Inflation Comes in Phases

One of the most interesting things that I recently learned is that "inflation" is a process; it comes in phases. 

According to Murray N. Rothbard's book The Mystery of Banking, inflation comes in phases.  This conclusion was derived earlier by Ludwig von Mises in his study of the German hyperinflation of 1923.

If you were to take a sophomore-level macro-economics course, you would be told that money is neutral, i.e., if the money supply were to double then the price level would also double.  What is interesting about this "inflation phases" theory is that the money neutrality assumption presented in the textbooks does not hold.  In fact, in Phase I, the money supply expands much more than the price level rises.  This is because there are two conflicting forces at work:  the money supply and the behavior of expectations.  The expanding money supply will, for a given demand for money curve, cause the price level to rise, which is the same thing as saying that the purchasing power of money will fall.  However, according to the Misesian inspired theory presented by Rothbard, a second force operates against the first, namely, a change in expectations partially offsets the effects of the money supply expansion.  In particular, the model assumes that in Phase I deflationary expectations exist, i.e., people expect to see a lower price level in the near future.  This implies that people are willing to hold much larger cash balances; consequently, their demand for money increases.  A higher demand for money for any given supply of money tends to depress prices or to increase the purchasing power of money.  The reason why deflationary expectations cause people to want to hold more money is simply that people are anticipating a "bargain" in the future.  People are expecting much lower prices in the future; consequently, they want to stock up on money so that they can go on a shopping spree in the future.  Consequently, we might see a 50% increase in the money supply but only a 10% increase in prices. 

The other observation that I want to make at this point is this:  I was surprised that the Mises-Rothbard theory incorporated expectations, specifically deflationary expectations.  When I flipped through Roger Garrison's book Time and Money:  The Macroeconomics of Capital Structure, I got the impression that "expectations" were problematic for Austrian school macroeconomics.  "What about expectations" was the refrain of the critics back during the big 1930s debates, which inspired Garrison's book (the whole Keynes versus Hayek theme).  For example, Garrison writes, "But in countering Keynes's "expectations without capital theory," Hayek (our Austrian economist in the Mises-Rothbard school) produced--or so it could be argued--a "capital theory WITHOUT EXPECTATIONS."  Granted that their might be a subtle way to reconcile these two works.  And of course, I might be in error because Garrison's book is on capital structure while Rothbard's is on money and banking, so I might be trying to link two dissimilar discussions.  I am not sure; I am still learning all these theories.  I just wanted to point out a possible point of inconsistency or discrepancy.  Still, it seemed to me from Garrison's book that "expectations" was a weak spot (at least when the discussion was about Hayek's triangles and capital theory), so seeing expectations playing such a major role in the Mises-Rothbard theory was a bit shocking for me.  I am intrigued; I wonder what to make of it all.  Maybe "expectations" are not so problematic to the Austrian macroeconomic model after all since Rothbard incorporates expectations in his model by allowing for changes in expectations that then cause changes in the demand for money curve, i.e., the curve will shift either to the right or to the left because of changes in expectations. 

In conclusion, the biggest shocker for me was to learn that "inflation comes in phases."  I never knew that before.  Second, the idea that the money supply and the price level can change but in disproportionate amounts (e.g., money supply goes up 100% but prices go up only 15%) was also new to me.  Finally, I was also a bit surprised that the Mises-Rothbard model did incorporate expectations.  These are the three surprises that I have come across so far in Rothbard's "Mystery of Banking."  Since I am still reading this book, I expect to find many more interesting discoveries, which I will share.

Confidence in Government

"Confidence is everywhere the parent of despotism," said Jefferson in 1798.  "Free government is founded in jealousy, and not in confidence....  In matters of Power, let no more be heard of confidence in man, but bind him down from mischief by the chains of the Constitution."  Nearly a quarter of a century later, Jefferson could still be heard uttering the same warning:  "Is confidence or discretion, or is STRICT LIMIT, the principle of our Constitution?"  --Ron Paul.  The Revolution:  A Manifesto.  46

When I first read the introductory quotation from Ron Paul, it reminded me of my own personal experience being a member of a local government board of directors.  Although our board ran a local unit of government, it operated under two very specific pieces of provincial legislation.  Moreover, the unit that I was a part of had counterpart units in other cities and towns because most communities set up similar units.  I noticed two major problems with how our local unit was operated.  First, the board was seized by a small clique without any real opposite; the only opposite came from myself.  I, unfortunately was ignored and attacked because of my minority position as the lone dissenter.  Second, the small ruling clique, functioned with total discretion.  They acted as if no laws or regulations could tell them what to do.  For example, the law specifically states that written records and "books" were to be kept, but our board operated without written records.  Instead, we had "oral reports."   I was labelled and attacked because I did not blindly "trust" the "good intentions" of the self-imposed rulers.  "Good behavior" means apparently blindly accepting whatever one is told; "bad behavior" i.e., my behavior is asking for compliance with the written laws.  I actually exposed numerous violations of the laws but nobody ever listened to me.   

From my experience, I understand why Jefferson would want to "chain" the political leaders with the constitution.  I observed first hand what happens when you have an inexperienced board.  The leaders, or should I say, the self-imposed leaders, seize power and enslave everyone.  Then the rules are made up as we go along.  This why, for example, the rules kept changing.  Rules were made that clear violated provincial laws or at least violated the spirit of these laws.  It was obvious to me that an arbitrary government was at work.  The weak-willed board just rolled over and submitted.

The other symptom of the "discretionary" government problem that I noticed was the atmosphere of cover-up.  White wash any thing that is written down!  Don't use my name!  (It was a violation of the rules to actually mention the names of some of the directors because they didn't want anything they said recorded).  These types of rules effectively render everything a perpetual secret because they go against the whole idea of openness and transparency in government.  Secrecy becomes the new standard operating procedure.  In my specific case, this was implemented using the ruse of "hurt feelings."  If I were to be so bold as to question a director from the ruling clique about what they were doing in secret, then I would be told that I had hurt her feelings and therefore needed to apologize.  The fact remains that the ruling clique effectively ran the entire board in secret, met in secret, and never turned over their written paper minutes (because they never kept any).  So the "hurt feelings" excuse was just a cover for the ongoing secrecy and the secrecy was caused by the arbitrary "we can do whatever we want to" attitude of the ruling clique.

I also noticed that the rest of the board was much more inclined to attack me.  In fact, nobody every tried to hold the ruling clique accountable.  As a an excellent example, I read to the board a laundry list of laws, regulations, precedents on why a publicly funded local government unit is supposed to keep full and complete written records.  The idea of "oral reports," which of course were just another way to control the flow of information, is preposterous.  After being ridiculed with the preposterous argument that I wanted a stenographer (I never said such a thing; I just asked for full and complete records of all material facts--the ruling clique wouldn't even be honest enough to admit that they had weekly meetings in the summer but would rather say that they met once or twice to "discuss disasters"), the entire board voted to stop keeping written minutes of the activities of its various committees.  I, of course, was the lone dissenter.

What bothered me the most, is how the rest of the board just blindly took the word of a group that seized total power.  In fact, the ruling clique violated the rights of everyone on the board, yet nobody on the board would stand up for their individual rights.  I tried to stand up for both my own rights and for the rights of the other members of the board.  Surprisingly, I was painted as the bad guy; the rest of the board wanted to be enslaved.  They could care less that their rights were being trampled continuously.  They fell into the trap that Jefferson warned us about, namely, they just trusted and believed rulers.

From my experience, I learned that questioning rulers is a very dangerous thing to do.  Not only the ruling clique but also the rest of the "sheep" will attack you.  The ruling clique went so far as to have meetings and strategy sessions to try to have me thrown off the board.  The rest of the "sheep" would tag team me.  And so I was totally marginalized; hence, I could not run an effectively opposition campaign.  The dangers of arbitrary government are all too real to me.

One issue of concern for me is how exactly does Jefferson expect the constitutional "strict" limits to be enforced?  I tried to enforce the "strict" limits of the applicable provincial laws in my own particular situation but I failed lamentably.  In fact, my experience changed my total view on government.  I used to think that government was a good agent in society; government was a means to making a better world.  After seeing what I saw and after experiencing what I experienced, my view of government became much more negative.  If a small little local government agency with a budget of around $525,000 can be this corrupt, then I can only imagine the corruption in a government with billions or trillions of dollars in its budget.  It must be sheer hell to see the corruption that Dr. Paul has seen with all of the Washington lobbyists he has had to deal with over his long tenure in Congress.  Dr. Paul is in the same situation that I was in.  A small group runs the show.  In fact, that is to be expected.  It is called the Iron Law of Oligarchy, i.e., a small group will seize control of any organization.  Then, the rest of the group will sit on their hands and do nothing; they will not have the courage to "rock the boat."  And so people such as Dr. Paul and myself get marginalized.  So, I don't know how Jefferson's idea of binding politicians to the constitution will work.  It seems to me that politicians will always operate outside of their governing documents and do whatever they want to do.  Of course, they will never say that they are engaged in arbitrary government because, especially in the American case, arbitrary government carries the dangerous connotation of tyranny.  Most of the time they will say that they are engaged in "the public good."  This happened in my experience; the ruling clique had intentions that were only angelic.  The clique consisted of angels who were trying to implement their angelic policies, but were being delayed and harassed by me, the lone dissenter.  The arguments used against me were, of course, the same arguments used by every welfare statist in Western history.  So now we have a situation where a clique rules, hardly anybody objects, and to object renders to the objector the status of "bad person" who "hurts other peoples' feelings." 

