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3 Kinds of Economic Ignorance – Article by Steven Horwitz

3 Kinds of Economic Ignorance – Article by Steven Horwitz

The New Renaissance HatSteven Horwitz
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Do you know what you don’t know?

Nothing gets me going more than overt economic ignorance.

I know I’m not alone. Consider the justified roasting that Bernie Sanders got on social media for wondering why student loans come with interest rates of 6 or 8 or 10 percent while a mortgage can be taken out for only 3 percent. (The answer, of course, is that a mortgage has collateral in the form of a house, so it is a lower-risk loan to the lender than a student loan, which has no collateral and therefore requires a higher interest rate to cover the higher risk.)

When it comes to economic ignorance, libertarians are quick to repeat Murray Rothbard’s famous observation on the subject:

It is no crime to be ignorant of economics, which is, after all, a specialized discipline and one that most people consider to be a “dismal science.” But it is totally irresponsible to have a loud and vociferous opinion on economic subjects while remaining in this state of ignorance.

Economic ignorance comes in different forms, and some types of economic ignorance are less excusable than others. But the most important implication of Rothbard’s point is that the worst sort of economic ignorance is ignorance about your economic ignorance. There are varying degrees of blameworthiness for not knowing certain things about economics, but what is always unacceptable is not to recognize that you may not know enough to be speaking with authority, nor to understand the limits of economic knowledge.

Let’s explore three different types of economic ignorance before we return to the pervasive problem of not knowing what you don’t know.

1. What Isn’t Debated

Let’s start with the least excusable type of economic ignorance: not knowing agreed-upon theories or results in economics. There may not be a lot of these, but there are more than nonspecialists sometimes believe. Bernie Sanders’s inability to understand why uncollateralized loans have higher interest rates would fall into this category, as this is an agreed-upon claim in financial economics. Donald Trump’s bashing of free trade (and Sanders’s, too) would be another example, as the idea that free trade benefits the trading countries on the whole and over time is another strongly agreed-upon result in economics.

Trump and Sanders, and plenty of others, who make claims about economics, but who remain ignorant of basic teachings such as these, should be seen as highly blameworthy for that ignorance. But the deeper failing of many who make such errors is that they are ignorant of their ignorance. Often, they don’t even know that there are agreed-upon results in economics of which they are unaware.

2. Interpreting the Data

A second type of economic ignorance that is, in my view, less blameworthy is ignorance of economic data. As Rothbard observed, economics is a specialized discipline, and nonspecialists can’t be expected to know all the relevant theories and facts. There are a lot of economic data out there to be searched through, and often those data require careful statistical interpretation to be easily applied to questions of public policy. Economic data sources also require theoretical interpretation. Data do not speak for themselves — they must be integrated into a story of cause and effect through the framework of economic theory.

That said, in the world of the Internet, a lot of basic economic data are available and not that hard to find. The problem is that many people believe that certain empirical facts are true and don’t see the need to verify them by actually checking the data. For example, Bernie Sanders recently claimed that Americans are routinely working 50- and 60-hour workweeks. No doubt some Americans are, but the long-term direction of the average workweek is down, with the current average being about 34 hours per week. Longer lives and fewer working years between school and retirement have also meant a reduction in lifetime working hours and an increase in leisure time for the average American. These data are easily available at a variety of websites.

The problem of statistical interpretation can be seen with data on economic inequality, where people wrongly take static snapshots of the shares of national income held by the rich and poor to be evidence of the decline of the poor’s standard of living or their ability to move up and out of poverty.

People who wish to opine on such matters can, again, be forgiven for not knowing all the data in a specialized discipline, but if they choose to engage with the topic, they should be aware of their own limitations, including their ability to interpret the data they are discussing.

3. Different Schools of Thought

The third type of economic ignorance, and the least blameworthy, is ignorance of the multiple perspectives within the discipline of economics. There are multiple schools of thought in economics, and many empirical questions and historical facts have a variety of explanations. So a movie like The Big Short that clearly suggests that the financial crisis and Great Recession were caused by a lack of regulation might be persuasive to people who have never heard an alternative explanation that blames the combination of Federal Reserve policy and misguided government intervention in the housing market for the problems. One can make similar points about the Great Depression and the difference between Hayekian and Keynesian explanations of business cycles more generally.

These issues involving schools of thought are excellent examples of Rothbard’s point about the specialized nature of economics and what the nonspecialist can and cannot be expected to know. It is, in fact, unrealistic to expect nonexperts to know all of the arguments by the various schools of thought.

Combining Ignorance and Arrogance

What is missing from all of these types of economic ignorance — and what is often missing from knowledgeable economists themselves — is what we might call “epistemic humility,” or a willingness to admit how little we know. Noneconomists are often unable to recognize how little they know about economics, and economists are often unable to admit how little they know about the economy.

Real economic “expertise” is not just mastery of theories and facts. It is a deeper understanding of the variety of interpretations of those theories and facts and humility in the face of our limits in applying that knowledge in attempting to manage an economy. The smartest economists are the ones who know the limits of economic expertise.

Commentators with opinions on economic matters, whether presidential candidates or Facebook friends, could, at the very least, indicate that they may have biases or blind spots that lead to uses of data or interpretive frameworks with which experts might disagree.

The worst type of economic ignorance is the type of ignorance that is the worst in all fields: being ignorant of your own ignorance.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Hayek’s Modern Family: Classical Liberalism and the Evolution of Social Institutions. He is a member of the FEE Faculty Network.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution 4.0 International License, which requires that credit be given to the author.

The Fed Can’t Raise Rates, But Must Pretend It Will – Article by Thorsten Polleit

The Fed Can’t Raise Rates, But Must Pretend It Will – Article by Thorsten Polleit

The New Renaissance HatThorsten Polleit
October 26, 2015
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Waiting for Godot is a play written by the Irish novelist Samuel B. Beckett in the late 1940s in which two characters, Vladimir and Estragon, keep waiting endlessly and in vain for the coming of someone named Godot. The storyline bears some resemblance to the Federal Reserve’s talk about raising interest rates.

Since spring 2013, the Fed has been playing with the idea of raising rates, which it had suppressed to basically zero percent in December 2008. So far, however, it has not taken any action. Upon closer inspection, the reason is obvious. With its policy of extremely low interest rates, the Fed is fueling an artificial economic expansion and inflating asset prices.

Selected US Interest Rates in Percent
Selected US Interest Rates in Percent

Raising short-term rates would be like taking away the punch bowl just as the party gets going. As rates rise, the economy’s production and employment structure couldn’t be upheld. Neither could inflated bond, equity, and housing prices. If the economy slows down, let alone falls back into recession, the Fed’s fiat money pipe dream would run into serious trouble.

This is the reason why the Fed would like to keep rates at the current suppressed levels. A delicate obstacle to such a policy remains, though: If savers and investors expect that interest rates will remain at rock bottom forever, they would presumably turn their backs on the credit market. The ensuing decline in the supply of credit would spell trouble for the fiat money system.

