|
|
By Toby Baxendale, on 19 August 10
One of our good supporters has sent us in an article to publish by Christopher Snowdon, who with the support of the courageous campaigners for liberty at the Taxpayers Alliance is setting out to challenge and demolish the work of Wilkinson and Pickett’s The Spirit Level: Why more equal societies almost always do better. Open-minded readers of this site will no doubt come to their own conclusions. Comment at The Guardian is warming up on the matter.
Myths rarely turn into conventional wisdom overnight. Usually they evolve gradually, exaggerated and embellished in the retelling. But in the case of The Spirit Level, a work of political science published last year, the transition from legend to gospel has been made with dizzying speed.
As its subtitle suggests, The Spirit Level: Why more equal societies almost always do better argues that the success of entire nations depends not on their absolute wealth but on the size of the gap between the highest and lowest earners. The ‘less equal’ nations suffer most severely from health and social problems, while the ‘more equal’ countries—particularly the Nordic states—are happier, healthier, more trusting, slimmer, more charitable and more socially cohesive.
The book’s authors—social epidemiologists Richard Wilkinson and Kate Pickett—insist that this phenomenon is not due to poverty, but is the result of the ‘psychosocial’ stress of living in an “unfair” country. Inequality, they say, acts like a “pollutant spread throughout society” with rich and poor equally susceptible to its toxic effects. The lesson is clear—if you want to mend the broken society, reject free market capitalism and adopt the Scandinavian model.
What raises The Spirit Level above the average left-wing polemic is what The Guardian described as its “inarguable battery of evidence”. This takes the form of a series of scatter graphs which, while crude, are consistent in their message: nearly all undesirable outcomes are more common in less equal countries. So neatly does this “battery of evidence” appeal to those who thought Gordon Brown was too right-wing, that it has been readily embraced by many on the left, including both Milliband brothers. A hotly debated political issue has, it seems, now been answered by science; an ethical question that has exercised the greatest minds for centuries has been answered with hard data.
If only things were so simple. In reality, The Spirit Level presents the world as its authors would like to see it, with inconvenient facts ignored and whole nations erased from the narrative. While claiming to study all rich market economies, countries such as Czech Republic, South Korea, Slovenia and Hong Kong never feature. If they had, the reader would see that the latter performs very well under almost every criteria despite extreme inequality (as does Singapore), while the Czech Republic and Slovenia do much less well despite having a very narrow gap between rich and poor.
If the sample group seems oddly selective, so too are the criteria of what makes a country “do better”. Wilkinson and Pickett focus on Scandinavia’s relatively low rate of illegal drug use without mentioning its high rate of alcoholism. They devote a chapter to the higher rate of imprisonment in less equal countries without discussing the more pertinent—and hardly coincidental—fact that these countries also have less crime. They confidently assert that people in egalitarian societies are more philanthropic, have stronger family relationships and are more involved in the local community. Had they sought empirical evidence for any of this, they would have found that it is actually the people in less equal countries who give more to charity, have fewer divorces and are most likely to be a member of a local club or association.
And so it goes on. Remarkably few of The Spirit Level’s claims stand up to scrutiny. If the book demonstrates anything, it is how easily statistics can be transformed into the proverbial ‘damned lies’. Nonetheless, it is a book that should not be ignored. Not only has it built up a large and avid readership, but it represents a milestone for those who view the narrowing the wealth gap as more important than creating wealth. While the traditional aim of the left was to alleviate poverty by making the poor richer, inequality can be alleviated by narrowing inequality in ways that need not make anyone richer.
Indeed, Wilkinson and Pickett seem indifferent to how inequality is reduced and explicitly state that economic growth is not the answer. By their rationale, society would improve if the poor got 5% poorer so long as the rich got 20% poorer. Rounding up Britain’s millionaires and sailing them to the Antarctic would not only make life better for the poor but, still less improbably, would make life better for everyone. But without a compelling reason to believe such a reduction will materially benefit the working class, the authors leave themselves open to accusations of trading in the politics of envy.
Herein lies the problem with focusing on relative income instead of absolute income. There are things we can do to make the poor richer which might also reduce inequality, and vice versa, but the two objectives are not always compatible. The government’s recent decision to raise the tax threshold to £10,000, for example, should make the poor richer, but if the rich find ways to get even richer in the mean time, will the resulting inequality make things worse? It is not obvious how or why, but the logic of The Spirit Level says it must.
In the end, the case for reducing inequality remains a moral and political question. It is not one that be answered by science. The Spirit Level represents an ingenuous attempt to bridge the gap between faith and reason but, like all grand unifying theories, it can be filed under ‘too good to be true’.
Christopher Snowdon is the author of The Spirit Level Delusion. The book can be ordered from Amazon.
By Toby Baxendale, on 1 August 10
We are told in this weekend’s Sunday Telegraph that:
Listening to David Cameron’s first speech on the steps of Downing Street, Archbishop Vincent Nichols says he nearly fell off his chair at the Prime Minister’s pledge to work for “the common good’.
His surprise was down to the fact that only a few weeks earlier, Catholic bishops had published a document offering election advice to churchgoers called “Choosing the Common Good”. Archbishop Nichols is “encouraged at the echoes of Catholic teaching emerging in the language of the new Coalition Government.” The article goes on to say “the Archbishop appears filled with an infectious optimism that the country could be on the cusp of returning to a more cohesive, united society.”
Nichols said,
If we can generate that sense of volunteering and the sense of fulfilment that comes from it in our society, then we would be better for it. The Big Society is a step in that direction.
It should come as no surprise to our Catholic leader in the UK that a Conservative Prime Minister should be in tune with large parts of Catholic Social Teaching. One of the greatest influences on Thatcher for example was F A Hayek, who was born a Catholic Christian, although he later became agnostic. The final sentence of his last book, The Fatal Conceit does seem to offer up a legitimate view that re reverted to his Catholic Faith.
In 1993 the Hayek Memorial Lecture “Two moral ideas of business” run by the Institute of Economic Affairs, Michael Novak in his book of the same year “The Catholic Ethic and the Spirit of Capitalism” revealed to us that Hayek had been having extensive conversations with Pope John Paul II who wrote the encyclical “Centesimus Annus.” Chapters 31 and 32 are very Hayekian.
As Karol Wojtyla, the old Pope’s doctoral Thesis, “The Acting Person,” is replete with observation that it is the creative and dynamic interaction of free citizens that causes social co-operation. This idea of course underscores Hayek’s conception of the spontaneous order of social co-operation.
Could this be David Cameron or F A Hayek writing? Is this the same as the spontaneous order of human co-operation or the mutual co-operation of The Big Society? Are they the same?
By intervening directly and depriving society of its responsibility, the Social Assistance State leads to a loss of human energies and an inordinate increase of public agencies, which are dominated more by bureaucratic thinking than by concern for serving their clients, and which are accompanied by an enormous increase in spending, In fact, it would appear that needs are best understood and satisfied by people who are closest to them who act as neighbours to those in need. It should be added that certain kinds of demands often call for a response which is not simply material but which is capable of perceiving the deeper human need.
Well it is from Centesimus Annus, by Pope John Paul II No 48 1991.
Archbishop Nichols should be aware that the Cameron modernised Conservative Party, which (whether it knows it or not) sits on a great body of thought that is deeply rooted in Catholic Social Thought.
I have written here about the Thatcherite view of society contrasted with the Cameronian one here. It is worth highlighting some of these points again.
Thatcher’s Infamous Quote
From an interview given by Prime Minister Margret Thatcher to Women’s Own magazine, October 31, 1987:
I think we have gone through a period when too many children and people have been given to understand “I have a problem, it is the Government’s job to cope with it!” or “I have a problem, I will go and get a grant to cope with it!” “I am homeless, the Government must house me!” and so they are casting their problems on society and who is society? There is no such thing! There are individual men and women and there are families and no government can do anything except through people and people look to themselves first. It is our duty to look after ourselves and then also to help look after our neighbour and life is a reciprocal business and people have got the entitlements too much in mind without the obligations, because there is no such thing as an entitlement unless someone has first met an obligation [...]
I wrote,
It would be ignorant to say that there is no such thing as society. Society is the purposeful actions of all the individuals who participate in it. As such it is simply the sum of all its parts. Delve a little bit deeper and you will see that is in fact the most liberating and fulfilling invention of mankind discovered by the use of reason. The ability for man to cooperate and pursue his ends is society. Working within the societal structure of mutual co-operation to facilitate exchange of goods and services, you get the additional benefits of friendship and a sense of belonging or togetherness. This is often hailed as one of the greatest benefits of living and cooperating together.
The principle of the division of labour that allows us to avoid providing individually for all our goods and services, shelter and warmth, with the necessary impoverishment this would mean for the majority (and probably death), make us what we are as human beings. We are lifted out of the survival of the fittest war of all against all.
The Darwinian nightmare is not writ large in the human species as it seems to be for most other life forms.