Maybe the idea of constitutional restrictions on the operation of the government is an utopian idea?  Maybe I was naive for thinking that I could run a one-man crusade to get everybody else on the board to follow the provincial laws?  Maybe Jefferson is naive in thinking that the federal government could ever be bound by the chains of the constitution?  Maybe if the masses of people watched the government like a hawk then they could force the government to stay chained to the constitution?  But the reality is that most people would rather attend to their daily routine than spy continuously on the operations of their 3 or 4 different levels of government.  It is a gigantic task; I do not know how anyone--even someone totally dedicated to these issues--could come even remotely close to doing so.  I suppose that the ingredients needed to try to implement this Jeffersonian proposal would have to include organization of well funded watch dog groups and some way to get the masses to stop going along with the program i.e., to stop tacitly accepting the status quo.  How could I have gotten the rest of the board to stop going along with the dictates of the ruling clique?  How could I have persuaded them to stand up for their rights and to get them to help me in my drive to chain the clique down to provincial laws?  Or is this problem insoluble?  Will we always be stuck with ruling cliques because of the Iron Law of Oligarchy who then will continually break the chains of the constitution because hardly anybody will help enforce it?  Is the inevitable result of government then arbitrary rule?  Who then enforces the constitution?  Can a constitution really be enforced or is it the "blank paper" that Jefferson also worried about?

My conclusion is that I do not know.  I do not know how one can chain a government down to a constitution.  It seems to me that the people in power will always try to wiggle their way out from the chains of the constitution.  It is all I saw from my experience.  I tried to chain the clique down with X and they would wiggle out with Y.  I then tried Z to chain them down and they would wiggle out of the chains with A.  It became somewhat of a cat-and-mouse game.  Maybe that is as good as it can possible get?

Etienne de la Boetie: A Political and Economic Analysis

Below is the link to my Google Docs version of my essay entitled Etienne de la Boetie:  A Political and Economic Analysis.

https://docs.google.com/document/pub?id=16FUmZ5i4qEVsMxFZBiIEacGrKBGCyk4oUYCl9DYQVI0

Etienne de la Boetie was a famous 16th century French political philosopher who is regarded today as one of the founding fathers of libertarianism in the Western world.  In my paper, I make a number of observations, which I will summarize later.  Right now, I just want to see if this link will work!

Massachusetts 1690-1691: The Plundering State and the Birth of Paper Money in the West

Massachusetts [in 1690] was accustomed to engaging in periodic plunder expeditions against prosperous French Quebec.  The successful plunderers would then return to Boston and sell their loot, paying off the soldiers with the booty thus amassed.  This time, however, the expedition was beaten back decisively, and the soldiers returned to Boston in ill humor, grumbling for their pay.  Discontented soldiers are liable to become unruly, and so the Massachusetts government looked around for a way to pay them off. --Murray N. Rothbard, The Mystery of Banking

Murray Rothbard, in the introductory quote, is describing one of the earliest attempts in the Western world to abandon metallic money and consequently to adopt government-issued paper money instead.  What makes Rothbard's discussion of Massachusetts history relevant for modern day discussions of political economy is this:  he links a plundering state to the issuance of irredeemable paper money.  

What I personally found interesting in Rothbard's discussion of 1690 Massachusetts [technically speaking he covers a period from December 1690 to February 1691; that is how long the government of Massachusetts kept its promises to the people regarding the new paper money issue] is the language Rothbard used.  He mentions that Massachusetts became accustomed to engaging in plundering expeditions in order to pay off the soldiers with the booty amassed.  


The idea of running a plundering state in order to continually "pay off" soldiers smacks of feudalism or absolutism.  Hans-Hermann Hoppe in his Theory of Socialism and Capitalism, describes the operations of a feudal state, with its total disregard for property rights and with its total reliance on state coercion, as follows:

Hence, the practice, based on these alleged ownership rights, of renting land and other production factors out to the natural owners in return for goods and services unilaterally fixed by the overlord, had to be enforced against the will of these natural owners, by brutal force and armed violence, with the help of a noble caste of military men who were rewarded by the overlord for their services by being allowed to participate and share in his exploitative methods and proceeds.  (84)

Notice further that the soldiers have become accustomed to the plundering expeditions.  This is in keeping with 16th century political philosophy; in fact, this is one of the primary goals of a tyrant.  The great 16th century political philosopher Etienne de la Boetie mentions in his discourse that "custom becomes the first reason for voluntary servitude" (23).  In other words, people get accustomed to a very bad habit, namely, robbing and plundering their neighbors.

What Rothbard describes in Massachusetts is a situation in which the plundering operation did not work. The soldiers became restless because they didn't get their share of the booty.  In other words, the soldiers who were accustomed to getting bought off by the state were now upset because their habit of living off booty has been interrupted.  So what does the government of Massachusetts do?  According to Rothbard's account, it first tries to borrow money from some Boston merchants, but the merchants refuse to do so.  So, the government resorts to issuing paper money.  To do so, the government makes a number of promises, which it does not keep.  The government of Massachusetts promises that this note issue will be the one and only issue; moreover, the government promises to make the notes redeemable in gold and silver.  Neither promise is kept!

The important observation, I think, is this. The government of Massachusetts is operating in a rather feudal manner by continually buying off soldiers with the proceeds of organized plundering raids.  The raids fail.  The habit of living off plundered booty has come to an end.  When the government was no longer able to bribe soldiers with plundered goods from Quebec, it resorted to the issuance of irredeemable paper money.  Consequently, paper money started as a way to continue the larcenous nature of the state.  Before the issuance of the irredeemable paper money, the state openly and overtly was engaged in a plunder operation.  Because of the problems created by the failure of the Quebec plundering expedition, the government of Massachusetts simply made the plundering operation covert and secretive.  This is because irredeemable paper money is also a method of plundering one group in order to benefit another group.  The only difference is that this new method has a built-in "stealth" component to it.  Fundamentally, nothing has changed.  The government of Massachusetts engaged in larceny before the issuance of paper money and continued to engage in larceny after the issuance of paper money.  The victims may have changed, but the underlying process of robbing some people in order to pay off soldiers has not changed.

The other important point to stress is the fact that the government of Massachusetts made promises and then promptly broke them.  Not only did the government issue more notes but also the government failed to keep its redemption promise.  According to Rothbard, "the bills continued unredeemed for nearly 40 years."  The promise of "one and only one" new issue was quickly broken 2 months after the promise had been made.

What troubles me is the fact that nobody seems to have learned the lessons of history.  Here we are in 1690 and early 1691 with broken promises followed by more broken promises with regard to government and the issue of paper money.  We see that the purpose of paper money is to bribe a group of larcenous soldiers.  So why then in 2011 do we keep repeating the same mistakes of 1690 Massachusetts?  Have we not learned the lesson that paper money benefits the government and its plundering soldiers at the expense of many victims?     

Linking 16th Century French Political Philosophy and Modern Monetary Theory

Obviously there is no need of fighting to overcome this single tyrant, for he is automatically defeated if the country refuses consent to its own enslavement.  --Etienne de la Boetie, The Politics of Obedience:  The Discourse of Voluntary Servitude, 44

Etienne de la Boetie, the famous French political philosopher of the 16th century who is still greatly admired as the founding father of Western libertarian thought, writes that all governments, including tyrannies, fall if the people withdraw their consent.  In fact, this idea was restated by David Hume who said in  his famous Essays, Moral, Political, and Literary (volume 1 of Essays and Treatises on Several Subjects in Two Volumes, 29) that

nothing appears more surprising to those, who consider human affairs with a philosophical eye, than the easiness with which the many are governed by the few; and the implicit submission, with which men resign their own sentiments and passions to those of their rulers.  When we enquire by what means this wonder is effected, we shall find, that, as force is always on the side of the governed, the governors have nothing to support them but opinion.  It is, therefore, on opinion only that government is founded.  (emphasis mine)

After I read la Boetie's discourse, I attempted to interpret what he really meant by his plan for the masses of common men and women to "withdraw their consent."  From Rothbard's introduction to la Boetie's discourse, the direct lived experience of la Boetie was a religious conflict in France between the Protestants and the Catholics.  Rothbard also used examples of towns in America going on a "tax strike," meaning that all the people in the town refused to pay their local taxes.  By refusing to pay their taxes, the people put pressure on the local government to change the government's policies and budget to something that the people would accept.  Rothbard also mentions a number of later anarchist writers who adopted and extended la Boetie's initial argument.  Finally, Rothbard mentions how la Boetie influenced Gandhi implying that la Boetie's book serves as a blue-print for non-violent civil disobedience movements.

