Lessons For Winning Liberty In a World Of Statism

Friends of freedom often become despondent when it seems that every day brings another growth and intrusion of government over people’s lives. But there is no reason to be disheartened, because there are lessons for winning liberty – from the opponents of freedom.

Beginning in the last decades of the nineteenth century, through most of the twentieth century and into our own time, all ideological, political and economic trends have been in the direction of various forms of collectivism. How did this come about, and what might friends of freedom learn from it?

Let’s take the case of socialism. On March 14, 1883, a German philosopher living in exile in London passed away. When he was buried three days later in a modest grave where his wife had been laid to rest two years earlier, fewer than ten people were present, half of them family members.

His closest friend spoke at the gravesite and said, “Soon the world will feel the void left by the passing of this Titan.” But there was, in fact, little reason to think that the deceased man or his long, turgid, and often obscure writings would leave any lasting impression on the world of ideas or on the course of human events.

That man was Karl Marx.

Socialism Did Not Always Seem “Inevitable”

Advocates of liberty often suffer bouts of despair. How can the cause of freedom ever triumph in a world so dominated by interventionist and welfare-statist ideas? Governments often give lip service to the benefits of free markets and the sanctity of personal and civil liberties. In practice, however, those same governments continue to encroach on individual freedom, restrict and regulate the world of commerce and industry, and redistribute the wealth of society to those with political power and influence. The cause of freedom seems to be a lost cause, with merely temporary rear-guard successes against the continuing growth of government.

What friends of freedom need to remember is that trends can change, that they have in the past and will again in the future. If this seems far-fetched, place yourself in the position of a socialist at the time that Karl Marx died in 1883, and imagine that you are an honest and sincere – if naïve – advocate of socialism.

As a socialist, you live in a world that is still predominately classical liberal and free market, with governments in general only intervening in relatively minimal ways in commercial affairs. Most people – including those in the “working class” – believe that it is not really the responsibility of the state to redistribute wealth or nationalize industry and agriculture, and are suspicious of most forms of government paternalism.

How could socialism ever be victorious in such a world so fully dominated by the “capitalist” mindset? Even “the workers” don’t understand the evils of capitalism and the benefits of a socialist future! Such a sincere socialist could only hope that Marx was right and that socialism would have to come – someday – due to inescapable “laws of history.”

Yet within 30 years the socialist idea came to dominate the world. By the time of the First World War the notion of paternalistic government had captured the minds of intellectuals and was gaining increasing support among the general population. Welfare-statist interventionism was replacing the earlier relatively free-market environment.

The socialist ideal of government planning was put into effect as part of the wartime policies of the belligerent powers beginning in 1914, and also lead to the communist revolution in Russia in 1917, the rise to power of fascism in Italy in 1922, the triumph of National Socialism (Nazism) in Germany in 1933, and the implementation of FDR’s New Deal policies in 1933, as well.

Collectivists Triumphed Based on Individualist Methods

Socialism triumphed during that earlier period of the last decades of the nineteenth and early decades of the twentieth centuries because while socialists advocated an ideology of collectivism, they practiced a politics of individualism. They understood that “history” would not move in their direction unless they changed popular opinion. And implicitly they understood that this meant changing the minds of millions of individual people.

So they went out and spoke and debated with their friends and neighbors. They contributed to public lectures and the publishing of pamphlets and books. They founded newspapers and magazines, and distributed them to anyone who would be willing to read them. They understood that the world ultimately changes one mind at a time – in spite of their emphasis on “social classes,” group interests, and national conflicts

They overcame the prevailing public opinion, defeated powerful special interests, and never lost sight of their long-term goal of the socialist society to come, which was the motivation and the compass for all their actions.

Uncle Sam and Lady Liberty Searched cartoon

Lesson One: Confidence in the Moral Rightness of Liberty

What do friends of freedom have to learn from the successes of our socialist opponents? First, we must fully believe in the moral and practical superiority of freedom and the free market over all forms of collectivism. We must be neither embarrassed nor intimidated by the arguments of the collectivists, interventionists, and welfare statists. Once any compromise is made in the case for freedom, the opponents of liberty will have attained the high ground and will set the terms of the debate.