Mrs Thatcher was taken out of context, as can be seen when you read the full text of the talk. However I suspect she, or her speech writers, displayed little understanding of the true benefits of the discovery of mutual human co-operation. I think they were also of the school of thought that would quite rightly argue for less government, as is Cameron, one of her successors. However she did not have much of an idea of what to put in its place. The transition from a government-run, welfare-providing, rule-making, centralised decision-making society to individual responsibility, local-community-led society is quite a painful process. To be smoothly transitioned to a society more compatible with liberty, I fear warrants only a constructivist approach to getting top-down government out of our lives and to rebalancing responsibility away from government and to the individual and the family. Cameron is spot on the money with regard to this.
Consider these extracts from “The Big Society” (delivered on the 10th Nov 2009) speech by David Cameron our aspiring PM.
I believe that in general, a simplistic retrenchment of the state which assumes that better alternatives to state action will just spring to life unbidden is wrong. Instead we need a thoughtful re-imagination of the role, as well as the size, of the state.
And:
The size, scope and role of government in Britain has reached a point where it is now inhibiting, not advancing the progressive aims of reducing poverty, fighting inequality, and increasing general well-being. Indeed there is a worrying paradox that because of its effect on personal and social responsibility, the recent growth of the state has promoted not social solidarity, but selfishness and individualism.
This is an extremely important point. Absent personal responsibility and the mutual bonds that bind us together through the universal division of labour fall away. The selfish, those who do not take individual responsibility, the person who says he has a “right” to a job, a house, an income etc, these people believe others must provide for them. This is selfishness in its extreme, if they are fit and ready to work. We all suspect that with 2.7 million people on Incapacity Benefit, there is extreme selfishness and little societal / individual responsibility at play. In war, enemies have tried their best to bomb the hell out of us and incapacitate as many of us as possible, but I suspect in 1945 there were not 2.7m people incapacitated in the UK!
Cameron goes on to say
And here lies the rub.
The paradox at the heart of big government is that by taking power and responsibility away from the individual, it has only served to individuate them. What is seen in principle as an act of social solidarity, has in practice led to the greatest atomisation of our society. The once natural bonds that existed between people – of duty and responsibility – have been replaced with the synthetic bonds of the state – regulation and bureaucracy.
Our alternative to big government is the big society.
But we understand that the big society is not just going to spring to life on its own: we need strong and concerted government action to make it happen.
Archbishop Nichols should be not surprised the modern Conservative Party has moved on and improved from the raw Thatcherite approach in its positioning of the free society with that of the Modern Catholic Social Teaching that it has so much in common with. When the Pope visits the UK this September, we trust that his advisors and Cameron’s celebrate the great vision of the last Pope, Hayek and Cameron himself on these matters.
Some related articles that go deeper into some of these issues mentioned above are listed here
Afterthought
It is a great shame that the Pope will not be visiting Northern Ireland as there is a large Catholic minority that has little in common with its political representatives who are largely statist, interventionist top down socialist meddlers who have little in common with Catholic teaching. Those Catholics actually have more in Common with The Big Society vision of Cameron and no political representation.
By Chris Neal, on 21 July 10
It was Richard Cobden’s view that “Peace will come to earth when the people have more to do with each other and governments less.
Cobden said this in the context of International relations but the same sentiment is relevant when applied to an overbearing meddlesome state that attempts to mollycoddle its citizens from cradle to grave. The result is that people are emasculated, not empowered — just look at Britain’s high levels of unemployment. The poorest in society have become entrenched in economic dependency, rather than set free from the shackles of poverty. Worklessness is at the very heart of Britain’s problems, we have an ever widening gap between rich and poor, and no amount of complex benefit provision has served to reduce the gap. Quite the opposite is true; the Centre for Social Justice report “Dynamic Benefits” flags benefit withdrawal rates as a key disincentive to work:
The swift withdrawal of benefits, offsetting earnings from work, creates a deeply regressive system that punishes low earners who are trying to earn more. Today’s complex benefits arrangements often result in a participation tax rate of more than 75% for low earners – which means that their increased income from working is less than 25% of their earnings. The first steps into the world of work for many in a low hours/low pay job are all but pointless.
The ONS Labour Market statistics report from August 2009 showed that there are 10.4 million working-age people not working in the UK. Of these, 5.9 million are claiming out-of-work benefits.
Alistair Darling said in his pre election Budget this year that income tax had contributed £146bn to the exchequer and a few breaths later mentioned that welfare had cost £196bn!!
What can we do about it?
Well, clearly paying our taxes and expecting that Government will take care of all of society’s ills on our behalf hasn’t worked. We cannot just pay and expect that this abrogates us from community involvement. Cobden was absolutely right when he said that we need to have more to do with each other — the “haves” helping the “have nots” is just as important as paying taxes, and should have a profound effect on reducing the overall tax burden.
A ‘Cobdenian’ Solution
On the 15th July 2009 I opened a job club in my local town. This small club has just celebrated its first birthday with its 33rd member finding work out of a group of 41 participants. I now run three Job Clubs, am in the process of opening three more, and now network with thirty plus Job Clubs nationwide. I am extremely grateful for the encouragement received from Cobden Centre colleagues in setting up the charity GB Job Clubs, particularly from Steve Baker MP who serves as a Trustee, and Toby Baxendale who has kindly agreed to Chair our Advisory Board. Here is an overview and progress report:
What is a Job Club?
A Job Club is a group of individuals who get together on a regular basis to support each other through the job hunting process. No two Job Clubs are alike – run by volunteers, they are local groups, run in, by and for the Community.
The Job Club enables members to expand their network of contacts whilst acting as a support group. A Job Club nurtures confidence, self esteem and optimism all of which are essential in the job search process.
Job Clubs can improve people’s chances of finding a job. Their efforts are strengthened by the sense of belonging to a group and job searches tend to be shorter. 30 percent of people who lose their jobs find another one through friends, family or social networks. Only 10 percent acquire new jobs through Job Centre Plus. ‘Who you know’ still counts for a lot.
Job Club also helps members keep work ready by arranging voluntary work. Volunteering not only provides valuable help to local organisations and charities; it brings purpose, raises self esteem and speaks volumes to a potential employer about the drive, tenacity and potential of the volunteer / job seeker.
Why do Job Clubs work?
“Empowerment” – pure and simple instead of a top down prescribed state solution people are empowered to help themselves. Taking responsibility for their own job seeking in the safe environs of a Job Club works on several levels:
- Individual responsibility brings purpose and serves to raise self esteem
- Helping one another expands networks, allows rejection/failures to be shared and successes celebrated. The spin off is that it improves social cohesion within the community.
- Engaging with the community to help find work is also good for social cohesion everyone shares in the process. It is important therefore that Job Clubs foster good relationships with local Chambers of Commerce, major employers, Job Centre Plus, CAB, Local Councils and other relevant organisations.
What has been achieved in the past year?
The network of clubs numbers 36 with more in development. Job Clubs have a high success rate for members finding work within six months and often much sooner.
At one stage the Conservative Party’s “Get Britain Working” campaign was responsible for around fifty job club initiatives. Most notable are Banbury and Bicester; Towcester and Warrington founded by MPs Tony Baldry, Andrea Leadsom, and David Mowat. The very transient nature of Job Club membership suggests that clubs will come and go; however we are delighted at the take-up of the concept by other community groups particularly Churches. It is our objective to support any inclusive voluntary Job Clubs which are free to attend, and not affiliated politically or otherwise.
There is absolutely no doubt as to the effectiveness of the Job Club self help ethos in enhancing the path back to work. Some clubs report success rates in excess of 80% of members finding work (this must be taken in context as they are served by JC+ and often DWP contractors simultaneously) but a number of barriers exist that prevent Job Clubs from truly gaining traction:
Apathy
Many jobseekers are trapped in economic dependency and will not take a low paid job as they do not consider it worth their while and would rather remain on benefits.
Funding and infrastructure
GB Job Clubs has founded a support network for voluntary job clubs and will help access basic start-up funding where possible, often from Local Authorities and most recently with the support of The Church Urban Fund. Most Job Clubs cost very little and require only a few volunteers and a venue. Some Job Clubs have attracted donations in kind from local businesses.
A start-up budget of £500 buys a wireless-enabled laptop, which we load with Microsoft’s donated software and their digital literacy curriculum, 5000 A5 flyers, and GB Job Clubs “How to run a Job Club” guide.
Our development team also visits new and prospective Job Clubs to help new leaders and provide hands-on advice. The objective is to provide ongoing support and resources such as expert guest speakers on subjects including CV writing, interview techniques, presentation, job-seeking on the internet, well-being, understanding benefits and debt advice.
The cost of setting up the charity and serving the existing network has thus far been met from within. Apart from myself I have one other volunteer Jane Gould who has joined me as full time Development Director. Our ‘not for profit’ company was registered at the beginning of July 2010 and our charity application is now awaiting approval by the Charity Commission. Once granted we will fundraise in order to recruit, resource and maintain a regional development team plus core administrative staff. Where possible we will look at pro bono input. The charity will also administer ‘The Jericho Programme’, our start-up business finance and mentoring project.