When I initially tried to interpret la Boetie's discourse, I focused on the fraudulent nature of "property rights" under a feudal tyranny.  The people kept sending resources to the tyrant; to withdraw their consent, the people should cut off the resources they allow the tyrant to take from them.  The people consented to this ongoing wealth transfer.  Some of the quotations that led me to focus on a "consent to property theft must be withdrawn by the masses" explanation of what la Boetie really meant shall be explored next.

For example, in Hans-Hermann Hoppe's A Theory of Socialism and Capitalism, we see a tendency for the people to want to run away to the towns set up by the merchants.  These towns are attempting to operate outside of the feudal system.  Hoppe writes that

in order to escape this threat the merchants were forced to organize themselves and help establish small fortified trading places at the very fringes of the centers of feudal power. As places of partial exterritoriality and at least partial freedom, they soon attracted growing numbers of the peasantry running away from feudal exploitation and economic misery, and they grew into small towns, fostering the development of crafts and productive enterprises which could not have emerged in the surroundings of exploitation and legal instability characteristic of the feudal order itself.  (85)

The economic exploitation aspect of the feudal system was stressed by la Boetie himself when he writes that

you sow your crops in order that he may ravage them, you install and furnish your homes to give him goods to pillage; you rear your daughters that he may gratify his lust; you bring up your children in order that he may confer upon them the greatest privilege he knows--to be led into his battles, to be delivered to butchery, to be made the servants of his greed and the instruments of his vengeance; you yield your bodies unto hard labor in order that he may indulge in his delights and wallow in his filthy pleasures; you weaken yourselves in order to make him the stronger and the mightier to hold you in check. (46-47)

My basic assumption was this:  la Boetie's model is similar to the explanation given on the movie Jaws regarding how to get rid of a shark.  In the movie, the oceanographic institute representative says that you can either kill the shark or you can starve it.  If you starve it, if you cut off its food supply, then the shark will leave the area looking for an area that will provide the shark with more food.  Similarly, it seems as if la Boetie wants the people to cut off the tyrant's "food supply."  Stop consenting to his pillaging of your farms!  Stop consenting to the conscription of your children, therefore cutting off his supply of troops, and so on.  Don't consent to the resources transfer from you to the tyrant!  Furthermore, from Hoppe's quote, the people could "exercise" their "withdrawal of consent" by using their feet and physically moving themselves to one of the relatively free towns set up by the merchants.

However, from my recent reading of Murray N. Rothbard's book The Mystery of Banking, I am starting to wonder if maybe my initial interpretation of la Boetie's discourse is incomplete.  Rothbard provides in his book a sketch of the process by which kings and governments gradually manipulate the people to give their consent to an arbitrary fiat money system.  In Rothbard's historical sketch, we begin with a story about how nobody will accept fiat paper money.  In the beginning, people will only accept "real money," i.e., gold or silver coin.  Then we see a gradual process by which people are slowly but surely encouraged to use the metallic coins less and less in their daily transactions.  So maybe early on the government will issue paper money but promise to make it fully redeemable in gold or silver coin.  Then later we start to see numerous attempts to make the paper money irredeemable in either gold or silver.  Propaganda campaigns are launched to demonize the use of gold and silver coin in daily transactions.  Moreover, temporary "war measures" that "suspend redemption temporarily" are part of the "training process," i.e., the process to slowly teach people to use irredeemable paper notes.  All of this has me wondering:  did la Boetie also intend his discourse to be a warning against the use of paper fiat money?  Since Rothbard's historical sketch is all about the "government" trying to get people to give their consent to irredeemable paper money and to get people to withdraw their consent to using gold and silver coin in their daily transactions, then maybe la Boetie also meant to warn the people that they should NOT CONSENT to the tyrant's plan to substitute irredeemable paper money for gold and silver coin.  In other words, maybe la Boetie saw an attempt by tyrants to get rid of silver and gold coin; la Boetie's response was that the people should not consent to this transition from metal to paper money.

It is easy to demonstrate that la Boetie wanted people to withdraw their consent from the tyranny.  Moreover, it is easy to find many examples in la Boetie's book about how the tyrants try to "engineer consent."  The laundry list of tricks used by tyrants in order to "get consent" is rather extensive and includes things such as:  manipulating religion, feasts, bribery, "it is all in the common good," and so on. La Boetie also criticizes the people for not declaring self-ownership, i.e., ownership over their own bodies.  La Boetie writes that

still men accept servility in order to acquire wealth; as if they could acquire anything of their own when they cannot even assert that they belong to themselves, or as if anyone could possess under a tyrant a single thing in his own name. Yet they act as if their wealth really belonged to them, and forget that it is they themselves who give the ruler the power to deprive everybody of everything, leaving nothing that anyone can identify as belonging to somebody. (74-75, emphasis mine)

So it is clear to me that la Boetie was concerned about the exploitation of property by the tyrant. People were giving their consent to a gigantic plundering operation because the tyrant was plundering not only the physical possessions of the masses but also the actual bodies of the masses.  Since money is also private property and since la Boetie was concerned about the fact that the masses were consenting to the robbery of their property (including their bodies), then maybe la Boetie's treatise can be interpreted as a warning against consenting to irredeemable paper money.  Maybe la Boetie is trying to warn people:  you need to stop consenting to the robbing of your body, stop consenting to the robbing of your physical property (e.g., the produce grown on your farm) and STOP CONSENTING TO THE ROBBING OF YOUR MONEY'S PURCHASING POWER THAT INEVITABLY WILL HAPPEN WHEN IRREDEEMABLE PAPER MONEY IS ADOPTED (i.e., the irredeemable paper money will permit unchecked inflation and the destruction of your real cash balances)!  I am still in the speculation stage of my thinking; I just noticed that Rothbard's historical sketch was full of key ideas stressed by la Boetie.  In Rothbard's historical sketch about how governments try to get people to stop consenting to the use of gold and silver coin and about how governments try to get people to consent to the use of irredeemable paper money instead, the governments are continually trying to get people to develop bad habits so that they will consent to their own enslavement.  Rothbard stresses ideas such as the "habituation to tyranny" and "consent to one's own enslavement." Since the exact same ideas (consent, habituation etc.) were also stressed in la Boetie's discourse, I began thinking that maybe la Boetie's treatise has a monetary theory dimension to it.  I began to think to myself, Rothbard's account sounds eerily similar to la Boetie's in terms of vocabulary used and in terms of underlying ideas.  Maybe a link exists between the two?

A First Look at the Debate between Objective and Subjective Value Theories

The fact that two commodities exchange for each other in some proportion does not mean that they are therefore 'equal' in value and can be 'represented by an equation.'  As we have learned ever since Buridan and the scholastics, two things exchange for each other only because they are unequal in value to the two participants in the exchange.  A gives up x to B in exchange for y, because A prefers y to x, and B, on the contrary, prefers x to y.  An equal sign falsifies the essential picture.  And if the two commodities, x and y, were really equal in value in the sight of the two exchangers, why in the world did either of them take the time and trouble to make the exchange?  --Murray N. Rothbard, Classical Economics:  An Austrian Perspective on the History of Economic Thought, Volume 2, 410, emphasis mine

 Rothbard's opening quotation was written as a response to the objective theory of value supported by Marx.  One should note that Marx is not the originator of the objective theory of value; the objective theory has its origins going back to the writings of Aristotle.  Rothbard summarizes the objective theory of value by citing Marx's rendition of it as follows:

Let us take two commodities, e.g., corn and iron.  The proportions in which they are exchangeable, whatever these proportions may be, can always be represented by an equation in which a given quantity of corn is equated to some quantity of iron:  e.g., 1 quarter corn = x cwt. iron.  What does this equation tell us?  It tells us that in two different things--in 1 quarter of corn and x cwt. of iron, there exists in equal quantities something common of both.  (Murray N. Rothbard, Classical Economics, 409-410)

 The significance of these two quotations is simply that they represent one of the fundamental differences between laissez-faire and Marxism.  Rothbard's introductory quotation is based purely on the subjective-value theory, which supports the laissez-faire doctrine, and Marx's quotation is based purely on the objective-value theory, which supports the communist doctrine.

