at the ballot box, but whose lives are affected significantly by these decisions. We call on the Government to ensure that these, our friends, neighbours, colleagues and family are not used as bargaining chips. They deserve certainty on their status.

“We ask you to hold in prayer all those in elected positions, upon whose shoulders falls the burden of responsibility – for our Prime Minister and First Minister, for our Governments and Parliaments in London and in Edinburgh and for our local authorities. We pray also for the European Union institutions.

“As Bishops in Scotland we recognise the distinct nature of the debate in this nation. We acknowledge that a majority of the people of Scotland voted against the outcome we face today. We therefore recognise that for many in Scotland, today is not simply the beginning of a new relationship with the European Union, but marks a significant moment in our ongoing national conversation about the relationship between Scotland and the rest of the United Kingdom. We call on all in Scottish society to learn from divisions caused by the Brexit process and to move forward in the debate on Scotland’s future in a respectful, peaceful and compassionate way.

“As Christians we believe that one task we are given is to show compassion and empathy to our neighbour, especially at moments when we disagree. We believe that we are asked to consider those who are less privileged than ourselves when we make decisions. We believe that our call is to give food to the hungry, to give water to the thirsty, to invite in the stranger, to clothe the naked, to heal the sick and to show humanity to the prisoner.

“When the clock strikes 11pm tonight we will still have that call.

“Tomorrow we will still be the same people we are today, still have the same hopes and fears as we do today, still be part of the continent of Europe. Our shared history will not change, and our shared hopes for the future will remain. The challenges we face in this country and across the globe will still be the same. We will still have to work together to face these challenges. We will go to Church on Sunday and pray, as we do every Sunday, for all the people of the world.”

God of love,

At this time of change, we pray to you.
For the people of this country, we pray to you.
For the people of the European Union, we pray to you.
For the people of the world, we pray to you.
For the future health of our planet, we pray to you.
For our elected representatives, we pray to you.
For those who are joyful, we pray to you.
For those who are scared, we pray to you.
For the hungry, for the thirsty, for the stranger, we pray to you.
For the naked, for the sick and for the prisoner, we pray to you.
And finally, we pray for ourselves, and all people of faith, that in your mercy your Holy Spirit would help us to be agents of your love.

Through Jesus Christ our Lord,

Amen

The post Scottish primus’ statement on Brexit appeared first on Anglican Ink © 2020.

Celtic bishops meet in Scotland

Anglican Ink - Sun, 09/02/2020 - 19:57

The College of Bishops of the Scottish Episcopal Church has been joined by 12 Anglican bishops from the Church in Wales and Church of Ireland at this year’s Celtic Bishops’ Conference, held in Inverness for the first time (27 to 29 January).

The agenda for the three-day event at the Kingsmill Hotel includes preparations for the Lambeth Conference 2020 later this year, which extends an invitation to all bishops from across the worldwide Anglican Communion of more than 165 countries to help seek God’s direction for the future of the Anglican Church.

As part of the programme of events, the bishops today [Tuesday] visited Deputy Provost Elizabeth McAllister as her guests for afternoon tea at Inverness Town House.

Deputy Provost Elizabeth McAllister said: “I am delighted and honoured to welcome the Celtic Bishops to the Inverness Town House and to recognise the importance of the Celtic Bishops’ Conference being held in the City of Inverness. The Highlands prides itself in welcoming people of all Faiths and beliefs and on behalf of the councillors and citizens of Inverness hope that our working relationship with the Interfaith Community remains strong, particularly at a time when people are experiencing particular hardship for a variety of reasons.”

The Most Rev Dr Mark Strange, Primus of the Scottish Episcopal Church, said: “We are delighted to welcome visiting bishops from the Church in Wales and Church of Ireland, to continue our regular dialogue in areas of shared interest. We are also grateful to the Deputy Provost of Inverness for marking the occasion, and to the city’s people for their warm welcome this week.”

The bishops completed a walking pilgrimage through the city following their visit to the Town House, before Eucharist at St Michael and All Angels. On Wednesday they will attend a farewell dinner at which the guest speaker will be The Reverend Canon Dr Joseph Morrow, Lord Lyon King of Arms, before the Irish and Welsh bishops return home on Thursday morning.

The Celtic Bishops’ Conference is held every two to three years, with the venue rotated among the nations. It was last held in Scotland in 2011, at Pitlochry.

In attendance are, from the Scottish Episcopal Church:

The Rt Rev John Armes, Bishop of Edinburgh
The Rt Rev Anne Dyer, Bishop of Aberdeen & Orkney
The Rt Rev Ian Paton, Bishop of St Andrews, Dunkeld & Dunblane
The Rt Rev Kevin Pearson, Bishop of Argyll & The Isles and Bishop-elect of Glasgow & Galloway
The Most Rev Mark Strange, Bishop of Moray, Ross & Caithness and Primus of the Scottish Episcopal Church
The Rt Rev Andrew Swift, Bishop of Brechin

from the Church of Ireland:

The Rt Rev Michael Burrows, Bishop of Cashel, Waterford, Lismore, Ossory, Ferns & Leighlin
The Rt Rev Paul Colton, Bishop of Cork, Cloyne & Ross
The Rt Rev Andrew Forster, Bishop of Derry & Raphoe
The Most Rev Michael Jackson, Archbishop of Dublin, Bishop of Glendalough, Primate of Ireland and Metropolitan
The Rt Rev Kenneth Kearon, Bishop of Limerick & Killaloe
The Rt Rev John McDowell, Bishop of Clogher
The Rt Rev Patrick Rooke, Bishop of Tuam, Killala & Achonry
The Most Rev Patricia Storey, Bishop of Meath & Kildare

and from the Church in Wales:

The Rt Rev Gregory Cameron, Bishop of St Asaph
The Rt Rev Andy John, Bishop of Bangor
The Rt Rev Dr Joanna Penberthy, Bishop of St Davids
The Rt Rev June Osbourne, Bishop of Llandaff

The post Celtic bishops meet in Scotland appeared first on Anglican Ink © 2020.

Piketty's latest bright idea - let's be like the Ottoman Empire

Adam Smith Institute - Sun, 09/02/2020 - 07:01

Thomas Piketty is back with his latest idea, that we should have a near total inheritance tax:

“What I’m proposing is not radical at all,” says rock star economist Thomas Piketty, who’s back on our bookshelves again six years after his first economic opus became a surprise best-seller.

Come again? The policy ideas unveiled in Capital and Ideology, the follow-up to his 2014 Capital in the 21st Century, are so extreme the most avowed Corbynite might whistle through his teeth and murmur about going a bit far.

His new work – released last year in French but launched in English shortly – sets out his stall for “participatory socialism”, but involves in practice wealth and inheritance taxes of up to 90pc.

That would help pay for an endowment for every 25-year-old of €120,000 (£101,000), a “public inheritance for all” for each to begin their personal and professional life.

There’s ever such a slight problem with such an idea. We’re had societies that do this. Have no transmission of accumulated wealth through the generations of a family. Where what wealth there is is allocated by the mechanisms of the State.

They’re societies in which long term investments in productive projects simply don’t happen.

As Alex Tabarrok is alluding to here, in India.

Under the Mansabdari system which governed the nobility, the Mughal Emperor didn’t give perpetual grants of land. On death, all land that had been granted to the noble reverted back to the Emperor, effectively a 100% estate tax. In other words, land titling for the Mughal nobility was not hereditary. Since land could not be handed down to the next generation, there was very little incentive for the Mughal nobility to build palaces or the kind of ancestral homes that are common in Europe. The one exception to the rule, however, was for tombs. Tombs would not revert back to the Emperor. Hence the many Mughal tombs

In the Ottoman system it was the Sultan who owned the freehold to all, Pashas merely having lifetime access to an asset.

Now, perhaps it’s true that people shouldn’t prefer passing on wealth to their own children rather than to the society more generally. But those experiments in societal organisation across history tell us that they do. Do to such an extent that they will curtail current consumption in order to invest for the long term where their children benefit and won’t when it’s society.

We do need to be organising matters to deal with the raw clay we have available - us humans - rather than whatever it is people might hope is true of those who don’t exist.

At least Piketty is right about one thing, his proposal isn’t radical at all. Returning to the inheritance - and thus investment - patterns of Istanbul circa 1750 AD really doesn’t sound anything other than distinctly conservative, reactionary even.

Categories: Current Affairs

Socialism Always Fails

Mises Institute - Sat, 08/02/2020 - 20:00

The Nation, which enthusiastically has supported every totalitarian communist regime that has existed in the past century (and that includes Pol Pot’s Cambodia and North Korea) is now firmly riding the Bernie Sanders bandwagon. This article, entitled “Why American Socialism Failed—and How It Could Prevail Today,” unwittingly gives away the mentality of American socialists which claims all economic issues as being “solved” by the implantation of socialism—regardless of the actual economic outcomes.

Three years ago, I wrote “The End of Socialists is Socialism, Not Prosperity,” and this article follows some of the same themes. In that article, I argued that socialists do not necessarily believe that socialism produces better economic outcomes than capitalism—indeed, one would have to be willfully blind to fail to recognize the differences—but that socialists believe it doesn’t matter. Socialism is a moral imperative, and the only thing holding back the implementation of this system in the USA has been the failure of socialists to present a plausible alternative—something that socialists claim now is being done.

People who follow the arguments based in Austrian economics are intimately familiar with the economic calculation problem of socialism as laid out by Ludwig von Mises in 1920 and Murray N. Rothbard on numerous occasions, as well as the secondary “knowledge” argument presented by F. A. Hayek in 1945. Mises and Rothbard presented what clearly are irrefutable claims that the only kind of socialist economy that could exist would be a primitive, extremely basic economy that could not support any kind of complex economic activity. Even a die-hard socialist like Robert Heilbroner would admit to as much in his 1989 commentary in The New Yorker:

The Soviet Union, China & Eastern Europe have given us the clearest possible proof that capitalism organizes the material affairs of humankind more satisfactorily than socialism: that however inequitably or irresponsibly the marketplace may distribute goods, it does so better than the queues of a planned economy….the great question now seems how rapid will be the transformation of socialism into capitalism, & not the other way around, as things looked only half a century ago. 

However, as I pointed out three years ago, the collapse of the USSR and the eastern European socialist states did not “convert” Heilbroner to becoming an advocate for capitalism, nor did China’s transformation from Mao’s giant commune to a quasi-capitalist economy (and subsequent economic growth) change his mind. Indeed, socialists seem almost impervious to factual arguments, and despite a gaggle of “what would a socialist economy look like” articles in publications such as Jacobin, socialists have never refuted the Austrian arguments. For that matter, socialists really cannot appeal to economics at all despite their claim that their goal is to provide a better economic society for those ubiquitous workers. Jacobin declares:

For socialists, establishing popular confidence in the feasibility of a socialist society is now an existential challenge. Without a renewed and grounded belief in the possibility of the goal, it’s near impossible to imagine reviving and sustaining the project. This, it needs emphasis, isn’t a matter of proving that socialism is possible (the future can’t be verified) nor of laying out a thorough blueprint (as with projecting capitalism before its arrival, such details can’t be known), but of presenting a framework that contributes to making the case for socialism’s plausibility.

(Note that the Jacobins are famous for unleashing the infamous Reign of Terror during the French Revolution, in which thousands of so-called enemies of the state were murdered. That American socialists today willingly associate themselves with genocide speaks volumes of what these people will do if they ever gain real power here.)

In other words, the implementation of a socialist order is not so much dependent upon a plausible model of a socialist economy, but rather is an exercise that depends upon convincing people that somewhere over the rainbow we can make the whole thing work, despite the failures of the past. And that is where the recent articles in The Nation and the Daily Mail reveal much about the socialist mentality.

In The Nation, Ross Barkan argues that the barriers to implementing a socialist system are political, not economic. Indeed, in “Why American Socialism Failed” he writes that there was just too much political resistance to reorganizing the United States into something like what at that time was being done in the Soviet Union. (It should be noted that he seems to view the Russian Revolution with much sympathy—and fails to note that perhaps Americans at that time were not interested in implementing a regime that would mirror the atrocities being committed by the Red Army and the new Soviet government.)

Instead of following the old political strategy of having people run as members of a socialist party, Barkan says that the better plan is for socialists simply to take over the modern Democratic Party by electing socialists from the presidency on down. He writes:

Today’s Democratic Party is a shell waiting to be inhabited by whoever claims the prizes of elected office. If Bernie Sanders, a democratic socialist, is elected president of the United States, the Democratic Party will slowly become his party. And if he loses, inspiring still more DSA recruits and fueling down-ballot victories, socialists can continue to win council, legislative, and even congressional seats on Democratic lines, wielding tangible clout.

In New York, there is one socialist in the state legislature: DSA member Julia Salazar. She has helped lead campaigns for public control of power companies and a universal right to housing. Five DSA-backed candidates are seeking legislative seats this June, challenging establishment-backed Democrats. If they all win, they will start to gain back the momentum of the 1920s.

