". . . a republic, if you can keep it."
“The dangers of deflation are chimerical, but its charms are very real. There is absolutely no reason to be concerned about the economic effects of deflation, unless one equates the welfare of a nation with the welfare of its false elites.” ~Dr. Jörg Guido Hülsmann
From Radio Free Market:
This is one of my favorite Mises Institute podcasts: Inverventionism by George Reismann.
I like Reismann’s approach. He starts with the principle of non-initiation of force; government cannot use violence against peaceful activity, and arrives, inevitably, at libertarianism.
Available here at the Mises Institute.
It seems to me that this failure of the economists to guide policy more successfully is closely connected with their propensity to imitate as closely as possible the procedures of the brilliantly successful physical sciences – an attempt which in our field may lead to outright error. It is an approach which has come to be described as the “scientistic” attitude – an attitude which, as I defined it some thirty years ago, “is decidedly unscientific in the true sense of the word, since it involves a mechanical and uncritical application of habits of thought to fields different from those in which they have been formed.”
. . . .
Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement.
. . . .
We are only beginning to understand on how subtle a communication system the functioning of an advanced industrial society is based – a communications system which we call the market and which turns out to be a more efficient mechanism for digesting dispersed information than any that man has deliberately designed.
If man is not to do more harm than good in his efforts to improve the social order, he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible. He will therefore have to use what knowledge he can achieve, not to shape the results as the craftsman shapes his handiwork, but rather to cultivate a growth by providing the appropriate environment, in the manner in which the gardener does this for his plants. There is danger in the exuberant feeling of ever growing power which the advance of the physical sciences has engendered and which tempts man to try, “dizzy with success”, to use a characteristic phrase of early communism, to subject not only our natural but also our human environment to the control of a human will. The recognition of the insuperable limits to his knowledge ought indeed to teach the student of society a lesson of humility which should guard him against becoming an accomplice in men’s fatal striving to control society – a striving which makes him not only a tyrant over his fellows, but which may well make him the destroyer of a civilization which no brain has designed but which has grown from the free efforts of millions of individuals.
(Read more from nobelprize.org)
The Nobel Prize committee made a rare exception when they awarded the 1974 to Hayek. See: Not New, Not True, Irrelevant or Evil: How Economic Nobel Prizes Are Won
@ 6:15 — Some of Marx’s writing was so horrific that even commie mass murderers like Lenin hid some of his work. It was recently declassified.
In 1848 in a Bonn newspaper editorial, Marx wrote that we have have a lot of racial trash in Europe — Highland Scots, Basques, Poles, Serbs, and other dirty Slavs who would not see the obvious benefits of progressive teaching. They should be destroyed. Violence is the midwife of history.
In an 1856 letter to Engles, he encouraged Engles to ignore his concern that they will be considered mass murderers.
@ 9:15 – the story of the KGB admitting to 42 million dead people.
This Mises Daily article is excerpted from chapters 4, 5, and 6 of Denationalisation of Money: the Argument Refined, by F.A. Hayek.
It tells some of the history of the world in terms of inflation:
Historians have again and again attempted to justify inflation by claiming that it made possible the great periods of rapid economic progress. They have even produced a series of inflationist theories of history,[2] which have, however, been clearly refuted by the evidence: prices in England and the United States were at the end of the period of their most rapid development almost exactly at the same level as 200 years earlier. But their recurring rediscoverers are usually ignorant of the earlier discussions.
From Marco Polo we learn that, in the 13th century, Chinese law made the rejection of imperial paper money punishable by death, and twenty years in chains or, in some cases death, was the penalty provided for the refusal to accept French assignats. Early English law punished repudiation as lese-majesty. At the time of the American revolution, non-acceptance of Continental notes was treated as an enemy act and sometimes worked a forfeiture of the debt.[3]
Only a few of the great powers preserved for a time tolerable monetary stability, and they brought it also to their colonial empires. But Eastern Europe and South America never knew a prolonged period of monetary stability.
I was struck by the clarification to Gresham’s Law given at the end. Something I’d noticed when I encountered the law in my studies:
It is a misunderstanding of what is called Gresham’s law to believe that the tendency for bad money to drive out good money makes a government monopoly necessary. . . . What Jevons, as so many others, seems to have overlooked, or regarded as irrelevant, is that Gresham’s law will apply only to different kinds of money between which a fixed rate of exchange is enforced by law. . . . Indeed, whenever inflation got really rapid, all sorts of objects of a more stable value, from potatoes to cigarettes and bottles of brandy to eggs and foreign currencies like dollar bills, have come to be increasingly used as money, so that at the end of the great German inflation it was contended that Gresham’s law was false and the opposite true.[20] It is not false, but it applies only if a fixed rate of exchange between the different forms of money is enforced.
To restate Gresham’s Law another way, bad money drives out good, IF IT FORCIBLY KEPT AT THE SAME PRICE.