The quotation from Marx, reminded me of the same thought process that appeared in my 2nd year undergraduate macroeconomics textbook by Blanchard and Melino.  They used a similar line of reasoning when they constructed their "real exchange rates" and made statements such as 2 Canadian goods are exchanged for 1 American good and then said 2 Canadian goods = 1 American good.  This is completely analogous with Marx's quotation above with the corn and the iron because both try to stick in an equal sign between things of unequal value. Moreover, in the famous Keynesian aggregate expenditure function (being equal to real output), Y = C + I + G + X - Q, they noted that the Q, which stands for imports, is measured in foreign goods, but the other variables are measured in domestic variables.  This creates an "apples and oranges" problem, which they propose to solve by multiplying Q by the real exchange rate.  By doing so, they argue that E*Q (i.e., the real exchange rate times the quantity of imports of foreign goods) is now measured in terms of domestic goods.  At this point they claim that all the variables in the modified equation Y = C + I + G + X - E*Q are measured in terms of domestic goods; consequently they have solved the "apples and oranges" problem that was present in the initial equation.  Personally, I found the whole idea of "a Canadian good" and "an American good" to be nonsensical.  What exactly is a Canadian good if the sub-components that went into manufacturing the final consumer good were imported from 40 different countries?  To construct the "real exchange rate," they compare the overall price level in Canada to that of the United States.  This raises another question about the suitability of trying to construct overall price levels.  Consumers who engage in a trade do not look at overall price levels; they look at the individual prices of the goods that they are considering buying.

Rothbard's critique of the Marxian position stresses the subjective nature of value and the fact that exchange takes place because people have different preferences.  Moreover, Rothbard raises a similar argument that Mises (see Theory and History, 16) also raises concerning human action.  If the two goods exchanged really were of equal value, then "his judgment of value expresses indifference.  No action can result from such a neutral disposition" (16, emphasis mine).  In other words, people won't engage in exchange if the actor views both goods as equal in value.  People exchange in order to benefit from receiving something that they value more than the thing that they give up.

Inflation, the United States Supreme Court, and Corporate Welfare

The panic of 1873 was a severe blow to many overbuilt railroads, and it was railroad men who LED in calling for MORE GREENBACKS to stem the tide.  Thomas Scott; Collis P. Huntington, leader of the Central Pacific Railroad; Russel Sage; and other railroad men joined in the call for greenbacks.  So strong was their influence that the Louisville Courier-Journal, in April 1874, declared:  "The strongest influence at work in Washington upon the currency proceeded from the railroads....THE GREAT INFLATIONISTS AFTER ALL, ARE THE GREAT TRUNK RAILROADS."  --Murray N. Rothbard, A History of Money and Banking in the United States:  The Colonial Era to World War II, 150, emphasis mine)

 Rothbard's introductory quote stresses the fact that some of the largest corporations are in fact the biggest sponsors of a policy of inflation.  The reason why is that most of these railroads were heavily in debt; consequently, the railroad men saw an inflationary policy as a means to their desired end, that end being a reduction in their long-term debt burden.  As Ludwig von Mises notes in his article entitled Socialism, Inflation, and the Thrifty Householder, "the more inflation progresses, the more is the debtor favored at the expense of the creditor" (Article 21 of Economic Freedom and Interventionism, 120).  Mises came to the same conclusion that the Louisville Courier-Journal did back in 1874, namely, that the large corporations are usually heavily in debt so that they are the biggest beneficiaries of inflation.  Mises stresses the point that the common man is by far a creditor and therefore the common man is the biggest loser from inflationary policies.  Mises made the following important observations of this general tendency of inflation to benefit the heavily in debt corporations at the expense of the common man by noting that

in the balance the common man is by far a creditor, not a debtor.  The billions of dollars that big business and real estate owe to mortgage banks, commercial banks, savings banks, and insurance companies belong--virtually, although not formally--to the common man....A policy of "creeping inflation" such as this country has now pursued for a long series of years--apart from all the other detrimental effects it produces--is in the strict meaning of the words antisocial and antidemocratic.  It is a policy against the vital material interests of the common man.  (Ludwig von Mises, Socialism, Inflation, and the Thrifty Householder, Article 21 of Economic Freedom and Interventionism, 121-122, emphasis mine)

The railroads, to be sure, were not only using inflation as a form of corporate welfare; they had a whole laundry list of additional techniques at their disposal.  According to Thomas J. DiLorenzo's book How Capitalism Saved America:  The Untold History of Our Country, from the Pilgrims to the Present, in Chapter 7 "The Truth About the 'Robber Barons,'" an important distinction is made between those who acquire wealth through political means and those who acquire wealth through economic means.  DiLorenzo's distinction is reminiscent of the distinction made by Franz Oppenheimer in the latter's work on the Origins of the State itself.  Most of the railroads used the "political means" and became entangled in numerous government backed schemes with the notable exception being James J. Hill's railroad.  DiLorenzo paints the stark contrast between these two groups by noting that "Jay Cooke was not the only one whose government-subsidized railroad ended up in bankruptcy.  In fact, Hill's Great Northern was the ONLY transcontinental railroad that never went bankrupt" (115-116, emphasis mine).  Hill, of course, used the "economic means" to acquiring wealth because Hill built his Great Northern Railroad "without any government aid, even the right of way, through hundreds of miles of public lands, being paid for in cash," (112, emphasis mine).  Therefore, the inflationary tool for getting out of debt, which both Mises and Rothbard mention, is only one special type of this much bigger and broader "corporate welfare" problem.

Nevertheless, the inflationary tool is certainly a potent weapon in the arsenal of large corporations trying to avoid paying their long-term debts.  The government is a willing accomplice to this crime in many ways.  One obvious way would be to stress the government created central banking system, which certainly plays a major role in our modern discussions of this government-business corporate welfare problem.  However, back in the 1870s, the United States banking system was not a central banking system.  Granted, there were successful steps being taken in this direction going back to at least the early 1860s.  As Thomas DiLorenzo notes in his book Hamilton's Curse:  How Jefferson's Archenemy Betrayed the American Revolution--and What It Means for Americans Today, the neo-Hamiltonian Republicans, that is Republicans influenced by the works of Alexander Hamilton and Henry Clay, the administration of Abraham Lincoln launched many pro-inflationist banking reforms.  DiLorenzo observed that the monopolization process of the American banking industry began in February 1862:

These [Legal Tender] acts of legislation permitted the treasury secretary to issue paper currency (greenbacks) that was not immediately redeemable in gold or silver.  Then they passed the National Currency Acts of 1863 and 1864, which created a system of nationally chartered (and regulated) banks that could issue currency.  A punitive 10 percent tax was placed on state-chartered banks in order to drive them into bankruptcy.  The neo-Hamiltonians were candid about their intention to create an "unqualified government monopoly."  (127)

All of these areas are very important since they are all contributing factors in explaining the corporate welfare schemes used to bail out big businesses and railroads in particular.  In fact the railroad corporate welfare schemes started in 1862 when "Congress, with the southern Democrats gone, diverted millions of dollars from the [Civil] war effort to begin building a subsidized railroad" (Thomas J. DiLorenzo, How Capitalism Saved America, 116, emphasis mine).  I do not want to downplay the importance of these other contributing factors; nevertheless, another important contributing factor THAT IS OFTEN OVERLOOKED is the ROLE PLAYED BY THE UNITED STATES SUPREME COURT IN BACKING THESE CORPORATE WELFARE SCHEMES.


Returning to the introductory quote from Rothbard, the economic means for reducing the debt load of the railroads was certainly a pro-inflationary scheme supported by the banking system.  However, there was a problem for the railroads, namely, the United States Constitution, which was initially interpreted by the Supreme Court of the United States in such a way that harmed the railroads because the Court initially was anti-inflationary in its rulings.  However, because of political interference in Supreme Court appointments, the Grant administration was able to get the earlier decisions changed.  Therefore, the United States Supreme Court also contributed to the pro-inflationary and hence pro-corporate welfare schemes of the railroad corporations.  Rothbard documents all the details in his A History of Money and Banking in the United States:  The Colonial Era to World War II and shows clearly how the "political means" mentioned earlier by both DiLorenzo and by Oppenheimer were at play in helping the railroad industry avoid paying its debts to its creditors:

The Grant administration was upset by Hepburn v. Griswold, as were the railroads, who had accumulated a heavy long-term debt, which would now be payable in more valuable gold.  As luck would have it, however, there were two vacancies on the Court, one of which was created by the retirement of one of the majority judges.  Grant appointed not only two Republican judges, but two railroad lawyers whose views on the subject were already known.  The new 5-4 majority dutifully and quickly reconsidered the question, and, in May 1871, reversed the previous Court in the fateful decision of Knox v. Lee.  From then on, paper money would be held consonant with [i.e., in agreement with] the U.S. Constitution. (153)

 In conclusion, we see that the economic tool of inflation can be used to bail out railroads and other large corporations who took on too much debt.  However, to actually implement such a fraudulent scheme, the political apparatus must also be utilized.  Notice how Congress, the President, and the Supreme Court all played roles in aiding and abetting the various corporate welfare schemes for the railroad industry.  The behavior of the Grant administration, which amounted to rigging the Supreme Court with political partisans, raises a serious question about the impartiality and justice of the entire governmental system in the United States.  Maybe a future article could address the following research question that flows naturally from this discussion:  "Is corporate welfare inherently unjust, a violation of the rule of law?"

