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

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

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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.

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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.

The Bait-and-Switch Behind Economic Populism – Article by Nicolás Cachanosky

The Bait-and-Switch Behind Economic Populism – Article by Nicolás Cachanosky

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Nicolás Cachanosky
May 26, 2015
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Argentina will hold elections this year, and a number of provinces will be electing governors. Buenos Aires, the capital city, is holding elections for mayor, and Mauricio Macri, who is stepping down as mayor, is a favorite to become the next president. Toward the end of the year, a presidential election will be held and Cristina Kirchner, after two consecutive mandates, will have to step down because she cannot be re-elected.

Like Chávez and Maduro in Venezuela, Argentina can be described as a country that fell victim to extreme populism during the Nestor and Cristina Kirchner administrations, which began in 2003. Twelve years later, this populist political project is about to end.

The economic policy of populism is characterized by massive intervention, high consumption (and low investment), and government deficits. This is unsustainable and we can identify several stages as it moves toward its inevitable economic failure. The last decade of extreme populism in Argentina can be described as following just such a pattern.

After observing the populist experience in several Latin American countries, Rudiger Dornbusch and Sebastián Edwards identified four universal stages inherent in populism in their article “Macroeconomic Populism” (1990). Even though populism can present a wide array of policies, certain characteristics seem to be present in most of the cases.

Populism usually fosters social mobilization, political propaganda, and the use of symbols and marketing practices designed to appeal to voter’s sentiments. Populism is especially aimed at those with low income, even if the ruling party cannot explain the source of its leaders’ high income. Populist rulers find it easy to use scapegoats and conspiracy theories to explain why the country is going through a hard time, while at the same time present themselves as the saviors of the nation. It is not surprising that for some, populism is associated with the left and socialist movements, and by others with the right and fascist policies.

The four stages of populism identified by Dornbusch and Edwards are:

Stage I

The populist diagnosis of what is wrong with an economy is confirmed during the first years of the new government. Macroeconomic policy shows good results like growing GDP, a reduction in unemployment, increase in real wages, etc. Because of output gaps, imports paid with central bank reserves, and regulations (maximum prices coupled with subsidies to the firms), inflation is mostly under control.

Stage II

Bottleneck effects start to appear because the populist policies have emphasized consumption over investment, the use of reserves to pay for imports, and the consumption of capital stock. Changes in sensitive relative prices start to become necessary, and this often leads to a devaluation of the exchange rate, price changes in utilities (usually through regulation), and the imposition of capital controls. Government tries, but fails, to control government spending and budget deficits.

The underground economy starts to increase as the fiscal deficit worsens because the cost of the promised subsidies need to keep up with a now-rising inflation. Fiscal reforms are necessary, but avoided by the populist government because they go against the government’s own rhetoric and core base of support.

Stage III

Shortage problems become significant, inflation accelerates, and because the nominal exchange rate did not keep pace with inflation, there is an outflow of capital (reserves). High inflation pushes the economy to a de-monetization. The local currency is used only for domestic transactions, but people save in US dollars.

The fall in economic activity negatively affects tax receipts increasing the deficit even more. The government needs to cut subsidies and increases the rate of the exchange rate, depreciation. Real income starts to fall and signs of political and social instability start to appear. At this point the failure of the populist project becomes apparent.

Stage IV

A new government is swept into office and is forced to engage in “orthodox” adjustments, possibly under the supervision of the IMF or an international organization that provides the funds required to go through policy reforms. Because capital has been consumed and destroyed, real wages fall to levels even lower than those that existed at the beginning of the populist government’s election. The “orthodox” government is then responsible for picking up the pieces and covering the costs of failed policies left from the previous populist regime. The populists are gone, but the ravages of their policies continue to manifest themselves. In Argentina the expression “economic bomb” is used to describe the economic imbalances that government leaves for the next one.

Economic Populism is Alive and Well

Even though Dornbusch and Edwards wrote their article in 1990, the similarities to the situation in countries like Venezuela, Bolivia, and Argentina is notable. In recent years, to keep populist ideas going in the minds of voters, Venezuela created the Ministry of Happiness, and Argentina created a new Secretary of National Thought.

These four stages are actually cyclical. The populist movement uses the fourth stage to criticize the orthodox party, and argues that during the populists’ tenure, things were better. The public opinion discontent with stage IV allows the populist movement to win new elections, receive an economy in a crisis or recession and the cycle starts over again from stage I. It is not surprising that populist governments usually appear following the hard times caused by economic crisis. A more bold populist government could avoid stage IV by finding a way to remain in office, calling off elections, or creating fake election results (as was the case in Venezuela). At such a point, the populist government succeeds in turning the country into a fully authoritarian nation.

Nicolás Cachanosky, a native of Argentina, is assistant professor of economics at Metropolitan State University of Denver.

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.

NSA Spying Ruled Illegal, But Will Congress Save the Program Anyway? – Article by Ron Paul

NSA Spying Ruled Illegal, But Will Congress Save the Program Anyway? – Article by Ron Paul

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The New Renaissance Hat
Ron Paul
May 11, 2015
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This week the Sixth Circuit Court of Appeals ruled that the NSA’s metadata collection program was not authorized in US law. The PATRIOT Act, under which the program began, was too vague, the court found. But the truth is the Act was intended to be vague so that the federal government could interpret it in the broadest possible way. But this is really more of a technicality, because illegality and unconstitutionality are really two very different things. Even if Congress had explicitly authorized the federal government to collect our phone records, that law would still be unconstitutional because the Constitution does not grant government the power to access our personal information without a valid search warrant.
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Even though the court found the NSA program illegal, it did not demand that the federal government stop collecting our information in this manner. Instead, the court kicked the ball back in Congress’s court, as these provisions of the PATRIOT Act are set to expire at the end of the month and the Appeals Court decided to let Congress decide how to re-authorize this spying program.

Unfortunately, this is where there is not much to cheer. If past practice is any lesson, Congress will wait until the spying program is about to expire and then in a panic try to frighten Americans into accepting more intrusions on their privacy. Senate Majority Leader Mitch McConnell has already put forth a new bill as a stop-gap measure to allow time for a fuller debate on the issue. His stop-gap? A five year re-authorization with no changes to the current program!