The Jericho Programme
This business incubator has been established to allow Job Club members to set up their own ventures by providing simple access to community help. Often the barrier to a good idea coming to fruition is a small amount of capital and mentoring to demystify basic business disciplines such as bookkeeping, marketing and compliance. ‘Jericho’ provides both by recruiting a mentor from the local business community and providing a start-up loan.
I am pleased to report that our first pilot project is now underway. CK Garden Maintenance has been given a loan of £1200 for equipment and marketing. The remaining barrier for our two intrepid Edenbridge Job Club members is for one of them to pass a driving test. Thankfully, funding has been received for an intensive driving course which assuming a successful outcome will allow the business to flourish.
Two other entrepreneurs are now in the process of having their projects evaluated:
- A ‘mosaic parties for kids’ concept from a Richmond Borough Job Club member.
- A cleaning business proposed by an ex-offender introduced to us by our friends at Alpha for Prisons and soon we hope to be a member of the Job Club initiative we are backing on the Isle of Wight.
In both cases suitable local volunteer mentors have been identified and recruited and funds are available for both businesses to launch.
What Next?
We have come a long way in twelve months and look forward to a bright future. The work achieved by colleagues in Job Clubs up and down the country has been inspirational but all agree that we are barely scratching the surface. The new Government, in particular Iain Duncan Smith’s Department for Work and Pensions, has an excellent understanding of the issues facing the unemployed and the overbearing complexities of the existing welfare system.
We look forward to innovative community-led solutions that encourage people presently entrenched in economic dependency to take their place in the workforce, knowing that they will benefit both economically and through enhanced well being. We look forward to playing our part and continuing to support “Big Society” solutions.
At time of writing and having recently addressed the Welfare to Work Convention in Liverpool, I am aware of the ‘enthusiasm’ of many DWP contractors to set up and run Job Clubs. I would strongly warn against this. I believe that Job Clubs are best left in the hands of the people who use them, i.e. the unemployed who are discovering the empowerment that comes from helping themselves and one another. Imposing an overarching structure and prescriptive methodology delivered by the state or their chosen contractors will only serve to further emasculate these determined job seekers and is contrary to the Coalition Government’s stated localist aim for a Big Society.
Chris Neal
Executive Director
GB Job Clubs
01732 866201 direct
07855 421530 mobile
chris@cjneal.com
By Steven Baker MP, on 14 June 10
By Steven Baker MP, on 1 June 10
With a hat tip to Associative Economist, Arthur Edwards, we reproduce below an excerpt from Riegel’s book The new approach to freedom.
The Right-Wing Socialists
THERE ARE three classes of socialists: the left-wing, or Marxist, group, who believe that the government should own and control everything; the middle-of-the-road socialists, who believe the government should own and operate public utilities; and the right-wing socialists, who believe that the government should control only the monetary system.
The right-wing socialists are by far the most dangerous, because they are not known as socialists and call themselves capitalists, individualists, private enterprisers, etc. They even believe themselves to be anti-socialist and profess full faith in private enterprise. They are not only numerically the largest group of socialists but are also individually the most influential. Among them are the leading industrialists and mercantilists and bankers and statesmen.
The right wing socialists believe that with production and distribution facilities in the ownership and operation of private interests, and with monetary facilities in the hands of government, we can have free enterprise. They might as well believe that if a man owns an automobile, he need not worry about who or what controls the gas.
Private enterprise means the right among men to come to voluntary agreement on the exchange of their goods and services. These agreements, some written, some oral, some implicit, some explicit, run into the millions, and upon their fidelity rests the entire social structure. In a money economy, all these contracts are expressed in terms of the monetary unit, which is itself based upon a contract—the basic contract which is the foundation of the entire pyramid of contracts.
What is the money contract that makes possible or impossible the faithful performance of every other contract? Ask any businessman, banker, lawyer, economist or statesman, and you will find that his idea is not only vague, but that it involves legislation.
In other words, he believes that money is a political product.
In contrast with this universal belief, the truth is that the state is incompetent to legislate money and powerless to issue it. The substance of money is supplied entirely by private enterprise. The state’s intervention in money is at best an impediment to private enterprise, and with the assertion of the issue power, it becomes the active agent of socialization. Thus those who believe in or accept political money power—and their number is legion—are the most dangerous, though innocent, socialists.
While the great mass of people have no ideology, those who think on the issue between private enterprise and socialism are virtually all socialists of the three classes named. This is a startling fact that we must recognize before the final battle lines are formed. The would-be friends of private enterprise must be made real friends, instead of innocent fellow travelers with those who would destroy our liberties.
Private enterprise, to survive, must control its three facilities, namely, the means of exchange, the means of production, and the means of distribution. To control the means of exchange, we must have separation of money and state.
Addendum
Richard Cobden on money:
I hold all idea of regulating the currency to be an absurdity; the very terms of regulating the currency and managing the currency I look upon to be an absurdity; the currency should regulate itself; it must be regulated by the trade and commerce of the world; I would neither allow the Bank of England nor any private banks to have what is called the management of the currency…
I should never contemplate any remedial measure, which left to the discretion of individuals to regulate the amount of currency by any principle or standard whatever… I should be sorry to trust the Bank of England again, having violated their principle [the Palmer rule]; for I never trust the same parties twice on an affair of such magnitude (Q. 519, 520, 527).
Further reading
By Steven Baker MP, on 14 May 10
 In the course of things, I had cause to quote Bastiat: “The state is the great fiction by which everyone seeks to live at the expense of everyone else.” This prompted me to dig out the original essay.
As the UK’s national debt doubles and after a period within which QE was used, creating space in the market for that debt, one wonders how much longer we can go on like this before we are forced to rediscover the truths in this classic work.
I wish that someone would offer a prize, not of five hundred francs, but of a million, with crosses, crowns, and ribbons, to whoever would give a good, simple, and intelligible definition of this term: the state.
What an immense service he would render to society!
The state! What is it? Where is it? What does it do? What should it do?
All that we know about it is that it is a mysterious personage, and certainly the most solicited, the most tormented, the busiest, the most advised, the most blamed, the most invoked, and the most provoked in the world.
For, sir, I do not have the honor of knowing you, but I wager ten to one that for six months you have been making utopias; and if you have been making them, I wager ten to one that you place upon the state the responsibility of realizing them.
And you, madame, I am sure that you desire from the bottom of your heart to cure all the ills of mankind, and that you would be in no wise embarrassed if the state would only lend a hand.
But alas! The unfortunate state, like Figaro, knows neither to whom to listen nor where to turn. The hundred thousand tongues of press and rostrum all cry out to it at once:
“Organize labor and the workers.”
“Root out selfishness.”
“Repress the insolence and tyranny of capital.”
“Make experiments with manure and with eggs.”
“Furrow the countryside with railroads.”
“Irrigate the plains.”
“Plant forests on the mountains.”
“Establish model farms.”
“Establish harmonious workshops.”
“Colonize Algeria.”
“Feed the babies.”
“Instruct the young.”
“Relieve the aged.”
“Send the city folk into the country.”
“Equalize the profits of all industries.”
“Lend money, without interest, to those who desire it.”
“Liberate Italy, Poland, and Hungary.”
“Improve the breed of saddle horses.”
“Encourage art; train musicians and dancers.”
“Restrict trade, and at the same time create a merchant marine.”
“Discover truth and knock a bit of sense into our heads.”
“The function of the state is to enlighten, to develop, to increase, to fortify, to spiritualize, and to sanctify the soul of a nation.”2
“Oh, sirs, a little patience,” replies the state with a piteous air. “I shall try to satisfy you, but for that I shall need some resources. I have prepared proposals for five or six taxes, brand new and the mildest in the world. You will see how glad people will be to pay them.”
But then a great cry is raised: “Shame! Shame! Anybody can do a thing if he has the resources! Then you would not be worthy of being called the state. Far from hitting us with new taxes, we demand that you eliminate the old ones. Abolish:
“The tax on salt;
“The tax on beverages;
“The tax on letters;
“The octroi;*
“Licenses;
“Prestations.”
In the midst of this tumult, and after the country had changed its state two or three times for not having satisfied all these demands, I tried to point out that they were contradictory. Good Lord! What was I thinking of? Could I not keep this unfortunate remark to myself?
So here I am, discredited forever; and it is now an accepted fact that I am a heartless, pitiless man, a dry philosopher, an individualist, a bourgeois—in a word, an economist of the English or American school.
Oh, pardon me, sublime writers, whom nothing stops, not even contradictions. I am wrong, no doubt, and I retract my error with all my heart. I demand nothing better, you may be sure, than that you should really have discovered outside of us a benevolent and inexhaustible being, calling itself the state, which has bread for all mouths, work for all hands, capital for all enterprises, credit for all projects, ointment for all wounds, balm for all suffering, advice for all perplexities, solutions for all problems, truths for all minds, distractions for all varieties of boredom, milk for children and wine for old age, which provides for all our needs, foresees all our desires, satisfies all our curiosity, corrects all our errors, amends all our faults, and exempts us all henceforth from the need for foresight, prudence, judgment, sagacity, experience, order, economy, temperance, and industry.