This time, there will be no reactionary legislative leaders to unseat the new socialists, no Red Scare to feed a public frenzy against their anti-capitalist views. Salazar is a member of the Democratic majority, an ally of the progressive block, unlikely to lose an election anytime soon. The DSA members seeking to join her will be free to advocate for radical change. It’s a future that would have surprised the class of 1920 because Socialists never took over New York, let alone America. But today’s socialists march into the 2020s without the daunting roadblocks of a century ago. They don’t need their own party anymore. They can just take someone else’s.

In other words, the entire question of socialism is political; socialists can speak about their utopian visions, be elected on those platforms, but really don’t have to explain how they actually will make a socialist economy perform in a way that will even begin to match the output of a private enterprise–based economy. Yet, when confronted with the reality of the actual performance of a socialist economy, all the writer can do is to appeal to the election of socialists, which should not be surprising, since the end of socialism is political power and nothing else.

The death of a Canadian teenager of leukemia while waiting for the government’s permission to have a bone marrow transplant speaks volumes both of the performance of socialist systems and the way that people under socialism submit to the system. Laura Hillier, 18, of Ontario died before she could receive a transplant, which is not particularly unusual in the Canadian system, as “standing in line” for care is the typical experience, even when a life is at stake. From the Daily Mail:

Laura might have experienced a few more milestones if a Hamilton, Ontario, Canada, hospital had been able to accommodate a bone marrow transplant for the young woman. Numerous donors were a match with Laura and ready to donate, but Hamilton's Juravinski Hospital didn't have enough beds in high-air-pressure rooms for the procedure. Hospital staff told her they had about 30 patients with potential donors, but the means to only do about five transplants a month.

Although Hillier’s obituary “slammed” the wait times in Canada, nonetheless, nothing will be done because Canada’s “single payer” system is both politically sacrosanct and a socialist politician’s dream. It is sacrosanct because it provides the “free healthcare” that socialists promise and a politician’s dream because it provides unending opportunities for “reform.” In reality, the economic calculation problem is front and center, making it impossible to “fix” the Canadian single-payer system, something no Canadian politician will admit.

One doubts that Hillier would have died in the same way in the United States. For all of the criticism American medical care receives from the left (and the current system hardly fits the claim by socialists that it is “free market”), one can be reasonably assured that a young woman here would not die because of a lack of hospital beds.

In Canada, however, such deaths are a matter of course, and for all of the “this shouldn’t happen” statements from both politicians and victims’ families, it will continue to happen. (Canada, perhaps not surprisingly, has relatively poor cancer survival rates.) Under socialism, one stands in line and does not challenge the system, since the system is based not upon the successful delivery of services, but rather on the prospect of such services being made available “to the people” for no fee, the product of a “compassionate” socialist state.

Note that at no point in his article does Barkan write of any way that socialism would improve the lives of Americans. Socialism is not about providing needed services to those who cannot receive them otherwise, nor is it about raising the living standards of the poor, despite socialist claims to the contrary. Socialists do not create goods and services; they commandeer them for political purposes, and such things are useful only as a means of putting and keeping socialist politicians in power.

No politician in Canada will be voted out of office for the premature death of Laura Hillier, nor will any hospital administrators be sacked. Had medical officials given in to sentiment and bumped Hillier up the transplant list, someone else would have died for lack of space. The enemy here is scarcity, and under socialism, scarcity is multiplied. Canadians have come to accept this situation, all the while convincing themselves that theirs not only is a morally-superior system to anything that exists in their neighbor to the south, but also enables them to receive medical services that they believe would be denied them if their government were not paying. They have become like the cave dwellers in Plato’s allegory, believing that the medical shadows they see on the wall represent the best care possible.

Socialists might well take over the Democratic Party; indeed, American voters are capable of putting someone like Bernie Sanders in the White House. They well could make the electoral gains that the writers at The Nation have coveted for decades. What they cannot do, however, is tell the truth about socialism. Another article in Jacobin, written by Sam Gindin, demonstrates this last point:

Murray Rothbard, a lifetime disciple of the archconservative Ludwig von Mises, lamented that when he entered grad school after World War ii “the economics establishment had all decided, left, right, and center, that…socialism’s only problems, such as they might be, were political. Economically, socialism could work just as well as capitalism.” With socialism carrying such a degree of economic credence, the elaboration of the details of a functioning socialist society seemed decidedly less pressing for socialists than developing the politics of getting to it.

Gindin then goes on to “refute” Hayek’s “knowledge problem” critique of socialism (while ignoring the Austrian “economic calculation” issue). The rest of the piece essentially can be shortened into this one sentence: forget the past failures of socialism; this time we will make it work.

We have been hearing this kind of thing for more than a century. Socialists tell us that if the rest of us will give them total power over our lives, this time they will provide prosperity, and unlike previous socialist regimes, they won’t strip us of our liberties. We should have as much confidence in their words as the loved ones of Laura Hillier had in the empty promises of Canadian medical officials.

Categories: Current Affairs

Private Sector Truck Drivers Are Nepal's Lifeline to Clean Water

Mises Institute - Sat, 08/02/2020 - 17:00

Increasing numbers of Americans are losing sleep about the climate and agitating that healthcare is a human right. Residents of Flint, Michigan, and Newark, New Jersey, want government to provide clean water, and again the rallying cry is that water is a human right.

But the water disasters in Flint and Newark are miniscule compared to what's going on in Nepal. In a massive story, the New York Times documents the trials and tribulations of people in Kathmandu, who have given up on their government providing water.

Nepal doesn’t qualify as anyone’s Galt’s Gulch, but, with government failing to deliver something as vital to life as water, entrepreneurs have stepped in.

The government’s proposed solution to these grave water shortages, the Melamchi project, has turned into a four-decade-long fiasco of almost unrivaled incompetence. First proposed in the 1970s and begun in 2000, this scheme to divert a mountain river from the Himalayas has been so delayed that the water it will bring—170 million liters a day in its first phase—is already insufficient to cover half of Kathmandu’s needs. It’s not a good plan, anyway, experts say. The pipeline network is so riddled with holes that “you could have Lake Baikal on the other end and it still wouldn’t be enough,” Mr. Gyawali said.

The result is four hundred competing water delivery trucks, in some cases running nineteen hours continuously in order to satisfy demand. Meanwhile the government has thrown up its hands:

The pressure is so weak that many households capture no more than 250 liters on each occasion. For these people and the roughly 30 percent of residents who receive nothing at all, tankers tide them over until the next pipeline flow. Officials recognize it’s a crisis, but say the solution is out of their hands.

Of course there is plenty of complaining. When demand is high and supply is low, high prices and profits attract providers. “Let’s face it: the private sector came in because the public sector failed,” Dipak Gyawali, a political economist and former water minister told the NYT. “And until you clean up government’s act, nothing will change. The tankers are just a symptom.”

Krishna Hari Thapa has been delivering water for a decade and says that “the number of tankers at his spring has increased from around 30 to over 80 a day.” Although the spring water has been reduced to a trickle, he won’t stop. “The money is too good,” writes the NYT’s Peter Schwartzstein. Besides, as Mr. Thapa says, “Where else would people get water?”

Mr. Schwartzstein tries his best to make the tanker men the enemy, from the article’s title, “Merchants of Thirst,” to quoting landlady Dharaman Lama, who claims,

They’re all thieves, rotten thieves, who should be hanged. It’s disgusting what they do to us.

What the truck men do is invest capital, work hard, and supply something vital. “The city depends on us,” said Maheswar Dahal, a businessman who owns six trucks in Kathmandu’s Jorpati district.

There would be disaster if we didn’t do our work.

So where the state has failed, private enterprise has stepped into the breach. Profits will make that happen. High cost makes customers more careful with how much they use. Nobody is wasting water in Kathmandu. “Before, I didn’t think about how often I could shower or when I can clean the house,” said Laxmi Magar, a housewife and mother of six. “But now that water is so expensive I watch every drop.”

Tanker water costs ten times more than government-supplied pipeline water, according to a World Resources Institute study. In Mumbai, the cost is fifty-two times more, according to Schwartzstein. Water seems like something you would always buy in bulk; however, for some that’s not possible. During the dry season, as you would expect, “The tankers raise their rates accordingly,” writes Schwartzstein. “And because many of these areas have narrow, tuk-tuk-wide streets sprawled across steep hills that often turn to mush in the monsoon, the bigger trucks can’t get through, meaning residents have to buy in smaller sums from middlemen at grossly inflated prices.”

Does the tanker business have a future? Likely, it will boom in Southeast Asia and beyond. Schwartzstein explains,

The urban population of South Asia alone is projected to almost triple to 1.2 billion by 2050, and as infrastructure decays and cities continue to sprawl into areas that aren’t served at all, tankers are well-placed to absorb some of the shortfall. Up to 1.9 billion city dwellers might experience seasonal water shortages by midcentury, according to the World Bank.

A water delivery boom seems unlikely as you pour a glass of aqua from your first-world tap. But, water shortages are not new, and tanker men (and presumably women) have come to the rescue before:

When severe drought emptied Cape Town’s reservoirs in 2017 and 2018, wealthy residents sidestepped restrictions by buying extra water from informal operators. When Chennai, one of India’s largest cities, almost ran dry amid weak rains this summer, over 5000 private tankers ferried in water from outside. As these shocks intensify and affect more cities, the tanker men look set for boom times.

Sunita Suwal told the Times, “The state fails us. The tanker men rob us. They all just want to make money from us. Really, what’s the difference?”

The difference? Tanker men are delivering, the state is not.

Categories: Current Affairs

The Economy Is Not a Factory—Nor Should We Try to Make It One

Mises Institute - Sat, 08/02/2020 - 12:00

A common issue with economists and political economists from left to right is that they misunderstand the market economy as simply being a set of production processes. We see this in Lenin’s statement that the Soviet Union should be run like one big factory. We see it in market socialists from Frederic Taylor to Oskar Lange attempting to respond to (and resolve) Mises’s argument that socialist economic calculation is impossible. And we see the same thing in the efficiency (and market failure) nonsense of Chicago school economists. The misconception is the same: that a working (and progressing) economy is about the management of existing production.

To be fair, if the economy is truly a matter of simply maintaining production processes, then it is certainly possible to rationally plan the whole thing. It may take more computing power than was possible in the 1920s and 1930s, but the data are all there. The problem is here only of a practical nature: to collect the data and to make sure the algorithms run smoothly enough to not cause delays in adjusting the central plan.

This is very far from how the economy actually works, however. It is quite the opposite: what is important in the economy is what happens before there are production processes in place. All the production efforts we see in the present economy are only the tip of the iceberg, if even that. The observable structure of production is but the result of the market process doing its work by consistently weeding out ineffective, improper, and unfit production.

It is thus a fundamental mistake to think that Misesian economic calculation is about the allocation of resources within and between production processes. The profit and loss system is not primarily about the adjustment of capital investment across industries and firms, but about the determination of which industries and types of production will exist—and who will be involved in this future production.

Clearly, it should be stretch to call the continuous tweaking and adjustment of production processes a “driving force” of the market. Incumbent firms’ responsiveness to price changes, whether day to day or quarter to quarter, is too passive to be labeled a driving force. Even for someone whose native language is not English. Such activities are neither much of a force to reckon with nor “driving” anything. It can appear dramatic on a micro level, but for the economic system it is barely a blip on the radar.

Mises had something else in mind when suggesting an explanation for economic calculation. As I elaborate in my essay “The Management Problem of Socialism: Cost at the Expense of Value,” the main issue in the economy is not production management. That is a comparatively simple problem that both Lenin, market socialists, and Chicago school economists can solve.

The real problem is how we can create a market situation that better meets consumers’ future wants. This cannot be planned, because consumers themselves rarely know the specifics of what they will want. It also cannot be planned, because that future must be imagined before it is created, and one mind or single committee cannot ever replace a “division of intellectual labor” between entrepreneurs who risk losing their own wealth.

Most of this process takes place before actual production commences. Only the most plausible and profitable ideas are invested in. Of those, only some see the light of day, and of them only very few actually succeed at generating revenue in excess of cost. This continuous process is carried out without hardly anyone noticing. It cannot be observed or measured: the idea that never gets invested in or that fails before it is completed is no data point.

But it is this preproduction selection process that determines what the market will provide consumers. And among those projects selected and tried, some will end up disrupting the status quo and thereby creatively destroying the production apparatus that non-Austrians believe they have the tools to properly manage.

Categories: Current Affairs

The beginnings of some sense on tariffs

Adam Smith Institute - Sat, 08/02/2020 - 07:01

In order to be able to deal with reality first we’ve all got to recognise reality. Understand what is actually happening out there. So far, one cheer for people beginning to grasp what trade tariffs are:

Ministers say they will reclaim Britain's mantle as the world's foremost free trade champion with a radical overhaul of tariffs that could save households £8.3bn a year.

The Government has pledged to slash thousands of tariffs and strike deals with the US and other countries as the nation sets its own trade policy for the first time in almost 50 years.

The Department of International Trade (DIT) is consulting on a new post-Brexit UK Global Tariff, cutting the cost of a swathe of goods ranging from fridges to bricks, burglar alarms and some food products.

Many tariffs will fall sharply, with “nuisance” charges of less than 2.5pc cut to zero in a bid to slash costs for families and manufacturers.