The Corporate Welfare Origins of the Environmental Movement

Meanwhile, the states moved in to compel cartellization and virtual socialization of the crude oil industry.  The oil-producing states enacted laws to enable governmental commissions to fix the maximum amount of oil produced, and this system is basically still in effect.  The state laws were enacted under the public guise of "conservation," which is a pat excuse for any compulsory monopoly or cartel in a natural resource. --Murray N. Rothbard, America's Great Depression, 5th edition, 283 (emphasis mine).

The origin of the environmental or "conservation" movement, (or today the term "sustainability" seems to be more popular) is in an anti-competition and pro-corporate welfare movement designed to protect the interests of the producers.  In Murray N. Rothbard's introductory quotation, the natural resource monopolists, who are getting their monopoly-privileges from favorable state laws, are using "environmentalism" and "conservationism" as an excuse for fixing production levels so that they can then increase their prices.  Rothbard's quote is a textbook example of how monopolies are deliberately formed through government interventionism.  This fact should be trivially obvious; in fact, back during the Great Depression Era these observations were fairly well-known.  In his 1944 masterpiece, the Nobel Prize winning economist F. A. Hayek observes that the deliberate formation of monopolies by government policy was commonplace.  Hayek writes that

anyone who has observed how aspiring monopolists regularly seek and frequently obtain the assistance of the power of the state to make their control effective can have little doubt that there is nothing inevitable about this development.  (93, emphasis mine)

This deliberate policy of government to create monopolies, which are meant to protect the vested interests of a handful of producers by protecting them for the effects of competition, is at the heart of Rothbard's introductory quotation.  The rational behind the "conservation" scheme in the oil industry has nothing to do with "saving the earth" or about "sustainability."  Instead, the real motivation is to raise the prices of oil in order to improve the profitability of the oil companies.  The "conservation movement" is simply a cover story for state created and state enforced (as we will see using coercive state power) corporate welfare:

In 1931, new oil discoveries in East Texas drove the price of crude down from one dollar a barrel to 2 1/2 cents a barrel, and cartelists and conservationists set up a hue and cry.  The lead was taken by Oklahoma's Governor "Alfalfa Bill" Murray, who ordered a general shutdown of the crude oil industry until the price of oil should rise to the "MINIMUM FAIR PRICE" of one dollar a barrel.  (Murray N. Rothbard, America's Great Depression, 5th ed., 283, emphasis mine).

The issue of ongoing "new oil discoveries leading to 'ruinous' competition for the existing established players" is an issue going back to the American Progressive Era.  As Gabriel Kolko notes in his study of the American Progressive Era entitled The Triumph of Conservatism:  A Reinterpretation of American History, 1900-1916, the new and independent oil companies were seriously attacking the dominant position of Standard Oil.  "In a spiralling market for oil," writes Kolko, "such as existed from the turn of the century on, Standard, conservative and technologically uncreative, was no match for the aggressive new competitors" (42).   Kolko's major thesis is that all voluntary attempts to cartelize a market will normally fail; consequently, the only effective way to establish a cartel is through the coercive power of the state.  Kolko summarizes his findings by writing that

voluntary agreements among corporations in the forms of pools and agreements of EVERY kind usually failed.  Consolidations and mergers were the next logical step, and also failed.  The proliferation of new competitors undermined the possibility of attaining economic rationalization, with profit, by voluntary economic means.  (56, emphasis mine)

Therefore, to establish a cartelized natural resource industry, the tools of state intervention and physical coercion were employed.  As Thomas J. DiLorenzo notes in his book How Capitalism Saved America:  The Untold History of Our Country, from the Pilgrims to the Present, the entire oil industry was deliberately cartelized by the National Industrial Relations Act or NIRA (June 16, 1933, see page 186) as well as almost every other industry in the United States.  Di Lorenzo writes that "the NIRA also cartelized the oil industry with a provision that created state 'control boards' to restrict the amount of oil sold in interstate and international commerce" (188).  To ensure legislative compliance, the oil producers got the help from the police state to enforce their "environmental conservation" movement.  Rothbard notes that in the oil industry, Oklahoma Governor "Alfalfa Bill" Murray "sent the Oklahoma National Guard into the oil fields to enforce his decree with bayonets" (Murray N. Rothbard, America's Great Depression, 5th ed., 283, emphasis is mine).

Using the "environmental protection" line as a cover story for a policy of deliberate corporate welfare is not limited to the oil industry.  In fact, the American Progressive Era is full of examples of most industries crying "save the environment" so that they could line their own pockets with federal taxpayer dollars.  Thomas Di Lorenzo, in his book entitled Hamilton's Curse:  How Jefferson's Archenemy Betrayed the American Revolution--and What It Means for America Today, notes that the loudest environmentalists are usually the biggest supporters of corporate welfare and cartelization of industries.  Di Lorenzo writes that

Teddy Roosevelt was a "progressive era" president (and admirer of Hamilton) who is credited with being a great environmentalist for having nationalized thousands of acres of land and built dams and other "conservation" projects with taxpayer dollars.  But this, too, was a form of NEO-HAMILTONIAN CORPORATE WELFARE.  Mining, farming, timber, and other interests lobbied for these programs because they would be enriched with "free" dams and irrigation, waterway improvements, cheap, subsidized water (mostly for agriculture), cheap timber lands (leased for next to nothing from the government), and cheap access to grazing lands.  (142-143, all emphasis is mine)

One could go on and on with examples but the point remains:  ENVIRONMENTALISM IS JUST A "SOCIALLY RESPONSIBLE" WAY OF SNEAKING THROUGH CORPORATE WELFARE PROGRAMS.  Environmentalism manipulates people by playing on their sense of "trying to do the 'right thing' for the 'common good.'"  However, this is actually just one of the oldest tricks in the book for tyrants to manipulate the mob.  In fact, Etienne de la Boetie mentions this "oh but we in the government are doing the common good" trick in his 16th century discourse on tyranny.  The rhetoric about saving the environment is just the cover story for getting the public to go along with these neo-Hamiltonian corporate welfare schemes i.e., the big federal government must subsidize big businesses and the federal government must protect big businesses from competition because competition has a strong tendency to progressively lower prices.  No justification exists for corporate welfare; consumers who want products will pay for them and make the producers of the desired (desired by the consumers' based on the consumers' value judgments) goods profitable.  Finally, there is no such thing as a "fair price" imposed by government decree and enforced by the National Guard armed with bayonets.  Fairness of price can only be determined by the voluntary agreement of the buyer and the seller.  It should be obvious now that the "environmental conservation" movement uses patently unfair methods to achieve its patently unfair goal.  The assumption that the "environmentalists" are somehow taking the "moral high ground" in debates is, I think, a false assumption.

Why Do the Wealthy Favor Inflation, Part 1

One intriguing aspect of both the Massachusetts Land Bank and other inflationary colonial schemes is that they were advocated and lobbied for by some of the wealthiest merchants and land speculators in the respective colonies.  Debtors benefit from inflation and creditors lose; realizing this fact, older historians assumed that debtors were largely poor agrarians and creditors were wealthy merchants and that therefore the former were the main sponsors of inflationary nostrums.  But, of course, there are no rigid "classes" of debtors and creditors; indeed, wealthy merchants and land speculators are often the heaviest debtors.  Later historians have demonstrated that members of the latter group were the major sponsors of inflationary paper money in the colonies.  --Ron Paul and Lewis Lehrman, The Case for Gold:  A Minority Report of the U. S. Gold Commission, 25

In the introductory quotation, Ron Paul and Lewis Lehrman address a common misconception over who benefits from a deliberate policy of monetary inflation.  At the root of this misunderstanding is the faulty assumption that debtors must be the poor starving masses and that the creditors must be a handful of rich businessmen and women.  The provenance of this misinterpretation can be traced back to ancient Athens.  During an interview with Professor Percy L. Greaves, Jr., Professor Dr. Ludwig von Mises mentions that the faulty assumption can be traced back to the ideas of Solon.  Mises tells Greaves, with regard to the faulty assumption above, that

this [i.e., the faulty assumption] was perfectly correct twenty-five hundred years ago in Athens, when the great statesman Solon exacted economic reforms cancelling public and private debts.  Solon had to deal with what we today call "social problems."  At that time the debtor was typically the poor man and the creditor was the rich man.  The rich people could save and increase their possessions by investing in real property, houses, businesses, forests, and other landed property.  For the masses of the people things were different.  Most of them couldn't save at all...