And why should I not desire it? Heaven forgive me! The more I reflect on it, the more I find how easy the whole thing is; and I, too, long to have at hand that inexhaustible source of riches and enlightenment, that universal physician, that limitless treasure, that infallible counselor, that you call the state.
Hence, I insist that it be shown to me, that it be defined, and that is why I propose that a prize be offered to the first to discover this rare bird. For, after all, it will have to be admitted that this precious discovery has not yet been made, since the people have up to now overthrown immediately everything that has presented itself under the name of the state, precisely because it has failed to fulfill the somewhat contradictory conditions of the program.
Need it be said that we may have been, in this respect, duped by one of the most bizarre illusions that has ever taken possession of the human mind?
Man is averse to pain and suffering. And yet he is condemned by nature to the suffering of privation if he does not take the pains to work for a living. He has, then, only the choice between these two evils. How arrange matters so that both may be avoided? He has found up to now and will ever find only one means: that is, to enjoy the fruits of other men’s labor; that is, to arrange matters in such a way that the pains and the satisfactions, instead of falling to each according to their natural proportion, are divided between the exploited and their exploiters, with all the pain going to the former, and all the satisfactions to the latter. This is the principle on which slavery is based, as well as plunder of any and every form: wars, acts of violence, restraints of trade, frauds, misrepresentations, etc.—monstrous abuses, but consistent with the idea that gave rise to them. One should hate and combat oppressors, but one cannot say that they are absurd.
Slavery is on its way out, thank Heaven, and our natural inclination to defend our property makes direct and outright plunder difficult. One thing, however, has remained. It is the unfortunate primitive tendency which all men have to divide their complex lot in life into two parts, shifting the pains to others and keeping the satisfactions for themselves. It remains to be seen under what new form this deplorable tendency is manifested.
The oppressor no longer acts directly by his own force on the oppressed. No, our conscience has become too fastidious for that. There are still, to be sure, the oppressor and his victim, but between them is placed an intermediary, the state, that is, the law itself. What is better fitted to silence our scruples and—what is perhaps considered even more important—to overcome all resistance? Hence, all of us, with whatever claim, under one pretext or another, address the state. We say to it: “I do not find that there is a satisfactory proportion between my enjoyments and my labor. I should like very much to take a little from the property of others to establish the desired equilibrium. But that is dangerous. Could you not make it a little easier? Could you not find me a good job in the civil service or hinder the industry of my competitors or, still better, give me an interest-free loan of the capital you have taken from its rightful owners or educate my children at the public expense or grant me incentive subsidies or assure my well-being when I shall be fifty years old? By this means I shall reach my goal in all good conscience, for the law itself will have acted for me, and I shall have all the advantages of plunder without enduring either the risks or the odium.”
As, on the one hand, it is certain that we all address some such request to the state, and, on the other hand, it is a well-established fact that the state cannot procure satisfaction for some without adding to the labor of others, while awaiting another definition of the state, I believe myself entitled to give my own here. Who knows if it will not carry off the prize? Here it is:
The state is the great fictitious entity by which everyone seeks to live at the expense of everyone else.
For, today as in the past, each of us, more or less, would like to profit from the labor of others. One does not dare to proclaim this feeling publicly, one conceals it from oneself, and then what does one do? One imagines an intermediary; one addresses the state, and each class proceeds in turn to say to it: “You, who can take fairly and honorably, take from the public and share with us.” Alas! The state is only too ready to follow such diabolical advice; for it is composed of cabinet ministers, of bureaucrats, of men, in short, who, like all men, carry in their hearts the desire, and always enthusiastically seize the opportunity, to see their wealth and influence grow. The state understands, then, very quickly the use it can make of the role the public entrusts to it. It will be the arbiter, the master, of all destinies. It will take a great deal; hence, a great deal will remain for itself. It will multiply the number of its agents; it will enlarge the scope of its prerogatives; it will end by acquiring overwhelming proportions.
But what is most noteworthy is the astonishing blindness of the public to all this. When victorious soldiers reduced the vanquished to slavery, they were barbarous, but they were not absurd. Their object was, as ours is, to live at the expense of others; but, unlike us, they attained it. What are we to think of a people who apparently do not suspect that reciprocal pillage is no less pillage because it is reciprocal; that it is no less criminal because it is carried out legally and in an orderly manner; that it adds nothing to the public welfare; that, on the contrary, it diminishes it by all that this spendthrift intermediary that we call the state costs?
And we have placed this great myth, for the edification of the people, in the Preamble of the Constitution. Here are the first words of the Preamble:
France has been constituted as a republic in order to …. raise all its citizens to an ever higher standard of morality, enlightenment, and well-being.
Thus, it is France, or the abstraction, which is to raise Frenchmen, or the realities, to a higher standard of morality, well-being, etc. Is this not to be possessed by the bizarre illusion that leads us to expect everything from another power than our own? Is this not to imply that there is, above and beyond the French people, a virtuous, enlightened, rich being who can and ought to bestow his benefits on them? Is this not to assume, and certainly most gratuitously, that there exists between France and the people of France, that is, between the synoptic, abstract term used to designate all these individuals and the individuals themselves, a father-son, guardian-ward, teacher-pupil relationship? I am well aware of the fact that we sometimes speak metaphorically of “the fatherland” or of France as a “tender mother.” But in order to expose in its full flagrance the inanity of the proposition inserted into our Constitution, it suffices to show that it can be reversed, I will not say without disadvantage, but even to advantage. Would exactness suffer if the Preamble had said:
“The French have been constituted as a republic in order to raise France to an ever higher standard of morality, enlightenment, and well-being”?
Now, what is the value of an axiom of which the subject and the object can be interchanged without disadvantage? Everyone understands the statement: “The mother will nurse the baby.” But it would be ridiculous to say: “The baby will nurse the mother.”
The Americans formed another idea of the relations of citizens to the state when they placed at the head of their Constitution these simple words:
We, the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquillity, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain, etc.
There is no mythical creation here, no abstraction from which the citizens demand everything. They expect nothing save from themselves and their own efforts.
If I have permitted myself to criticize the first words of our Constitution, it is not, as one might think, in order to deal with a mere metaphysical subtlety. I contend that this personification of the state has been in the past, and will be in the future, a fertile source of calamities and of revolutions.
Here the public, on the one side, the state on the other, are considered as two distinct entities, the latter intent on pouring down upon the former, the former having the right to claim from the latter, a veritable shower of human felicities. What must be the inevitable result?
The fact is, the state does not and cannot have one hand only. It has two hands, one to take and the other to give—in other words, the rough hand and the gentle hand. The activity of the second is necessarily subordinated to the activity of the first. Strictly speaking, the state can take and not give. We have seen this happen, and it is to be explained by the porous and absorbent nature of its hands, which always retain a part, and sometimes the whole, of what they touch. But what has never been seen, what will never be seen and cannot even be conceived, is the state giving the public more than it has taken from it. It is therefore foolish for us to take the humble attitude of beggars when we ask anything of the state. It is fundamentally impossible for it to confer a particular advantage on some of the individuals who constitute the community without inflicting a greater damage on the entire community.
It finds itself, then, placed by our demands in an obviously vicious circle.
If it withholds the boon that is demanded of it, it is accused of impotence, of ill will, of incapacity. If it tries to meet the demand, it is reduced to levying increased taxes on the people, to doing more harm than good, and to incurring, on another account, general disaffection.
Thus, we find two expectations on the part of the public, two promises on the part of the government: many benefits and no taxes. Such expectations and promises, being contradictory, are never fulfilled.
Is this not the cause of all our revolutions? For between the state, which is lavish with impossible promises, and the public, which has conceived unrealizable expectations, two classes of men intervene: the ambitious and the utopian. Their role is completely prescribed for them by the situation. It suffices for these demagogues to cry into the ears of the people: “Those in power are deceiving you; if we were in their place, we would overwhelm you with benefits and free you from taxes.”
And the people believe, and the people hope, and the people make a revolution.
Its friends are no sooner in charge of things than they are called on to make good their promises: “Give me a job, then, bread, relief, credit, education, and colonies,” say the people, “and at the same time, in keeping with your promises, deliver me from the burden of taxation.”
The new state is no less embarrassed than the old, for, when it comes to the impossible, one can, indeed, make promises, but one cannot keep them. It tries to gain time, which it needs to bring its vast projects to fruition. At first it makes a few timid attempts; on the one hand, it extends primary education a little; on the other, it reduces somewhat the tax on beverages (1830). But it is always confronted with the same contradiction: if it wishes to be philanthropic, it must continue to levy taxes; and if it renounces taxation, it must also renounce philanthropy.