My former Austrian Economics teacher Patrick Barron had another Mises Daily essay.
Excerpt:
A Revolving-Door Lobbyist for the All-Electric Car
Such is the case, as recently reported by the Associated Press, of a lobbyist for an all-electric car.
“Leading the Charge” glorifies Mr. David Sandalow, a US Department of Energy assistant secretary and an avid advocate for the all-electric car. Hybrid cars usually recharge their batteries only while operating on their gasoline-powered engines, but Mr. Sandalow has converted his Toyota Prius hybrid into a plug-in hybrid at the cost of $9,000. Now he can recharge his car’s battery from his home electrical outlet.
Mr. Sandalow is very proud that his daily five-mile commute (a ten-mile round trip) can be accomplished with a gasoline-refueling stop only “about once every month or two.” Nevertheless his car needs to recharge after only 30 miles of travel, so he advocates that the government pursue developing a battery that will allow 100 miles between rechargings.
The government itself estimates the cost of such a battery at around $33,000 per battery. How the government knows this when no such battery yet exists was left unclear.
. . . .
So, by converting his car to a plug-in hybrid for $9,000, buying a yet-to-be produced 100-mile range battery for $33,000, and buying electricity for the equivalence of 75¢ per gallon of gasoline, Mr. Sandalow could have purchased enough $3 per gallon gasoline to enable him to drive to work for 132 years!
. . . .
We must disabuse ourselves of the propensity to believe that anything can be accomplished as long as government throws enough money at it. We have been down this road before with the fast breeder nuclear reactor that was supposed to produce more fuel than it consumed. Billions were wasted. We seem to be doing the same thing today with wind and solar power, too. There may be an economically rational niche for these energy technologies, but only the free market will give us the answer.
The Paul Reveres of the economics profession are riding their horses, warning Americans, “Deflation is coming! Deflation is coming!” From Paul Krugman to Joseph Gagnon to the various mainstream news publications, the message is the same — the government needs to induce inflation now, or else the economy will sink further into the Slew of Despond and unemployment will increase.
A recent U.S. News article declared,
When the price of cars or sweaters or iPods declines, it’s a break for consumers and a welcome sign that economic productivity is improving. That helps drive up living standards. But when the price of everything drops, it’s an alarming development that portends stagnation.
. . . .
After the crisis arrives and the depression begins, various secondary developments often occur. In particular, for reasons that will be discussed further below, the crisis is often marked not only by a halt to credit expansion, but by an actual deflation — a contraction in the supply of money. The deflation causes a further decline in prices. Any increase in the demand for money will speed up adjustment to the lower prices. Furthermore, when deflation takes place first on the loan market, i.e., as credit contraction by the banks — and this is almost always the case — this will have the beneficial effect of speeding up the depression-adjustment process.
Most people, including the majority of economists, make their error in the failure to see that the initial effects are not permanent, provided the government and the monetary authorities permit these adjustments to occur. Just as inflation has a very real and harmful effect upon the relative values of factors of production, deflation also has an effect on the factors, but the effect over time is to return those factors to their proper proportional values, according to consumer preferences.
To put it another way, the economy right now needs deflation, yet all of the public voices are shouting that what we really need is for the economy to take another “hair of the dog.” Rothbard explains,
Just as inflation is generally popular for its narcotic effect, deflation is always highly unpopular for the opposite reason. The contraction of money is visible; the benefits to those whose buying prices fall first and who lose money last remain hidden. And the illusory accounting losses of deflation make businesses believe that their losses are greater, or profits smaller, than they actually are, and this will aggravate business pessimism.
It is true that deflation takes from one group and gives to another, as does inflation. Yet not only does credit contraction speed recovery and counteract the distortions of the boom, but it also, in a broad sense, takes away from the original coercive gainers and benefits the original coerced losers. While this will certainly not be true in every case, in the broad sense much the same groups will benefit and lose, but in reverse order from that of the redistributive effects of credit expansion. Fixed-income groups, widows and orphans, will gain, and businesses and owners of original factors previously reaping gains from inflation will lose. The longer the inflation has continued, of course, the less the same individuals will be compensated.
Some may object that deflation “causes” unemployment. However, as we have seen above, deflation can lead to continuing unemployment only if the government or the unions keep wage rates above the discounted marginal value products of labor. If wage rates are allowed to fall freely, no continuing unemployment will occur.
. . . .
Right now, the Austrians seem to be the economic version of Cassandra, predicting the future and giving sound advice, only to be rejected by most academic economists and certainly the politicians. Krugman last year demanded that the government “stop the pain” via inflation and dramatic increases in government spending.