To prevent this from happening, the Fed must achieve two things. First, it needs to uphold the expectation in financial markets that current low interest rates will be increased again at some point in the future. If savers and investors buy this story, they will hold onto their bank deposits, money market funds, bonds, and other fixed income products despite minuscule yields.

Second, the Fed must succeed in continuing to postpone rate hikes into the future without breaking peoples’ expectation that rates will rise at some point. It has to send out the message that rates will be increased at, say, the forthcoming FOMC meeting. But, as the meeting approaches, the Fed would have to repeat its trickery, pushing the possible date for a rate hike still further out.

If the Fed gets away with this “Waiting for Godot” strategy, savings will keep flowing into credit markets. Borrowers can refinance their maturing debt with new loans and also increase total borrowing at suppressed interest rates. The economy’s debt load can continue to build up, with the day of reckoning being postponed for yet again.

However, there is the famous saying: “You can fool all the people some of the time and some of the people all the time, but you cannot fool all the people all the time.” What if savers and investors eventually become aware that the Fed will not bring interest rates back to “normal” but keep them at basically zero, or even push them into negative territory?

If a rush for the credit market exit would set in, it would be upon the Fed to fill debtors’ funding gap in order to prevent the fiat system from collapsing. The central bank would have to monetize outstanding and newly originated debt on a grand scale, sending downward the purchasing power of the US dollar — and with it many other fiat currencies around the world.

The “Waiting for Godot” strategy does not rule out that the Fed might, at some stage, nudge upward short-term borrowing costs. However, any rate action should be minor and rather short-lived (like they were in Japan), and it wouldn’t bring interest rates back to “normal.” The underlying logic of the fiat money system simply wouldn’t admit it.

Selected Japanese Interest Rates in Percent
Selected Japanese Interest Rates in Percent

The Fed — and basically all central banks around the world — are unlikely to accept deflation clearing out the debt, which would topple the economic and political structures built upon it. Fending off an approaching recession-depression with more credit-created fiat money and extremely low, perhaps even negative, interest rates is what one can expect them to do.

Murray N. Rothbard put it succinctly: “We can look forward … not precisely to a 1929-type depression, but to an inflationary depression of massive proportions.”

Dr. Thorsten Polleit is the Chief Economist of Degussa (www.degussa-goldhandel.de) and Honorary Professor at the University of Bayreuth. He is the winner of the O.P. Alford III Prize in Political Economy and has been published in the Austrian Journal of Economics. His personal website is www.thorsten-polleit.com.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Technology Needs Capital To Produce Economic Growth – Article by Frank Shostak

Technology Needs Capital To Produce Economic Growth – Article by Frank Shostak

The New Renaissance Hat
Frank Shostak
June 8, 2015
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In his article “The Big Meh” Paul Krugman complains that despite all the information technology advances the effect so far has been negligible as far as economic growth is concerned.

Krugman writes “That the whole digital era, spanning more than four decades, is looking like a disappointment. New technologies have yielded great headlines but modest economic results. Why? … The answer is that I don’t know — but neither does anyone else.”

Indeed if one looks at the real gross domestic product to the potential real gross domestic product ratio the economy does appear to be hovering below potential with the ratio of 0.977 registered in Q1 this year.

shostak_june 8 300_1

Contrary to Krugman, we suggest that economists such as Ludwig von Mises and Murray Rothbard have provided a clear answer to the issue of technology and economic growth.

In Man, Economy, and State, Rothbard says that technology, while important, must always work through the investment of capital in order to generate economic growth.

On this issue, Rothbard quotes Mises who says,

What is lacking in (underdeveloped counties) is not knowledge of Western technological methods (“know how”); that is learned easily enough. The service of imparting knowledge, in person or in book form, can be paid for readily. What is lacking is the supply of saved capital needed to put the advanced methods into effect.

Most modern theories that emphasize the importance of new ideas and new technologies give the impression that these ideas and technologies have a “life of their own.” Many experts hold that because of the limited amounts of capital and labor, without technological progress, the opportunities for growth will eventually run out.

We Need Funding To Implement New Ideas

Ideas, unlike material inputs, are not themselves scarce. Consequently, it is argued, new ideas for more efficient processes and new products can make continuous growth possible.

We suggest that regardless of how many ideas people have, what matters is whether these ideas can be implemented. What always limits the implementation of various new techniques is the availability of funding. While ideas and new techniques can result in a better use of scarce resources, they can however, do very little without the pool of real savings.

So regardless of how clever we are and regardless of various technological ideas, without an adequate pool of funding nothing will emerge. It is through the expansion in the pool of real savings that an increase in the stock of capital goods is possible. And it is the increase in the capital goods per worker that permits economic growth to emerge.

To Get More Funding, We Need Savings

Obviously, new ideas and new technology can be introduced during the production of new capital goods (i.e., new technology) and will be imbedded in the capital goods stock. The crux of the matter however, is that capital goods cannot emerge without a prior increase in the pool of funding or pool of real savings.

Take, for instance, a baker John who produced ten loaves of bread. He consumes two loaves of bread whilst the other two loaves — his real savings — he employs to purchase a new part to improve his oven. With a better oven he can now raise the output of bread to twenty loaves. If he still consumes only two loaves, then with a larger savings (now stands at eighteen loaves) he can enhance further his oven by introducing new parts, which will enable the introduction of new technology. Note that all this is made possible on account of real savings.

We suggest that despite new technologies, a major impediment to economic growth has been the relentless central bank tampering with financial markets.

Since 2008 this tampering was made manifest in the extremely loose monetary policy of the Fed that resulted in the massive monetary expansion of the Fed’s balance sheet and the lowering of interest rates to almost nil.

These policies have been responsible for a severe erosion of the pool of real savings and thus a weakening of the process of capital formation. This in turn has undermined real economic growth notwithstanding new information technology.

For Krugman and his followers savings is bad news — it is seen as less demand — hence one shouldn’t be surprised that Krugman is puzzled as to why new ideas haven’t manifested in a more robust economic growth. Contrary to Krugman, boosting so-called aggregate demand whilst undermining the capital formation process, and hence the ability to produce goods and services, cannot strengthen economic growth over time. In fact this way of thinking results in the notion that something can be generated out of nothing.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies.

This article was originally published by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Diversity in Goals Brings Diversity in Value – Article by Frank Shostak

Diversity in Goals Brings Diversity in Value – Article by Frank Shostak

The New Renaissance Hat
Frank Shostak
November 28, 2014
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A major problem with the mainstream framework of thinking is that people are presented as if a scale of preferences were hard-wired in their heads. Regardless of anything else this scale remains the same all the time. Valuations however, do not exist by themselves regardless of the things to be valued. On this Rothbard wrote,

There can be no valuation without things to be valued. 1

Valuation is the outcome of the mind valuing things. It is a relation between the mind and things.