These two promises always and necessarily conflict with each other. To have recourse to borrowing, that is, to eat into the future, is indeed a means of reconciling them in the present; one tries to do a little good in the present at the expense of a great deal of harm in the future. But this procedure raises the specter of bankruptcy, which destroys credit. What is to be done, then? The new state then takes a firm stand against its critics: it regroups its forces to maintain itself, it stifles opinion, it has recourse to arbitrary decrees, it ridicules its former maxims, it declares that one can govern only on condition of being unpopular; in short, it proclaims itself the government.
And this is precisely what other demagogues are waiting for. They exploit the same illusion, take the same road, obtain the same success, and soon come to be engulfed in the same abyss.
This is the way we came to the February Revolution. At that time the illusion that is the subject of this article had made its way further than ever into popular thought, along with socialist doctrines. More than ever before, people expected that the state, in a republican form, would open wide the floodgates of its bounty and close off the stream of taxes. “I have often been deceived,” said the people, “but this time I myself will stand guard to see that I am not again deceived.”
What could the provisional government do? Alas! What is always done in such a circumstance: promise and gain time. It did not fail to do this, and, to add solemnity to its promises, it gave them definitive form in its decrees. “Increased welfare, shorter working hours, relief, credit, gratuitous education, agricultural settlements, land clearance, and, at the same time, reductions in the taxes on salt, beverages, letters, meat, all will be granted …. when the National Assembly meets.”
The National Assembly met, and, as two contradictory ideas cannot both be realized, its task, its sad task, was confined to retracting, as gently as possible, one after another, all the decrees of the provisional government.
Still, in order not to make the disappointment too cruel, it had to compromise a little. Certain commitments were kept; others were fulfilled in token form. Hence, the present administration is trying to devise new taxes.
Now, looking ahead a few months, I ask myself sadly what will happen when the newly created civil servants go out into the country to collect the new taxes on inheritances, incomes, and the profits of agriculture. May Heaven give the lie to my presentiments, but here again I see a role for the demagogues to play.
Read the last Manifesto of the Montagnards* which they issued in connection with the presidential election. It is rather long, but can be summed up in a few words: The state should give a great deal to the citizens and take little from them. It is always the same tactic, or, if you will, the same error.
The state owes instruction and education free of charge to all citizens.
It owes:
A general and professional education, appropriate as nearly as possible to the needs, vocations, and capacities of each citizen.
It should:
Teach each citizen his duties toward God, toward men, and toward himself; develop his feelings, his aptitudes, and his faculties; give him, in short, proficiency in his work, understanding of his best interests, and knowledge of his rights.
It should:
Put within everyone’s reach literature and the arts, the heritage of human thought, the treasures of the mind, all the intellectual enjoyments which elevate and strengthen the soul.
It should:
Insure against every disaster, fire, flood, etc. [how great are the implications of this little et cetera!], suffered by a citizen.
It should:
Intervene in the relations between capital and labor and make itself the regulator of credit.
It owes:
Practical encouragement and efficacious protection to agriculture.
It should:
Buy up the railroads, the canals, the mines, and undoubtedly also administer them with that industrial expertise which is so characteristic of it.
It should:
Stimulate laudable enterprises, and encourage and aid them with all the resources capable of making them succeed. As regulator of credit, it will largely control the industrial and agricultural associations, in order to assure their success.
The state is to do all this without prejudice to the services that it performs today; and, for example, it must always adopt a threatening attitude toward foreign nations; for, say the signers of the program, linked by that holy solidarity and by the precedents of republican France, we extend our commitments and our hopes, beyond the barriers that despotism has raised between nations, on behalf of all those whom the yoke of tyranny oppresses; we desire that our glorious army be again, if it must, the army of liberty.
You see that the gentle hand of the state, that good hand which gives and which bestows, will be very busy under the government of the Montagnards. Perhaps you believe that the same will be true of the rough hand, of the hand that reaches into our pockets and empties them?
Undeceive yourselves. The demagogues would not know their business if they had not acquired the art of hiding the rough hand while showing the gentle hand.
Their reign will surely mean a jubilee for the taxpayer.
“It is on luxuries,” they say, “not necessities, that taxes should be imposed.”
Will it not be a happy day when, in order to load us with benefits, the public treasury is content to take from us just our superfluous funds?
Nor is this all. The Montagnards intend that “taxation should lose its oppressive character and should henceforth be no more than an act of fraternity.”
Heavenly days! I am well aware of the fact that it is the vogue to get fraternity in everywhere, but I did not suspect that it could be put into the receipt of the tax collector.
Getting down to details, the signers of the manifesto say:
We demand the immediate abolition of taxes that fall on objects of primary necessity, such as salt, drinks, et cetera.
Reform of the real estate tax, the octroi [a local tax], and license fees.
Justice free of charge, that is, the simplification of forms and the reduction of expenses. [This no doubt has to do with official stamps.]
Thus, real estate taxes, the octroi, license fees, taxes on stamps, salt, beverages, mail—all are to be done away with. These gentlemen have found the secret of keeping the gentle hand of the state energetic and active, while paralyzing its rough hand.
Indeed! I ask the impartial reader, is this not childish and, what is more, dangerously childish? Why would people not make one revolution after another, once they had made up their minds not to stop until this contradiction had been made a reality: “Give nothing to the state, and receive a great deal from it”?
Does anyone believe that if the Montagnards came to power, they would not themselves become the victims of the very means that they employed to seize it?
Citizens, throughout history two political systems have confronted each other, and both of them can be supported by good arguments. According to one, the state should do a great deal, but also it should take a great deal. According to the other, its double action should be barely perceptible. Between these two systems, one must choose. But as for the third system, which is a mixture of the two others, and which consists in requiring everything from the state without giving anything to it, it is chimerical, absurd, childish, contradictory, and dangerous. Those who advance it in order to give themselves the pleasure of accusing all governments of impotence and exposing them thus to your violent attacks, flatter and deceive you, or at least they deceive themselves.
As for us, we think that the state is not and should not be anything else than the common police force instituted, not to be an instrument of oppression and reciprocal plunder, but, on the contrary, to guarantee to each his own and to make justice and security prevail.
Find the essay, with footnotes, via The Online Library of Liberty.
By Steven Baker MP, on 6 April 10
This post is taken from Mises, The Theory of Money and Credit (1934), chapter 13 Monetary Policy (PDF, HTML), covering inflationism. Follow this link for the series.
Emphasis mine.
3 Inflationism
Inflationism is that monetary policy that seeks to increase the quantity of money.
Naive inflationism demands an increase in the quantity of money without suspecting that this will diminish the purchasing power of the money. It wants more money because in its eyes the mere abundance of money is wealth. Fiat money! Let the state “create” money, and make the poor rich, and free them from the bonds of the capitalists! How foolish to forgo the opportunity of making everybody rich, and consequently happy, that the state’s right to create money gives it! How wrong to forgo it simply because this would run counter to the interests of the rich! How wicked of the economists to assert that it is not within the power of the state to create wealth by means of the printing press!—You statesmen want to build railways, and complain of the low state of the exchequer? Well, then, do not beg loans from the capitalists and anxiously calculate whether your railways will bring in enough to enable you to pay interest and amortization on your debt. Create money, and help yourselves.
Other inflationists realize very well that an increase in the quantity of money reduces the purchasing power of the monetary unit. But they endeavor to secure inflation nonetheless, because of its effect on the value of money; they want depreciation, because they want to favor debtors at the expense of creditors and because they want to encourage exportation and make importation difficult. Others, again, recommend depreciation for the sake of its supposed property of stimulating production and encouraging the spirit of enterprise.
Depreciation of money can benefit debtors only when it is unforeseen. If inflationary measures and a reduction of the value of money are expected, then those who lend money will demand higher interest in order to compensate their probable loss of capital, and those who seek loans will be prepared to pay the higher interest because they have a prospect of gaining on capital account. Since, as we have shown, it is never possible to foresee the extent of monetary depreciation, creditors in individual cases may suffer losses and debtors make profits, in spite of the higher interest exacted. Nevertheless, in general it will not be possible for any inflationary policy, unless it takes effect suddenly and unexpectedly, to alter the relations between creditor and debtor in favor of the latter by increasing the quantity of money. Those who lend money will feel obliged, in order to avoid losses, either to make their loans in a currency that is more stable in value than the currency of their own country, or to include in the rate of interest they ask, over and above the compensation that they reckon for the probable depreciation of money and the loss to be expected on that account, an additional premium for the risk of a less probable further depreciation. And if those who were seeking credit were inclined to refuse to pay this additional compensation, the diminution of supply in the loan market would force them to it. During the inflation after the war it was seen how savings deposits decreased because savings banks were not inclined to adjust interest rates to the altered conditions of the variations in the purchasing power of money.