Freedom advocate, Leonard E. Read, once warned of sinking in a sea of “buts.” I believe in freedom and self-responsibility, “but” we need some minimum government social “safety net.” I believe in the free market, “but” we need some limited regulation for the “public good.” I believe in free trade, “but” we should have some form of protectionism for “essential” industries and jobs. Before you know it, Read warned, the case for freedom has been submerged in an ocean of exceptions.

Each of us, given the constraints on his time, must try to become as informed as possible about the case for freedom. Here, again, Leonard Read pointed out the importance of self-education and self-improvement. The more knowledgeable and articulate we each become in explaining the benefits of the free society and the harm from all forms of collectivism, the more we will have the ability to attract people who may want to hear what we have to say.

Lesson Two: Focusing on the Long Run, Not Short Run Turns

Another lesson to be learned from the earlier generation of socialists is not to be disheartened by the apparent continuing political climate that surrounds us. We must have confidence in the truth of what we say, to know in our minds and hearts that freedom can and will win in the battle of ideas.

We must focus on that point on the horizon that represents the ideal of individual liberty and the free society, regardless of how many twists and turns everyday political currents seem to be following. National, state, and local elections merely reflect prevailing political attitudes and beliefs. Our task is to influence the future and not allow ourselves to be distracted or discouraged by who gets elected today and on what policy platform.

As Austrian economist, F.A. Hayek, emphasized, current policy directions are the product of ideological and political trends from thirty or forty years ago. In other words government policies today are the lagged effect of political-philosophical and ideological trends of earlier decades. To change tomorrow’s policies, our focus today must be on influencing the “climate of opinion” reflected in people’s minds that, then, will determine how people in the future view issues such as the role of government in society based on their notion of the nature and rights of individuals.

Lesson Three: Knowing that Only Freedom Works

Let us remember that over the last hundred years virtually every form of collectivism has been tried—socialism, communism, fascism, Nazism, interventionism, welfare statism—and each has failed. There are very few today who wax with sincere enthusiasm that government is some great secular god that can solve all of mankind’s problems – at least not many outside of those currently employed in the White House!

Obama and the Declaration of Independence

Statist policies and attitudes continue to prevail because of institutional and special interest inertia; they no longer possess the political, philosophical, and ideological fervor that brought them to power in earlier times.

Political collectivism resulted in terrible and brutal tyrannies around the world. Government central planning created economic stagnation and chaos wherever tried. Interventionist-welfare statist policies have generated spider’s webs of special interest politics, intergenerational redistributive dependency, and perverse incentives and barriers to opportunity and prosperity.

There is, in fact, only one “ism” left to fill this vacuum in the face of collectivism’s failures in all its forms. It is classical liberalism, with its conception of the free man in the free society and the free market, soundly grounded in the ideas of each individual’s right to his life, liberty, and honestly acquired property in a social setting of peaceful association and voluntary cooperation and trade.

If we keep the classical liberal ideal of individual rights and laissez-faire capitalism before us, we can and will win liberty in our time – for our children and ourselves.


A New Year’s Resolution: Becoming a Light of Liberty

With the beginning of 2015, what might be a “New Year’s resolution” for a friend of freedom? I would suggest that one answer is for each of us to do our best to become “lights of liberty” that will attract others to the cause of freedom and the free society.

For five years, from 2003 to 2008, I had the opportunity and privilege to serve as the president of the Foundation for Economic Education. FEE, as it is also called, was founded in 1946 by Leonard E. Read, with the precise goal of advancing an understanding of and the arguments for individual freedom, free markets, and constitutionally limited government.

One of the reasons that I accepted the position as president was that FEE had been influential in my own intellectual development in appreciating the meaning and importance of liberty from the time that I was a teenager, both through the pages of its monthly magazine, The Freeman and the books that it published and distributed at heavily discounted prices.

I wanted to assist in continuing the work that Leonard Read had begun at FEE, especially among the young whose ideas and actions would greatly influence the chances for liberty in the decades to come.

Self-Improvement as Lights of Liberty

In fact, it is now just over forty years ago, in June 1974 when I was in my mid-20s, that I first attended a weeklong FEE summer seminar at its, then, headquarters in a spacious and charming mansion building in Irvington-on-Hudson, New York.

There were many impressive speakers at the seminar that week, including the famous free-market journalist, Henry Hazlitt, and the riveting Austrian School economist, Hans Sennholz.

But I must confess that I only recall the content of one of the lectures that week, delivered by Leonard Read, himself. He pointed out that many of us wish we could change the world in ways that we consider to be for the better. But changing the world can only happen through changes in the attitudes, ideas, and actions of the individual members of any society.