The main reform bill being floated, the FREEDOM Act, is little better. Pretending to be a step in the right direction, the FREEDOM Act may actually be worse for our privacy and liberties than the PATRIOT Act!

One silver lining in the court decision is that it should exonerate Ed Snowden, who risked it all to expose what the courts have now found was illegal US government activity. That is the definition of a whistleblower. Shouldn’t he be welcomed back home as a hero instead of being threatened with treason charges? We shouldn’t hold our breath!

This week Snowden addressed a conference in Melbourne, Australia, informing citizens that the Australian government watches all its citizens “all the time.” Australia’s program allows the government to “collect everyone’s communications in advance of criminal suspicion,” he told the conference. That means the government is no longer in the business of prosecuting crimes, but instead is collecting information in case crimes someday occur.

How is it that the Australian government can collect and track “pre-crime” information on its citizens? Last month Australia passed a law requiring telecommunications companies to retain metadata information on their customers for two years.

Why do Australia’s oppressive laws matter to us? Because the NSA “reform” legislation before Congress, the FREEDOM Act, does exactly what the Australian law does: it mandates that US telecommunications companies retain their customers’ metadata information so that the NSA can access the information as it wishes.

Some argue that this metadata information is harmless and that civil libertarians are over-reacting. But, as Ed Snowden told the Melbourne conference, “under these mandatory metadata laws you can immediately see who journalists are contacting, from which you can derive who their sources are.”

This one example of what happens when the government forces corporations to assist it in spying on the people should be a red flag. How can an independent media exist in the US if the federal government knows exactly whom journalists contact for information? It would be the end of any future whistleblowers.

The only reform of the PATRIOT Act is a total repeal. Accept nothing less.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Speaking Truth to Power: Jimmy Lai – Article by Lawrence W. Reed

Speaking Truth to Power: Jimmy Lai – Article by Lawrence W. Reed

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Lawrence W. Reed
May 4, 2015
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For years, a bust of John James Cowperthwaite sat prominently in the foyer of Jimmy Lai’s Next Media office in Hong Kong, along with others of economists F.A. Hayek and Milton Friedman. If that’s all you ever knew about Jimmy Lai, you could at least surmise that he loves liberty and free markets.

Cowperthwaite had been the architect of Hong Kong’s free-market miracle. He started with a destitute rock and turned it into one of the world’s freest and most prosperous economies. (Indeed, I’ve suggested that he deserves to be recognized annually and everywhere with a Cowperthwaite Day on the anniversary of his birthdate, April 25.) Jimmy Lai is precisely the sort of individual that Cowperthwaite had in mind when he decided that entrepreneurs, not central planners, should drive an economy. Because of what Cowperthwaite had done, Jimmy Lai found a hero himself. And Lai, too, would go on to do great things.

Of the characteristics most often identified with successful entrepreneurship, Jimmy Lai possesses them all in abundance. He is a self-starter who takes initiative (and risk) with enthusiasm. He’s creative and intuitive. He’s passionate and tenacious. Where others see problems, he sees opportunity. He’s a visionary, both in business endeavors and for society at large. He doesn’t hesitate to defy conventional wisdom when it points to a dead end. Whatever he undertakes, he musters the courage to act. He puts his all — money, time, and energy — where his mouth is (and where his convictions are).

On paper, Lai’s early life would seem unlikely to produce a “real hero.” He was born in China the year before it fell under Mao Zedong’s dictatorial rule. Lai was smuggled out of the country and into Hong Kong at age 12. In the absence of child-labor laws, which would have ensured his deprivation there, too, Lai went to work in a garment factory for $8 a month. Fifteen years later, he bought his own garment factory and built it into the giant known as Giordano, now a leading international retailer. Lai’s boundless entrepreneurial zeal, free to operate within Hong Kong’s laissez-faire business environment, yielded jobs for thousands and consumer goods for millions.

But in 1989, Beijing’s infamous Tiananmen Square massacre set Jimmy Lai on a new course. With Hong Kong scheduled to be transferred from British to Chinese rule in just eight years, Lai knew that maintaining traditional freedoms under Beijing’s rule would be a challenge. So he ventured into media, creating what soon became the territory’s largest-circulation magazines, Sudden Weekly and Next. In spite of Beijing’s coercion of advertisers, Jimmy Lai’s tabloid-style newspaper, Apple Daily, is still the premier voice in Asia for the freedoms of speech, press, and enterprise.

Jimmy Lai does not shrink from controversy. The Communist Party of China, he wrote in a 1994 column, is “a monopoly that charges a premium for a lousy service.” He defended the student demonstrators when they went into the streets by the hundreds of thousands in late 2014 in defense of democracy. He routinely exposed corruption in both government and business, including the especially toxic brand of corruption that arises when the two get in bed together. He sold Giordano, the apparel firm he founded, to save it from Beijing’s intense pressure, but he refuses to this day to renounce his principles.

In December 2014, he revealed that he was stepping down as publisher of Apple Daily and chairman of Next Media to devote more time to family and personal interests. A month later, and for the second time, unknown assailants firebombed his home. He remains under intense scrutiny from Beijing, which regularly employs ugly rumors, threats of litigation, and other nefarious means to undermine his influence.

Earlier this year, Lai told the New York Times that he never planned to make his media empire into a family dynasty. His six children (ages 8 to 37) are not in line as heirs to that business or its leadership positions. “I don’t think I should ask my kids to inherit my business, because they can’t start where I did,” he said. “I was from the street. I’m a very different make of person. I’ve been a fighter all my life.”

Whatever the future holds for Jimmy Lai, friends of liberty everywhere can count him as one very brave man.

For additional information:

In the Freeman:

Lawrence W. (“Larry”) Reed became president of the Foundation for Economic Education (FEE) in 2008. Prior to that, he was a founder and president for twenty years of the Mackinac Center for Public Policy in Midland, Michigan. He also taught Economics full-time and chaired the Department of Economics at Northwood University in Michigan from 1977 to 1984.

He holds a B.A. degree in Economics from Grove City College (1975) and an M.A. degree in History from Slippery Rock State University (1978), both in Pennsylvania. He holds two honorary doctorates, one from Central Michigan University (Public Administration—1993) and Northwood University (Laws—2008).