Tariffs are, in the jargon, incident upon consumers. That is, it’s us out here, we people buying things, who pay the tariffs. They’re a tax on the people who have the temerity to buy things made by foreigners.

So, lower tariffs, households save that £8.3 billion a year, isn’t that lovely? Except that’s only the lower bound of what is saved. For the point of the tariff is to “protect” the domestic producer. To allow them to charge higher prices in the absence of that foreign competition. So the costs to households are the tariffs collected plus the higher prices charged by domestic producers as a result of the existence of the tariffs.

We consumers are all made poorer by their existence. Therefore, given that we’d all like to be richer - indeed, the very point of having an economy is so that the people become richer - we should have no tariffs.

But it is only the one cheer so far. For the truth of that reality out there hasn’t sunk in properly as yet:

Ms Truss told Parliament that the UK will "drive a hard bargain" in its trade negotiations and is "prepared to walk away if that is in the national interest".

What negotiation? Walk away from what bargain? It is in our simple - and complex - interest to not tax ourselves for buying those lovely things made by foreigners. Therefore we should simply announce unilateral free trade and declare victory:

"My only lament for the UK is that the immediate plan is not to cut all tariffs to zero on Jan 1, 2021.”

Quite so, we did this in 1846 when we abolished the Corn Laws. That’s just when real wages started to rise substantially after the Engels Pause. Why the heck don’t we just do what we know works?

Categories: Current Affairs

Anglican Unscripted 572 – The Left Outs their Bishops

Anglican Ink - Fri, 07/02/2020 - 20:13

Kevin Kallsen, George Conger, and Gavin Ashenden stream their conversation about the disunity surrounding the Evangelical in the Church of England. Also, the far left is now outing their un-outed gay bishops. And yes the three amigos have their typical banter about differing ecclesiologies and other whatnots.

The post Anglican Unscripted 572 – The Left Outs their Bishops appeared first on Anglican Ink © 2020.

The Quality of Money

Mises Institute - Fri, 07/02/2020 - 20:00
I. INTRODUCTION

The economics profession has recently neglected the connections between the purchasing power and the quality of money. In order to cover this gap, I will analyze the quality of money and how its changes affect the purchasing power of money. I will argue that changes in the quality of money can be far more important for the value of money than changes in its quantity. This conclusion is in line with the subjectivist approach of the Austrian school. In fact, the quantity of money is an objective and measurable aggregate. The quantity theory of money is the heart of neoclassical monetary theory, but does not reconcile well with the Austrian approach. In contrast, the quality of money is a subjective concept and should stand at the center of a monetary theory based on human action. Money serves people in attaining their subjective ends more efficiently and it fulfills certain functions for people. The better these functions of money are fulfilled in the eyes of actors the higher they value money. The quality of money is, consequently, defined as the capacity of money, as perceived by actors, to fulfill its main functions, namely to serve as a medium of exchange, as a store of wealth, and as an accounting unit. Hence, the theory of the quality of money maintains that the demand for money does depend on the quality of money. In fact, the quality of money is one of the important factors, along with uncertainty, financial innovations (credit cards, ATM machines, MMMFs), frequency of payment, etc. that affect the reservation or cash-balance demand for money. The theory of the quality of money, thus, contrasts with a one-sided quantity theory of explaining the price level.

I will first review the treatment of the quality and quantity of money by economists. I will then analyze different properties of money influencing money’s quality and how they can change. In the process I focus on the function as a medium of exchange and as a store of value. I conclude with a summary of my findings.

II. THE THEORY OF THE QUALITY OF MONEY IN HISTORY

The theory of the quality of money, even though not under this label, has a long tradition. While many authors have discussed the factors influences the quality of money, no unifying consensus has ever been established. Juan de Mariana (1609) explains that the deterioration of the quality of gold coins must be considered an (unjust) tax. Sir William Petty ([1662] 1889) considers the deterioration of the quality of coins by the government a tax. Adam Smith (1776) speaks of the origin of money and important qualities like durability and divisibility. Jean Baptiste Say ([1802] 1855) states that a good money must be divisible, of the same quality, resistant to friction, sufficiently rare, and malleable. He also analyzes the adulteration of the quality of money in historical instances as in the case of Philip I of France. Nassau William Senior ([1850] 1853) and John Stuart Mill ([1848] 1965) are two classical authors who discuss qualities of commodities that made them suitable to become money. Carl Menger (1871) explains the emergence of money as a spontaneous market process in which commodities with specific qualities prevail. Thus, the treatment of the qualities of money had been widespread before the twentieth century as William Stanley Jevons’s (1875, p. 30) passage states:

Many recent writers, such as Huskisson, MacCulloch, James Mill, Garnier, Chevalier, and Walras, have satisfactorily described the qualities which should be possessed by the material of money. Earlier writers seem, however, to have understood the subject almost as well. Harris explained these qualities with remarkable clearness in his “Essay upon Money and Coins,” published in 1757, a work which appeared before the “Wealth of Nations,” yet gave an exposition of the principles of money which can hardly be improved at the present day. Eighty years before, however, Rice Vaughan, in his excellent little “Treatise of Money,” had written a brief but satisfactory statement of the qualities requisite in money. We even find that William Stafford, the author of that remarkable dialogue of the Elizabethan age (1581), called “A Brief Conceipte of English Policy,” showed perfect insight into the subject. Of all writers, M. Chevalier, however, probably gives the most accurate and full account of the properties which money should possess, and I shall in many points to follow his views.

Austrian economists such as Mises (1953, chap. 1) and Rothbard (2004, pp. 189–93) have followed Carl Menger in their analysis of the origins of money. While Mises does not list the specific qualities that help a commodity to become money, Rothbard (2008, p. 6) mentions the “proper qualities of money”: commodity money is in heavy demand, highly divisible, portable, durable, and has a high value per unit weight.

However, Mises and Rothbard do not advance beyond this insight and do not mention—at least not explicitly—the importance of the quality of money for money’s demand. In fact, Mises neither in The Theory of Money and Credit (1953, pp. 131–37) nor in Human Action (1998) in his chapter on the demand for money (chap. 17) mentions the quality of money as a factor that influences money’s demand. As Salerno (2006, p. 39) states: “Mises (1998, pp. 398–402) provided only a very sketchy discussion of the demand for money which cannot bear the full weight of a theory of money prices.”

Rothbard (2004, p. 756) advances beyond Mises in his conceptualization of the demand for money and states: “The total demand for money on the market consists of two parts: the exchange demand for money (by sellers of all other goods that wish to purchase money) and the reservation demand for money (the demand for money to hold by those who already hold it).”

Rothbard (2008, p. 39) emphasizes that changes in the demand for money (as cash holdings) change money’s purchasing power. In chapters on the demand for money Rothbard (2008, chap. 5; 2004, chap. 11, sec. 5) like Mises does not mention the quality of money as a factor that influences the demand for money explicitly. However, Rothbard (2008, pp. 65–74) mentions two factors that are important for the quality of money: the confidence in money and inflationary and deflationary expectations.

In reviewing Mises’s and Rothbard’s contributions, one question comes to mind: Why did these authors not advance further and develop an explicit theory of the quality of money as a factor that influences money’s demand?1 The answer lies most probably in their neglect of the function of money as a store of wealth. This function is essential for money’s quality and is more sensitive to changes than the medium of exchange and accounting unit functions.

In fact, Mises (1953, p. 35) follows Menger (1871, p. 278), and maintains that the store of wealth function is a derived and not a necessary function of money. Indeed, Mises (1998, p. 401) focuses even more exclusively on the exchange function of money than does Menger:

Money is the thing which serves as the generally accepted and commonly used medium of exchange. This is its only function. All the other functions which people ascribe to money are merely particular aspects of its primary and sole function, that of a medium of exchange.

Mises (1953, pp. 107, 110, 129; 1990, chap. 4) and Rothbard (2004, pp. 764–65) focus on the exchange function. Thus, they neglect important factors for the value of money. As they do not analyze in detail the store of wealth function, they neither point to the effects that changes in it or that money’s quality in general can have for money’s demand.

In contrast to the hesitant qualitative monetary analysis by the economists mentioned above, there is also a current in the economic literature that does not treat qualitative issues at all. This is the simple quantity theory of money defended by David Ricardo.2 For Ricardo it does not matter if gold coins, a chicken, a cocoa bean, a stone token or a paper note is money. Quantity is the only thing that matters. Quantitative issues explain all monetary phenomena. In fact, for Ricardo, all qualities of money are to be found within the limitation of money’s quantity.

Ricardo and the followers of the simple quantity theory strongly emphasize the exchange function of money set forth by John Law and Adam Smith for whom money is basically a voucher to buy goods. Money is simply an instrument of circulation. These quantitative theorists thereby neglect completely the function of money as a store of wealth. Ricardo also implies that there is no difference between inconvertible paper money and convertible money certificates. He, consequently, neglects the demand for money. For him convertibility is just a practical method to ensure a limitation of the quantity of money.

For the believers of this quantity theory,

the value of money is a function of its quantity, it is entirely independent of the value of the material from which coins are made and derived solely from its peculiar uses….(p. 49)

According to that theory, so long as the number of exchanges and the rapidity of the circulation of money remain the same, nothing can affect the value of the unit, and with it the level of prices, except changes in the volume of currency. (Scott 1897, p. 56)

As a consequence, quantity theorists tend to neglect the importance of the demand for money. As Carver (1934, p. 188) points out:

Most quantity theories of money are ostensibly demand and supply theories. Unfortunately, less attention has been given to the demand for than to the supply of money. In fact, some expounders of the quantity theory ignore altogether the demand for money, and proceed on the assumption that it is only the supply that counts. This ignoring of the subject of demand and concentration on the subject of supply seems to be based on the further assumption that the demand for money is, at a given time and under a given set of circumstances, fixed; that it consists exclusively in the number of commodities and services that are for sale.

The quantity theory of money continues to dominate in popular economics textbooks to this day. Some of the more widely used texts are: Mankiw (2004), Blanchard (2006), Stockman (1999), Hyman (1994), Slavin (1994), Boyed and Melvin (1994), Sachs and Larrain (1993), Ekelund and Tollison (2000), Case and Fair (1994), Dornbusch and Fischer (1990). Only a few textbook authors (Colander 1995 and Sloman 1994) mention qualities of money while Melotte and Moore (1995) claim that a good money must be divisible, portable, durable, and stable in value. The textbook by Abel, Bernanke, and Croushore (2008) does not even discuss the qualities of money at all.

Williamson (2005, p. 536) goes so far as to discuss several problems with the qualities of commodity money: First, its quality would be difficult to identify. Second, it would be costly to produce. Third, the use of the commodity as money diverts it from other uses.3

Williamson (2005) may have given the real reason why only a few lines, if any, are put forward in support of the quality of money, for it was the advent of fiat paper money that led economists to believe they found the perfect money. Thus, Lewis and Mizen (2000, p. 47) state that paper money can, in principle, do better than commodity money. They argue that paper money’s value can be better stabilized and involves lower resource costs.

A second reason for the virtual disappearance of the quality of money from economic analysis is general equilibrium analysis and mathematization in economics. In general equilibrium analysis, there is no process. With equilibrium analysis the evolution and the origin of money, which would need an analysis of the quality of money, cannot be explained. In fact, the quantity theory of money can explain neither the rise nor the demonetization of money. Moreover, the mathematization in economics and the accompanying rise of the quantity theory of money allowed for measurement. As the quantity of money is more usable for mathematics and measurements, the quality of money was disregarded.

Insights into the theory of the quality of money existed prior to the twentieth century. These insights, however, only enumerate the characteristics of what a good medium of exchange must have, neglecting to point out the importance of the characteristics for the purchasing power of money. In other words, they do not investigate the effects of changes in these characteristics on the purchasing power of money and do not set forth a unified theory of the quality of money. Money has other functions than serving as a medium of exchange. Money serves also as a store of value and a unit of account. A complete theory of the quality of money, must therefore also investigate the qualities of a money in respect to these two other functions. The function of money as a unit of account will not be dealt with. Instead the focus will be on the function of money as a medium of exchange and a store of wealth.

III. THE QUALITY OF MONEY AND ITS PURCHASING POWER

The price of money is its purchasing power. As any price, the price of money is determined by its supply and demand. The demand for money is determined by its marginal utility.4 The utility of money is, in turn, determined by money’s quality, i.e., its capacity to fulfill its services. The quantity of money affects money’s marginal utility by increasing the number of monetary units. The quality of money affects money’s marginal utility by changing the position of monetary units on the value scale of actors in relation to other goods. As Salerno (2006, p. 52) summarizes the determinants of the purchasing power of money:

the stock of money is one of the immediate determinants of the structure of money prices and the purchasing power of money—in conjunction with its immediately past purchasing power, the existing stocks of goods, and the distribution of ownership and the relative rankings of goods and of money among market participants. (Italics added)

It is this relative ranking of goods and of money among market participants that is affected by the quality of money. The factors influencing the quality of money and, consequently, the relative ranking of goods and of money have been widely neglected. Their analysis is precisely the focus of this paper.