Unfortunately, more doses of inflation will not stop the pain, at least any longer, and the more the government inflates and recklessly spends, the worse the pain will be. The very “cure” of inflation will be what makes the economy sicker. However, if we would be willing to experience the real economic pain just a little longer, a real recovery would be around the corner. In fact, had the authorities more than two years ago agreed to stop the foolishness of promoting inflation and malinvestments, we would be in recovery now.
Unfortunately, there is going to be no recovery, at least for a long time. Deflation is the answer, but few are listening. Rothbard understood this fact intimately. Those who reject his wise counsel will live to regret it.
What is Austrian Economics?
I think this series of lectures is a great starting point.
Let us not forget how consistently wrong the Keynesian like Bernanke and Krugman have been. Let us not forget how accurately the Austrians predicted the recession we’ve had, and the disastrous recession we’re about to have.
Were there such a category, Somalia would hold a place in Guinness World Records as the country with the longest absence of a functioning central government. When the Somalis dismantled their government in 1991 and returned to their precolonial political status, the expectation was that chaos would result — and that, of course, would be the politically correct thing to expect.
Imagine if it were otherwise. Imagine any part of the globe not being dominated by a central government and the people there surviving, even prospering. If such were to happen and the idea spread to other parts of Africa or other parts of the world, the mystique of the necessity of the state might be irreparably damaged, and many politicians and bureaucrats might find themselves walking about looking for work.
If the expectation was that Somalia would plunge into an abyss of chaos, what is the reality? A number of recent studies address this question, including one by economist Peter Leeson drawing on statistical data from the United Nations Development Project, World Bank, CIA, and World Health Organization. Comparing the last five years under the central government (1985–1990) with the most recent five years of anarchy (2000–2005), Leeson finds these welfare changes:
* Life expectancy increased from 46 to 48.5 years. This is a poor expectancy as compared with developed countries. But in any measurement of welfare, what is important to observe is not where a population stands at a given time, but what is the trend. Is the trend positive, or is it the reverse?
* Number of one-year-olds fully immunized against measles rose from 30 to 40 percent.
* Number of physicians per 100,000 population rose from 3.4 to 4.
* Number of infants with low birth weight fell from 16 per thousand to 0.3 — almost none.
* Infant mortality per 1,000 births fell from 152 to 114.9.
* Maternal mortality per 100,000 births fell from 1,600 to 1,100.
* Percent of population with access to sanitation rose from 18 to 26.
* Percent of population with access to at least one health facility rose from 28 to 54.8.
* Percent of population in extreme poverty (i.e., less than $1 per day) fell from 60 to 43.2.
* Radios per thousand population rose from 4 to 98.5.
* Telephones per thousand population rose from 1.9 to 14.9.
* TVs per 1,000 population rose from 1.2 to 3.7.
* Fatalities due to measles fell from 8,000 to 5,600.
Another even more comprehensive study published last year by Benjamin Powell of the Independent Institute, concludes: “We find that Somalia’s living standards have improved generally … not just in absolute terms, but also relative to other African countries since the collapse of the Somali central government.”
Somalia’s pastoral economy is now stronger than that of either neighboring Kenya or Ethiopia. It is the largest exporter of livestock of any East African country. Telecommunications have burgeoned in Somalia; a call from a mobile phone is cheaper in Somalia than anywhere else in Africa. A small number of international investors are finding that the level of security of property and contract in Somalia warrants doing business there. Among these companies are Dole, BBC, the courier DHL, British Airways, General Motors, and Coca Cola, which recently opened a large bottling plant in Mogadishu. A 5-star Ambassador Hotel is operating in Hargeisa, and three new universities are fully functional: Amoud University (1997) in Borama, and Mogadishu University (1997), and University of Benadir (2002) in Mogadishu.
The Call to “Establish Democracy”
All of this is terribly politically incorrect for the reason I suggested. Consequently, the United Nations has by now spent well over two billion dollars attempting to re-establish a central government in Somalia. (Read more from mises.org)
Somalia is in the news again. Rival gangs are shooting each other, and why? The reason is always the same: the prospect that the weak-to-invisible transitional government in Mogadishu will become a real government with actual power.
The media invariably describe this prospect as a “hope.” But it’s a strange hope that is accompanied by violence and dread throughout the country. Somalia has done very well for itself in the 15 years since its government was eliminated. The future of peace and prosperity there depends in part on keeping one from forming.
As even the CIA factbook admits:
“Despite the seeming anarchy, Somalia’s service sector has managed to survive and grow. Telecommunication firms provide wireless services in most major cities and offer the lowest international call rates on the continent. In the absence of a formal banking sector, money exchange services have sprouted throughout the country, handling between $500 million and $1 billion in remittances annually. Mogadishu’s main market offers a variety of goods from food to the newest electronic gadgets. Hotels continue to operate, and militias provide security.”