This article was originally 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.
USA FREEDOM Act: Just Another Word for Lost Liberty – Article by Ron Paul

USA FREEDOM Act: Just Another Word for Lost Liberty – Article by Ron Paul

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Ron Paul
May 4, 2015
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Apologists for the National Security Agency (NSA) point to the arrest of David Coleman Headley as an example of how warrantless mass surveillance is necessary to catch terrorists. Headley played a major role in the 2008 Mumbai terrorist attack that killed 166 people.While few would argue that bringing someone like Headley to justice is not a good thing, Headley’s case in no way justifies mass surveillance. For one thing, there is no “terrorist” exception in the Fourth Amendment. Saying a good end (capturing terrorists) justifies a bad means (mass surveillance) gives the government a blank check to violate our liberties.
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Even if the Headley case somehow justified overturning the Fourth Amendment, it still would not justify mass surveillance and bulk data collection. This is because, according to an investigation by ProPublica, NSA surveillance played an insignificant role in catching Headley. One former counter-terrorism official said when he heard that NSA surveillance was responsible for Headley’s capture he “was trying to figure out how NSA played a role.”

The Headley case is not the only evidence that the PATRIOT Act and other post-9/11 sacrifices of our liberty have not increased our security. For example, the NSA’s claim that its surveillance programs thwarted 54 terrorist attacks has been widely discredited. Even the president’s Review Group on Intelligence and Communications Technologies found that mass surveillance and bulk data collection was “not essential to preventing attacks.”

According to the congressional Joint Inquiry into Intelligence Activities before and after the Terrorist Attacks of September 11, 2001 and the 9/11 Commission, the powers granted the NSA by the PATRIOT Act would not have prevented the 9/11 attacks. Many intelligence experts have pointed out that, by increasing the size of the haystack government agencies must look through, mass surveillance makes it harder to find the needle of legitimate threats.

Even though mass surveillance threatens our liberty, violates the Constitution, and does nothing to protect us from terrorism, many in Congress still cling to the fiction that the only way to ensure security is to give the government virtually unlimited spying powers. These supporters of the surveillance state are desperate to extend the provisions of the PATRIOT Act that are set to expire at the end of the month. They are particularly eager to preserve Section 215, which authorizes many of the most egregious violations of our liberties, including the NSA’s “metadata” program.

However, Edward Snowden’s revelations have galvanized opposition to the NSA’s ongoing violations of our liberties. This is why Congress will soon vote on the USA FREEDOM Act. This bill extends the expiring surveillance laws. It also contains some “reforms” that supposedly address all the legitimate concerns regarding mass surveillance.

However, a look at the USA FREEDOM Act’s details, as opposed to the press releases of its supporters, shows that the act leaves the government’s mass surveillance powers virtually untouched.

The USA FREEDOM Act has about as much to do with freedom as the PATRIOT Act had to do with patriotism. If Congress truly wanted to protect our liberties it would pass the Surveillance State Repeal Act, which repeals the PATRIOT Act. Congress should also reverse the interventionist foreign policy that increases the risk of terrorism by fostering resentment and hatred of Americans.

Fourteen years after the PATRIOT Act was rushed into law, it is clear that sacrificing liberty does little or nothing to preserve security. Instead of trying to fool the American people with phony reforms, Congress should repeal all laws that violate the Fourth Amendment, starting with the PATRIOT Act.

Ron Paul, MD, is a former three-time Republican candidate for U. S. President and Congressman from Texas.

This article is reprinted with permission from the Ron Paul Institute for Peace and Prosperity.

Will the Fed Let Innovation Work Its Magic? – Article by Edin Mujagic

Will the Fed Let Innovation Work Its Magic? – Article by Edin Mujagic

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Edin Mujagic
April 21, 2015

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Sometimes one finds true gems in one’s archives. Recently I came across a speech by then-chairman of the Fed, Ben Bernanke, from May 18, 2013. It was the commencement speech at Bard College at Simon´s Rock, in Great Barrington, Massachusetts. In it, Bernanke chose to forget for a while the dire straits the Western economy is in and focused on prospects for economic growth in the long run, which he defined as “measured in decades, not months or quarters.”

In short, Bernanke focused on scientific and technological progress, more commonly described as innovation. He envisaged a fourth wave of innovation — the first three being the early industrial era (mid-1700s until mid-1800s), the modern industrial era (from 1880 onwards), and the IT-revolution.

His commencement speech was a speech of hope and of encouragement. But Bernanke did not tell the whole story. The then-Fed chairman failed to mention that living standards will depend on more than innovation. At least as important is the role of the very institution he chaired, the Federal Reserve, and what it does or does not do. If it allows high inflation to take hold — either through action or inaction — that would annihilate a very substantial part of the increase in living standards due to innovation.

And yet, recent history strongly suggests that the Fed will end up destroying a large part of the increase in living standards of those graduates Bernanke was speaking to. For example, at the beginning of 2013 Bernanke spoke at another American college. During the Q&A session, he said that “the worst mistake the Fed can make is to tighten monetary policy too soon.” In other words, the then-chairman essentially promised to raise interest rates too late. Nowadays, Bernanke may be gone from the Fed, but his line of thinking on monetary policy certainly has not, and indeed, this line of thinking reflects dominant Fed policy well beyond the Bernanke years.

Innovation and Living Standards

Bernanke, like Greenspan before him, is counting on innovation to keep the economy moving. As well he should. Technological innovation often leads to more efficient production and greater worker productivity which leads to higher wages and more affordable goods.

But if Bernanke is going to tell students that technology will make their lives better, he should also mention the role that he himself and other central bankers play in stifling the positive effects of innovation.

We can see multiple examples of this phenomenon in recent decades. For example, if we consider the effect that China’s entrance into the global economy should have had on living standards in the US, we find the actual results to be somewhat underwhelming. We should have witnessed growth in living standards similar to what we witnessed toward the end of the nineteenth century as the US industrialized. But in fact, the record of growth in real wealth in the US has been disappointing at best.