Thus, while the quantity of money is important for the purchasing power of money, it is not the only factor. As Henry Hazlitt (1978, p. 74) puts it:

The truth in the quantity theory is that changes in the quantity of money are a very important factor in determining the exchange value of a given unit of money. This is merely to say that what is true of other goods is true of money also. The market value of money, like the market value of goods in general, is determined by supply and demand. But it is determined at all times by subjective valuations, not by purely objective, quantitative, or mechanical relationships. (Italics in original)

Indeed, the quality of money is an essential factor in the process determining money’s price, i.e., its purchasing power. When the quality of money increases, money’s demand and, consequently, purchasing power will be higher than without this quality improvement. Money is, thus, no different than any other good. If the quality of a good increases, there will be more demand, and its price will be higher than without this increase of quality.

The importance of the quality of money can be seen in Eugen von Böhm-Bawerk’s analysis of price determination. Böhm-Bawerk (1884) names six individual determinants of prices in his price theory: the number of units of the goods offered; the number of units of the good demanded; the intensity with which the potential seller values the good; the intensity with which the potential seller values the monetary unit (or good of exchange); the intensity with which the potential buyers value the good; and the intensity with which the potential buyers value the monetary unit (or good of exchange).

The last four determinants can be summarized as the intensity of the valuation of money in relation to the valuation of other goods and services on the part of potential buyers and sellers. This intensity is not only influenced by the quantity of money and goods and services but also by the quality of money. The higher the quality of money is, the more buyers and sellers of money value the monetary unit in relation to other goods and services. The lower the quality of money is, the less buyers and sellers of money value the monetary unit in relation to other goods and services. This implies that the purchasing power of money can vary with a constant supply of money and of goods and services if the quality of money changes. When people start to value money higher, the purchasing power of money will be higher.

Actually, changes in the quality of money can have more abrupt and stronger effects on the price of money than changes in the quantity of money. In fact, changes in the quantity of money only have marginal effects on the value of money. Changes in the quality of money however can abruptly upset the subjective valuation of money in general. Apart from dramatic changes in the money supply, faster movements of the price of money can be expected by changes in the subjective valuation of money’s quality than by changes in its quantity.

One important ramification of the quality theory of money is that prices in general can rise or fall without a change in the quantity of money. Frank Shostak (2008) does not take into account the quality theory of money when he writes:

We know that a price of a good is the amount of money paid for the good. From this we can infer that for any given amount of goods, a general increase in prices can only take place in response to the increase or inflation of the money supply….Now, if the money stock did not increase, then consumers won’t have more money to support the general increase in prices of goods and services.

Shostak is wrong precisely because the quality of money can fall without an increase in the money supply.5 The subjective valuation of money and, correspondingly, its marginal utility can fall as a result of a deterioration of money’s quality. As a consequence of the lower subjective valuation of money, money’s price falls. If my subjective valuation of money falls, I will try to reduce my cash balance. If I sold five apples for five dollars, now that the value of money is less I might sell one for five dollars. The same applies for the prices of other goods. As a result, I reduce my real cash balances.6 Dollar prices have risen because of a change in subjective valuations and not a change in the quantity of money. This rise in prices is due to a fall in the quality of money that resulted in a fall in the demand for money. The fall in the demand for money means that money’s position on value scales relative to other goods’ positions has deteriorated.

In the following section we will discuss factors that influence the quality of money and, consequently, money’s subjective valuations. Some of the factors are related to expected increases in money’s quantity, a possibility not considered by Shostak. Other factors are completely disconnected from quantitative considerations.7

IV. QUALITY OF MONEY AND ITS FUNCTION AS A MEDIUM OF EXCHANGE

We will first look at factors or properties that influence the quality of money in its function as a medium of exchange. When these properties change the quality of money improves or deteriorates and affects the purchasing power of money. 

There are several properties of a good medium of exchange. Most of them have been discussed in the literature in another context, namely in explaining the origin of money. In fact, the quality theory of money can explain the emergence and disappearance of money while the quantity theory cannot explain these phenomena.8 One of the most important properties for the quality of money is the existence of a non-monetary demand in society for the money. This demand can be in the form of consumption goods or factors of production. It is important for the quality of money that its non-monetary demand plays an essential role in society—everyone wants and needs it. The money is not only demanded as a medium of exchange but also for other purposes. Thus, for money, as a good, there exist many unsatisfied wants and the intensity of the wants are relatively high and permanent (Menger 1892, p. 5). The non-monetary demand is important because it gives the money holder an “insurance.” Even if the money gets demonetized, i.e., it loses its monetary demand, there is still considerable value to it. The non-monetary demand supports its value.9 In sum, the higher the non-monetary demand, the higher the quality of money. If, for instance, gold is money and demand for gold jewelry increases, more gold will be used for these purposes and the marginal utility of gold is raised. In other words, the marginal utility of gold may change independent of the rapidity of circulation, the number of exchanges, and the quantity of gold (Scott 1897, p. 56).10

Furthermore, the more people that accept the money the better the money functions as a medium of exchange. In fact, the incorporation of new users improves the quality of the money. For instance, when people that are engaged in barter start using money its quality is increased. When the Soviet Union and China opened their economies and became a market for dollars, the quality of the dollar increased. The introduction of the euro, in ever more countries, can improve its function as a medium of exchange as more potential buyers accept it. Also legal tender laws influence the acceptance of money and, thereby its quality. As Carver (1934, p. 188) points out, it does matter for money’s purchasing power if paper money is legal-tender and accepted by the government for the payment of taxes and duties or not. By giving paper money legal privileges, the government subsidizes its quality by increasing its use in exchanges.

Other properties for money as a medium of exchange are low storage and transportation costs, easy handling, durability, divisibility, resistance to tarnish, homogeneity, and recognizability.11 Changes in these properties affect the quality of money and thereby its purchasing power independent from money’s quantity or expectation about money’s quantity.

V. QUALITY OF MONEY AND ITS FUNCTION AS A STORE OF WEALTH

One of the most important properties of good money is that it is a good store of wealth (Menger 1871, p. 277). Money is the most marketable or liquid good. Liquidity is higher or lower as the loss of value (or the loss of time) experienced in liquidating ever larger quantities of an asset is smaller or greater. The spread between bid and ask prices for a good is an increasing function of quantity. Rising spreads go along with increasing quantities offered.12 Different goods have different spreads. The speed with which spreads increase is determined by the speed with which marginal utility declines with increasing quantities.

As money is the most liquid good, people can easily store their wealth and profits from sales until needed for exchange. The stored money serves as purchasing power for the future. People can easily separate the moment of the sale of their product from the moment of the purchase of their needs. Money is, thus, a means to store wealth and preserve the value of goods and services (mainly labor) sold from price fluctuations. It is insurance against the uncertainties of the future. The store of wealth function is, consequently, crucial for the origin of money and for money’s quality. A medium of exchange that loses its storage function will also lose its exchange function.

For the purpose of our paper it is not important if the medium of exchange function or the store of wealth function is more important for the origin of money or if they are two sides of the same coin.13 The store of wealth function is key for the quality of money.14 In fact, exchange always takes place in time. Production and consumption are not simultaneous.15 Abstracting from time in economics has led to crucial errors in price theory, capital theory, etc., and it is equally misleading to abstract from time in monetary theory or exchange theory. When people sell their products they cannot, or do not, buy goods and services they need at the very same moment, but rather at a later time. A liquid good to store the wealth that does not lose in value is, hence, crucial.

There are several characteristics of a good store of wealth. One important characteristic is the hoardability or storability of a good (Fekete 2003, p. 2). A good is more storable the smaller the loss incurred when it is bought and sold in the smallest quantities—when it is possible to add and subtract small amounts from one’s store of wealth with minimal costs. It should be noted that hoardability is slightly different from liquidity. The more liquid a good is, the slower the increases of the spread between bid and ask prices with increasing quantities. Hoardability, however, refers not to the costs of selling and buying large quantities of a good but rather to the costs of selling and buying small quantities of a good. Thus, salt may be more hoardable than gold but less liquid. Hoardability is also different from divisibility. Divisibility is the ability to divide a good to make exact purchases, while hoardability refers to the economic costs of adding or subtracting from a store of wealth. Teleologically, these concepts refer to different ends, namely exchanging and storing.

Another important characteristic in relation to money’s function as a store of wealth is the possibility of changes in the quantity of money. Thus, the quality of money as a store of wealth is influenced by the possibilities of changing money’s quantity. It should be noted from the outset that the possibility of changing money’s quantity (and derived from this possibility is money’s expected quantity) is only one of several factors that influence the quality of money. Moreover, the expected quantity is relevant for human action precisely because it affects the quality of money. It is relevant because it influences money’s capacity to function as a store of wealth. The expected quantity of money is one of the important factors determining the quality of money.

Let us first look at how the quantity of money increases in free competition. Two characteristics of money production in the free market influence the quality of money as a store of wealth. First, the costs to produce the money are important. Money production costs are determined by the value that individuals place on additional money. The higher the production costs of the money in relation to its market value, the slower the quantity of money will increase. Second, the already existing stock of money in relation to potential production is important. The higher the existing stock in relation to potential production, the lower is the potential rate of increase in the money supply and the better the storage function of money is fulfilled.

We now look at the case of a monopolist money producer. When there is a monopolist producer of money an important property of the money is how its quantity is expected to change. In a fiat paper money standard with a central bank, for instance, the institutional setting of the central bank becomes relevant.16 The institutional setting of the currency, therefore, also determines money’s quality. For instance, a central bank that receives its orders directly from the government is more likely to be used to monetize government debt in order to finance spending. A formally “independent” central bank, consequently, improves the quality of the currency.17 The statutes of the central bank, until they are changed, can to a certain extent limit the potential increase in the money supply. Incentives (like bonus payments for central bankers) to inflate the money supply less can also increase the quality of money. If central bankers are accountable and responsible for their policies, and if there is transparency, this can improve the quality of money.

The official goals or mandates of the central bank, as well as the minimum reserves they impose on banks, play a role in the way the quantity of money is expected to be increased and influence money’s quality. In other words, the philosophy of its monetary policy implied in the statutes of the central bank, or the philosophy of central bankers, influences the quality of money in the way that the quantity is expected to change.

A central bank, whose official policy is to stabilize consumer goods’ prices, stands for a higher quality of money than a central bank that in addition to the control of consumer goods’ prices tries to stimulate the economy, stabilize asset prices, or seek full employment.

The ideology of the central bank’s president and other central bank staff influences the quality of money. In addition, comments by central bankers and politicians can immediately alter the quality of money. For instance, when the chairman of the Federal Reserve board states that he is willing to do anything to prevent a recession, this will be interpreted as the promise of future monetary inflation. As a result, the quality of money decreases and there will be an immediate impact on prices, as the currency depreciates in terms of foreign currencies. The dollar price of all goods and services outside of the US increases. Moreover, the prices of commodities can be influenced by central bankers’ comments without a necessary change in money’s quantity. The announcement, as well as its anticipation, of a Paul Volcker or a Ben Bernanke as Federal Reserve president influences immediately the quality of money.

The integrity of the monetary unit is another important property of the quality of money. Money’s integrity, for instance, may be altered through wear and tear of metallic coins. While the nominal quantity of money remains the same, wear and tear leads to higher prices than otherwise. Coin clipping is another example. The government denigrates the quality of the monetary unit by cutting part of the coin away and replacing it with metal of an inferior value (such as copper), without changing the quantity of coins in circulation. For instance, the government can clip 10 percent of the gold coins in circulation and hoard the clipped gold or do whatever it wants with it. The quality of money may decrease independently of whether the government spends the hoarded gold or not. When people become aware of this practice it will lead to higher prices, since instead of coins of 100 percent gold, the coins are 90 percent gold and 10 percent copper.18 It is then likely that people value gold and copper, as well as other goods and services higher in relation to the currency unit than before. In this case prices do not rise because the quantity of money increases or is expected to increase but rather because the quality of the money unit’s gold content was diminished.

Another case of altering the integrity of money is a change in the redemption rate of a government-controlled commodity standard. When the US government changed the redemption rate for the dollar from 1/20.67 to 1/35 ounce of gold in 1933, the quantity of the outstanding dollars was not changed. However, the quality of the dollars changed as there was less gold backing (Carver 1934).

This leads us to the question of the backing of money in the broader sense, i.e., money proper and money-substitutes. Goods or rights of different qualities can be used to back money in the broader sense. The crucial question is, can a money-substitute be redeemed against goods or rights of higher quality? Do bank notes represent a right of redemption in specie? Are the notes just fiat paper money notes? Is the note a money-certificate that can be redeemed against assets of the banks or central banks or not?

A bank note that is a money certificate is of a higher quality than inconvertible paper money.19 This is so, because inconvertible paper money presents a claim on an indeterminate amount, while a (convertible) money certificate is a claim on a clearly defined sum. Inconvertible paper money presents a claim on something that is not specified, it fluctuates in value according to the holder’s estimation of what the inconvertible paper money will be able to buy. If this estimation is very low, the value may well fall to zero.20 Inconvertible paper money’s capacity to serve as a store of wealth is dominated by this uncertainty. Nothing of this sort happens with a (convertible) money certificate that, for instance, can be exchanged at any moment against gold. As Rist (1966, p. 200) summarizes: “In short, convertibility is not a mere device for limiting quantity; convertibility gives notes legal and economic qualities which paper money does not possess, and which are independent of quantity.”