But we no longer live in Athens in the days of Solon.  Nor do we live under the conditions of the Middle Ages or of the sixteenth, seventeenth, and eighteenth centuries, when the poor people couldn't save.  Under capitalistic conditions the situation is very different.  (Ludwig von Mises, On Current Monetary Problems, Article #43 in Economic Freedom and Interventionism, 214, emphasis mine).

The same misconception over who is the creditor and who is the debtor and therefore the question of who benefits from inflation and who loses was picked up by Nazi propaganda.  In fact, this entire issue is at the core of one of the major Nazi party demands, namely the elimination of "interest slavery."  In a paper entitled On Some Atavistic Economic Ideas (Article #28 in Economic Freedom and Interventionism), Mises notices that "the most spectacular manifestation of the misinterpretation of the economic meaning of the present-day creditor-debtor nexus was provided by the program of the National-Socialist-German-Labor-Party, the Nazis" (153).  The Nazi propaganda, written by Gottfried Feder, called for the "destruction of interest slavery" in the unalterable party program.  However, just as the colonial Americans in Massachusetts were confused so too the Nazis were confused.  In fact, one of the voices of dissent against Hitler and the Nazi regime published an article entitled, "Do you, average reader, know that you are a creditor?"  To this observation, Mises notes, "the German voters who practically unanimously voted for Hitler certainly did not know it" (153).

At the core of the misconception, then, is to assume incorrectly that the masses of people are not savers.  The faulty assumption is to assume that the rich are the creditors and the poor are debtors.  As Mises stressed in the article On Some Atavistic Economic Ideas, "under the modern credit organization the more opulent strata are more often debtors than creditors" and "the common man is a creditor insofar as he has taken out insurance policies, has savings deposits with commercial banks and savings banks, owns bonds whether government issued or corporate, and is entitled to receive retirement and old age pensions" (153).

I should further emphasis that the properties of the "common man" who is also a "creditor" just happen to be the "perfect storm" scenario for being victimized by an inflationary policy.  At this point, the observation that the rich are trying to use inflation as a "bail out tool" so that they can reduce the burden of their debt should be obvious.  Inflation is just a way for the rich to avoid paying their debts to the savers, the "common man" on the street.  What makes this a "perfect storm" for hurting the common man, the saver, the creditor, is that the process of new money creation (i.e., the inflationary process) is rigged to transfer wealth from one group to another group.  The most vulnerable people in this process are the ones who are on fixed incomes.  As we shall see in a moment, these fixed income victims are perfectly described by Mises in the quotation above.

Murray N. Rothbard goes to the heart of this wealth-transfer problem of inflation, which is specifically designed to hurt the creditors and savers (i.e., the "common man") when he observes that

those who get the [newly created] money early in this ripple process benefit at the expense of those who get it late or not at all.  The first producers or holders of the new money will find their stock [of money] increasing before very many of their buying prices have risen.  But, as we go down the list, and more and more prices rise, the people who get the money at the end of the process find that they lose from the inflation.  Their buying prices have all risen before their own incomes have had a chance to benefit from the new money [so their "real" cash balances will fall; they have the same amount of money in dollars but with higher prices on most goods at the store, they can now buy fewer goods and services].  And some people will NEVER get the new money at all:  either because the ripple stopped, or because they have FIXED INCOMES--from salaries or bond yields, or as pensioners or holders of annuities.  (Murray N. Rothbard, the Mystery of Banking, 50, emphasis and square bracket clarifications are both mine)

In other words, the biggest victims of inflation are the savers, the people on fixed incomes and fixed salaries.  The biggest winners from an inflationary policy are then the people with large debts and the people who are the early receivers of the newly created money.  As we saw above, the largest debtors tend to be the wealthy; consequently, the indebted wealthy people are the first beneficiaries of an inflationary policy.  The inflation effectively "bails them out" from all of their debts.  The second major group to benefit from a deliberate policy of inflation is the early receiver group.  Who are the earlier receivers of the new money?  It turns out that they are usually a group of well connected big businesses too!  In Ludwig von Mises's 1919 book entitled Nation, State, and Economy:  Contributions to the Politics and History of Our Time, citing Auspitz and Lieben, Mises notes that "during the issue of notes, the additional means of circulation will be concentrated in the hands of a small fraction of the population, e.g., of the suppliers and producers of war materials" (130, emphasis mine).  Consequently, we see that the second major group to benefit from an inflationary policy is what today we might call the "military-industrial complex."  Therefore, the two groups who benefit from inflation are the military contractors and the heavily indebted corporations and wealthy individuals.  They benefit because they not only receive the new money at the earlier stages of the rippling effect but also engineer a reduction in the real costs of their debt.  In both cases, the "common man" or the saver is hurt.  The common man experiences not only a reduction in the real value of his savings (since he is a creditor) but also a penalty for being a later receiver of the new money (or in the extreme case because he never receives any of the new money; and so his real cash balances are severely depleted).

A Comment on the Political Rhetoric Used Against the System of Laissez-Faire

Politics certainly is full of hyperbole and exaggeration.  One of the phrases that really needs to be dropped from the political lexicon is that of "group XYZ is being exploited."  Exploitation is one of those terms that gets thrown around a lot; in fact, everyone seems to accuse everyone else of being an "exploiter."  The general line seems to be "my philosophy will help out the masses of the poor" but "the wonderful reforms are being stopped by some evil exploiters."  Now, it does not take an expert to identify such sentiments as being the stock-in-trade of leftist writers.  At the heart of Marxian propaganda is, after all, the so called "Iron Law of Wages," which claims that the evil capitalist exploiters set the wage rates so low that if wage rates were to fall any further then the entire exploited labor classes would be wiped out and would quite literally drop dead.  So, the exploiters, the capitalist class, must, assuming that they want to keep their slave laborers alive for future plundering, then keep the wages set at the "subsistence level."  To raise the wages any higher would be pointless; why pay a slave more money if you don't have to?  To lower the wages any lower would be pointless; how can you exploit dead people?  Ignoring the obvious logical contradiction here in this process of Marxian thought (since it is illogical to say that wages are set by the capitalists at a subsistence level and then to insist that the lot of the workers "progressively" gets "worse and worse"), one might be surprised to learn that laissez-faire capitalist writers make exactly the same claims against socialism.  Socialism is the system of exploitation, not laissez-faire.  Socialism is a system of tyranny.  Socialism will lead to the progressive pauperizing of the laboring classes; capitalism will pour a horn of plenty out on them.


In fact, these types of accusations are among some of the oldest criticisms made against socialism in general.  According to F. A. Hayek, socialism, at least modern socialism, (since one can easily study pre-Marxian communism, the so called utopian socialists, and one can go back even further in history to some very early communist-like experiments such as the Munster experiment in the 16th century) has its origins in a reaction against classical [not to be confused with the modern American or Canadian usage; the modern usage of "liberalism" is totally different from what is being described here] liberalism steaming from the French Revolution.  Hayek is rather blunt in his observations regarding the totalitarian origins of socialism.  Hayek states in his famous work, The Road to Serfdom, that

the extraordinary thing is that the same socialism that was not only early recognized as the gravest threat to freedom, but quite openly began as a reaction against the liberalism of the French Revolution, gained general acceptance under the flag of liberty.  It is rarely remembered now that socialism in its beginnings was frankly authoritarian.  The French writers who laid the foundations of modern socialism had no doubt that their ideas could be put into practice only by a strong dictatorial government.  (76)

In Mises's 1947 work, which was originally published by the Foundation for Economic Education under the title of Planned Chaos, now simply called the Epilogue to Socialism, he mentions the writings of the "heretic" Trotsky, who was a rival and a later a victim of comrade Stalin.  Trotsky, writes Mises, "saw things realistically" when he describes the inner workings of the Soviet Union.  Trotsky declared that

in a country where the sole employer is the State, opposition means death by slow starvation.  The old principle:  who does not work shall not eat, has been replaced by a new one:  who does not obey shall not eat."  This confession settles the issue.  (Epilogue to Socialism, 538)

In other words, under socialism, the only liberty that a person has is either to obey or to die.  Just as socialist writers accuse capitalism of offering a "false liberty" (and socialism will then bring "full liberty") so capitalist writers accuse the socialists of offering up "totalitarianism under the banner of liberty."  For example, Mises in his article entitled The Individual in Society, has to this to say about "socialist freedom":

They define liberty as the opportunity to do the "right" things, and, of course, they arrogate to themselves the determination of what is right and what is not.  In their eyes government omnipotence means full liberty.  To free the police power from all restraints is the true meaning of their struggle for freedom.