Purposeful action implies that people assess or evaluate various means at their disposal against their ends. An individual’s ends set the standard for human valuations and thus choices. By choosing a particular end an individual also sets a standard of evaluating various means.

For instance, if my end is to provide a good education for my child, then I will explore various educational institutions and will grade them in accordance with my information regarding the quality of education that these institutions are providing. Observe that the standard of grading these institutions is my end, which, in this case, is to provide my child with a good education. Or, for instance, if my intention is to buy a car, and there are all sorts of cars available in the market, then I have to specify to myself the specific ends that the car will help me achieve. I need to establish whether I plan to drive long distances or just a short distance from my home to the train station and then catch the train. My final end will dictate how I will evaluate various cars. Perhaps I will conclude that for a short distance, a second-hand car will do the trick.

Since an individual’s ends determine the valuations of means and thus his choices, it follows that the same good will be valued differently by an individual as a result of changes in his ends. At any point in time, people have an abundance of ends that they would like to achieve. What limits the attainment of various ends is the scarcity of means. Hence, once a larger variety of means become available, a greater number of ends — or goals — can be accommodated (i.e., people’s living standards will increase).

Another limitation on attaining various goals is the availability of suitable means. Thus to quell my thirst in the desert, I require water. If no one willing to sell water is nearby, any diamonds in my possession will be of no help in this regard.

Frank Shostak is an adjunct scholar of the Mises Institute and a frequent contributor to Mises.org. His consulting firm, Applied Austrian School Economics, provides in-depth assessments and reports of financial markets and global economies. See Frank Shostak’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

The End of Quantitative Easing Is Not the End of Bad Policy – Article by John P. Cochran

The End of Quantitative Easing Is Not the End of Bad Policy – Article by John P. Cochran

The New Renaissance Hat
John P. Cochran
November 7, 2014
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Recently the financial press and media has been abuzz as the Federal Reserve moved closer to the anticipated end to its massive bond and mortgage backed securities purchases known as quantitative easing. James Bullard, President of the St. Louis Federal Reserve Bank, stirred controversy last week when he suggested the Fed should consider continuing the bond buying program after October. But at the October 29th meeting, the policy makers did as anticipated and “agreed to end its asset purchase program.” However one voting member agreed with Mr. Bullard. Per the official press release, “Voting against the action was Narayana Kocherlakota, who believed that, in light of continued sluggishness in the inflation outlook and the recent slide in market-based measures of longer-term inflation expectations, the Committee should commit to keeping the current target range for the federal funds rate at least until the one-to-two-year ahead inflation outlook has returned to 2 percent and should continue the asset purchase program at its current level” (emphasis added).

The action yesterday completes the phase out, which began in January 2014, of the controversial QE3 under the leadership of Ben Bernanke and continued unabated under Janet Yellen.

“Not the End of Monetary Easing”

While the headline in the Wall Street Journal highlighted the action as closing a “chapter on easy money,” a closer look illustrates this is perhaps not the case. The Journal, on the editorial page the same day offers a better perspective, supported by data and the rhetoric in the press release. Much to the determent of future economic prosperity, “The end of Fed bond buying is not the end of monetary easing.”

While quantitative easing has contributed to the massive expansion of the Fed balance sheet — now nearly $4.5 trillion in assets — it is not the whole story. Even as the Fed ends new buying of favored assets, the Fed balance sheet will not shrink. As pointed out by the Wall Street Journal, “QE is not over, and the Fed will still reinvest the principal payments from its maturing securities.” Even more relevant, during the phase out there was a continuing expansion of three broad measures of Fed activity; St. Louis Fed adjusted reserves (Figure 1), the monetary base (Figure 2), and Federal Reserve Banks — Total Assets, Eliminations from Consolidation program (Figure 3). (All data from FRED economic data series St. Louis Federal Reserve. Calculations are mine.)

Figure 1: St. Louis Fed Adjusted Reserves

Figure 2: The Monetary Base

Figure 3: Federal Reserve Banks — Total Assets, Eliminations from Consolidation

The Fed’s Balance Sheet Continues to Expand

Despite some ups and downs, adjusted reserves increased 15.8 percent from January 2014 through September 2014, the monetary base by 8.6 percent, and consolidated assets by 10.7 percent. Given QE purchases were $85 billion per month at their peak, this continuing expansion of the Fed balance sheet and the other relevant monetary aggregates, the phase out and end of quantitative easing represents not a change in policy stance, but only a shift in tools. Monetary distortion has continued unabated. The only plus in the change is that more traditional tools of monetary manipulation create only the traditional market distortions; Cantillon effects, false relative prices, particularly interest rates, and the associated misdirection of production and malinvestments. Temporarily gone is the more dangerous Mondustrial Policy where the central bankers further distort credit allocation by picking winners and losers.

As illustrated by the Fed speak in the press release, post QE3-forward policy will, despite John Taylor’s optimism that this would not be the case, continued to be biased against a return to a more balanced, less potentially self-defeating rules-based policy. Instead driven by the Fed’s unwise dual mandate and the strong belief by Fed leadership in Tobin Keynesianism, policy will continue to “foster maximum employment.” This despite strong theoretical arguments (Austrian business cycle theory and the more mainstream natural unemployment rate hypothesis)[1] and good empirical evidence that any short-run positive impact monetary policy may have on employment and production is temporary and in the long run, per Hayek, cause greater instability and potentially even higher unemployment.

The Lasting Legacy of QE

As pointed out by David Howden in “QE’s Seeds Are Already Sown,” and as emphasized by Hayek (in Unemployment and Monetary Policy: Government as Generator of the “Business Cycle”), and recently formalized by Ravier (in “Rethinking Capital-Based Macroeconomics”), the seeds of easy money and credit creation, even when sown during times with unused capacity, bring forth the weeds of instability, malinvestment, bust, and economic displacement. They do not bring the promised return to prosperity, sustainable growth, and high employment.

Since the phase-out is only apparent, and not a real change in policy direction, Joe Salerno’s warning (“A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis,” p. 41) remains relevant:

(G)iven the unprecedented monetary interventions by the Fed and the enormous deficits run by the Obama admin­istration, ABCT also explains the precarious nature of the current recovery and the growing probability that the U.S economy is headed for a 1970s-style stagflation.

While highly unlikely there is still time to do the right thing, follow the policy advice of Rothbard and the Austrians, as argued earlier in more detail here and here. Despite some short run costs which are likely small compared to the cost of a decade of stagnation, such a policy is the only reliable route to return the economy to sustainable prosperity.

John P. Cochran is emeritus dean of the Business School and emeritus professor of economics at Metropolitan State University of Denver and coauthor with Fred R. Glahe of The Hayek-Keynes Debate: Lessons for Current Business Cycle Research. He is also a senior scholar for the Mises Institute and serves on the editorial board of the Quarterly Journal of Austrian Economics. Send him mail. See John P. Cochran’s article archives.