For example, technological progress due to the Industrial Revolution and globalization in the late nineteenth century led to continuous deflation in the US, and hence unprecedented increases in welfare. Research by Michael Bordo at Rutgers, shows that on average, prices fell by 1.2 percent each year between 1870 and 1896. Real living standards increased substantially over the same time period. Labor market economists in the United States have been able to reconstruct wage development in the United States since 1830. In every decade the real wage was higher than the preceding decade. That is, until the 1970s.

In contrast, in the decades since the early 1980s, as Asia was joining the world with its own industrial revolution, each year prices increased in the US by more than 2 percent. According to the statistics available from US Census, real median household income in the United States (i.e., income adjusted for inflation) barely moved between 1980 and 2012. This is odd, given the fact that economic growth averaged some 3 percent per annum and labor productivity soared by some 50 percent in total. A working American male earned approximately $48,000 in 1969. Adjusted for inflation, his income had barely grown by the time the current economic crisis started.

The main difference between the two periods is that in 1800s there was no Federal Reserve, and the money supply, while certainly not completely non-inflationary, was restrained by the absence of a central bank.

Lost Opportunities

In an unhampered market, technological progress, innovation, and globalization in the decades before the current crisis should have led to three things: slower wage growth, larger profits, and lower prices. In other words, what firms like Apple accomplished (i.e., the creation of innovative, labor-saving products made available at ever-lower prices) on a micro scale, should have happened on the macro-level as well. Slower wage growth would have been inevitable because of increased global competition in the labor market and the constant and increasing threat of jobs being offshored. Larger profits would have occurred economy-wide because of this fact, and the fact that production costs fell. And finally, lower prices would have spread throughout the economy because, due to technological progress, globalization, falling wages, and falling transportation costs.

The first two effects manifested themselves. As mentioned, real income barely budged in the last few decades in the United States. This becomes evident when we take a look at the total employee compensation in the United States. Measured as a share of GDP, US wages in recent years have been lower than during any other period since World War II. At the end of the war, the ratio was 53.6 percent. Nowadays, we find it below 45 percent.

Moreover, as a rule of thumb, the lower the share of wages in any country’s GDP, the higher the share of profits. So we find the second effect evident as well: profits increased.The third effect, however, falling prices, has been largely prevented by the intervention of the central bank. In fact, the Fed aimed for, and continues to aim for some 2 percent inflation per annum. The Fed has been very successful in preventing prices from falling even when the downward pressure on prices was strong, due to the aforementioned combination of technological progress, innovation, globalization, and free trade.

In more than a century before the inception of the Fed in 1913, cumulative inflation in the United States was approximately 0 percent. Between January 1, 1914 and July 2013, cumulative inflation in the United States stood at 2,236 percent, prompting Milton Friedman to write — way back in 1988 —that “no major institution in the US has so poor a record of performance over so long a period, yet so high a public reputation.”

A logical consequence of any “fourth wave” of innovation should be deflation, or falling prices. Then and only then will the living standards of those graduates who were listening to Bernanke indeed increase strongly. It will not happen as long as the Fed continues to aim for inflation every year and certainly not if the Fed continues to follow its current policy that will, according to many, cause even higher inflation in years to come.

Edin Mujagic has a Master’s degree in macro and monetary economics from Tilburg University (The Netherlands) and is an independent macro-economist and author of Money Murder: How the Central Banks Are Destroying Our Money (published in Dutch, as Geldmoord). He is the youngest-ever member of the Monetaire Kring (Monetary Circle) in the Netherlands, a by-invitation-only policy forum of university professors and senior officials at the central bank, ministry of Finance, banks, pension funds and other financial institutions.

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.

Michel Chevalier’s Case Against the Patent System – Article by Louis Rouanet

Michel Chevalier’s Case Against the Patent System – Article by Louis Rouanet

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Louis Rouanet
April 17, 2015
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Michel Chevalier (1806–1879) was a very influential French economist during the second half of the nineteenth century. He is still widely known in France for being the architect of the Cobden-Chevalier Treaty of 1860 which was the free-trade agreement between France and Great Britain. Michel Chevalier is, however, less known for his major contribution to the intellectual property debate. [1] Contrary to Jean Baptiste Say, Gustave de Molinari, and many other French economists, Chevalier fiercely opposed the patent system. As Fritz Machlup remarked: “Among French economists, Michel Chevalier was probably the most emphatic in the joint antagonism to tariffs and patents, declaring that both ‘stem from the same doctrine and result in the same abuses.’”

Taking a fresh look at Michel Chevalier’s major work, Les Brevets d’invention (1878), we find it to be not only a well-written and powerful book, but also has remained impressively relevant. The arguments advanced by Chevalier anticipate the current arguments of the present opponents of intellectual property.

Patents as Contrary to Freedom and Economic Progress

Michel Chevalier argues that patents cannot be justified if they are contrary to freedom, even if beneficial to technological change. For him “From the moment we can make effective the patent only through inquisitorial expedients, violence, and subversion of liberty of labor, it is proof that we must renounce patents.” Chevalier rejects utilitarianism as a sufficient method to justify or refute the patent system. Chevalier’s opposition to patents, however, is not just based on moral arguments but shows the disastrous effects of this system for both foreign trade and the economy in general.

According to Chevalier, patents are of the same nature as privileges and monopolies which were prevalent during the Ancien Régime. They are also comparable in their effects to protectionist policies:

In absolute terms, patents diminish the productive power of nations that recognize them: evident proposition for those who believe that freedom, free competition, is the great lever of industrial progress.

Chevalier goes on to note the conservative and anti-innovation nature of monopolies and gives many examples of monopolies during the Ancien Régime. According to him, the innovators during the Ancien Régime weren’t rewarded, not because of the absence of patents, but because of the corporation guild system which was destroying competition and freedom to entry into markets. Thus, the innovators were constantly sued by guilds and consumers rarely benefited from their inventions. This argument is still relevant today. Indeed, companies protected from competition and government-owned corporations are often less innovative and more subject to conservative measures. Sectors typically run by government such as schools experience very little technological progress. On the other hand, the competitive process of the market gives incentives for the actors to differentiate from the other producers. As Pascal Salin stated, the company which makes the highest profits on a free market is the company which is the best positioned to “invent the future.” The essential virtue of competition is that it encourages producers to innovate in order to better serve the needs of consumers.