To understand more about the country without a government, turn to The Law of the Somalis, written by Michael van Notten (1933-2002) and edited by Spencer Heath MacCallum, sheds light on the little known Somali law, culture and economic situation. Somalia is often cited as an example of a stateless society where chaos is the “rule” and warlords are aplenty.
The BBC’s country profile of Somalia sums up this view as widely publicized by the mainstream media: “Somalia has been without an effective central government since President Siad Barre was overthrown in 1991. Fighting between rival warlords and an inability to deal with famine and disease led to the deaths of up to one million people.”
The first sentence is indeed true: when the president was driven out by opposing clans in 1991, the government disintegrated. The second sentence, however, depicts Somalia as a lawless country in disorder. As for disorder, Van Notten quotes authorities to the effect that Somalia’s telecommunications are the best in Africa, its herding economy is stronger than that of either of its neighbors, Kenya or Ethiopia, and that since the demise of the central government, the Somali shilling has become far more stable in world currency markets, while exports have quintupled.
As for Somalia being lawless, Van Notten, a Dutch lawyer who married into the Samaron Clan and lived the last dozen years of his life with them, specifically challenges that portrayal. He explains that Somalia is a country based on customary law. The traditional Somali system of law and politics, he contends, is capable of maintaining a peaceful society and guiding the Somalis to prosperity. Moreover, efforts to re-establish a central government or impose democracy on the people are incompatible with the customary law.
Van Notten distinguishes between the four meanings of the word “law” — statutory, contractual, customary, and natural law. The common misunderstanding is that legitimate rules only come from formally established entities and that therefore a country without a legislature is lawless. Refuting that misunderstanding, van Notten explains that a perfectly orderly and peaceful country can exist when people respect property rights and honor their contracts. While natural laws denote peace, liberty, and friendly relations, statutory laws represent commands. Statutory laws reflect the preferences of legislators, who impose “morality” on those they govern and regulate their ability to voluntarily enter into contracts. This, according to van Notten, is wrong from the standpoint of both morality and law. (Read more from mises.org)
Lecture from last summer @ Iowa City public library. Sorry for the poor quality.
It always troubles me to see professionally produced, economically illiterate videos condemning capitalism. Here’s one:
David Harvey asks if it is time to look beyond capitalism towards a new social order that would allow us to live within a system that really could be responsible, just, and humane?
@ 3:20 — The fifth of his list of “popular explanations of the crisis” is pretty much correct, though Glenn Beck and the World Bank are hardly apostles of deregulation. Why doesn’t he cite Ron Paul, Peter Schiff, Mises, etc? This guy would do well to study the Austrian School.
@ about 3:40, the narrator asks, “What kind of plausible story can I write [explaining our economic crash] which is none of the above?” I think, WTF? Uniqueness is not how we should judge economic theories. How about a meticulous logical examination? “Renowned academic,” my ass.
@ 4:20, the narrator relates a story about the Queen of England asking economists why they didn’t see it coming. “Story” is a good description for what David Harvey is telling. He ignores the many Austrian Economists who did see it coming, and now see things getting much, much worse before they get better. Maybe we should listen to them before we try David Harvey’s workers’ paradise.
@ 6:00, he speaks from Marx’s flawed class analysis. In a free market, the interested of capital are not opposed to those of labor. They are complimentary. In fact, capital competes with other capital for the best of labor, and labor competes with labor for the best jobs. If you consider each a monolithic class opposed to the other, you will be blind to much of the world. Significantly, Marx, in his writing, never defined his most crucial term: class.
@ 7:15 — Capitalism DOES solve its own crises, if you let people fail, and let people accept whatever they damn well please as money. Bailouts and forcing people to use fiat money have nothing to do with free markets or capitalism.
@ 8:50 — Financial innovation does not empower financiers. Government bailouts and government subsidies empower financiers. If firms were allowed to go bankrupt they would regulated themselves / be regulated by their investors.
@ 10:15 — “I don’t have the solutions.” Here, I completely agree with you, Mr. Harvey.
From their website: For over 250 years the Royal Society for the encouragement of Arts, Manufactures and Commerce (RSA) has been a cradle of enlightenment thinking and a force for social progress. Our approach is multi-disciplinary, politically independent and combines cutting edge research and policy development with practical action.
That’s not enlightenment suckling in their cradle. I think the previous century has seen enough of their sort of “progress.”
This is a wonderful essay I recently discovered by Hans Hermann Hoppe. It demonstrates the anarcho-capitalist point of view.
If the government excludes a person while even one domestic resident wants to admit this very person onto his property, the result is forced exclusion (a phenomenon that does not exist under private property anarchism). Furthermore, if the government admits a person while there is not even one domestic resident who wants to have this person on his property, the result is forced integration (also non-existent under private property anarchism).
Here’s the video of the lecture I posted about earlier.
Socialism in the 21st Century by Dr. Yuri Maltsev at the University of Iowa from Michael McKay on Vimeo.