It has already been shown in the preceding chapter that it is a mistake to think that the depreciation of money stimulates production. If the particular conditions of a given case of depreciation are such that wealth is transferred to the rich from the poor, then admittedly saving (and consequently capital accumulation) will be encouraged, production will consequently be stimulated, and so the welfare of posterity increased. In earlier epochs of economic history a moderate inflation may sometimes have had this effect. But the more the development of capitalism has made money loans (bank and savings-bank deposits and bonds, especially bearer bonds and mortgage bonds) the most important instruments of saving, the more has depreciation necessarily imperiled the accumulation of capital, by decreasing the motive for saving. How the depreciation of money leads to capital consumption through falsification of economic calculation, and how the appearance of a boom that it creates is an illusion, and how the depreciation of the money really reacts on foreign trade have similarly been explained already in the preceding chapter.
A third group of inflationists do not deny that inflation involves serious disadvantages. Nevertheless, they think that there are higher and more important aims of economic policy than a sound monetary system. They hold that although inflation may be a great evil, yet it is not the greatest evil, and that the state might under certain circumstances find itself in a position where it would do well to oppose greater evils with the lesser evil of inflation. When the defense of the fatherland against enemies, or the rescue of the hungry from starvation is at stake, then, it is said, let the currency go to ruin whatever the cost.
Sometimes this sort of conditional inflation is supported by the argument that inflation is a kind of taxation that is advisable in certain circumstances. Under some conditions, according to this argument, it is better to meet public expenditure by a fresh issue of notes than by increasing the burden of taxation or by borrowing. This was the argument put forward during the war when the expenditure on the army and navy had to be met; and this was the argument put forward in Germany and Austria after the war when a part of the population had to be provided with cheap food, the losses on the operation of the railways and other public undertakings met, and reparations payments made. The assistance of inflation is invoked whenever a government is unwilling to increase taxation or unable to raise a loan; that is the truth of the matter The next step is to inquire why the two usual methods of raising money for public purposes cannot or will not be employed.
It is only possible to levy high taxes when those who bear the burden of the taxes assent to the purpose for which the resources so raised are to be expended. It must be observed here that the greater the total burden of taxation becomes, the harder it is to deceive public opinion as to the impossibility of placing the whole burden of taxation upon the small richer class of the community. The taxation of the rich or of property affects the whole community, and its ultimate consequences for the poorer classes are often more severe than those of taxation levied throughout the community. These implications may perhaps be harder to grasp when taxation is low; but when it is high they can hardly fail to be recognized. There can, moreover, be no doubt that it is scarcely possible to carry the system of relying chiefly upon “taxation of ownership” any farther than it has been carried by the inflating countries, and that the incidence of further taxation could not have been concealed in the way necessary to guarantee continued popular support.
Who has any doubt that the belligerent peoples of Europe would have tired of war much more quickly if their governments had clearly and candidly laid before them at the time the account of their war expenditure? In no European country did the war party dare to impose taxation on the masses to any considerable extent for meeting the cost of the war. Even in England, the classical country of “sound money,” the printing presses were set in motion. Inflation had the great advantage of evoking an appearance of economic prosperity and of increase of wealth, of falsifying calculations made in terms of money, and so of concealing the consumption of capital. Inflation gave rise to the pseudo-profits of the entrepreneur and capitalist which could be treated as income and have specially heavy taxes imposed upon them without the public at large—or often even the actual taxpayers themselves—seeing that portions of capital were thus being taxed away. Inflation made it possible to divert the fury of the people to “speculators” and “profiteers.” Thus it proved itself an excellent psychological resource of the destructive and annihilist war policy.
What war began, revolution continued. The socialistic or semi-socialistic state needs money in order to carry on undertakings which do not pay, to support the unemployed, and to provide the people with cheap food. It also is unable to secure the necessary resources by means of taxation. It dare not tell the people the truth. The state-socialist principle of running the railways as a state institution would soon lose its popularity if it was proposed, say, to levy a special tax for covering their running losses. And the German and Austrian people would have been quicker in realizing where the resources came from that made bread cheaper if they themselves had to supply them in the form of a bread tax. In the same way, the German government that decided for the “policy of fulfillment” in opposition to the majority of the German people, was unable to provide itself with the necessary means except by printing notes. And when passive resistance in the Ruhr district gave rise to a need for enormous sums of money, these, again for political reasons, were only to be procured with the help of the printing press.
A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, i.e., of antidemocratic, policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. It explains why inflation has always been an important resource of policies of war and revolution and why we also find it in the service of socialism. When governments do not think it necessary to accommodate their expenditure to their revenue and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism.
The various aims pursued by inflationists demand that the inflationary measures shall be carried through in various special ways. If depreciation is wanted in order to favor the debtor at the expense of the creditor, then the problem is to strike unexpectedly at creditor interests. As we have shown, to the extent to which it could be foreseen, an expected depreciation would be incapable of altering the relations between creditors and debtors. A policy aiming at a progressive diminution of the value of money does not benefit debtors.
If, on the other hand, the depreciation is desired in order to “stimulate production” and to make exportation easier and importation more difficult in relation to other countries, then it must be borne in mind that the absolute level of the value of money—its purchasing power in terms of commodities and services and its exchange ratio against other kinds of money—is without significance for external (as for internal) trade; the variations in the objective exchange value of money have an influence on business only so long as they are in progress. The “beneficial effects” on trade of the depreciation of money only last so long as the depreciation has not affected all commodities and services. Once the adjustment is completed, then these “beneficial effects” disappear. If it is desired to retain them permanently, continual resort must be had to fresh diminutions of the purchasing power of money. It is not enough to reduce the purchasing power of money by one set of measures only, as is erroneously supposed by numerous inflationist writers; only the progressive diminution of the value of money could permanently achieve the aims which they have in view. [5] But a monetary system that corresponds to these requirements can never be actually realized.
Of course, the real difficulty does not lie in the fact that a progressive diminution of the value of money must soon reach amounts so small that they would no longer meet the requirements of commerce. Since the decimal system of calculation is customary in the majority of present-day monetary systems, even the more stupid sections of the public would find no difficulty in the new reckoning when a system of higher units was adopted. We could quite easily imagine a monetary system in which the value of money was constantly falling at the same proportionate rate. Let us assume that the purchasing power of this money, through variations in the determinants that lie on the side of money, sinks in the course of a year by one-hundredth of its amount at the beginning of the year The levels of the value of the money at each new year then constitute a diminishing geometrical series. If we put the value of the money at the beginning of the first year as equivalent to 100, then the ratio of diminution is equivalent to 0.99, and the value of money at the end of the nth year is equivalent to 100 × 0.99n-1. Such a convergent geometrical progression gives an infinite series, any member of which is always to the next following member in the ratio of 100 : 99. We could quite easily imagine a monetary system based on such a principle; perhaps even more easily still if we increased the ratio, say, to 0.995 or even 0.9975.
But however clearly we may be able to imagine such a monetary system, it certainly does not lie in our power actually to create one like it. We know the determinants of the value of money, or think we know them. But we are not in a position to bend them to our will. For we lack the most important prerequisite for this; we do not so much as know the quantitative significance of variations in the quantity of money. We cannot calculate the intensity with which definite quantitative variations in the ratio of the supply of money and the demand for it operate upon the subjective valuations of individuals and through these indirectly upon the market. This remains a matter of very great uncertainty. In employing any means to influence the value of money we run the risk of giving the wrong dose. This is all the more important since in fact it is not possible even to measure variations in the purchasing power of money. Thus even though we can roughly tell the direction in which we should work in order to obtain the desired variation, we still have nothing to tell us how far we should go, and we can never find out where we are already, what effects our intervention has had, or how these are proportioned to the effects we desire.
Now the danger involved in overdoing an arbitrary influence—a political influence; that is, one arising from the conscious intervention of human organizations—upon the value of money must by no means be underestimated, particularly in the case of a diminution of the value of money. Big variations in the value of money give rise to the danger that commerce will emancipate itself from the money which is subject to state influence and choose a special money of its own. But without matters going so far as this it is still possible for all the consequences of variations in the value of money to be eliminated if the individuals engaged in economic activity clearly recognize that the purchasing power of money is constantly sinking and act accordingly. If in all business transactions they allow for what the objective exchange value of money will probably be in the future, then all the effects on credit and commerce are finished with. In proportion as the Germans began to reckon in terms of gold, so was further depreciation rendered incapable of altering the relationship between creditor and debtor or even of influencing trade. By going over to reckoning in terms of gold, the community freed itself from the inflationary policy, and eventually even the government was obliged to acknowledge gold as a basis of reckoning.
A danger necessarily involved in all attempts to carry out an inflationary policy is that of excess. Once the principle is admitted that it is possible, permissible, and desirable, to take measures for “cheapening” money, then immediately the most violent and bitter controversy will break out as to how far this principle is to be carried. The interested parties will differ not merely about the steps still to be taken, but also about the results of the steps that have been taken already. It would be impossible for any inflationary measures to be taken without violent controversy. It would be practically impossible so much as to consider counsels of moderation. And these difficulties arise even in the case of an attempt to secure what the inflationists call the beneficial effects of a single and isolated depreciation. Even in the case, say, of assisting “production” or debtors after a serious crisis by a single depreciation of the value of money, the same problems remain to be solved. They are difficulties that have to be reckoned with by every policy aiming at a reduction of the value of money.