As one of his more striking examples, Chevalier examines the case of aniline — a dye and major innovation in the chemical industry — and shows how monopoly, resulting from patents, leads to hampered innovation. His interpretation of the problems caused by patents in the chemical industry at the time is consistent with more recent studies done by Boldrin and Levine in Against Intellectual Monopoly, now the seminal work on the topic.

Innovation as a Process

Chevalier understood that innovation is, above all, a process and that giving privileges to the innovator will destroy this process, leading to less and not more inventions. He wrote:

Every industrial discovery is the product of the general ferment of ideas, the result of an internal work which was accomplished with the support of a large number of successive or simultaneous collaborators in society, often for centuries.

This argument regarding the cumulative nature of innovation is still the most powerful argument against intellectual monopoly today and has also been the theme of several recent studies.2 Similar to Chevalier, Hayek saw innovation as a process and stated that “it is not obvious that such forced scarcity [intellectual property] is the most effective way to stimulate the human creative process.”

In an 1862 debate in the Académe des Sciences Morales et Politiques, Chevalier gave the example of Louis Daguerre, one of the inventors of photography, who didn’t seek a patent for his system of photography. According to Chevalier, the absence of a patent led to necessary improvements of the daguerreotype and fostered its widespread use. His conclusion is the following:

The spirit of man proceeds only by successive trials and repeated attempts. Discoveries do not arrive with a single bound to the degree of perfection or completion, which is reserved for them; there must be renewed, persevering efforts, cut by breaks that allow, so to speak, to breath. … If it is true that the invention must pass through the hands of twenty people before reaching its final state, it follows that the exclusive privilege granted to the first patented, and to each of his followers, prevents this practical result rather than facilitate it.

The Increasing Number of Patents and Negative Consequences

Already during the nineteenth century, legal instability and uncertainty challenged the actual efficiency of the patent system and the economists were very much aware of this problem. Chevalier warned that the patent system would lead to legal uncertainty for the companies and would lead the industry back to a guild system where no entrepreneur would dare to enter a market for fear of being sued by patent holders. Chevalier was ahead of his time by denouncing what can be considered the ancestors of today’s patent trolls.

Chevalier concluded his 1862 article by stating: “I think I have said enough to show that the patent legislation has been an eccentricity of the legislator.” He went further in 1863 and added that “[a]ll friends of industrial and social progress must work together to rescue the industry of obstacles, obsolete remains of the past. Patents must disappear first.” [3]

1. Fritz Machlup and Edith Penrose briefly discussed Michel Chevalier in “The Patent Controversy in the Nineteenth Century,” Journal of Economic History, 1950.

2. See Alberto Galasso et Mark Schankerman, “Patents and Cumulative Innovation: Causal Evidence from the Courts”, NBER working paper, 21 June 2014 ; and also, Alessandro Nuvolari, “Collective Invention during the British Industrial Revolution: The Case of the Cornish Pumping Engine,” Cambridge Journal of Economics 28, No. 3 (2004).

3. Quoted in Eugène Pouillet, “Traité théorique et pratique des brevets d’invention et de la contrefaçon,” 1909, pp. x–xi.

Louis Rouanet is a student at Sciences Po Paris (Institute of Political Studies) where he studies economics and political science.

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.

A Portrait of the Classical Gold Standard – Article by Marcia Christoff-Kurapovna

A Portrait of the Classical Gold Standard – Article by Marcia Christoff-Kurapovna

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The New Renaissance Hat
Marcia Christoff-Kurapovna
April 15, 2015
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“The world that disappeared in 1914 appeared, in retrospect, something like our picture of Paradise,” wrote the economist Cecil Hirsch in his June 1934 review of R.W. Hawtrey’s classic, The Art of Central Banking (1933). Hirsch bemoaned the loss of the far-sighted restraint that had once prevailed among the “bankers’ banks” of the West, concluding that modern times “had failed to attain the standard of wisdom and foresight that prevailed in the 19th century.”That wisdom and foresight was once upon a time institutionalized throughout an international monetary culture — gold-based, wary of credit, and contemptuous of debt, public or private. This world included central banks including the Bank of England, the Bank of France, the Swiss National Bank, the early Federal Reserve, the Imperial Bank of Austria-Hungary, and the German Reichsbank. But the entrenched hard-money ideology of the time restrained all of them. The Bank of Russia, for example, which once required 50 percent to 100 percent gold backing of all notes issued, possessed the second largest gold reserves on the planet at the turn of the twentieth century.

“The countries that were tied together in the gold standard system represented to a not inconsiderable degree a community of interest in and responsibility for the maintenance of economic and financial stability throughout the world,” recounted Aldoph C. Miller, member of the Federal Reserve Board from 1914 to 1936, in The Proceedings of the Academy of Political Science, in May 1936. “The gold standard was the one outstanding symbol of unity and economic solidarity which the nineteenth century world had developed.”

It was a time when “automatic market forces,” as economists of the day referred to them, prevailed over monetary management. Redeemability of money in (fine) gold ensured, within limits, stability in foreign exchange rates. Credit was extended only as far as reserve ratios would allow, and central banks were required to keep fixed reserves of gold against notes-in-circulation and against demand deposits.

When Markets Dominated Monetary “Policy”

Gold flows regulated international price relationships through markets, which adjusted themselves accordingly: prices rose when there was an influx of gold — for example, when one country received a debt payment from another country (always in gold), or during such times as the California or Australian gold rushes of the 1870s. These inflows meant credit expansion and a rise in prices. An outflow of gold meant credit was contracted and price deflation followed.

The efficiency of that standard was not impeded by the major central banks in such a way that “any disturbance of economic or financial character originating at any point in the world which might threaten the continued maintenance of economic equilibrium was quickly detected by foreign exchanges,” Miller, the Federal Reserve board member, noted in his paper. “In this way, the gold standard system became in a very real sense a regime or rule of economic health, a method of catching economic disturbances in the bud.”

The Bank of England, the grand master of them all, was the financial center of the universe, whose tight handle on its credit policies was so disciplined that the secured the top spot while not even holding the largest gold reserves. Consistent in its belief that protection of reserves was the chief, and only important, criterion of credit policy, England became the leading exporter of capital, the free market for gold, the international discount market, and international banker for the trade of other countries, as well as her own. The world was in this sense on the sterling standard.