Hence, when the redemption of bank notes in a gold standard is suspended, the quality of money, from one second to the next, is reduced (independent from what might happen to money’s quantity). Bank notes are traded at a discount in relation to gold. This discount grows when people fear redemption is less probable, while the discount shrinks when people regard redemption as imminent. Mises (1953, p. 52) points out, that the value of credit money fluctuates independently of the underlying commodity, depending on the expected probability that it will be redeemed in the future, and on the remoteness of the expected future date of redemption. An illustration is provided by the history of the greenbacks in the U.S.21 After the beginning of the American Civil War, redemption was suspended with the promise to resume redemption at some future point. As a consequence, prices rose in terms of greenbacks reflecting the deterioration in quality. During the Civil War, the purchasing power of greenbacks fluctuated with the military success of the Union, independent of quantity issues (Carver 1934, p. 203). With the resumption of specie payment in 1879, there was an expectation that the the quality of the money would increase resulting in an increase in purchasing power (Bagus 2008).

Another historical illustration of the importance of the backing of a currency is the “Bully Marks” in a German prisoners’ of war camp during World War II, as described in Radford (1945). The “Bully Marks” were backed 100 percent by food at the shop and the restaurant in the camp. When the camp was bombed, the restaurant was closed for a short while and food parcels were halved. As a consequence, it became apparent that the backing of the “Bully Marks” became insecure. “Bully Marks” lost ever more in value in relation to the more secure cigarette currency. At the end there was a flight from the “Bully Mark”—a fact, that was not caused by changes in its quantity but rather its quality.

When redemption is suspended indefinitely and there exists no hope that it will be resumed, as occurs in a fiat paper money, the assets and reserves that central banks and banks hold are still important for the quality of money. This is so, because those assets and reserves back the liabilities of the banks.

When a bank goes bankrupt, because of a bank run, the bank’s assets are taken over by the depositors and creditors. The more liquid and valuable the assets the less the money holders can lose and the better is the quality of money. For instance, consider two paper money fractional reserve banks who hold 10 percent reserves in cash and both experience a bank run leading to bankruptcy. Bank A holds foreign reserves, gold, and commercial bills as assets, allowing for a rapid sell-off and a recuperation of large amounts of the depositors’ money. Bank B holds low quality mortgages and other illiquid long-term loans that can only be sold at huge losses or cannot be sold at all. Of course, people would tend to prefer notes from Bank A to those from Bank B. Thus, changes in the assets banks hold affect the quality of their notes.

Similarly, the assets of the banking system as a whole influence the quality of money. Just imagine that Bank A or Bank B represents the aggregate balance sheet of the banking system. The assets of the central bank are especially important for the quality of money (Bagus and Schiml 2008). The assets of a central bank can be used to defend the value of a currency internally and externally. Furthermore, these assets can be used to support a collapsing banking system or a monetary reform. They back the liabilities of the central bank which is mainly the monetary base. A deterioration of the average quality of central bank assets might be called “qualitative easing.” A qualitative easing is possible without an increase in the quantity of money. For instance, a central bank may sell its gold reserves and in turn acquire loans granted to an insolvent bank or troubled government. This deterioration of the average quality of central banks assets while not affecting the quantity of money deteriorates its quality.22

A final characteristic of the quality of money as a store of wealth is the policies, the ideology, the personnel, credit, and status of government.23 When the fiscal condition of government improves (deteriorates), the danger that government will resort to a deterioration of the monetary standard is lower (higher) than it otherwise would have been. A deterioration of the money standard (improvement) can consist in abandoning (returning to) a commodity standard, a change in the redemption rate or in the increased (reduced) use of the printing press to finance its expenditures.

In fact, a budget deficit is like a “currency illness” and reduces the quality of money (Röpke 1954, p. 142). The amount of public debts is like a “currency cancer” and weighs on the quality of money. The condition of government actually can get very alarming and a fear arises that the government will cease to exist, e.g., the government could be overturned in a revolution or suffer defeat in a war.

In a fiat paper standard the bankruptcy or the end of the government likely means the end of the currency and renders it worthless. It is the confidence in the economy and the taxation capacities of the government that hold the value of the fiat money up. The taxation capacity is crucial, because a fiat paper money is backed by the reserves of the banking system and central bank, which are largely government debts. When government debts become worthless because of an end of government due to war or revolution, the fiat money will also lose in value and may cease to exist. An example would be greenbacks during the American Civil War. The depreciation of greenbacks in terms of gold increased after Northern defeats and was reduced by Northern victories (Studenski and Kroos, 1963, p. 147).

Another example is the development of the currency of the Philippines issued by the Japanese in World War II, as mentioned by Henry Hazlitt (1978, p. 76):

One of the most striking illustrations of the importance of the quality of the currency occurred in the Philippines late in World War II. The forces under General Douglas MacArthur had effected a landing at Leyte in the last week of October 1944. From then on, they achieved an almost uninterrupted series of successes. Wild spending broke out in the capital of Manila. In November and December 1944, prices in Manila rose to dizzy heights. Why? There was no increase in the money stock. But the inhabitants knew that as soon as the American forces were completely successful their Japanese-issued pesos would be worthless. So they hastened to get rid of them for whatever real goods they could get.

Not only wars influence the quality of money. Also economic development influences the quality of money. Anything that disturbs or disrupts development inhibits the taxation capacities of the government and, therefore, potentially the quality of a money. The importance of government policies for the quality of money implies that the government can improve the quality of money if it credibly can impose restrictions on its fiscal policies. Thus, the introduction of a new article in the constitution of a country, that makes a balanced budget mandatory, can increase the quality of money. A related example is the “Stability and Growth Pact” of the European Union. The “Stability and Growth Pact” mandates an annual budget deficit no higher than 3 percent of GDP and a national debt lower than 60 percent of GDP or approaching that value. This was instigated to raise confidence in the euro currency and give a guarantee of its quality. On the other hand, signing a treaty that will probably lead to reckless governmental policies and monetizing of debts, will decrease the quality of money. An example is the signing of the Treaty of Versailles after World War I (Bresciani-Turroni 1968, p. 54). Confidence in the future of Germany declined and a flight from the Deutsche Mark set in. Likewise, Charles Rist (1966, p. 152) emphasizes the importance of government finance for a currency:

when the convertibility of paper has to be re-establised and the exchanges stabilised, sound finance and a balanced budget count far more than limitation of the quantity of paper. The important thing in such a case is to reassure foreign holders of securities or currency as to the ultimate value of paper, and this can only be done by convincing them that the financial stability of the State has been re-established.

From all this we can infer that a fiscally irresponsible government reduces the quality of money. This is so, because by excessive taxation it destroys the productive capacities of the country, reducing the quality of existing government debts. It also increases the amount of government debts itself, which implies even higher future taxation or the monetization of debts. This implies a reduction of the quality of money. Hence, a change in the government itself, its personnel, philosophy, promises, etc., can change the quality of money without any change in money’s quantity.

VI. CONCLUSION

The economic profession has largely neglected the quality theory of money concentrating mainly on money’s quantity. Changes in the quality of money are very important for the purchasing power of money and have an important explanatory power. The quality of money affects the purchasing power of money by first altering the demand for money, which reflects the changed valuation of a fixed quantity of money on the public’s value scales. The expected quantity of money is only one of many factors influencing the quality of money and derives its importance from its effects on the quality of money. Thus, an integrated theory of money must put emphasis on the quality of money and explain the importance of the expected quantity of money relating it to its effects upon money’s quality.

Money’s quality is continuously changing. The changes in the quality of money can be slow but also abrupt. Consequently, they can have stronger effects for the purchasing power of money than changes in money’s quantity, which are seldom abrupt. Actually, increases in the quantity of money are increasingly less important the higher the quality of the money is. This is so, because with a money of high quality there will be a strong demand to absorb the additional amount of money as a store of value or for industrial or consumption purposes. If its quality deteriorates or is expected to deteriorate, it can have strong effects on the purchasing power of money. Furthermore, increases in the quantity of a money of high quality such as a 100 percent gold standard do not result in a deterioration of the integrity of the money. The integrity of the previously existing gold coins is not harmed by new gold production. In contrast, increases in the quantity of a money of lower quality, i.e., a fractional reserve paper money, can cause money’s quality to deteriorate by diminishing the average backing of the previously existing monetary units.

In sum, it is time for economists to shift their focus onto the analysis of the quality of money and how it can be changed in line with the analysis in this article. For instance, the quality of different monetary and political regimes, the relevant properties of a good money, the role of expectations and the quality of media of exchange should be analyzed in more detail.

  • 1. This question is intriguing considering that Mises (1953, part II, chap. 2) and Rothbard (2004, pp. 831–42) criticize the mechanistic quantity theory of money. In fact, Mises (1953, pp. 128–30) even criticizes the quantity theory for failing to go behind supply and demand to explain what ultimately determines the value of money. By analyzing the quality of money we will, thus, build on the monetary theory of Mises and Rothbard.
  • 2. For an analysis of Ricardo’s monetary theory and his version of the quantity theory see, Rist (1966), esp. chap. 3.
  • 3. See also Burda and Wyplosz (2005, p. 176).
  • 4. On a free market the supply of money, as the supply of any good, is indirectly determined by the subjective valuations of consumers. While neoclassical economists maintain that the supply of a good is determined by its historical costs of production, Austrian economists have maintained that the supply of a good is determined by alternative uses of the factors of production for the satisfaction of consumer wants and, thereby, by subjective factors.
  • 5. Subjective value theory shows that the price of pens can fall when the quality of pens decreases even with a constant supply of pens. The same is true for the price of money.
  • 6. The opposite case is, of course, also possible. When people try to increase their real cash balances due to an increase in the quality of money, prices will be lower than otherwise. The effect holds independent of the quantity of money. The phenomenon of falling prices due to a generalized wish to increase cash balances has been called “cash building deflation” (Salerno 2003). See also Hülsmann (2003).
  • 7. At this point, consider some examples provided by Carver (1934, p. 194):
    The desire for [money] is, in turn, made up of several elements. First, there is the fact that the Government will accept it in payments to itself; secondly, there is the fact that creditors must accept it; thirdly, there is the fact, sometimes, that the Government will give gold for it; fourthly—a resultant of the first threethere is the fact that custom has made it acceptable in private purchases. Remove any of these elements and the purchasing power of money will decrease without any increase in the quantity of money or any decrease in the number of commodities and services available for exchange.
  • 8. Another deficiency of the quantity theory of money is that it resorts to the socalled “velocity of circulation;” a black box used ad hoc to explain price changes unexplainable via quantity changes. Yet, an increasing “velocity of circulation” or increasing volume of exchanges in a period does not imply that prices necessarily need to rise. In fact, an increase volume of exchanges on the stock market may coincide with rising or falling stock prices. I thank José Ignacio del Castillo for bringing this point to my attention. Moreover, as a consequence of changes in the store of wealth and medium of exchange function the demand for money may change for a multitude of reasons. To explain all these phenomena by referring to the “velocity of circulation” does not clarify anything. Thus, Mises (1990, chap. 5) calls the “velocity of circulation” a “nebulous metaphor” and Rothbard (2008, p. 29) an ill-defined concept. In any case, a higher “velocity” may be the result of a deterioration in money’s quality (or of a decline in uncertainty, or of financial innovations such as credit cards, ATM machines, etc.), but not its cause. As Salerno (2006, p. 51) puts it: “the aggregate flow of money spending is determined by the value of money and not the other way around.” Salerno rightly criticizes the “vacuousness of the quantity theory.” Similarly, Carver (1934, p. 191) states that when “paper money is no longer redeemable it becomes less desirable, and therefore is spent more promptly. It loses some of its desirability—as a store of value.” In other words, a lower quality as a store of wealth may lead to increased spending independent of quantitative issues. As Carver adds, the increased spending can, however, be compensated for by a decreased eagerness to sell, because sellers also value money less than before. Then, it is not clear at all if the velocity of circulation will increase or decrease. It is, therefore, not an increase in the “velocity of circulation” but the decrease in desirability that explains the fall in purchasing power.
  • 9. When gold, in 1971, became demonetized, there remained a strong industrial demand, and also as a store of wealth. The price of gold in terms of dollars even soared as the quality of dollars was reduced. The quality of dollars was reduced by suspending the redemption in gold. The price of gold in dollars rose from the conversion rate of $35 in 1971 to a yearly average of $58 in 1972, to $97 in1973, to $159 in 1974, and to $613 in 1980. The increase in the quantity of dollars was also important when the price control on gold was removed.
  • 10. Carver (1897) also emphasized that the value of money is determined by the same general laws of value as any other good and, specifically, by its metallic value independent of the number of money units. Similarly, Conant (1904) mentions the importance of the intensity of the demand for money. He shows that an increased demand for gold for use in the arts reduces its supply for monetary use.
  • 11. Actually gold became useful as a world money only after advances in metallurgy made divisibility easier. See Fekete (1996, pp. 12–13). These advancements led to an increase in the quality of gold coins and to a higher purchasing power. Indeed innovations such as new melting techniques improved the quality of money (coins). Likewise innovations that decrease transportation costs, facilitate handling, resistance, recognizability or increase homogeneity, and durability also improve the quality of money.
  • 12. This does not contradict the fact, that spreads are high in some markets and lower in others. It is true that in “thin” markets spreads are high. However, when the quantities offered in “thin” markets increase, spreads also increase. When we buy and sell a book in Sanskrit we will have a high spread. When we buy and sell 1,000 books in Sanskrit, the spread tends to increase. In other markets like the stock market spreads are comparatively low. However, the stock market spreads increase with quantities offered. When we buy 1,000 shares of IBM and sell them the next second, the spread is usually very low. When we buy 100,000,000 shares of IBM and sell them the next second, the spread tends to increase.
  • 13. It is true, that other goods besides money, such as commodities, serve as a store of wealth. If commodities become relatively more desirable as a store of wealth than money, money’s purchasing power decreases. The same is true for the exchange function of money. Other goods besides money, such as stocks (used as a means of payment in a buyout) or bills of exchange are used in exchanges and their desirability relative to money influences money’s purchasing power. In fact, anything may serve as a medium of exchange while not any object can serve as a store of wealth.
  • 14. Rist (1966, p. 329) is an example of an author that argues that the store of wealth function is more fundamental and prior to the medium of exchange function:
    In fact, and this point is fundamental, the function of acting as a medium of exchange, since time is necessarily involved (there is always a certain interval between the receipt of money and expenditure) presupposes the function of a store of value…[the storage and the exchange function of money are] as inseparable as the obverse and reverse of a medal. (Italics in the original)
  • 15. Rist (1966, pp. 107–8) emphasizes the time element. He explains the characteristics a good store of wealth must fulfill and how gold does so:
    it must be borne in mind that man lives in society, that social life implies exchanges of services and products, that the greater part of these exchanges can only be effects after an interval of time, and that the goods which offer the best possibility of guarding against the uncertainties of time, of taking precautions against its risks, of preserving, in order to provide against future misfortunes, the equivalent of the labour and the services provided, are precious, rare, durable and indestructible objects, such as gold….Stable money, metallic money, is the bridge between the present and the future. It is because of stable money, or, in its absence, of other stable and precious objects, that, within the economic sphere, man can wait, can reserve his choice and calculate his chances. Without that, he would be completely at a loss. (Italics in the original)
  • 16. The setup and the “formal” independence of the central bank can be changed, of course, and this can also be anticipated.
  • 17. In an empirical study, Spiegel (1998) argued that announcement of the independence of the Bank of England on May, 6 1997 led, on this very day, to a reduction of long-term interest rates by an average of 34 basis points, and thus a reduction of inflationary expectations. This reduction of inflationary expectations represented an increase in the quality of money.
  • 18. To make the point even clearer imagine that the government does not just hoard the golden ball but transports it in a ship over the ocean. The ship sinks in a storm and the gold is irretrievably lost.
  • 19. As Carver (1934, p. 188) points out, quantity theorists erroneously must maintain that money would have the same purchasing power going off gold, provided the quantity of the paper money remains the same.
  • 20. This estimation is influenced by expected quantitative and qualitative monetary developments.
  • 21. A similar case are the French assignats that fluctuated in value according to the opinions of the chances of redemption. See Rist (1966, p. 189).
  • 22. An example is the subprime crisis. While the quantity of money did not change very much from January 2007 to August 2008, the average quality of assets that the Federal Reserve System held deteriorated substantially. Government bonds were substituted by assets of dubious quality. This process might explain part of the price inflation during the period. See Bagus and Schiml (2009). See Bagus and Howden (2009a) for an analysis of the quality of money as influenced by the actions of the European Central Bank during the financial crisis and Bagus and Howden (2009b) for a comparison of the balance sheet policies of the Federal Reserve System and the European Central Bank and the implications for the quality of the respective currencies.
  • 23. See on this point also Hazlitt (1978, p. 76).
Categories: Current Affairs