This article was published on Mises.org and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Why I Do Not Adhere to Anarcho-Capitalism (2009) – Article by G. Stolyarov II

Why I Do Not Adhere to Anarcho-Capitalism (2009) – Article by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
Originally Published August 9, 2009,
as Part of Issue CCII of The Rational Argumentator
Republished July 2, 2014
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Note from the Author: This essay was originally published as part of Issue CII of The Rational Argumentator on August 9, 2009, using the Yahoo! Voices publishing platform. Because of the imminent closure of Yahoo! Voices, the essay is now being made directly available on The Rational Argumentator. The arguments in it continue to be relevant to discussions regarding minarchism and anarcho-capitalism, and therefore it is fitting for this publication to provide these arguments a fresh presence.
~ G. Stolyarov II, July 2, 2014
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As one of the many libertarians who loves individual freedom and free markets but nevertheless perceives an important role for government, I have been challenged numerous times on my stance. The best way to describe my position is that I am a minarchist in theory; I happen to agree with Thomas Jefferson that “that government is best which governs least,” and yet I recognize that an active government is necessary for combating force and fraud and for ensuring that the natural rights of individuals are not transgressed upon by other private parties. In practice, I am an incrementalist – a strong supporter of evolutionary change rather than revolutionary change of any sort. I believe that real-world political reform is a delicate process, and that the sequence of transitions matters just as much as the abstract desirability of any given transition. We want to implement the right changes, but we also need to implement them in the right order – just as a doctor who wishes to cure a patient using theoretically sound procedures cannot just apply the procedures in an arbitrary sequence and hope to succeed.

Following Murray Rothbard (who, unlike me, was a noted anarcho-capitalist), I believe that liberty is the most desirable political end, but it is not necessarily the most desirable end of all. The length, prosperity, and security of every individual’s life are to me much more important – and I see liberty as the surest means of attaining those ends to the greatest extent. However, it is possible for those ends to also be partially and tolerably well attained – at least in the short term – in an environment that lacks complete liberty. This is why I developed a rough system that “measures” degrees of government oppression using a mixture of cardinal and ordinal approaches. Irrespective of the particular criteria of comparison, any reasonable thinker will agree that some governments today are much more tolerable than others – and a few are quite innocuous and even outright beneficent, especially when we consider governments over smaller jurisdictions, such as states and localities, and particular agencies of those governments which do not employ coercion to any substantial extent. Metaphysically, I agree with Ayn Rand that there is an objective reality, where A = A – i.e., every particular thing is what it is and not what one’s mental model of it happens to be. Thus, I believe in judging every particular instance of government or governance not just as “government or governance in general” but rather as precisely what it is specifically – which means that a government is nothing more than the sum of the people who compose it and their actions, which need to be judged on their own merits or lack thereof. I am therefore open to the possibility that some governments may be able to solve some problems without infringing on natural rights at all. I am equally open, of course, to the possibility that those problems may be solved on the free market without government participation.

Here, I will present a basic outline of my objections to anarcho-capitalism as it is typically presented today. Anarcho-capitalism can be defined as the position that government is unnecessary altogether and that market-based services can provide all of the essential functions of government recognized by the minarchist as legitimate – including police protection, protection from foreign invaders, enforcement of contracts, and adjudication of disputes.

My Foremost Political Goal

I define a state of complete liberty as the absence of the initiation of violence or coercive dishonesty by any individual against any other individual. By “violence” I mean the physical disruption of either the integrity of an individual’s body or that of the material things which that individual owns. The term “coercive dishonesty” encompasses fraud, breach of contract, bad-faith dealings, and failure to fully disclose information that would affect the decision of a party in a business transaction. By “initiating” violence or coercive dishonesty I mean being the first party to inflict such acts on another, without having had such acts inflicted on oneself by that other and without defending some other innocent party against those acts inflicted by that other. I do not consider retaliatory force – provided that it is a proportional response to the initiated force and does not harm innocent parties – to be illegitimate or undesirable.

Thus, I believe that the state of the world which minimizes violence and coercive dishonesty as much as possible is the most desirable state. To be sure, both many governments and many private parties throughout history have engaged in these heinous acts – and I am not defending any entities that have. My position does not embrace governments as they currently are, but as they can be and ought to be. Anarcho-capitalists may object to my position by arguing that few, if any, governments in history have subscribed to minarchist principles and initiated no violence or coercive dishonesty. To this, I will reply by quoting John Lennon: “You may call me a dreamer, but I’m not the only one.” Few, if any, societies in history have been viably anarcho-capitalist, either. Neither my position nor the anarcho-capitalists’ has any existing real-world incarnation. The question before us, then, is which of these positions would result in less overall violence and coercive dishonesty if implemented in practice?

Objection 1: Lack of an Ultimate Arbiter

Anarcho-capitalists posit that dispute resolution – be it of the character of police action or judicial proceedings – can occur among entirely private entities on the free market without any government involvement at all. For sake of conciseness, I will call the entities that engage in this manner of dispute resolution DRAs – or dispute resolution agencies.

It is true that many forms of dispute resolution can occur without government participation and do occur in this manner today – within families and business arrangements subject to private arbitration. If a private dispute is resolved satisfactorily by the relevant private parties themselves, then there is no need for recourse to government. However, there also exist instances – all too many today, as evidenced by the overwhelmed American judicial system – where private parties cannot reconcile their differences solely through private means. Anarcho-capitalists’ typical response to this is that in a wholly free market (as they define it, that is, with no government altogether) ex ante arrangements would exist whereby, if DRA X and DRA Y – representing two different and opposing parties in a dispute – could not reach a mutually satisfactory decision, the power of decision would be delegated to a third DRA – Z. This is conceivable, but it is by no means guaranteed that such an arrangement would occur in all cases. Thus, under anarcho-capitalism, there is nothing theoretically preventing there being no ultimate resolution to a dispute – ever – from the standpoint of legitimacy, in which case there would be no recourse left but to the principle of “might makes right.” If a dispute cannot be resolved peacefully, then it will devolve into violence – which is the least desirable of all outcomes. Anarcho-capitalism lacks an ultimate arbiter that would step in irrespective of prior contractual arrangements or lack thereof in order to quell the initiation of violence if it were to occur.

It is conceivable that a government could leave most dispute resolution to the private market – unless the market has demonstrated its failure to achieve lasting, peaceable resolution. In that case, the government, as the ultimate arbiter, would need to intervene and offer a resolution, either through a decision of its courts or through the interposition of armed agents whose presence would prevent violence from erupting. It is important to remind my readers that my foremost objective is the prevention of violence breaking out. If two private DRAs were about to begin a miniature war – and they happened not to have contractual procedures in place for preventing it beforehand – then it is desirable for a third agency with greater powers than a mere private entity to decisively put an end to such coercive and damaging behavior.