The Bank of France, wisely admonished by its founder, Napoleon, to make sure France was always a creditor country, was so replete with reserves it made England a 500 million franc loan (in 1915 numbers) at the onset of the World War I. Switzerland, perhaps the last “19th-century-style” hold-out today with unlimited-liability private bankers and strict debt-ceiling legislation, also required high standards of its National Bank, founded in 1907. By the 1930s that country had higher banking reserves than the US; the Swiss franc was never explicitly devalued, unlike nearly every other Western nation’s currency, and the country’s domestic price level remained the most stable in the world.

For a time, the disciplined mindset of these banks found its way across the Atlantic, where the idea of a central bank had been long the subject of hot debate in the US. The economist H. Parker Willis, writing about the controversy in The Journal of the Proceedings of the Academy of Political Science, October 1913, admonished: “The Federal Reserve banks are to be ‘bankers’ banks,’ and they are intended to do for the banker what he himself does for the public.”

At first, the advice was heeded: in September 1916, almost two years after its founding on December 23,1913, the fledgling Fed worked out an amendment to its gold policy on the basis of a very conservative view of credit. This new policy sought to restrain “the undue and unnecessary expansion of credit,” wrote Fed board member Miller, in an article for The American Economic Review, in June 1921.

The Bank of Russia, during the second half of the nineteenth century steered itself through the Crimean War, the Russo-Turkish War, the Russo-Japanese War, impending Balkan wars — not to mention all that was to follow — and managed to emerge with sound fiscal policies and massive gold reserves. According to The Economist of May 20, 1899, Russian holdings were 95 million pounds sterling of gold, while the Bank of France held 78 million sterling worth. (Austria-Hungary held 30 million sterling worth of gold and the Bank of England 30 million sterling worth of both gold and silver.) “Russia up to the very moment of rupture [with Japan, 1904–1905], was working imperturbably at the progressive consolidation of her finances,” reported Karl Helfferich of the University of Berlin, at a meeting of The Royal Economic Society [UK] in December 1904. “Even in years of industrial crises and defective harvest, her foreign trade showed an excess of exports over imports more than sufficient to compensate payments sent abroad. And, as guarantee her monetary system she has succeeded in a amassing and maintaining a vast reserve of gold.”

These banks, in turn, drew on the medieval/Renaissance and Baroque-era banking traditions of the Hanseatic League, the Bank of Venice, and Amsterdam banks. Payment-on-demand “in good and heavy gold” was like a blood-oath binding the banker-client relationship. The transfer of credit “did not arise from any such substitution of credit for money,” noted Charles F. Dunbar, in The Quarterly Journal of Economics of April 1892, “but from the simple fact that the transfer in-bank saved the necessity of counting coin and manual delivery of every transaction.”

Bankers were forbidden to deal in certain commodities, could not make loans or create credit for the purchase of such commodities, and forbade both foreigners and citizens from buying silver on credit unless the same amount in cash was in the bank. According to Dunbar, a Venetian law of 1403 on reserve requirements became the basis of US banking law on the deposits of public securities in the late 1800s.

After the fall of bi-metallism in the 1870s, gold continued to perform monetary functions among the main countries of the Western world (and the well-administered Bank of Japan). It was the only medium of exchange and the only currency with unrestricted legal tender. It became the vaunted “measure of value.” Bank currency notes were simply used as auxiliary to gold and, in general, did not enjoy the privilege of legal tender.

The End of An Era

It was certainly not a flawless system, or without periodic crises. But central banks had to act in an exceptionally prudent manner given the all-over public distrust of paper money.

As economist Andrew Jay Frame of the University of Chicago, writing in The Journal of Political Economy, in January 1912, noted: “During panics in Britain in 1847 and 1866, when cash payments were suspended, the floodgates of cash were opened [by The Bank of England], the governor sent word to the street that solvent banks would be accommodated, and the panic was relieved.” Frame then adds: “However, this extra cash and the increased loans that went with it were very quickly put to an end to avoid credit expansion.”

The US was equally confident of its prudent attitude. Aldoph Miller, writing of Federal Reserve policy, remarked: “The three chief elements of the policy of a central bank or system of reserve holding institutions are best disclosed in connection with the attitude towards 1) gold 2) currency 3) credit.” He noted proudly: “The federal reserve system has met [these] tests on the whole with remarkable success.”

But after World War I, a different international landscape was left behind. England had been displaced as the center of international finance; the US and France emerged as the chief post-war creditor countries. The mechanism of the gold standard to which depreciated currencies could be related no longer existed. Only the US was left with a full gold standard. England and France had a gold bullion standard and other countries (Germany, primarily) had a gold-exchange standard.

A matrix of unbalanced trade relationships began to saturate the international economy. Then, with so many foreign countries attendant upon its speculative boom, the US manipulated its own domestic credit policies to ease credit and exchange-standard controls. This eventually culminated in an international financial crisis of 1931. Under Bretton Woods (1944), the gold standard was effectively abandoned: domestic convertibility was illegal and the role of gold was very constrained in favor of the dollar.

“It was, at least in theory, simple enough in the old days,” wrote a wistful W. Randolph Burgess, head of the New York Federal Reserve, in 1938. “In the present strange new world, where the old gold portents have lost their former meaning, where is the radio beam which the central banker may follow? What is the equivalent of gold?”

The men of his era and of the late nineteenth century understood the meaning of such a question and, more importantly, why it is one that must be asked. But theirs was a different world, indeed — one without “QE,” ZIRP,” or “Unknown Knowns” as fiscal policy. And there were no helicopters, either.

Marcia Christoff-Kurapovna is at work on the biography of a prominent European head of state and businessman.  Her work has appeared in such publications as The Wall Street Journal, The Economist and Foreign Affairs.

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.