Independent NPs: Public Health Threat or Libertarian Step Forward?

Mises Institute - Fri, 07/02/2020 - 19:45

Hordes of independent nurse practitioners are on the horizon. Many physicians are raising the alarm bell, but Dr. John Mandrola views things differently.

Categories: Current Affairs

What Is Aggression?

Mises Institute - Fri, 07/02/2020 - 17:00

Murray Rothbard stated the nonaggression principle (NAP) in this way:

No one may threaten or commit violence (“aggress”) against another man's person or property. Violence may be employed only against the man who commits such violence; that is, only defensively against the aggressive violence of another. In short, no violence may be employed against a nonaggressor.

Why is the threat of violence a NAP violation? Why not confine NAP violations to the use of violence? Rothbard answered in this way:

Suppose someone approaches you on the street, whips out a gun, and demands your wallet. He might not have molested you physically during this encounter, but he has extracted money from you on the basis of a direct, overt threat that he would shoot you if you disobeyed his commands. He has used the threat of invasion to obtain your obedience to his commands, and this is equivalent to the invasion itself.

In other words, in Rothbard’s view, if someone obeys a command we ask, “Why did he do so?” If his belief that you would use violence if he disobeyed is the explanation for his compliance, there is a NAP violation.

This position raises gives rise to some problem cases. Suppose A offers B $10,000 to mow A’s lawn and threatens to break his leg if he refuses. B complies in part because he wants the money and in part because he fears you will break his leg if he refuses. Here, the fear of violence is only part of the explanation for B’s compliance. Is this a NAP violation? What if B complies only because he wants the money? He doesn’t take the threat seriously and disregards it. The threat isn’t even part of the explanation for his compliance. Further, a threat need not make you worse off than you would have been without the threat. Suppose B is ecstatic about getting $10,000 for a job he would have done for five dollars. Is this case a NAP violation? In this post, I won’t pursue these questions, but I just offer them, without a threat, for your consideration.

What I want to discuss today is a different position, one brought to my attention by a correspondent who is one of Walter Block’s students. My correspondent did not intend his comment for publication, so I will paraphrase rather than quote his remarks.

My correspondent agrees with Rothbard that initiating a threat of violence, as well as the use of violence itself, counts as a NAP violation. He would not include helping NAP violations in various ways as themselves NAP violations. For instance, suppose someone drives the getaway car in a robbery or drives a car to the scene of a crime, intending in doing so that the aggressor initiate a NAP violation. We assume also that the helper isn’t himself coerced into helping. My correspondent would not include these drivers as NAP violators on the ground that driving a car is not intrinsically an aggressive activity. In a similar way, urging someone to violate the NAP or offering him money to do so are not NAP violations. Again, there is nothing intrinsically aggressive in urging someone to so something or in offering someone money. In contrast, initiating a threat of violence is inherently aggressive.

This position is ingenious, but I don’t find it convincing. Two or more people can commit a crime together. Suppose A and B decide to shoot C. They both start shooting at C and a bullet from one of their guns hits C and kills him. Both have aggressed against C, not just the one whose bullet killed him. The case is no different if A drives B to the site where B shoots C, so long as A and B have together decided to kill C, and neither is coerced.

It is true, as my correspondent notes, that under the description “driving a car” the activity isn’t a NAP violation. But as Elizabeth Anscombe long ago pointed out in her classic book Intention, actions are intentional under a description, and the same action can be intentional under one description and not under others. The same action can be intended as aggression under the description “participating in a plan to rob a store” and not intended as aggression under the description “driving a car.” The identical point applies, with the necessary changes, to the examples of persuading someone to commit a crime and offering someone a bribe. These actions are not intended as aggression under the descriptions “speaking freely” and “offering someone money,” respectively, but they are NAP violations under the description “participating in a planned aggression.” So long as an action under consideration is intentionally aggressive under a description, it suffices for a NAP violation.

But what of my correspondent’s point that threatening force is intrinsically aggressive? Again, Anscombe’s principle applies. Threatening force is aggressive under the description “threatening force” but not under the description “uttering certain words.” I am unable to find a difference in principle between the cases my correspondent counts as aggressive and those he does not.

Rothbard's discussion of bribery complicates things. He considers the case of someone who bribes a worker to violate his contract with his employer. Here we have to distinguish two types of rights violation. Some rights arise only from a contract. For example, if I hire you to work for me and contract to pay you money, then if you do the work but I don't pay you I have violated your rights. Without a contract, I have no such obligation. If you hand me some oranges that you purchased when I didn't ask you for them, you can't demand that I pay you for them, even if you can use the oranges. Some rights, though, are not based on contract. You have a right not to be killed or assaulted by me. These rights don't depend on a contract.

Now for the complication that results from Rothbard's position on bribery. A contract binds only those who are parties to it. The briber in Rothbard's case hasn't made a contract with the owner of the company, so, according to Rothbard, his offering a bribe doesn't violate the owner's rights. He is participating in a plan to violate the owner's rights, but his doing this does not violate the owner's rights, because he has no obligation to respect the owner's contractual rights that arise from his arrangement with the person bribed. If you accept Rothbard's view—I’m not now considering whether you should accept it—then there are some cases in which participating in a rights violation isn't aggression. But there are other cases, the ones where the participation is not a matter of contractual rights, that are aggression. Once more trying to find intrinsic descriptions of aggressive acts is not the correct path to take. Or at least, so it seems to me.

Categories: Current Affairs

How State-to-State Open Borders Empower the Central Government

Mises Institute - Fri, 07/02/2020 - 16:00

"Open borders" is a phrase usually heard in the context of international borders only.

We hear far less about the issue of open borders between member states within a confederation or union of states.

After all, no one thinks twice of crossing the borders between member states within the United States of America. Increasingly, one is similarly unimpressed when crossing from one EU member state to another in Europe. 

Often unnoticed is the way that disappearing borders between states have helped pave the way for advocates of ever greater consolidation of power in the hands of the central government.

It's a process that has taken decades—or even centuries in some cases—but it is real.

This process of centralization often proceeds in four steps:

One: So long as there are internal border controls, each member state can control the flow of migrants, goods, and services. Thus, if one state has legalized a dangerous substance or device, neighboring states can still stop those substances and devices at the member state's border. Similarly, if one state is believed to be fostering the inflow of "undesirable" migrants or fugitives, neighboring member states can respond by regulating the flow of persons into their own territories. There is no need for a universal policy, because each member state is able to shield itself from the effects of policies in neighboring member states.

Two: But some activists and lawmakers recognize there are benefits to open borders. So, seeking greater ease in the movement of goods, capital, and workers—and in some cases to transfer the cost of border enforcement to others—member states seek to minimize or abolish member-state borders as functioning borders.

Three: But this does not come without risks and externalities. Without union-wide and uniform laws, it is then feared that "bad actors" and prohibited goods can easily cross from less regulated areas to more regulated ones. 

Four: So a solution is proposed: the central government will assume the cost of border control, transferring border control activities to the new union-wide border encompassing all member states. Within this border, lawmakers seek union-wide uniform policies. "Bad actors" are declared to be criminals in all jurisdictions and the "dangerous" substances and devices can now only legally enter by crossing international boundaries. The central government is now expected to provide enforcement to maintain this new status quo. What had once been the responsibility of the member states has been transferred to a newly empowered central government.

This process is now underway in Europe, where the EU government is moving closer to demanding "harmonization" of tax rates and that all states within the open-border zone adopt more stringent gun control laws. But for now, we'll stick to examples in the United States:

Cross-Border Travel as an Excuse for National Gun Control

In the gun control debate, it has long been argued that the lack of state borders means a greater need for uniform nationwide gun control. In an analysis from National Public Radio, for example, the author concludes that the high homicide rates in Washington, DC, and Chicago are partly to blame on gun laws in neighboring states. According to political scientist Philip Cook, the stringent gun laws in places like Chicago are "only at best partially effective, because the borders are permeable."

Were there not free movement from state to state, of course, it would be more difficult to argue that Wisconsin is to blame for Chicago's homicide rate.

The argument by gun control advocates in this case follows a now familiar pattern: the presence of a relatively low amount of regulation in one member state (i.e., Indiana) is viewed as a threat to surrounding member states, who then insist that open borders between states mean that low-regulation states must change their policies to match the high-regulation states.

The Federalization of Immigration

Up until the late nineteenth century, immigration control had been regarded as a state matter. States heavily impacted by immigration—especially New York and Massachusetts—had imposed a variety of laws restricting the movement of immigrant paupers and requiring that bonds be paid on new immigrants to ensure that they did not become a burden on public funds. As late as the 1870s, bills aimed at federalizing immigration policy were killed by majorities in Congress.

Part of the reason that there was a lack of a national consensus was that views of immigrants nationwide were hardly uniform. Some frontier states actively sought immigrants in order to increase the development of farmland and increase state populations. Moreover, in 1897, President Cleveland vetoed legislation attempting to further restrict immigration on the grounds that many states and territories of the US—especially those bordering Canada, which provided migrant labor to American farmers—benefited from the free movement of migrants. Cleveland noted that these parts of the country "have separate and especial interests which in many cases make an interchange of labor between their people and their alien neighbors most important."