Objection 2: Lack of Legitimate Enforcement against Violent Non-Parties to Contracts

The way an anarcho-capitalist society would work – according to most of its advocates – is that all members would bind themselves by contracts in their mutual interactions, and the contracts would stipulate consequences for non-compliance. This raises an interesting issue: What if a person within the society refused to bind himself by any contracts whatsoever and simply raided, stole, and murdered as he saw fit? If there is no law other than what individuals choose to bind themselves by, then what legitimate recourse do other non-coercive members of the society have against this initiator of violence? Moreover, if this person were to team up with a host of others who similarly chose not to bind themselves by any contracts that prohibit initiation of force, could not a formidable criminal gang form and terrorize – if not overwhelm – the peaceful portions of the anarcho-capitalist society? Of course, somebody in the anarcho-capitalist society could always simply kill or detain the aggressors in practice, without regard for whether the aggressors broke a contract or not. However, such an act would not be legitimate in an anarcho-capitalist society. Illegitimate acts can and do occur – both with and without governments – but what counts as an illegitimate act matters. Under a government, murder can and does happen, but murder is considered illegitimate. Under anarcho-capitalism, murder by non-parties to any contracts is not illegitimate, but punishing by force a person who commits such a murder is illegitimate. A system where legitimacy fails to apply to actions with obvious morality and desirability is a troubling system indeed.

Objection 3: The Oxymoron and the Danger of Markets in Force

A market arrangement is an arrangement based on voluntary participation of all parties – an arrangement where trading is substituted for compulsion. On a free market for a typical good or service – such as an item of food or a construction job, for instance – no individual is required to buy and no individual is required to sell, except on terms mutually favorable and explicitly agreed upon. However, the term “market” no longer applies in this sense when any element of compulsion is introduced. When a “market service” involves wielding weapons and enacting violence against individuals who do not wish to have this violence inflicted upon them, it ceases to be a “market service” and becomes something quite different. This does not necessarily make such a service illegitimate, of course – as the potential for retaliatory force is a necessary component in minimizing the initiation of force. However, this difference does invalidate the application of typical principles of analyzing markets to such “services.” There can be no market-based analysis of a service that does not entirely rely on voluntary consent from all parties involved.

One of the glaring dangers of a “market service” specializing in the use of force is that such a service could simply use the force it “produces” to extort or steal other people’s wealth instead of earning it in voluntary trades. Without an external authority to enforce a prohibition on this behavior, there is no guarantee that such behavior would not occur. A free-market DRA would not always do this, of course, but there are conceivable scenarios where every incentive would favor such behavior. Only when there are substantial disincentives to the use of force from other armed parties on a free market or when the DRA administrator is particularly humane, benevolent, and enlightened could a DRA be reasonably expected not to violate individual rights. There are two ways for such incentives to arise without reliance on anyone’s personal virtues. Either 1) there could exist a “balance of power” among the DRAs such that each of them is afraid of transgressing against clients of the other or 2) there could exist an authority external to the DRAs that would always protect the parties unjustly aggressed upon, irrespective of the power differential between the aggressors and the targets of aggression. I favor solution 2), because it is not as contingent on a particular balance of power being in place.

Moreover, many anarcho-capitalists claim that one of the problems with government is that it has a monopoly on the use of force and that, as a monopoly, it necessarily offers a lower quality and lower quantity of its product at higher prices. I urge the reader to recall, however, that we are not here discussing a monopoly on otherwise entirely voluntary transactions. It is useful to ask the question whether it is desirable to have force offered in “higher quality,” higher quantities, and a lower price. I, for one, would prefer it to be more expensive to kill a person rather than less – and for the methods of killing to be both of lower quality (i.e., less reliable at killing) and available in lower quantities. Perhaps a monopoly on force has the potential to minimize the use of force compared to “competition” in force. This, I believe, is an empirical question – but even the question itself challenges many anarcho-capitalists’ assertions that governments are necessarily bad because they are monopolies on the use of force.

Objection 4: Each Person a Judge in His Own Case

This objection to anarcho-capitalism comes from none other than one of history’s first libertarians – John Locke. Locke believed that a government is necessary to resolve disputes and decide on punishments, because no individual is qualified to be an impartial judge in his own case. Virtually all of us, when we feel wronged, have a tendency to exaggerate the magnitude of the injury we have suffered and to demand a punishment that is likely to be disproportionate to the offense. On the other hand, when a person has wronged somebody else, he has an incentive to maintain his innocence or to argue that his act was not as grievous as was truly the case. A third party, not itself a victim or a perpetrator of the wrongful act, is needed to ascertain both the facts of the case and the apportionment of guilt and punishment. Sometimes, such a third party could indeed be a private arbiter. However, it is entirely possible for two private DRAs to each be vested – either emotionally, financially, or both – in the interests of their particular clients in a manner that would detract from objectivity in reaching a decision. In that case, I believe that an indispensable role exists for government to provide the desirable impartial arbitration.

Objection 5: Over-Emphasis on Names, Under-Emphasis on Reality

My concern with anarcho-capitalism is it substitutes consideration of the names of political arrangements for the reality of those arrangements – i.e., the physical actions performed by physical people in the physical world. Whether a function is called a “market” function or a “government” function is not as important as the physical movements involved in carrying out that function. If the physical movements involved do not cause disruption of body or property (as in violence) and do not involve the formation of chemical reactions corresponding to false impressions of reality in the brains of parties to a transaction (as in coercive dishonesty), then the action is legitimate from the standpoint of natural law. On the other hand, if the physical movements of individuals correspond to acts of violence or coercive dishonesty, then these actions are illegitimate – irrespective of whether the individuals call themselves (or are called by others) government officials, free-market DRAs, or private gangsters.

Anarcho-capitalists might respond here by noting that, in the 20th century, governments have killed more people than possibly all private crime in human history. This is true – but it does not undermine the case for any government whatsoever. The killing was done by some governments – such as the governments of Nazi Germany, the USSR, and Maoist China – but not others, such as many of the governments of American cities, towns, and villages. Moreover, even in the governments that perpetrated the killings, only some of the officials were responsible for either ordering the killings, promoting them as desirable, or carrying them out. Millions of government employees have never committed a single coercive action (and yes, that even includes their mode of earning a living – as quite a few government positions are not tax-financed). It does not seem fair to lump a peaceful bureaucrat doing research or mediating consumer complaints at his desk with an NKVD officer massacring villagers in the Ukraine. Both are “government” functionaries, but they could not be farther apart in terms of what they do, and the atrocities of the latter do not de-legitimize the former. The anarcho-capitalist characterization of all government as violent, coercive, and unnecessary is a poor substitute for a thorough consideration of reality. Moreover, it is a violation of the principle of methodological individualism, which evaluates the actions of each person as an individual person, and not primarily as a member of a collective. Collectives do not act or think; only individual people do – although the incentives people face depend on the institutional structure to which those people are subject.