The Ukrainian Regime’s Censorship Spreads West to Canada, and Political Correctness is to Blame – Article by G. Stolyarov II

The Ukrainian Regime’s Censorship Spreads West to Canada, and Political Correctness is to Blame – Article by G. Stolyarov II

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The New Renaissance Hat
G. Stolyarov II
April 14, 2015
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There is nothing friendly to liberty or to Western values about the government of Petro Poroshenko and Arseniy Yatseniuk in Ukraine – a regime completely incapable of understanding the principle of individual rights or the freedoms of speech, property, and conviction that this principle entails. The Ukrainian government has just enacted a law prohibiting the private expression of Communist symbols and ideology, while elevating to “national hero” status the Ukrainian Insurgent Army of Stepan Bandera, who collaborated with the Nazi army during World War II and committed systematic acts of genocide against Russian, Belarusian, Polish, and Jewish civilians. Bandera serves as an explicit inspiration for the neo-Nazi Right Sector paramilitary organization, whose fighters have been documented by Amnesty International to have committed extensive war crimes against civilians in the Donbass region, and whose leader Dmytro Yarosh now holds a prominent position as advisor to the Ukrainian Commander-in-Chief.

Criticism of Bandera and his Ukrainian Insurgent Army is now illegal in Ukraine. According to UaPosition, a Ukrainian website aimed at informing non-Ukrainians about Ukraine, the text of the law legitimizing Bandera’s thugs reads as follows: “Public denial of the legitimacy of the struggle for the independence of Ukraine in the twentieth century [is] recognized [as an] insult to the memory of fighters for independence of Ukraine in the XX century [and as] disparagement of the Ukrainian people and is illegal.”

As David Boaz put it, “One difference between libertarianism and socialism is that a socialist society can’t tolerate groups of people practicing freedom, but a libertarian society can comfortably allow people to choose voluntary socialism.” No libertarian or even remotely quasi-libertarian society would censor the expression of even the most strident socialist or communist viewpoints. On the other hand, legal censorship of opposing viewpoints was indeed a hallmark of the former Soviet Union. A government that attempts to censor the ideas that, at least ostensibly, animated Soviet policies, becomes just a mirror image of the Soviet regime by adopting the very same policies in essence. In addition, the Ukrainian regime has prohibited films alleged to “glorify” the Russian military and has imprisoned journalists and activists who criticized military conscription, such as Ruslan Kotsaba.

The Poroshenko/Yatseniuk government has assumed the worst characteristics of the former USSR regime without any of its few decent attributes. By validating both historical genocidal ethnic nationalism and its neo-Nazi successor movements, the Ukrainian regime has departed from one of the most important admirable aspects of the post-1941 USSR: its adamant opposition to Nazism and to the plethora of ethnically tinged fascist movements that arose in the wake of Hitler’s invasions of Eastern Europe. Indeed, one of the reasons why so many Soviet subjects of diverse ethnicities acquiesced to the tyranny of Stalin and his successors was the fact that the Soviet regime did act to protect them against the worse threat of genocide by Hitler and his petty nationalist allies. The prohibition on criticism of the Banderites is, in the eyes of many Ukrainians, Russians, and Belarusians, a prohibition on criticism of the armed gangs who murdered or tried to murder their grandparents.

Even more troubling, however, is that the zeal of “pro-Ukrainian” activists in the West is creating a chilling effect on speech and criticism of the Ukrainian regime even in Canada. Valentina Lisitsa, a world-renowned pianist born in Ukraine who became a US citizen and is currently residing in Paris, has become the latest victim of the campaign to silence those who disagree with militant Ukrainian nationalism. Lisitsa’s performances of classical compositions (see and hear examples here, here, here, and here) are completely apolitical and have attracted tens of millions of views on her YouTube channel. She was due to play Rachmaninoff’s Concerto #2 (earlier recordings are here, here, and here) at the Toronto Symphony Orchestra, before her appearance was cancelled at the behest of anonymous Ukrainian nationalist activists, who also fueled a social-media outcry against Lisitsa. The reason? Lisitsa posted on her Twitter account satirical, often scathing criticism of the Ukrainian government and its war against separatists in the Donbass – specifically condemning the neo-Nazi and genocidal strains among the Ukrainian government’s paramilitary supporters. She has remained steadfast in defending her posts as free expression – and rightfully so, as her liberty to express her views does not require those views or the manner of their expression to be inoffensive or universally agreeable to all. Furthermore, any manner of words or imagery she used pales in comparison to the real deaths of over 6,000 civilians (and likely many more) in the Donbass, many at the hands of the Ukrainian army and its allied “volunteer” paramilitary battalions. Lisitsa was outraged at the people and policies that brought about the deaths of these innocents, and she was right to proclaim her outrage.

But whether or not one agrees with Lisitsa or with the manner in which she expressed her views, her performance of Rachmaninoff had no relationship to any of her political activities – and none of her other classical performances over the course of many years had even the remotest political aspect. By successfully pressuring the Toronto Symphony Orchestra to cancel Lisitsa’s appearance, the Ukrainian nationalist activists recreated in Canada the same politicization of classical music for which Stalin’s Soviet Union was infamous. Some of the most innovative 20th-century composers – including Sergei Prokofiev, Dmitri Shostakovich, and Aram Khachaturian – were often victims of Stalin’s denunciations and sometimes came perilously close to imprisonment or worse. In a free society, it is generally recognized that a person’s artistic prowess and political positions are separate matters unless the artist wishes to intentionally combine the two – as, for instance, in a work of explicitly politically motivated art. Preventing the performance of art that is inherently apolitical, on the grounds of the artist’s outside political activities, creates a chilling effect on both art and peaceful political activism. Artists, fearing that their livelihoods would be denied to them if they became too vocal about current events and ran afoul of one pressure group or another, would be incentivized to stick only to bland, uncontroversial statements or avoid discussing any subjects where significant disagreements might arise. Art would suffer, as works of technical and esthetic merit would become more difficult for audiences to access, given that anybody with controversial political views would be shut out of the talent pool.