Nevertheless, anti-immigrant forces had increasingly lobbied for greater federal controls in part to counter the assumed threat of free movement of migrants from some states to others.1 Thus in 1876, the US Supreme Court ruled that it was necessary to provide "a system of laws in this matter applicable to all ports and all vessels" in order to settle a long-standing "matter of contest and complaint."  By the early twentieth century, the state and local origins of immigration policy were all but forgotten.

Prohibition and the Drug War

Regulating guns and migrants haven't been the only excuses given for expanding federal power in the name of national uniformity. Centralized control was also deemed to be necessary in order to control the transport and manufacture of alcoholic beverages. In the years leading up to the adoption of nationwide prohibition, all but sixteen states had adopted their own versions of prohibition. For the moralists, however, this wasn't enough. Those states where alcohol remained legal—mostly states with large numbers of Catholics and ethnic Germans—offered a haven to residents of "dry" states, who could easily cross over into the "wet" states.  Even worse, people could illegally import alcohol into dry states from wet ones with relative ease. By imposing nationwide prohibition on everyone, however, access to alcohol could be more easily attacked.

We see similar issues today as some states have begun to legalize recreational marijuana much to the dismay of officials in neighboring states. Once again, the answer is alleged to be the federalization of policy and the abolition of local prerogatives. In 2014, two marijuana prohibitionist states, Oklahoma and Nebraska, unsuccessfully sued Colorado in response to its legalization of recreational marijuana. The two states were concerned that the lack of a patrolled border between Colorado and its neighbors was an unacceptable threat to the public in prohibitionist states. Thus, the two states petitioned the court to declare state law null and void and to rule that federal law reigns supreme in matters of drug prohibition. Fortunately, on this particular issue the federal courts have not yet decided to declare federal law supreme, as they have many times before.

How Open Borders Are Used and Abused

Often the ideological motivation behind open borders among member states of a political union is admirable. Among the creators of both the United States and the European Union, for instance, it appears that at least some of them were motivated by a desire to increase the free flow of people and goods for the economic and cultural betterment of all.

There is no danger in individual states lowering trade barriers or border controls unilaterally. The problem only comes in when there is a general government—such as the US federal government or the European Commission—to impose uniformity of law.

Unfortunately, economic integration between member states in the US did not come organically or unilaterally. It was imposed from above, so that low-regulation states would not be an inconvenience to high-regulation states. We have seen this with alcohol, with migrants, and with guns.

In all cases, the removal of internal barriers between member states has provided the impetus for some members to demand more regulation on other members. This can only be carried out, however, when there is a strong enough central government in place. Since at least the late nineteenth century in the US, this has clearly been the case. 

Experience now suggests that these sorts of open borders really only work under certain conditions: 1) border controls are decreased unilaterally by each member state in an ad hoc and decentralized manner. 2) The central government is too weak to impose uniform nationwide laws without widespread consensus. 3) Member states bring to the table a significant amount of tolerance for their neighbors, and for the fact that people might do things differently in other places. In decades past, for instance, it was simply accepted by most that some places have stringent gun laws and other places don't. In the minds of many policymakers, this created certain risks and externalities, but these were tolerated in light of the ideological notion that not every aspect of daily life ought to be regulated from the center.

It is not longer clear, however, that we live in a political environment where this sort of tolerance or decentralization is still valued. It now appears that a lack of functioning borders between member states—instead of promoting unity and cooperation—may actually be promoting conflict. For example, were there a patrolled border between California and the rest of the United States it is unlikely that the rest of the nation would regard immigration into the United States to be close to the high-stakes political issue it now is. Similarly, if it were not so easy to travel unobstructed from gun-friendly Indiana to gun prohibitionist Chicago, we wouldn't be hearing about how we need federal action on gun control.

As results from political centralization in general, the lack of physical separation between states in the US has increased the stakes of who controls the central government and influences its policymakers. In the long term, the attempt at building unity through the abolition of borders may ironically lead to greater regional conflict.

  • 1. There is an additional problem of immigrants becoming political actors—i.e., voting—even without moving from state to state. They can affect national politics as voters in the same state that their port of entry is in. It is likely that many would then oppose immigration of this sort even if state-to-state borders were closed, and if all states were part of a single national political jurisdiction. This issue, however, can be addressed through naturalization laws rather than immigration controls. See https://mises.org/wire/dont-confuse-immigration-naturalization
Categories: Current Affairs

The Fight for Liberty and the Beltway Barbarians

Mises Institute - Fri, 07/02/2020 - 15:00

In the conservative and libertarian movements there have been two major forms of surrender, of abandonment of the cause.

The most common and most glaringly obvious form is one we are all too familiar with: the sellout. The young libertarian or conservative arrives in Washington, at some think-tank or in Congress or as an administrative aide, ready and eager to do battle, to roll back the State in service to his cherished radical cause. And then something happens: sometimes gradually, sometimes with startling suddenness. You go to some cocktail parties, you find that the Enemy seems very pleasant, you start getting enmeshed in Beltway marginalia, and pretty soon you are placing the highest importance on some trivial committee vote, or on some piddling little tax cut or amendment, and eventually you are willing to abandon the battle altogether for a cushy contract, or a plush government job. And as this sellout process continues, you find that your major source of irritation is not the statist enemy, but the troublemakers out in the field who are always yapping about principle and even attacking you for selling out the cause. And pretty soon you and The Enemy have an indistinguishable face.

We are all too familiar with this sellout route and it is easy and proper to become indignant at this moral treason to a cause that is just, to the battle against evil, and to your own once cherished comrades. But there is another form of abandonment that is not as evident and is more insidious – and I don’t mean simply loss of energy or interest. In this form, which has been common in the libertarian movement but is also prevalent in sectors of conservatism, the militant decides that the cause is hopeless, and gives up by deciding to abandon the corrupt and rotten world, and retreat in some way to a pure and noble community of one’s own. To Randians, it’s “Galt’s Gulch,” from Rand’s novel, Atlas Shrugged. Other libertarians keep seeking to form some underground community, to “capture” a small town in the West, to go “underground” in the forest, or even to build a new libertarian country on an island, in the hills, or whatever. Conservatives have their own forms of retreatism. In each case, the call arises to abandon the wicked world, and to form some tiny alternative community in some backwoods retreat. Long ago, I labeled this view, “retreatism.” You could call this strategy “neo-Amish,” except that the Amish are productive farmers, and these groups, I’m afraid, never make it up to that stage.

The rationale for retreatism always comes couched in High Moral as well as pseudo-psychological terms. These “purists,” for example, claim that they, in contrast to us benighted fighters, are “living liberty,” that they are emphasizing “the positive” instead of focusing on the “negative,” that they are “living liberty” and living a “pure libertarian life,” whereas we grubby souls are still living in the corrupt and contaminated real world. For years, I have been replying to these sets of retreatists that the real world, after all, is good; that we libertarians may be anti-State, but that we are emphatically not anti-society or opposed to the real world, however contaminated it might be. We propose to continue to fight to save the values and the principles and the people we hold dear, even though the battlefield may get muddy. Also, I would cite the great libertarian Randolph Bourne, who proclaimed that we are American patriots, not in the sense of patriotic adherents to the State but to the country, the nation, to our glorious traditions and culture that are under dire attack.

Our stance should be, in the famous words of Dos Passos, even though he said them as a Marxist, “all right, we are two nations.” “America” as it exists today is two nations; one is their nation, the nation of the corrupt enemy, of their Washington, D.C., their brainwashing public school system, their bureaucracies, their media, and the other is our, much larger, nation, the majority, the far nobler nation that represents the older and the truer America. We are the nation that is going to win, that is going to take America back, no matter how long it takes. It is indeed a grave sin to abandon that nation and that America short of victory.

But are we then emphasizing “the negative”? In a sense, yes, but what else are we to stress when our values, our principles, our very being are under attack from a relentless foe? But we have to realize, first, that in the very course of accentuating the negative we are also emphasizing the positive. Why do we fight against, yes even hate, the evil? Only because we love the good, and our stress on the “negative” is only the other side of the coin, the logical consequence, of our devotion to the good, to the positive values and principles that we cherish. There is no reason why we can’t stress and spread our positive values at the same time that we battle against their enemies. The two actually go hand in hand.

Among conservatives and some libertarians, these retreats sometimes took the form of holing up in the woods or in a cave, huddling amidst a year’s supply of canned peaches and guns and ammo, waiting resolutely to guard the peaches and the cave from the nuclear explosion or from the Communist army. They never came; and even the cans of peaches must be deteriorating by now. The retreat was futile. But now, in 1993, the opposite danger is looming: namely, retreatist groups face the awful menace of being burned out and massacred by the intrepid forces of the Bureau of Alcohol, Tobacco, and Firearms in their endless quest for shotguns one millimeter shorter than some regulation decrees, or for possible child abuse. Retreatism is beginning to loom as a quick road to disaster.

Of course, in the last analysis, none of these retreats, generally announced with great fanfare as the way to purity if not victory, have amounted to a hill of beans; they are simply a rationale, a half-way house, to total abandonment of the cause, and to disappearance from the stage of history. The fascinating and crucial point to note is that both of these routes – even though seemingly diametrically opposite, end up inexorably at the same place. The sellout abandons the cause and betrays his comrades, for money or status or power; the retreatist, properly loathing the sellouts, concludes that the real world is impure and retreats out of it; in both cases, whether in the name of “pragmatism” or in the name of “purity,” the cause, the fight against evil in the real world, is abandoned. Clearly, there is a vast moral difference in the two courses of action. The sellouter is morally evil; the retreatist, in contrast, is, to put it kindly, terribly misguided. The sellouts are not worth talking to; the retreatists must realize that it is not betraying the cause, far from it, to fight against evil; and not to abandon the real world.

The retreatist becomes indifferent to power and oppression, likes to relax and say who cares about material oppression when the inner soul is free. Well sure, it’s good to have freedom of the inner soul. I know the old bromides about how thought is free and how the prisoner is free in his inner heart. But call me a low-life materialist if you wish, but I believe, and I thought all libertarians and conservatives believed to their core, that man deserves more than that, that we are not content with the inner freedom of the prisoner in his cell, that we raise the good old cry of “Liberty and Property,” that we demand liberty in our external, real world of space and dimension. I thought that that’s what the fight was all about.

Let’s put it this way: we must not abandon our lives, our properties, our America, the real world, to the barbarians. Never. Let us act in the spirit of that magnificent hymn that James Russell Lowell set to a lovely Welsh melody:

Once to every man and nation

Comes the moment to decide, In the strife of truth with falsehood,

For the good or evil side; Some great cause, God’s new Messiah,

Offering each the bloom or blight, And the choice goes by forever

Twixt that darkness and that light. Though the cause of evil prosper,

Yet ’tis truth alone is strong; Though her portion be the scaffold,

Upon the throne be wrong, Yet that scaffold sways the future,

And, behind the dim unknown, Standeth God within the shadow 

Keeping watch above His own.

Excerpted from On Resisting Evil, originally published  September 1993 
Categories: Current Affairs

The National Drive for Rent Control

Mises Institute - Fri, 07/02/2020 - 12:00

Everyone wants affordable housing, but how far will they go to attain it?

For some, housing affordability is such a pressing issue that they will entrust politicians with the duty of providing it through legislation. Rent control is one of the oldest tricks politicians can pull out of their magic hats to demonstrate to the public that they’re getting to the bottom of the housing affordability crisis.

At its core, rent control consists of a government-imposed ceiling on residential rental rates within a given jurisdiction. Thirty-seven states in the country preempt or prohibit rent control. On the other hand, states like New Jersey, Maryland, California, Oregon, and New York have localities that permit some form of residential rent control. However, the latter three states pushed the legislative envelope last year.

States like Oregon became trendsetters by passing statewide rent control legislation which restricts annual rent increases to 7 percent plus inflation. Other states such as New York and California passed similar pieces of legislation that limit the ability of landowners to raise rents on their tenants. Oregon's passage of statewide rent control may have been the straw that broke the camel's back in terms of putting interventionist housing policies on the national spotlight.

Even federal politicians and 2020 presidential aspirants are catching on to the rent control mania. Vermont senator Bernie Sanders and Congresswoman Alexandria Ocasio-Cortez have offered their two cents on rent control. Sanders stated,

Landlords cannot be allowed to raise rents to whatever they want, whenever they want. We need national rent control.

Ocasio-Cortez echoed Sanders’ sentiments, declaring that

It’s time that we stop commodifying the housing market because it is not a speculative investment, it is a basic right for all Americans.

The rent control enthusiasm we’re seeing is not occurring in a vacuum. People are clearly incensed with their local governments. After all, congested streets and highways and a high cost of living have made many city dwellers perpetually frantic. Frustrations aside, hastily falling for a politician's demagogic proposals only invites lower living standards for all. Rent control is the embodiment of "too good to be true" legislation that mesmerizes the politically disenchanted at first but makes them even more frustrated once the consequences of these policies set in.