To really emphasis this point in which each side accuses the other of being the "real villain," consider the "plight of the laboring classes."  Even here it might be a bit misleading on my part to suggest that the socialists are the natural allies of the "workers."  (See Mises, Theory and History,  82).   Socialism is more of a product of the intellectuals in ivory towers than a philosophy of the shop floor worker.  The actual workers, the actual people who get their hands dirty, are more likely to favor interventionism and syndicalism than pure Marxian socialism.  All I am trying to say is that capitalism is normally vilified as the enemy of the laboring classes by most anti-capitalist schools of thought.

Mises, in his work on theoretical capitalism, called Liberalism:  The Classical Tradition, notes that there are actually five different systems of organizing the cooperation of individuals:  the system of private ownership of the means of production, the system of private ownership of the means of production with periodic confiscation of all wealth and its subsequent redistribution, syndicalism, the system of public ownership of the means of production, and the system of interventionism (37).  The fact remains, that all systems claim to be workable, whether or not that is true or false is the job for scientific reasoning to ascertain.  Moreover, no system claims that it is purposefully trying to harm the "poor" and the "laboring classes."  Again, what one claims to be true and what actually happens in reality can be very different things or even contradictory things.  The point is that laissez-faire asserts that it is the only system that can benefit the "poor" and the "laboring classes."  Actually, laissez-faire goes further and asserts that everybody wins under its system.  Mises asserts in Liberalism:  The Classical Tradition that

Liberalism [i.e., laissez-faire capitalism] has demonstrated that the antagonism of interests, which, according to a widely prevalent opinion, is supposed to exist among different persons, groups, and strata within a society based on private ownership of the means of production, does not, in fact, occur.  Any increase in total capital raises the income of capitalists and landowners absolutely and that of workers both absolutely and relatively.  As regards their income, any shifts in the various interests of the different groups and strata of society--the entrepreneurs, capitalists, landowners, and workers--occur together and move in the same direction as they pass through different phases in their fluctuations; what varies is only the ratio of their shares of the social product.  (127, emphasis mine)

In conclusion,  all of the claims made by "leftist" authors against capitalism have been turned around and used against them.  Laissez-faire capitalist authors have argued that socialism and interventionism are the real villains, the real tyrants who want to enslave humanity to the omnipotent state.  Socialism and interventionism provide a "false liberty" because they are really just forms of totalitarianism; socialism and interventionism harm the workers or benefit some workers at the expense of others.  Since everybody accuses everybody else of being the evil exploiters while still asserting that his own system is the only path to an improved standard of living for the masses, how does one decide who is right and who is wrong.  The starting point is to realize that judgments of value are not scientific.  Calling your opponent "an exploiter" is not a legitimate approach to a scientific discussion.  The solution is to study the cause and effect nature of each proposed system.  For example, if I were to implement a system of government interventions in the labor market, what will be the result.  Will it benefit some labor?  All labor?  No labor?  By studying cause and effect, one can get around the name calling, which is just a distraction.

 

The Problem of Interventionism

Many politicians and authors believe that they could avoid the necessity of choosing between capitalism (laissez faire) and socialism (communism, planning).  They recommend a third solution which--as they say--is as far from capitalism as it is from socialism.  In imperial Germany this third system was called Sozialpolitik; in the United States it is known as the New Deal.  Economists prefer the term used by the French, interventionism.  The idea is that private ownership of the means of production should not be entirely abolished; but the government should "improve" and correct the operation of the market by interfering with the operations of the capitalists and entrepreneurs--by means of orders and prohibitions, taxes, and subsidies.  --Ludwig von Mises.  The Why of Human Action

From a purely logical perspective, the idea of creating a third system that is neither capitalism nor socialism is nonsensical.  In the final analysis, capitalism means that the factors of production (i.e., the machines, the factories etc.) are privately owned and socialism means that these same factors are collectively owned.  But the terms capitalism and socialism cover all conceivable possibilities.  One either owns a factor of production or one do not own it.  There cannot possibly be some sort of state in the middle in which property is not really owned but it is also sort of owned simultaneously.  Trying to merge two conflicting ideologies is why such confusion exists in the first place.  A person cannot be simultaneously dead and alive, nor can a social philosophy be simultaneously in favor of and against ownership in the means of production.  

A Hayekian, i.e., someone subscribing to the major theses of Nobel Laureate economist Friedrich A. Hayek, might begin an analysis of the problems of interventionism by distinguishing between spontaneous order and animistic design.  The issue at hand is whether one has to deliberately design order or whether a complex organization can organize itself without outside interference.  Hayek views the interventionist idea of trying to deliberately plan the organization of society as naive and self-defeating.  He wrote that

to the naive mind that can conceive of order only as the product of deliberate arrangement, it may seem absurd that in complex conditions order, and adaptation to the unknown, can be achieved more effectively by decentralising [sic] decisions, and that a division of authority will actually extend the possibility of overall order.  (The Fatal Conceit, 76-77).

Moreover, Hayek warns that interventionism, which inhibits the process of spontaneous ordering of society, can impede the entire process of advancing civilization.  He notes that "it would seem as if, over and over again, powerful governments so badly damaged spontaneous improvement that the process of cultural evolution was brought to an early demise" (The Fatal Conceit, 44).   Hayek sees interventionism and planning as a deliberate attempt to suppress competition; the suppression of competition causes the inefficiency problem described earlier.  "Competition is a process of discovery," writes Hayek, "a procedure involved in all evolution, that led man unwittingly to respond to novel situations; and through further competition, not through agreement, we gradually increase our efficiency" (The Fatal Conceit, 19).

The idea that intervening in the spontaneous ordering process of the market leads to deliberate attempts to suppress competition is supported by the historical evidence of the American Progressive Era.  According to Gabriel Kolko in his seminal reinterpretation of this era of American history, interventionism is a conservative policy designed to protect the existing arrangement of economic resources from competition.  Kolko summarized his exploration of the conditions in numerous industries during this period by writing that

the economic and industrial development of the United States from 1890 until World War I assured a fluidity of conditions that made economic rationalization and stability by voluntary means substantially impossible.  If the growth of big business was spurred by the expanding urban markets, the consolidation of the economy into a few hands was made impossible by the shifting locations of markets and resources--changes that meant few companies were sufficiently well managed to hold on to their share of the market and prevent new entries.  America was too diverse, the economic resources and opportunities too decentralized, to prevent the creation of an American economic frontier.  The idea that economic opportunities were closed to middle-level wealth is not in accord with the facts.  There was sufficient product and service development--the distribution and service industries increase sharply in this period--to dispel that notion (The Triumph of Conservatism, 54).

Hayek's abstract observation that "competition is a process of discovery" and Kolko's description of the much less regulated (less interventionist) Progressive Era are consistent.  Kolko's descriptions of what happens in a minimally regulated and minimally interventionist economy are full of stories of continuous innovations with new discoveries being made.  For example, Standard Oil was challenged by the innovations of new entrants.  "In this area," writes Kolko, "the independent oil companies led the field, pioneering in gas stations in the same way that they had surpassed Standard in developing improved tank cars and trucks as well as most of the major innovations in petroleum chemistry" (42).  Or consider the discovery process in action in the minimally interventionist steel industry of this period of history.  "U.S. Steel failed to alter the location of its facilities sufficiently or to improve its technology at a time when its competitors were rapidly moving ahead" (38).

Kolko stressed the highly competitive nature of this minimally interventionist period of American history because he wanted to compare and contrast it with the following interventionist period (say the pre-World War I and post-World War I periods).  The minimally interventionist period began with observations on a dynamic capitalism, i.e., a period completely consistent with the discovery process stressed by Hayek.  Kolko wrote that

to the extent that Joseph A. Schumpeter was correct in holding that each significant new innovation was embodied in a new firm and the leadership of new men in a still dynamic capitalism--and that firms that do not innovate die--it can also be said that important competitive trends were inherent in the economic structure.  (The Triumph of Conservatism, 29).

However, the Progressive Era ends with a number of government interventions and regulations.  In the introductory quotation, Mises puts the word "improve" in quotations when he wrote that the intention of interventionism is to "'improve' and correct the operation of the market by interfering" because Mises wants to stress that the idea of "improvement" is a sham.  The motivation is not to improve the functioning of the free market but rather to hinder its functioning.  Interventionism is simply a protection racket to protect the existing successful firms from the dynamic discovery process of the free market.  Without the government intervention, the market process of continual change and learning keeps pushing forward.  The government interventions, then, become the only effective way to shut down the discovery process of the market with its attendant competitive features.  Kolko summarizes this process of interventionism as a form of protectionism when he observes that

As new competitors sprang up, and as economic power was diffused throughout an expanding nation, it became apparent to many important businessmen that only the national government could rationalize the economy.  Although specific conditions varied from industry to industry, internal problems that could be solved only by political means were the common denominator in those industries whose leaders advocated greater federal regulation.  Ironically, contrary to the consensus of historians, it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.  (The Triumph of Conservatism, 4-5, emphasis mine).