The cultural reign of political correctness in the West further exacerbates the threat of the chilling effect on art and speech. The political repression of art in the contemporary West would come not from a top-down decree by a government, but rather due to any sufficiently vocal special interest claiming to be “offended” – not just by an idea contrary to its own agenda, but by the whole person expressing that idea. It then becomes the case that no Stalin is necessary – but the effect is the same: ideologically motivated threats cowing artists into acquiescence to the popular political agenda of the day. A person can become widely denounced, blacklisted, and shut out from opportunities that should be determined by artistic merit alone – not due to any conspiracy, but rather because the typical, middle-of-the-road decision makers in private as well as public institutions become fearful of the special interests’ ire. Political correctness is not primarily a problem of governments, but rather a problem of a deeply broken societal and intellectual culture, where not giving offense is prioritized over the pursuit of truth and justice. In the case of Lisitsa, as usual, the politically correct prohibition on offense results in the most offensive possible ideologies having a free hand to shut down dissenting views. What “offended” fundamentalist Islam has been able to perpetrate in shutting down debate in Europe for over a decade, “offended” Ukrainian nationalism is beginning to inflict in Canada now, often with the vociferous support of media commentators crusading against “hate speech” – a phrase which can mean anything they want it to mean.

The Ukrainian nationalists are able to export their agenda of censorship and intimidation to the West as parasites taking advantage of a weakened host. Political correctness is the disease that renders Western public discourse vulnerable to their arguments, while endangering the vital critical voices who need to be heard in order to prevent a tragic Western-led escalation of the Ukrainian civil war. It seems that the only way the Ukrainian regime and its nationalist allies will be able to render Ukraine more Western is to render the West more like Ukraine. We in the West need to strengthen our defenses and develop an immunity against this incursion of illiberalism by reaffirming the values of individual rights, open discourse and debate on controversial ideas, free expression of dissenting views, and resistance to the dependence of art on political orthodoxy.

How the West Invented Individualism – Article by Roger McKinney

How the West Invented Individualism – Article by Roger McKinney

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Roger McKinney
April 1, 2015
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Inventing the Individual, by Larry Siedentop, Belknap Press, 2014

I lived in Morocco a few decades ago and needed some furniture for our apartment. A college student I had befriended, Hamid, offered to take my cash and negotiate with the dealer for me while I drank coffee in a nearby qahwa because, as he said, the price of the furniture would triple if the merchant glimpsed an American within a block of his store.

I hesitated to take Hamid’s offer only because I didn’t want to put him to so much trouble, but he mistook my pause for distrust. So he assured me that he could not cheat me because I had eaten dinner with him and his family and therefore enjoyed a status similar to that of a family member.

No Moroccan can cheat a family member or anyone who has eaten at their table. I gave Hamid my cash and later returned home to find a nice selection of furniture at a good, Moroccan, price.

Later, I met the owner of a construction firm who enlightened me further on business ethics in Morocco. He told me he spent a large part of his time thwarting the efforts of suppliers, customers, and employees to cheat him. The cleverness that went into dreaming up new ways to cheat him surprised me. He confirmed what Hamid had told me: cheating others is not considered unethical at all but a sign of an astute businessman. But cheating family members is immoral.

Moroccan business ethics might be appalling to westerners, but ancient Greeks and Romans would have understood and applauded them according to Larry Siedentop in his latest book, Inventing the Individual: The Origins of Western Liberalism.

In Siedentop’s words, the book is “… a story about the slow, uneven and difficult steps which have led to individual moral agency being publicly acknowledged and protected, with equality before the law and enforceable ‘basic’ rights.”

Like Moroccans, ancient Greeks and Romans cared little for non-family members. Those “… outside the family circle were not deemed to share any attributes with those within. No common humanity was acknowledged, an attitude confirmed by the practice of enslavement.”

The past is a foreign country but foreign countries are more foreign than politicians and economists in the West understand. The prize for the reader in Siedentop’s package is the understanding that the individualism at the core of classical liberalism is a new and rare gem.

When we fail to recognize its uniqueness, we project onto past and modern cultures our own values. Siedentop explains the failures of attempts at nation building by US politicians in the Middle East as well as the aborted efforts at economic development by mainstream economists without mentioning either.

Classical liberal individualism did not exist in the ancient world. Siedentop wrote, “Since the sixteenth century and the advent of the nation-state, people in the West have come to understand ‘society’ to mean an association of individuals.” For the ancient Romans and Greeks society consisted of a collection of extended families. The heads of the families, including family-based clans and tribes, held all the power and made all of the decisions. Only the heads of families could become citizens in the polis.

Antiquity had no notion of the powers of the government being limited by the rights of individuals, even for family heads. “Citizens belonged to the city, body and soul.” Women, children, slaves and non-citizens held no rights and lived only at the pleasure of the family head.

The ancients had no concept of the equality of man, either. Even for Plato and Aristotle, a natural hierarchy of humanity existed, much like the caste system of India. Some were born to rule, others to serve or fight. Submitting to the needs of the city as determined by the family heads was the only reason for existence and any person who failed to contribute to the cause could be legally killed — or worse — exiled. Politics and war became the noblest occupations while commerce was held in contempt.

Siedentop devotes just the first chapter to the culture of ancient Greece and Rome, but I think it’s the most important chapter because it forces the reader to face the stark contrast between that culture and the culture of the modern West. The story of the painfully slow gestation of individualism from its conception in early Christianity through the monastic movements, revolutions in church government, the creation of secular space, and finally its birth during the Reformation is rewarding, but the real value of the book lies in the understanding that this process took place only in the West and nowhere else in the world in history.

To grasp the impact of Siedentop’s thesis, readers need to place it alongside the works of Helmut Schoeck, Geert Hofstede, and Shalom H. Schwartz. Schoeck informs us that envy is the organizing principle of society and the enemy of individualism. Hofstede and Schwartz show that the distinguishing feature of the West today is the classical liberal individualism that the rest of the world not only does not share, but abhors. Within the West, the US stands out as an extreme outlier on individualism.

Of course, to round out the topic people need to read Hayek’s essay, “Individualism: True and False” to understand how socialists created a pseudo-individualism that is for the most part a resurrection of ancient Greek and Roman collectivism.

Classical liberal individualism does not exist in the modern world outside of the US and Europe, and it is dying here. The collectivist cultures of the rest of the world differ little from those of ancient Greece and Rome. If economists and politicians understood the uniqueness of classical liberalism, they would quit trying to pour new wine into old wine skins, which causes the old to explode. And they would mourn the rise of socialism.

Roger McKinney is an analyst for an HMO and teaches economics for a small private college.

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.