Objection 6: No Practical Application

To date, I have not found a single viable proposal for the attainment of anarcho-capitalism in the real world. Anarcho-capitalists have tended to spend most of their time on either 1) describing what an ideal anarcho-capitalist society would be like or 2) discussing why government, in its various manifestations, is undesirable. At the same time, some anarcho-capitalists have disdained and even actively discouraged participation in “the system” as it currently is, because that would grant “implicit recognition” to existing power structures. During the 2008 Republican Primaries, for instance, many anarcho-capitalists (though, of course, not all of them; I do not mean to offer a blanket characterization) endeavored to actively dissuade people from supporting the Ron Paul movement, arguing that attempting to reform the U.S. government from within would grant legitimacy to the structures of the U.S. government. These anarchists were preoccupied with formal structures over the substantive functions of the government – which could be better or worse than they are today. Moreover, these anti-Ron-Paul anarcho-capitalists undermined a movement that had the potential to eliminate many of the abuses of the U. S. federal government against its subjects’ liberties.

I happen to believe that political theory is more than a mind game; it has relevance to the real world, and it ought to have real-world implications for how we act in our own lives. It is not enough to simply state that one would like the world to be a certain way. Rather, a specific, technical, and quite involved series of steps is necessary to transition from the status quo to any state considered desirable. To simply contemplate the end outcome without any idea of how to attain it or even approach it is to divorce one’s political thinking from reality. We find ourselves today with a highly imperfect political system – one that involves numerous violations of individual liberties and also jeopardizes the economic prosperity and technological progress of the Western world. To solve today’s political problems, we cannot but participate in government in some way for the purposes of reforming it or at least protecting ourselves. To reject government altogether instead of endeavoring to improve it is to hide from the real, pressing problems of our time.

Perhaps the anarcho-capitalist ideal will be realizable in some distant future time, once human beings have progressed morally and technologically to such an extent that the initiation of force is no longer lucrative to anybody. I even suggested that this would happen in my short story, “The Fate of War.” In that enlightened time, violence would altogether not be within the realm of human consideration, and a viable anarcho-capitalism would be the natural corollary to that state of affairs.

Meanwhile, however, we are alive today – and if we do not have that which we consider good within our lifetimes, we shall not have it at all. If it is liberty we want – and the anarcho-capitalists have not come up with a viable way to have it without government – then we must have liberty with government. This endeavor will require working through government as well as through private channels; it will require not rejecting the existing system, but modifying it incrementally to move it toward more liberty and less violence. At the same time, a revolution against government is the least desirable course of action, because it would devastate our current levels of prosperity, health, and stability. Individuals who are wealthy, productive, and in control of their lives will come, over time, to civilly demand increasing amounts of independence from centralized control. On the other hand, individuals whose livelihoods have been ruined and whose prospects for upward mobility have been thwarted by an unstable macroeconomic and political climate – which inevitably accompanies revolutions – are easy prey for demagogues and would-be tyrants. Advocates of freedom must be patient, civil, and cautious. While challenging abuses of government authority as such abuses occur, freedom-loving people ought never to do anything that would undermine the standard of living or the safety and comfort of people in the Western world.

The Importance of Subjectivism in Economics – Article by Sheldon Richman

The Importance of Subjectivism in Economics – Article by Sheldon Richman

The New Renaissance Hat
Sheldon Richman
October 3, 2012
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After many years, Frédéric Bastiat remains a hero to libertarians. No mystery there. He made the case for freedom and punctured the arguments for socialism with clarity and imagination. He spoke to lay readers with great effect.

Bastiat loved the market economy, and badly wanted it to blossom in full—in France and everywhere else. When he described the blessings of freedom, his benevolence shined forth. Free markets can raise living standards and enable everyone to have better lives; therefore stifling freedom is unjust and tragic. The reverse of Bastiat’s benevolence is his indignation at the deprivation that results from interference with the market process.

He begins his book Economic Harmonies (available at the FEE store) by pointing out the economic benefits of living in society:

It is impossible not to be struck by the disproportion, truly incommensurable, that exists between the satisfactions [a] man derives from society and the satisfactions that he could provide for himself if he were reduced to his own resources. I make bold to say that in one day he consumes more things than he could produce himself in ten centuries. What makes the phenomenon stranger still is that the same thing holds true for all other men. Every one of the members of society has consumed a million times more than he could have produced; yet no one has robbed anyone else.

The Existence of Privilege

Bastiat was not naïve. He knew he was not in a fully free market. He was well aware of the existence of privilege: “Privilege implies someone to profit from it and someone to pay for it,” he wrote. Those who pay are worse off than they would be in the free market. “I trust that the reader will not conclude from the preceding remarks that we are insensible to the social suffering of our fellow men. Although the suffering is less in the present imperfect state of our society than in the state of isolation, it does not follow that we do not seek wholeheartedly for further progress to make it less and less.”

He wished to emphasize the importance of free exchange for human flourishing. In chapter four he wrote,

Exchange is political economy. It is society itself, for it is impossible to conceive of society without exchange, or exchange without society. …For man, isolation means death….

By means of exchange, men attain the same satisfaction with less effort, because the mutual services they render one another yield them a larger proportion of gratuitous utility.

Therefore, the fewer obstacles an exchange encounters, the less effort it requires, the more readily men exchange.

How does trade deliver its benefits?

Exchange produces two phenomena: the joining of men’s forces and the diversification of their occupations, or the division of labor.

It is very clear that in many cases the combined force of several men is superior to the sum of their individual separate forces.…

Now, the joining of men’s forces implies exchange. To gain their co-operation, they must have good reason to anticipate sharing in the satisfaction to be obtained. Each one by his efforts benefits the others and in turn benefits by their efforts according to the terms of the bargain, which is exchange.

But isn’t something missing from this account?

Austrian Insight

Indeed, there is: the subjectivist Austrian insight that individuals gain from trade per se. For an exchange to take place, the two parties must assess the items traded differently, with each party preferring what he is to receive to what he is to give up. If that condition did not hold, no exchange would occur. There must be what Murray Rothbard called a double inequality of value. It’s in the logic of human action–which Ludwig von Mises christened praxeology. Bastiat, like his classical forebears Smith and Ricardo, erroneously believed (at least explicitly) that people trade equal values and that something is wrong when unequal values are exchanged.

Perhaps I am too hard on Bastiat. After all, he was writing before 1850. Carl Menger did not publish Principles of Economics until 1871. Yet the Austrians were not the first to look at exchange strictly through subjectivist spectacles, that is, from the economic actors points of view. The French philosopher Étienne Bonnot de Condillac (1715-1780) did so a hundred years before Bastiat wrote:

The very fact that an exchange takes place is proof that there must necessarily be profit in it for both the contracting parties; otherwise it would not be made. Hence, every exchange represents two gains for humanity.

Bastiat Unaware?

Well, perhaps Bastiat was unaware of Condillac’s argument. That is not the case. He reprints the quote above in his book and responds:

The explanation we owe to Condillac seems to me entirely insufficient and empirical, or rather it fails to explain anything at all. . . .

The exchange represents two gains, you say. The question is: Why and how? It results from the very fact that it takes place. But why does it take place? What motives have induced the two men to make it take place? Does the exchange have in it a mysterious virtue, inherently beneficial and incapable of explanation?