He asked, out of all the people in the world, over whom do you have the most influence? The answer, he said, is, obviously, yourself. Therefore, changing the world begins with improving one’s own understanding and ability to explain and persuasively articulate the case for freedom and free markets.

At one point in his talk he asked that the lights be turned off in the classroom. In the darkness he slowly started to turn up the light of an electric candle that he held in his hand, asking us to notice how all eyes were drawn to it, however dim the illumination.

As the candle brightened he pointed out that more and more of the darkness was pushed away into the corners, enabling us to see more clearly both the objects and the people in the room.

If each of us learned more about liberty, we would become ever-brighter lights in the surrounding collectivist darkness of the society in which we lived. Our individually growing enlightenment through self-education and self-improvement would slowly but surely draw others to us who might also learn the importance of freedom.

Through this process more and more human lights of freedom would sparkle in the dark until finally there would be enough of us to guide the way for others so that liberty would once again triumph. And collectivism would be pushed far back into the corners of society.

Anything That’s Peaceful and First Principles

Central to Read’s philosophy of freedom was a commitment to first principles as the Archimedean point from which the logic of liberty flows. As Read explained in his book Anything That’s Peaceful(1964):

“I mean let anyone do anything that he pleases that’s peaceful and creative; let there be no organized restraint against anything but fraud, violence, misrepresentation, predation; let anyone deliver the mail, or educate, or preach his religion or whatever, so long as it’s peaceful. Limit society’s agency of organized force – government – to juridical and policing functions . . . Let the government do this, and leave all else to the free, unfettered market!”

What are the “first principles” of liberty, and what do they imply?

Each Individual’s Right to His Own Life

Firstly, and most importantly, liberty means the right of the individual to live his own life for himself. The starting axiom of freedom is that right of the individual to his life, liberty, and honestly acquired property.

Either the individual has “ownership” over himself, or it must be presumed that the collective, the tribe, the group has the authority to dispose of his life and the fruits of his mental and physical labors.

If he does not have a right to his own life, then he is at the mercy of the wishes, whims and coercive caprice of others who claim to speak and act in political authority in the name of “society.”

Only the individual knows what will bring happiness, satisfaction, fulfillment, meaning and purpose to his own life. If this is taken away from him, then he is a slave to the purposes and brute power of others.

Respect for the Equal Rights of All

Secondly, liberty means for each of us to respect the equal right of every other individual to his life, liberty, and honestly acquired property. We cannot expect others to respect our own right to these things, if we do not, as a matter of principle, forswear any claim to their life and property.

To not recognize and abide by the reciprocity of respect for and defense of such unmolested individual rights is to abrogate any principle of human association other than force and plunder – the enslavement and spoliation by the intellectually manipulative and physically stronger over others in society.

On what basis or by what principle can we appeal not to be murdered, physically violated or robbed by others, if we do not declare and insist upon the right of each individual to his life, liberty and property, ours and everyone else’s, as a starting moral premise in society?

Voluntary Consent and Peaceful Agreement

Thirdly, this means that all human associations and relationships should be based on peaceful and voluntary consent and agreement. No one may be coerced or intimidated through the threat of force to act in any way other than he freely chooses to do.

Each of us only enters into those associations and exchanges from which we expect to be made better off, as we define and desire an improvement in our lives.

This does not mean that we often do not wish that the terms under which another is willing to trade with us would be more favorable to ourselves. But the fact that we may choose to exchange at some agreed terms that is minimally acceptable to ourselves as well as to the other person means that, all things considered, we anticipate that our circumstances will be better than if we passed up this trading opportunity.

The only time that it is clear that a trade or an association with others is not considered by us as a source of personal betterment is when we are forced or coerced into the relationship. Why would compulsion have to be used or threatened against us, if we did not view what we are being compelled to do is an action or a commitment that we evaluate as making us worse rather than better off?

How Wrong Becomes Right

The Mutual Respect of Private Property

Fourthly, liberty means that each individual’s honestly acquired property is respected as rightfully his, and may not be plundered or taxed away by others, even when majorities may think that some minority has not paid some supposed “fair share.”