Understanding Rent Control

Rent control legislation establishes price ceilings that artificially boost demand for housing. If the government-imposed ceiling falls below market rental rates, shortages will start to pop up as the demand exceeds the current housing supply. This is a question of basic economics. More perverse are some of the other unintended consequences. Rent control essentially redistributes wealth to current tenants at the expense of future tenants and those who pay market-rate rents. Those living in rent-controlled units usually benefit at the expense of those who do not. Furthermore, rent control leads to the deterioration of housing units due to owners having less of an incentive to spend their money on apartment upkeep. In normal, market-rate units, owners would have sufficient revenues to maintain the apartments and add improvements. Swedish economist Assar Lindbeck did not mince words when he asserted that

In many cases rent control appears to be the most efficient technique presently known to destroy a city—except for bombing.

A Free Market Solution Must Be Offered

The housing affordability crisis that many cities in America are facing is no joke. To put it in perspective, real housing prices increased twofold in New York City and Los Angeles and tripled in San Francisco in 1970. For nearly a fourth of renters nationwide, housing accounts for half of their spending. With this in mind, we should still exercise prudence when trying to analyze why rents are so out of control in these cities. The rising rents we see aren't the end result of the machinations of greedy landlords. The dirty secret that big-city politicians don’t want their constituents to find out is that rising rents are the result of interventionist public policies, namely land-use regulations that constrict the overall supply of housing.

Just looking at land-use regulations in California and Oregon should give us an idea of how badly government policies are asphyxiating the housing market. According to the Cato Institute’s Freedom in the 50 States Index, California and Oregon are ranked forty-seventh and forty-third in terms of land-use freedom, respectively. Oregon’s dismal ranking is justified when looking at how its land-use policies have impacted development.

The Wall Street Journal editorial staff observed that Oregon’s restrictive zoning and land-use mandates have generated the lowest rate of residential construction in decades. Between 2010 and 2019, Oregon grew by four hundred thousand people. However, the state added only thirty-seven housing permits per one hundred new residents based on a report from the Oregon Office of Economic Analysis.

Economist Josh Lehner correctly noted that people who are only looking at rising housing costs are paying attention to "the symptom and not the cause of the disease." In Lehner’s view, "the chief underlying cause is the ongoing low levels of new construction this decade." Lehner added that

on a population growth-adjusted basis, Oregon built fewer new housing units this decade than we have since at least World War II.

Like rent control, these questions of housing prices boil down to the basics. When the supply of housing stock is artificially restricted thanks to legislation, we inevitably get more expensive housing. However, it is not sufficient to say "let the market handle it" when trying to offer an alternative policy to rent control.

There’s plenty of government intervention that impedes market mechanisms from providing affordable housing. Instead, we must point to specific policies, such as zoning rules, that make it more difficult to build housing. These regulations are the main culprits behind these rising housing prices. To win this debate, free market proponents must offer the solution of land-use liberalization, which entails repealing these measures.

Are We Still Stuck on Interventionist Canards?

The lack of insight into how to solve housing problems is the product of a mindset that treats housing as a positive right. Similar to other services such as education, many political busybodies view housing as a "right" and thus compel the state to step in and provision it.

Blinded by their zeal to save the masses from the "excesses" of greedy landlords, politicians ignore the regulatory state in the background. Like its education counterpart, the housing market has provided housing for decades without issue. But for these markets to actually work, a genuine effort to roll back arbitrary rules and regulations has to take place. This may be too much to ask for from political chattering classes who insist that their political programs will help the common man.

Nonsolutions like rent control are the go-to options for politicians who desperately scour their precincts for votes. Tragically, their constituents end up paying the price once the predictable economic distortions begin to materialize. By the time the damage is done, the political do-gooders will likely be out of office, to be replaced by another set of demagogues who will blame the market yet again for the failures that regulation caused in the first place. Some facts never seem to register with society’s most "enlightened."

And that’s how a vicious cycle of never-ending regulation commences.

Categories: Current Affairs

This Austrian Legal Scholar Thought Case Law Was the Key to Limiting State Power

Mises Institute - Fri, 07/02/2020 - 11:00

[Adapted from "A Practical Approach to Legal-Pluralist Anarchism: Eugen Ehrlich, Evgeny Pashukanis, and Meaningful Freedom through Incremental Jurisprudential Change" from the Journal of Libertarian Studies.]

Born into a deracinated Jewish family in Czernowitz in the Austria-Hungarian province of Bukovina, Eugen Ehrlich did his habilitation on Roman law in Vienna in 1894. He was never able to rise above the post of rector at Franz-Josef University in Czernowitz, a second-rate appointment attributable largely to Ehrlich’s Jewish background. Taking advantage of his de facto exile in the hinterland, Ehrlich was among the seminal group of law-and-society thinkers at the turn of the century that launched the sociological turn in both jurisprudence and in legal philosophy. Ehrlich, along with Hermann Kantorowicz (1877–1940), founded the Freirechtsbewegung (Free Law Movement) in the first decade of the twentieth century and, together with Kantorowicz, Max Weber (1864–1920), Émile Durkheim (1858–1917), Hugo Sinzheimer (1875–1945), and Roscoe Pound (1870–1964), formed the nucleus of what would later become known as the law and society movement.

Disillusioned with state power for a variety of reasons both personal and intellectual, Ehrlich sought the legitimacy of the law in something other than the reigning corporatist-positivist state. Specifically, Ehrlich conducted extensive research in community custom, which he saw as a way to reform Austrian law by means of insisting on the validity of legal pluralism within the existing civil code jurisprudential system. For many thinkers in the German tradition, the state and its laws were seen as forming an unassailable edifice not open to reform. While some German thinkers had posited a distinction between Gemeinschaft, or community, and Gesellschaft, or civil society, the legal system itself conceptually “saw” only Gesellschaft. Most theorists admitted of a working identity between law and the state. Ehrlich, on the other hand, argued that the state and the law are not the same. In many ways, they are at odds with one another, if not opposites. German experience itself tends to prove this. Ehrlich’s groundbreaking Grundlegung der Soziologie des Rechts (1913), for example, offers clues to the ability of the law to endure even amidst political crisis, such as in the wake of the Second Reich’s defeat in World War I.

Ehrlich, along with Kantorowicz, observed that societies organically and spontaneously generate their own legal orders apart from the oversight of a state, and often in contradiction to the state’s Pandekten-style law (a centralized system of law based on the Pandects, a codification of Roman law) claiming a totality of legal sovereignty. The plurality of law in Ehrlich’s Bukovina region of Austria-Hungary was probably the source of his initial puzzlement over the gap between what the law in the books said, and what the people in the villages and towns actually did. While interpersonal disputes were meant to be adjudicated according to the Weberian scheme of the state’s monopoly of violence, in reality those disputes were often resolved according to customs and practices that often seemed to have very little to do with the codified positive law. For Ehrlich, the application of the law involved not the robotic matching of real-life happenings to an ethereal and abstracted civil code, but, rather, a great deal of human agency floating clear of the legal realm and drawing on norms better understood by the new discipline of sociology (Rottleuthner 1987, p. 5). Gemeinschaft, in other words, was not an ideal imposed from above by the Gesellschaftlich corporatist state, but a process of messy discovery taking place in actual lived society, far removed from state control.

Unlike his predecessors, Ehrlich was almost indifferent toward the existence of the state within the framework of actually existing legal practice. Ehrlich’s turn away from German legal idealism found expression in his theory of free-law:

As a Free-Law advocate […], Ehrlich criticized the ideal of the seamless web of a codified legal order, and made clear that the decision in an individual case could not be understood as a logical derivation from general norms (or even concepts), performed ‘with the aid of a hair-splitting machine and a hydraulic press’. Like Fuchs, he too emphasized the creative role, the personal moment, in the application of law. However, by this he did not intend that the private intuition of the judge be set free. Rather this is the point where his specific understanding of legal sociology came into play: when the law permits no orientation, the application of law should orient itself on social norms, on the norms of the law which was actually alive in society. In his legal sociology, Ehrlich stressed precisely the central role of society—as the totality of human associations—for the emergence and development of law. Legislation, jurisprudence, and judicial decision-making, by contrast, were considered secondary phenomena. The true legal science—understood as legal sociology—had to capture the law that was ‘alive’ in society. Traditional jurisprudence was blind to this sphere and only took into account laws and the norms of judicial decisions.

For Ehrlich, the central question of law was this tension between the people and the state. The Pandekten idealists and strong-state advocates had things precisely backwards. Increasing the power of the state—to legislate, regulate, and control ever-greater swaths of private life and to co-opt ever more nonstate institutions through promises of political inclusion—led only to greater corruption and a wider gulf between law and society. Left to their own devices, people actually fared much better without interference from the state. A political solution to social ills was therefore not even misguided; it was oxymoronic.

With the theories of Eugen Ehrlich we have a blueprint for foregrounding communities and communal custom and practice as the “groundwork” for an entirely new kind of law. But how can this new law be animated and deployed to challenge the power of the state? The answer lies in the works of American sociologist and historian William Sewell Jr. In chapter four of Logics of History, for example, Sewell posits a relationship between structure and agency that is open to interventions and contingencies. Sewell’s kinetic view of the interaction between people and institutions expands on Anthony Giddens’s “duality of structure” and Pierre Bourdieu’s habitus to envision complex of social, political, cultural, and economic influences that more closely approximates the reality of human life amid structural patterning. (“By this [i.e., ‘duality of structure’] he [i.e., Giddens] means that [structures] are ‘both the medium and the outcome of the practices which constitute social systems’ (Giddens 1976, 1979, 1981, 1984). Structures shape people's practices, but it is also people's practices that constitute (and reproduce) structures. In this view of things, human agency and structure, far from being opposed, in fact presuppose each other.” (Sewell 2005, 127)) This approach “(1) recognize[s] the agency of social actors, (2) build[s] the possibility of change into the concept of structure, and (3) overcome[s] the divide between semiotic and materialist visions of structure.” Sewell’s rethinking of structural malleability is the key to setting legal-pluralist anarchy against the existing state, chipping away at the state one small interaction at a time. The dialectic is the key to the ongoing existence and substantive autonomy of the Gemeinschaft vis-à-vis the Gesselschaft, and especially the Gesselschaft writ large, the state.

The absence of a state short-circuits this dialectic, destabilizing the legal-pluralist Gemeinschaft and inviting reprisal, such as Stalin’s against his enemies (including Evgeny Pashukanis). Giving up the notion that structures themselves are negotiable, pliable, and subject, at least partially, to human agency—or, as Sewell put it, that structures (such as law) are “continually evolving outcome[s] and matri[ces] of process[es] of social interaction”—leaves a Gemeinschaft with no partner in the dialectic diminishment of the state. Gemeinschaftlich autonomy via legal-pluralist anarchy is much better accomplished by means of case law interactions with state authorities. Case-law trials, even in the state’s courts, are small-scale legal skirmishes, as it were, that afford small Gemeinschaften a fighting chance of winning small victories against state power and incrementally undermining the state’s power.

This tension among law, society, and the state was summed up by Ehrlich himself, although in the context of legislation and not case law. The important point, however, is that, for Ehrlich, law was a means of attenuating state power, not augmenting it:

Legislation is commonly considered the oldest, the original, the peculiar task of the state. In reality, however, the state becomes a law-giver only late in its existence. The original state is a purely military center of might and is concerned neither with law nor with courts. The original state, so far as it is not yet Europeanized, knows no legislation. We speak, it is true, of the legislation of Moses, of Zarathustra, of Manu, of Hammurabi, but these are only collections of judicial and juristic laws together with numerous religious, moral, ceremonial and hygienic provisions such as we can see in popular or popular-scientific writings. An oriental despot can, if he pleases, level a city to the earth or condemn a few thousand human beings, but he cannot introduce civil marriage into his kingdom.

The more central planners work to bind up law and society through executive power, the farther law and society drift apart from one another. Local communities can achieve a measure of autonomy from state interference by acknowledging and reflecting the spontaneity and unpredictability of social order under the banner of legal pluralism, with jury trials as a key feature of this arrangement.

Also, when communities or their members have no choice but to interact with the state’s courts, this helps to ensure that the state’s judges will be forced to divorce their decisions from statist-ideological presuppositions. Legal-pluralist decentralization and the promotion of anti-statist jurisprudence are both effective at carving out spheres of autonomy for local Gemeinschaften. The gradual “withering away,” one case at a time, of the state’s monopoly on the justice process, along with the championing of legal pluralism and spheres of law separate from the state’s legislative prerogative, are the two abiding promises of Ehrlichian jurisprudence.

An Ehrlichian legal order unique to a given community and evolving from within it, such as the English Common Law or Germanic tribal law did, is a virtually ready-made way to ensure stability in an anarchical community. Jury trials are the best way to ensure that law does not become tyranny over society. Furthermore, state courts should, and can, be avoided at all costs in order to maintain Gemeinschaflich autonomy as far as possible.

[W]hen it becomes necessary to interact with state courts, a case law method is best. Case law forces judges to think using synderesis and not statist ideology, prying them away from their Code-based justifications and entangling them in the limiting skeins of the natural law. As a bonus to case law, each case becomes precedent that, ideally, incrementally undermines Code law, thus attenuating the power of the state while also injecting more of the “living law” into the jurisprudential corpus of a given state.

Categories: Current Affairs

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