Consistently and uninterruptedly continued inflation must eventually lead to collapse. The purchasing power of money will fall lower and lower, until it eventually disappears altogether. It is true that an endless process of depreciation can be imagined. We can imagine the purchasing power of money getting continually lower without ever disappearing altogether, and prices getting continually higher without it ever becoming impossible to obtain commodities in exchange for notes. Eventually this would lead to a situation in which even retail transactions were in terms of millions and billions and even higher figures; but the monetary system itself would remain.
But such an imaginary state of affairs is hardly within the bounds of possibility. In the long run, a money which continually fell in value would have no commercial utility. It could not be used as a standard of deferred payments. For all transactions in which com modities or services were not exchanged for cash, another medium would have to be sought. In fact, a money that is continually depreciating becomes useless even for cash transactions. Everybody attempts to minimize his cash reserves, which are a source of continual loss. Incoming money is spent as quickly as possible, and in the purchases that are made in order to obtain goods with a stable value in place of the depreciating money even higher prices will be agreed to than would otherwise be in accordance with market conditions at the time. When commodities that are not needed at all or at least not at the moment are purchased in order to avoid the holding of notes, then the process of extrusion of the notes from use as a general medium of exchange has already begun. It is the beginning of the “demonetization” of the notes. The process is hastened by its paniclike character. It may be possible once, twice, perhaps even three or four times, to allay the fears of the public; but eventually the affair must run its course and then there is no longer any going back. Once the depreciation is proceeding so rapidly that sellers have to reckon with considerable losses even if they buy again as quickly as is possible, then the position of the currency is hopeless.
In all countries where inflation has been rapid, it has been observed that the decrease in the value of the money has occurred faster than the increase in its quantity. If m represents the nominal amount of money present in the country before the beginning of the inflation, P the value of the monetary unit then in terms of gold, M the nominal amount of money at a given point of time during the inflation, and p the value in gold of the monetary unit at this point of time; then, as has often been shown by simple statistical investigations, mP > Mp. It has been attempted to prove from this that the money has depreciated “too rapidly” and that the level of the rate of exchange is not “justified.” Many have drawn from it the conclusion that the quantity theory is obviously not true and that depreciation of money cannot be a result of an increase in its quantity. Others have conceded the truth of the quantity theory in its primitive form and argued the permissibility or even the necessity of continuing to increase the quantity of money in the country until its total gold value is restored to the level at which it stood before the beginning of the inflation, that is, until Mp = mP.
The error that is concealed in all of this is not difficult to discover. We may completely ignore the fact already referred to that the exchange rates (including the bullion rate) move in advance of the purchasing power of the money unit as expressed in the prices of commodities, so that the gold value must not be taken as a basis of operations, but purchasing power in terms of commodities, which as a rule will not have decreased to the same extent as the gold value. For this form of calculation too, in which P and p do not represent value in terms of gold but purchasing power in terms of commodities, would still as a rule give the result mP > Mp. But it must be observed that as the depreciation of money proceeds, the demand for money (that is, for the kind of money in question) gradually begins to fall. When loss of wealth is suffered in proportion to the length of time money is kept on hand, endeavors are made to reduce cash holdings as much as possible. Now if every individual, even if his circumstances are otherwise unchanged, no longer wishes to maintain his cash holding at the same level as before the beginning of the inflation, the demand for money in the whole community, which can only be the sum of the individuals’ demands, decreases too. There is also the additional fact that as commerce gradually begins to use foreign money and actual gold in place of notes, individuals begin to hold part of their reserves in foreign money and in gold and no longer in notes.
An expected fall in the value of money is anticipated by speculation so that the money has a lower value in the present than would correspond to the relationship between the immediate supply of it and demand for it. Prices are asked and given that are not related to the present amount of money in circulation nor to present demands for money, but to future circumstances. The panic prices paid when the shops are crowded with buyers anxious to pick up something or other while they can, and the panic rates reached on the exchange when foreign currencies and securities that do not represent a claim to fixed sums of money rise precipitously, anticipate the march of events. But there is not enough money available to pay the prices that correspond to the presumable future supply of money and demand for it. And so it comes about that commerce suffers from a shortage of notes, that there are not enough notes on hand for fulfilling commitments that have been entered into. The mechanism of the market that adjusts the total demand and the total supply to each other by altering the exchange ratio no longer functions as far as the exchange ratio between money and other economic goods is concerned. Business suffers sensibly from a shortage of notes. This bad state of affairs, once matters have gone as far as this, can in no way be helped. Still further to increase the note issue (as many recommend) would only make matters worse. For, since this would accelerate the growth of the panic, it would also accentuate the maladjustment between depredation and circulation. Shortage of notes for transacting business is a symptom of an advanced stage of inflation; it is the reverse aspect of panic purchases and panic prices, the reflection of the “bullishness” of the public that will finally lead to catastrophe.
The emancipation of commerce from a money which is proving more and more useless in this way begins with the expulsion of the money from hoards. People begin at first to hoard other money instead so as to have marketable goods at their disposal for unforeseen future needs—perhaps precious-metal money and foreign notes, and sometimes also domestic notes of other kinds which have a higher value because they cannot be increased by the state (for example, the Romanoff ruble in Russia or the “blue” money of communist Hungary); then ingots, precious stones, and pearls; even pictures, other objects of art, and postage stamps. A further step is the adoption of foreign currency or metallic money (that is, for all practical purposes, gold) in credit transactions. Finally, when the domestic currency ceases to be used in retail trade, wages as well have to be paid in some other way than in pieces of paper which are then no longer good for anything.
The collapse of an inflation policy carried to its extreme—as in the United States in 1781 and in France in 1796—does not destroy the monetary system, but only the credit money or fiat money of the state that has overestimated the effectiveness of its own policy. The collapse emancipates commerce from etatism and establishes metallic money again.
It is not the business of science to criticize the political aims of inflationism. Whether the favoring of the debtor at the expense of the creditor, whether the facilitation of exports and the hindrance of imports, whether the stimulation of production by transferring wealth and income to the entrepreneur, are to be recommended or not, are questions which economics cannot answer. With the instruments of monetary theory alone, these questions cannot even be elucidated as far as is possible with other parts of the apparatus of economics. But there are nevertheless three conclusions that seem to follow from our critical examination of the possibilities of inflationary policy.
In the first place, all the aims of inflationism can be secured by other sorts of intervention in economic affairs, and secured better, and without undesirable incidental effects. If it is desired to relieve debtors, moratoria may be declared or the obligation to repay loans may be removed altogether; if it is desired to encourage exportation, export premiums may be granted; if it is desired to render importation more difficult, simple prohibition may be resorted to, or import duties levied. All these measures permit discrimination between classes of people, branches of production, and districts, and this is impossible for an inflationary policy. Inflation benefits all debtors, including the rich, and injures all creditors, including the poor; adjustment of the burden of debts by special legislation allows of differentiation. Inflation encourages the exportation of all commodities and hinders all importation; premiums, duties, and prohibitions can be employed discriminatingly.
Second, there is no kind of inflationary policy the extent of whose effects can be foreseen. And finally, continued inflation must lead to a collapse.
Thus we see that, considered purely as a political instrument, inflationism is inadequate. It is, technically regarded, bad policy, because it is incapable of fully attaining its goal and because it leads to consequences that are not, or at least are not always, part of its aim. The favor it enjoys is due solely to the circumstance that it is a policy concerning whose aims and intentions public opinion can be longest deceived. Its popularity, in fact, is rooted in the difficulty of fully understanding its consequences.
Further Reading
Please see our literature for a range of further reading and also The Crack Up Boom.
By Steven Baker MP, on 2 April 10
This post is taken from Mises, The Theory of Money and Credit (1934), chapter 13 Monetary Policy (PDF, HTML), covering monetary policy and the instruments of monetary policy. Follow this link for the series.
Emphasis mine.
1 Monetary Policy Defined
The economic consequences of fluctuations in the objective exchange value of money have such important bearings on the life of the community and of the individual that as soon as the state had abandoned the attempt to exploit for fiscal ends its authority in monetary matters, and as soon as the large-scale development of the modern economic community had enabled the state to exert a decisive influence on the kind of money chosen by the market, it was an obvious step to think of attaining certain sociopolitical aims by influencing these consequences in a systematic manner Modern currency policy is something essentially new; it differs fundamentally from earlier state activity in the monetary sphere. Previously, good government in monetary matters—from the point of view of the citizen—consisted in conducting the business of minting so as to furnish commerce with coins which could be accepted by everybody at their face value; and bad government in monetary matters—again from the point of view of the citizen—amounted to the betrayal by the state of the general confidence in it. But when states did debase the coinage, it was always from purely fiscal motives. The government needed financial help, that was all; it was not concerned with questions of currency policy.