We see how exchange . . . adds to our satisfactions. . . . [T]here is no trace of . . . the double and empirical profit alleged by Condillac.

This is perplexing. Clearly, the necessary double inequality of value is not empirical or contingent. Contra Bastiat, the double inequality explains quite a lot, and his questions all have easy answers.

Yet more perplexing still is Bastiat’s statement in the same chapter: “The profit of the one is the profit of the other.” This seems to imply what he just denied.

Consequential Failure

Bastiat’s failure to grasp this point had consequences for his debates with other economists. For example, he and his fellow “left-free-market” advocate Pierre-Joseph Proudhon engaged in a lengthy debate over whether interest on loans would exist in the free market or whether it was a privilege bestowed when government suppresses competition. Unfortunately, the debate suffers because neither Bastiat nor Proudhon fully and explicitly grasped the Condillac/Austrian point about the double inequality of value. As Roderick Long explains in his priceless commentary on the exchange,

[E]ach one trips up his defense of his own position through an inconsistent grasp of the Austrian principle of the “double inequality of value”; Proudhon embraces it, but fails to apply it consistently, while Bastiat implicitly relies on it, but explicitly rejects it. . . .

Proudhon’s case against interest seems to depend crucially on his claim that all exchange must be of equivalent values; so pointing out the incoherence of this notion would be a telling reply. But Bastiat cannot officially give this reply (though he comes tantalisingly close over and over throughout the debate) because elsewhere–in his Economic Harmonies–Bastiat explicitly rejects the doctrine of double inequality of value.

How frustrating! Bastiat has so much to teach. But here is one blind spot that kept him from being even better.

Sheldon Richman is the editor of The Freeman and TheFreemanOnline.org, and a contributor to The Concise Encyclopedia of Economics. He is the author of Separating School and State: How to Liberate America’s Families.

This article was published by The Foundation for Economic Education and may be freely distributed, subject to a Creative Commons Attribution United States License, which requires that credit be given to the author.

Rand Paul’s Endorsement of Romney versus Ayn Rand’s and Murray Rothbard’s Historical Grudging Endorsements – Post by G. Stolyarov II

Rand Paul’s Endorsement of Romney versus Ayn Rand’s and Murray Rothbard’s Historical Grudging Endorsements – Post by G. Stolyarov II

The New Renaissance Hat
G. Stolyarov II
September 2, 2012
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A September 1 post on the Facebook page of The Capitalism Institute reads: “I fully understand the hatred of Romney by libertarians who believe he’s a liberal in sheep’s clothing. That’s perfectly understandable. What I don’t understand is the notion that Rand Paul has somehow become an enemy of the liberty movement in the eyes of many because he endorsed Romney. Murray Rothbard once endorsed George Bush, Sr. Ayn Rand once endorsed Nixon.”

Yet I see Rand Paul’s endorsement of Mitt Romney as qualitatively different from the endorsements by either Ayn Rand or Murray Rothbard in previous election cycles. I think Ayn Rand unfortunately fell into the “lesser of two evils” trap when endorsing Nixon.

In particular, the following statement of Ayn Rand’s (quoted from this article by ARI Watch) is interesting: “If there were some campaign organization called ‘Anti-Nixonites for Nixon,’ it would name my position. The worst thing said about Nixon is that he cannot be trusted, which is true: he cannot be trusted to save this country. But one thing is certain: McGovern can destroy it.

Rothbard’s endorsement of Bush, Sr., was also grudging. Rothbard wrote this: “Yes, gulp, I’m down to the grim, realistic choice: Which of two sets of bozos is going to rule us in 1993-1997? No one has been more critical of George Bush than I, but yes, dammit, I am working my way back to the President.

If Rand Paul had explicitly stated that he was an “Anti-Romneyite for Romney” or stated that no one has been more critical of Romney than he – then I would have had more respect for his approach to this matter. At present, though, his comments after his endorsement of Romney have not at all highlighted Romney’s weaknesses or areas where Romney and Rand Paul disagreed. If Rand Paul had merely endorsed Romney to support “the lesser evil” in his mind, then I would still not share his opinion, but his mistake would be understandable. His actual endorsement of Romney, however, was not so grudging or reserved. Furthermore, he may have seen some (as of yet unrealized) personal political advantage from it, whereas neither Ayn Rand nor Rothbard had any personal political ambitions.

Additionally, since 1972 and even 1992, the two major political parties have come far closer together, to the point where Obama and Romney are virtually indistinguishable in their policy stances, even though they try to augment minutiae through volatile (and often outright deceptive) campaign rhetoric. Therefore, the contrasts that Ayn Rand drew between Nixon and McGovern – and those that Rothbard drew between Bush, Sr., and Clinton – cannot be drawn between Romney and Obama.  Voting for either party can no longer help “save” the country from the other (if it ever could, which I also doubt), because the same perils would befall us either way.

Why the Deflationists Are Wrong – Article by Gary North

Why the Deflationists Are Wrong – Article by Gary North

The New Renaissance Hat
Gary North
August 23, 2012
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An inflationist is someone who believes that price inflation is the result of two things: (1) monetary inflation and (2) central-bank policy.

A deflationist is someone who believes that deflation is inevitable, despite (1) monetary inflation and (2) central -bank policy.

No inflationist says that price inflation is inevitable. Every deflationist says that price deflation is inevitable.

Deflationists have been wrong ever since 1933.

Milton Friedman is most famous for his book A Monetary History of the United States (1963), which relies on facts collected by Anna Schwartz, who died recently.

It is for one argument: the Federal Reserve caused the Great Depression because it refused to inflate.

This argument, as quoted by mainstream economists, is factually wrong.

I often cite a study, where you can see that the monetary base grew under the Federal Reserve, 1931 to 1932. This graph is from a speech given by the vice president of the Federal Reserve Bank of St. Louis. You can access it here.

Figure 1
I posted this first in early 2010.

We can see that there was monetary deflation of the money supply, beginning in 1930. This continued in 1931 and 1932, despite a deliberate policy of inflation by the Fed, beginning in the second half of 1931 and continuing through 1932.

Depositors kept pulling currency out of banks and hoarding it. They did not redeposit it in other banks. This imploded the fractional-reserve-banking process for the banking system as a whole. M1 declined: monetary deflation.

The Fed could not control M1. It could only control the monetary base.

The argument of Friedman and Schwartz was picked up by mainstream economists. It is his most famous and widely accepted position. Bernanke praised him for it on Friedman’s 90th birthday in 2002.

Why was the argument wrong, as applied to 1931–33? I must tell the story one more time. Four letters tell it: FDIC. Well, nine: FDIC + FSLIC. They did not exist.

Franklin Roosevelt froze all bank deposits in early March 1933, immediately after his inauguration. This calmed the public when the banks reopened a few days later. He verbally promised people that the banks were now safe.