What intervention seems to then lead to is a process of "self-socialization" of industry.  The industries become less and less "private" and more and more "public" in the sense that the operation of industries becomes more and more wrapped into the political process.  Mises notes already in a work from 1932, entitled The Myth of the Failure of Capitalism, that businesses were continually integrating themselves, freely, into the government and political sphere.  Mises writes that "statist writers have hailed this politically motivated 'tendency of big enterprise to socialize itself,' i.e., to let interests other than regard for 'the maximum profit for the shareholders' guide the administration of the enterprise" (Selected Writings of Ludwig von Mises, Volume 2, 189).  The reason for why these big businesses want to "socialize themselves" is because to do so is in the best interests of the managers and directors.  Mises continues by noting that "directors of large enterprises nowadays no longer think they need to give any consideration to the interests of the shareholders, since they feel themselves thoroughly supported by the state and that they have interventionist public opinion standing behind them" (Selected Writings of Ludwig von Mises, Volume 2, 189).  Mises's interpretation implies that the managerial class of high level corporate directors are engaged in an expropriation of the property of the shareholders in order to make themselves into well-paid quasi-bureaucrats.  Of course, bureaucrats function in a world without market competition because bureaucrats do not have to seek voluntary consent; instead, they can use the coercive power of the state to force compliance on the part of the public.  In other words, interventionism then leads to the total death of competition, which implies a total death of the discovery process.  All of this implies a death of innovation and progress.  The dynamic discovery process of capitalism that existed in the minimally regulated days of the early Progressive Era have been replaced by a bureaucratic and static interventionist environment.  This means that the managerial class benefits at the expense of the rest of society.  Society benefits from competition and its discovery process; society suffers when a locked in group of managerial elites kills off competition with its discovery process in order for this small managerial elite to enjoy the fruits that accrue to a small but politically connected elite.  Therefore, interventionism is not a solution, nor is it a third-way.  It is not a solution that differs from both capitalism and socialism.  Instead, interventionism is just a process that leads to, in the end, the self-socialization of business.  Interventionism will end in socialism with the monopoly state owning or controlling all the factors of production.

On Why Market-Oriented Research Institutes Are Using the Wrong Tactics

One of the tactics that seems to be popular these days is the use of "Report Cards" among "market-oriented" research institutes.  A good example of this is when they create and issue "Report Cards" based on standardized test results.  I suppose they think that the report cards are the means for them to their desired end, with the desired end being accountability of the education system.  I want to briefly point out why I think this whole approach is terribly flawed given our current global situation.

First, it makes little sense to me for why supposed market-oriented research institutes would use an empirical-positivist approach in their quest to advance their free market cause.  The empirical-positivist approach was first advanced as a tool to advance the cause of central planning.  The transition of economic science from a study of human action to a study of applied mathematics has its origins in the 1920s and 1930s.  So I am not sure that "measuring everything" is really the best approach for advancing the free market cause.  But seriously, that is only a minor criticism.

Second, a much bigger issue is that we are engaged in an ideological war.  So it makes no sense to pump out a bunch of "report card" numbers as some sort of "tracking number," when the war is over ideas not observable numbers.  If these market-oriented research institutes want to be effective then they better observe what kind of topics people chat about on Facebook.  People don't talk about "Report Card" scores on Facebook.  Most of the time they are talking about some sort of banker conspiracy to set up some sort of world government.  Given the fact that the mainstream media is now talking about total European Union collapse and how this collapse will spread to North America then it is understandable that people will be looking for causal factors.  My suspicion is that the neo-Marxists and communists will exploit this for all it is worth (think 1930s and the transition to fascist economics in America) and our current batch of market-oriented research institutes seem to be unprepared for a counterattack or at least a defense.

From all the material I have read, seen posted, discussions, etc., I would recommend that instead of making little "report cards," they better start refuting neo-Marxist imperialism theories.  Today I took maybe 1 hour just very briefly flipping through Lionel Robbins The Economic Causes of War and this book sounds like a very good place to start.  Robbins seems to be addressing a number of issues that have resurfaced today as "conspiracy theories."  They seemed to be the same conspiracy theories back in his day as well.  For example, I noticed that Robbins mentioned something about the Baghdad railroad concessions; well that is a common issue you will see raised in "New World Order" type books (I saw William Engdahl mention that in his New World Order book on the oil industry).  Given the fact that we are going into a global economic collapse, the conspiracy theories are going to make a big-time comeback.  Consequently, I recommend that market based research institutes stop wasting their time on report cards or a lot of their other secondary issues (I remember how one market-oriented research institute in Canada seemed obsessed with "accountability" on Indian reserves).  Instead, they need to address the neo-Marxist imperialist theories.  They also need to address a related issue:  the underconsumption theories.

According to Robbins, there is some serious inconsistency even among Marxian writers as to what the term "Marxian theory of imperialism" means.  Robbins wrote (23) [all emphasis is mine; all comments in square brackets are also mine]:

The Marxian theory of imperialism, I thought, rested upon a somewhat rigid form of the underconsumption theory of the trade cycle.  Because there was chronic tendency for the working classes to have too little to spend, [my guess is that this justifies the call for "more money" to be continually pumped in; people just do not have enough money to buy the goods] there developed a struggle for international markets which tended from time to time to culminate in war.  That, I thought....was the Marxian theory of imperialism.  BUT IN FACT THIS IS NOT SO.  The theory of imperialism, or the theory of catastrophe...is NOT a matter on which there is general agreement among Marxian writers.

Robbins also noted that this is an area where even among the Marxists there is "the sharpest possible dissension."

Later on, Robbins (60) [all comments and emphasis is mine] wrote that there are serious defects in the Marxian theories:

Our researches thus far have had a negative outcome.  We have surveyed the under-consumptionist versions of the communist theory of imperialism and found that they were either logically defective or that they did not prove their main contention.

The problem, as I see it, is that when unemployment rates jump to 30% [even if we ignore the often heard cries of manipulation of rates to make them look less damaging to the incumbent politicians], and when people see escalation of conflicts toward world war (maybe Iran?) people will be much more likely to ignore cool and rational arguments and will be tempted to fall for different variations of Marxian theories of imperialism.  The danger here is that people will blame this all on "laissez-faire capitalism" even though no such thing exists or has existed for some time.  Laissez-faire capitalism was already being suppressed by the inherently conservative movement of the Progressive Era.  This was all done deliberately, as a matter of government policy.

Therefore, I think that market-oriented researcher institutes are misdirecting their efforts to tangential and minor issues such as:  report cards, more homework for students, whether we should or should not have a "harmonized" tax and so on.  These are all valid issues; I am not saying that they should not address them.  All I am saying is this:  I think these institutes are addressing minor issues.  They are addressing minor skirmishes and ignoring the mega-war that is staring them in the face.


The war is ideological.  You are going to see a resurgence of the underconsumption hypothesis and a resurgence of the idea that monopoly somehow emerges on the "free market."  We will get a lot of 1920s propaganda coming back.  It was, for example, the 1920s communists in Italy who kept pushing the Occupation Movement (granted back then it was to "occupy the factories" and not to "occupy Wall Street).  Similarly, Mussolini pretty much gave us the same false dichotomy argument that will probably come back, namely, "you can either have monopolies of private corporations or the government monopoly."  It will be extremely important to refute the argument that monopolies emerge on the free market.  In addition, the correct interpretation, namely, that monopoly emerges because of deliberate government policy, needs to be stressed.  Ron Paul wrote about this in his book The Case for Gold.  This thesis was supported by Gabriel Kolko in his book The Triumph of Conservatism, in which he noted that the competition was so stiff and the economy was so decentralized that no one could centrally control it.  This trend toward competition and away from monopoly lasted until the government intervened in order to protect certain firms from competition.  I would also emphasize that this is not laissez-faire because it was deliberately created by government interventionism.  Stressing the fact that government intervention caused the problems will be vitally necessary.


In conclusion, when I read the websites of market-oriented research institutes I think to myself "fine, these are all nice suggestions that I can accept" but you are missing the big picture.  The entire idea of free markets will be attacked vociferously in the next few months.  As unemployment skyrockets and as global wars intensify, all the old Marxist lines on imperialism that blame it all on "capitalism" will all be resurrected.  These institutes need to start positioning themselves to address this coming storm.