Questions of currency policy are questions of the objective exchange value of money. The nature of the monetary system affects a currency policy only insofar as it involves these particular problems of the value of money; it is only insofar as they bear upon these questions that the legal and technical characteristics of money are pertinent. Measures of currency policy are intelligible only in the light of their intended influence on the objective exchange value of money. They consequently comprise the antithesis of those acts of economic policy which aim at altering the money prices of single commodities or groups of commodities.
Not every value problem connected with the objective exchange value of money is a problem of currency policy. In conflicts of currency policy there are also interests involved which are not primarily concerned with the alteration of the value of money for its own sake. In the great struggle that was involved in the demonetization of silver and the consequent movement of the relative exchange ratio of the two precious metals gold and silver, the owners of the silver mines and the other protagonists of the double standard or of the silver standard were not actuated by the same motives. While the latter wanted a change in the value of money in order that there might be a general rise in the prices of commodities, the former merely wished to raise the price of silver as a commodity by securing, or more correctly regaining, an extensive market for it. Their interests were in no way different from those of producers of iron or oil in trying to extend the market for iron or oil so as to increase the profitability of their businesses. It is true that this is a value problem, but it is a commodity-value problem—that of increasing the exchange value of the metal silver—and not a problem of the value of money.
But although this motive has played a part in currency controversy, it has been a very subordinate part. Even in the United States, the most important silver-producing area, it has been of significance only inasmuch as the generous practical encouragement of the silver magnates has been one of the strongest supports of the bimetallistic agitation. But most of the recruits to the silver camp were attracted, not by the prospect of an increase in the value of the mines, which was a matter of indifference to them, but by the hope of a fall in the purchasing power of money, from which they promised themselves miraculous results. If the increase in the price of silver could have been brought about in any other way than through the extension of its use as money, say by the creation of a new industrial demand, then the owners of the mines would have been just as satisfied; but the farmers and industrialists who advocated a silver currency would not have benefited from it in any way. And then they would undoubtedly have transferred their allegiance to other currency policies. Thus, in many states, paper inflationism was advocated, partly as a forerunner of bimetallism and partly in combination with it.
But even though questions of currency policy are never more than questions of the value of money, they are sometimes disguised so that their true nature is hidden from the uninitiated. Public opinion is dominated by erroneous views on the nature of money and its value, and misunderstood slogans have to take the place of clear and precise ideas. The fine and complicated mechanism of the money and credit system is wrapped in obscurity, the proceedings on the stock exchange are a mystery, the function and significance of the banks elude interpretation. So it is not surprising that the arguments brought forward in the conflict of the different interests often missed the point altogether. Counsel was darkened with cryptic phrases whose meaning was probably hidden even from those who uttered them. Americans spoke of “the dollar of our fathers” and Austrians of “our dear old gulden note”; silver, the money of the common man, was set up against gold, the money of the aristocracy. Many a tribune of the people, in many a passionate dis course, sounded the loud praises of silver, which, hidden in deep mines, lay awaiting the time when it should come forth into the light of day to ransom miserable humanity languishing in its wretchedness. And while some thus regarded gold as nothing less than the embodiment of the very principle of evil, all the more enthusiastically did others exalt the glistening yellow metal which alone was worthy to be the money of rich and mighty nations. It did not seem as if men were disputing about the distribution of economic goods; rather it was as if the precious metals were contending among themselves and against paper for the lordship of the market. All the same, it would be difficult to claim that these Olympic struggles were engendered by anything but the question of altering the purchasing power of money.
2 The Instruments of Monetary Policy
The principal instrument of monetary policy at the disposal of the state is the exploitation of its influence on the choice of the kind of money. It has been shown above that the position of the state as controller of the mint and as issuer of money substitutes has allowed it in modern times to exert a decisive influence over individuals in their choice of the common medium of exchange. If the state uses this power systematically in order to force the community to accept a particular sort of money whose employment it desires for reasons of monetary policy then it is actually carrying through a measure of monetary policy. The states which completed the transition to a gold standard a generation ago, did so from motives of monetary policy. They gave up the silver standard or the credit-money standard because they recognized that the behavior of the value of silver or of credit money was unsuited to the economic policy they were following. They adopted the gold standard because they regarded the behavior of the value of gold as relatively the most suitable for carrying out their monetary policies.
If a country has a metallic standard, then the only measure of currency policy that it can carry out by itself is to go over to another kind of money. It is otherwise with credit money and fiat money. Here the state is able to influence the movement of the objective exchange value of money by increasing or decreasing its quantity. It is true that the means is extremely crude, and that the extent of its consequences can never be foreseen. But it is easy to apply and popular on account of its drastic effects.
Further Reading
Please see our literature for a range of further reading.
By Jamie Whyte, on 1 April 10
In 2006, the European Court of Justice ruled that the Department of Trade and Industry has misinterpreted clauses 3 and 5 of the Working Time Directive. Clause 3 states: “Member states shall take the measures necessary to ensure that every worker is entitled to a minimum daily rest period of 11 consecutive hours per 24-hour period”. Clause 5 says that workers are additionally entitled to at least one uninterrupted rest period of 24 hours every week.
The tricky word here is “entitled”. The DTI interpreted it to mean entitled. They instructed employers that they must allow, but need not require, employees to take these rest periods. According to the ECJ, however, “entitled” actually means obliged. Employees may not choose to take shorter rest periods, and employers must not give them this option.
The European judges are surely correct on the matter of interpretation. If the words of European legislators are open to several interpretations, then deciding which was intended is simple; it must be the one that most restricts freedom of choice. And if you think that obliged is not a possible interpretation of “entitled”, then there is much you could learn from the judiciary about post-modern semiotics.
If not surprising, the ruling may still seem unfortunate. British employees already enjoyed the right to these rest periods. When it suited them, however, they were free to take shorter breaks – perhaps to earn overtime or to negotiate a longer break for another occasion. This option was surely valuable to them. Why should the manufacturing union Amicus have asked the ECJ to eliminate it? And why should the TUC have welcomed the ECJ’s ruling?
To see why, note that in the labour market employees are the suppliers and employers are the consumers. Employers buy the labour offered for sale by workers. The Working Time Directive, as now interpreted, is a regulation about the kind of service workers may offer for sale.
Product regulations usually impose minimum standards. When it comes to labour, however, we get maximum standards. The ECJ’s ruling means that, with respect to the flexibility of hours worked, employees may not offer a product exceeding a certain quality. And that is precisely why unions support this interpretation. Maximum standard regulations are required by suppliers attempting to fix their prices above the market price.
Consider a different example. Suppose you manufactured a basic type of bicycle. If the most efficient bike-maker could produce such a bike at a cost of £100, then this would soon be its market price. In a free market, price competition between suppliers drives the price of goods down to the cost of producing them. This is nice for consumers but not for suppliers. How might you avoid this unpleasant consequence of competition?
You could try collusion. Create the British Association of Bike-Makers and, at your annual conference, agree that no one will sell bikes for less than £200. Or lobby the government to set a minimum bicycle price of £200.
Alas, a minimum price will not work on its own, because it does not stop competition on quality. If everyone must sell bikes at £200, and my competitors’ bikes are worth £100, then I can get an advantage by producing better bikes at a cost of £110. My competitors will then retaliate with a yet better bike that costs £120 to make. This process will continue until we are all making bikes at a cost of £200, and none of us is better off than when they cost £100. To keep the benefits of our minimum price, we also need to restrict the quality of the bikes on sale: we need maximum standards.
Trade unionists and employment regulators are devoted to keeping the price of labour higher than its market value. So they must also stop the suppliers of labour from competing on quality. The endeavour is corrupt in principle – indeed, it would be illegal if the product were anything except labour – and futile in practice. The legislation they favour does not eliminate competition between workers; it simply benefits some at the expense of others.
I recently managed a team of two consultants. They were of roughly equal value. John was brighter but Don worked harder, often violating the Working Time Directive. If I had stopped him, who would have benefited? Not Don. He would have been robbed of his ability to compete with John, and his chance of promotion would have been reduced. A ban on hard work benefits not those who work “too hard” but those with other qualities to offer. It rigs the competition in their favour.
It is impossible to eliminate competition between the suppliers of labour. Rule it out in one respect, such as effort, and it will merely shift to something else, such as talent. Rule it out in all economically relevant respects – allow no price or quality competition – and it will shift onto irrelevant preferences of the employer. A bigot might employ foreigners if they came at a discount. But why would he otherwise? Immigrants do better in America than in France, not because Americans are less racist, but because their labour market is less regulated.
Labour laws are intended to protect employees from employers. But no such protection is needed. Feudalism ended long ago, and the labour market is not a monopsony (a market with only one buyer). No one is forced into any particular job. Indeed, unemployment benefits mean that no one need work at all. Labour laws merely distort the allocation of labour and arbitrarily bestow costs and benefits across the population. They should not be interpreted more stringently; they should be repealed.
|
|