The US government created federal bank-depositor insurance in 1933. The Wikipedia article describes the Banking Act of 1933, which was signed into law in June:

  • Established the FDIC as a temporary government corporation
  • Gave the FDIC authority to provide deposit insurance to banks
  • Gave the FDIC the authority to regulate and supervise state non-member banks
  • Funded the FDIC with initial loans of $289 million through the U.S. Treasury

That stopped the bank runs. The money supply reversed. It went ballistic. So did the monetary base.

The key event was therefore the Banking Act of 1933. After that, the money supply never fell again. After that, prices never fell again by more than 1 percent. That was in 1955.

All it took for prices to reverse and rise was this: an expansion of the monetary base coupled with bank lending.

Yet deflationists ever since 1933 have predicted falling prices. They die predicting this. Then their successors die predicting this.

They never learn.

They do not understand monetary theory. They do not understand monetary history. They therefore do not learn. They do not correct their bad predictions, year after year, decade after decade, generation after generation.

They still find people who believe them, people who also do not understand monetary theory or monetary history.

I have personally been arguing against them for four decades.

Price deflation has nothing to do with the fall in the price of stocks.

There can be monetary deflation as a result of excess reserves held at the Fed by commercial banks. But this is Fed policy. The Fed pays banks interest on the deposits. Even if it didn’t, there would still be excess reserves. But by imposing a fee on excess reserves, the Fed could eliminate excess reserves overnight. Then the money multiplier would go positive, price inflation would reappear, and the Fed would get blamed. So, it maintains a policy of restricting the M1 multiplier.

Every inflationist says that monetary inflation will produce hyperinflation unless reversed by the central bank. There will be a return to low prices after what Ludwig von Mises called the crack-up boom. The classic example is Germany in 1934. That was a matter of policy. The central bank substituted a new currency and stopped inflating.

John Exter — an old friend of mine — argued in the 1970s and 1980s that monetary deflation has to come, despite Fed policy. There will be a collapse of prices through deleveraging.

He was wrong. Why? Because it is not possible for depositors to take sufficient money in paper-currency notes out of banks and keep these notes out, thereby reversing the fractional-reserve process, thereby deflating the money supply. That was what happened in the United States from 1930 to 1933. If hoarders spend the notes, businesses will redeposit them in their banks. Only if they deal exclusively with other hoarders can they keep money out of banks. But the vast majority of all money transactions are based on digital money, not paper currency.

Today, large depositors can pull digital money out of bank A, but only by transferring it to bank B. Digits must be in a bank account at all times. There can be no decrease in the money supply for as long as money is digital. Hence, there can be no decrease in prices unless it is Fed policy to decrease prices. This was not true, 1930 to 1933.

Deflationists never respond to this argument by invoking either monetary theory or monetary history. You can and should ignore them until one of them does answer this, and all the others publicly say, “Yes. That’s it! We have waited since 1933 for this argument! I was blind, but now I see! I’m on board! I will sink or swim with this.”

Let me know when this happens. Until then, ignore the deflationists. All of them. (There are not many still standing.)

The fact that a new deflationist shows up is irrelevant. Anyone can predict inevitable price deflation. They keep doing this. Look for the refutation of the inflationists’ position. Look for a theory.

If you do not understand the case I have just made, you will not understand any refutation. In this case, just pay no attention to either side. If you cannot follow economic theory, the debate will confuse you. It’s not worth your time.

For background, see my book Mises on Money.

See also Murray Rothbard’s book What Has Government done to Our Money?

Gary North is the author of Mises on Money and Honest Money: The Biblical Blueprint for Money and Banking. He is also the author of a free 20-volume series, An Economic Commentary on the Bible. Visit his website: GaryNorth.com. Send him mail. See Gary North’s article archives.

This article originally appeared on GaryNorth.com.

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Copyright © 2012 by the Ludwig von Mises Institute. Permission to reprint in whole or in part is hereby granted, provided full credit is given.

Audit the Fed Moves Forward! – Article by Ron Paul

Audit the Fed Moves Forward! – Article by Ron Paul

The New Renaissance Hat
Ron Paul
July 31, 2012
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Last week the House of Representatives overwhelmingly passed my legislation calling for a full and effective audit of the Federal Reserve.  Well over 300 of my Congressional colleagues supported the bill, each casting a landmark vote that marks the culmination of decades of work.  We have taken a big step toward bringing transparency to the most destructive financial institution in the world.

But in many ways our work is only beginning.  Despite the Senate Majority Leader’s past support for similar legislation, no vote has been scheduled on my bill this year in the Senate.  And only 29 Senators have cosponsored Senator Rand Paul’s version of my bill in the other body.  If your Senator is not listed at the link above, please contact them and ask for their support.  We need to push Senate leadership to hold a vote this year.

Understand that last week’s historic vote never would have taken place without the efforts of millions of Americans like you, ordinary citizens concerned about liberty and the integrity of our currency.  Political elites respond to political pressure, pure and simple.  They follow rather than lead.  If all 100 Senators feel enough grassroots pressure, they will respond and force Senate leadership to hold what will be a very popular vote.

In fact, “Audit the Fed” is so popular that 75% of all Americans support it according to this Rasmussen poll.  We are making progress.

Of course Fed apologists– including Mr. Bernanke– frequently insist that the Fed already is audited.  But this is true only in the sense that it produces annual financial statements.  It provides the public with its balance sheet as a fait accompli: we see only the net results of its financial transactions from the previous fiscal year in broad categories, and only after the fact.

We’re also told that the Dodd-Frank bill passed in 2010 mandates an audit.  But it provides for only a limited audit of certain Fed credit facilities surrounding the crisis period of 2008.  It is backward looking, which frankly is of limited benefit.

The Fed also claims it wants to be “independent” from Congress so that politics don’t interfere with monetary policy.  This is absurd for two reasons.

First, the Fed already is inherently and unavoidably political.  It made a political decision when it chose not to rescue Lehman Brothers in 2008, just as it made a political decision to provide liquidity for AIG in the same time period. These are just two obvious examples.  Also Fed member banks and the Treasury Department are full of former– and future– Goldman Sachs officials.  Are we really to believe that the interests of Goldman Sachs have absolutely no effect on Fed decisions? Clearly it’s naïve to think the Fed somehow is above political or financial influence.

Second, it’s important to remember that Congress created the Fed by statute.  Congress therefore has the full, inherent authority to regulate the Fed in any way– up to and including abolishing it altogether.

My bill provides for an ongoing, thorough audit of what the Fed really does in secret, which is make decisions about the money supply, interest rates, and bailouts of favored banks, financial firms, and companies.  In other words, I want the Government Accountability Office to examine the Fed’s actual monetary policy operations and make them public.

It is precisely this information that must be made public because it so profoundly affects everyone who holds, saves, or uses US dollars.

Representative Ron Paul (R – TX), MD, is a Republican candidate for U. S. President. See his Congressional webpage and his official campaign website

This article has been released by Dr. Paul into the public domain and may be republished by anyone in any manner.