What makes something the rightful property of an individual? When he has either appropriated unclaimed and previously unowned land and resources through their transformation in some manner through his mental and physical labor, or when he has acquired it through peaceful and non-fraudulent trade with another in exchange for something he has to offer in the form of a desired good or his labor services at voluntarily agreed-upon terms of trade.

The use of force by either private individuals or those in political authority to seize such rightful property or compel its use or sale on terms other than those freely chosen and agreed to by its owner is, therefore, unjust and indefensible in a free society.

A Free Market of Goods and Ideas

Fifthly, liberty means respect for the free, competitive interactions of people in the marketplace of goods and ideas, out of which comes the creative and innovative energy of mind and effort that bring about rising standards of living for all in society.

The free market is the arena of human association in which each individual is at liberty to make his own choices and decisions as both producer and consumer.

Yet, as has been understood since the time of Adam Smith in the eighteenth century, each individual, in his own self-interest, necessarily must apply his abilities in ways that take into consideration the circumstances and desires of others in society.

Since, in the society of liberty, no individual may acquire what he desires through murder, theft or fraud, he is left with only one avenue to obtain what others have that he wants. He must offer to those others something that he can produce or provide that those others value more highly than what they are asked to trade away to get it.

Thus, in the free market each receives in voluntary trade what they value more highly in exchange for what they value less highly. And each serves the interests of others as the means to his own end of the personal improvement of his self-defined circumstances.

Thus, the free market as a moral and starting principle eschews all forms of compelled self-sacrifice in the networks of human association.

Liberty and Limited Government

And, sixthly, a society of liberty means a limited government, a government whose purpose is to protect each individual in his freedom and peaceful market and social affairs, and is not to be an agency of political oppression or economic favoritism through special privileges and benefits that are given to some at the expense of others in society.

Compulsory redistribution of wealth and income, and regulatory coercions over the means and methods of production, and the peaceful buying and selling of goods and services are all inconsistent with the ideal of a society of free men and women, each secure in their individual rights to their life, liberty and honestly acquired property.

These are not easy rules and ideals to live by, but they are what America was founded upon and made it originally great as a land of liberty – a land of both wide individual freedom and rising prosperity.

Winning Others Over to Liberty, One Person at a Time

They are, also, ideas not always easy to get others around us to understand and appreciate the way we see them, ourselves. This gets us back to Leonard Read’s conception of self-improvement in our own understanding of what he called the “freedom philosophy.”

Our New Year’s resolution should be to do all that we individually can to better understand the principles of liberty, their logic, their moral rightness, and their convincing application to the political and economic issues of our day.

As we each become more enlightened and articulate spokespersons for freedom we widen the circle of people able to persuasively draw others into that illumination of liberty. And step-by-step, one person at a time, the supporters and advocates of collectivism will be reduced and the proponents and enthusiasts for freedom will be increased.

Make it your goal, therefore, to bring at least one person over to the cause of liberty in 2015, and if we all do this we will have, at a minimum, doubled the friends of freedom in this New Year. If we repeat this same process of reasoned persuasion in 2016, that larger number can and will be doubled again. And, then, again in 2017, and 2018, and . . .

Through this means of peaceful persuasion the friends of freedom can become the majority of Americans in our own lifetime. All it requires is enough of us willing to try.


Yes, Virginia, There Is No Political Santa Claus

At a time of the year when gift giving and charitable good spirit fills the air, please allow me to be the one who rains on the parade: “Yes, Virginia, there is no Santa Claus!”

I don’t mean the Santa who comes down the chimney with toys for every girl and boy. This is the Santa who really is Mom or Dad, Grandparent or other family members or close friends who out of their own earned income choose to purchase, wrap and give gifts to those little ones on Christmas morning.

The small child may have been told the fairy story about an jolly, fat man in a red suit who lives in the far north, working with his elves all year long so the toys and other presents are ready to be miraculously delivered to every “good boy and girl” around the world in one night.

But we “adults” all know that is all just a story for the children at an early and gullible age when the fantasy of it all seems possibly real. And many of us cherish those early years of wonder and make-believe, before the reality breaks through that it just does not and cannot happen that way.

The Redistributing and Regulating Political Santa

I mean the Uncle Sam “Santa” that, not just at Christmas time, but year-round, is believed by many people to have the ability to bring them many of the good things they want from a mythical North Pole called Washington, D.C., or any governmental capital around the world.

This is the political Santa who delivers subsidies of various sorts to farmers or “alternative energy” manufacturers. The Santa who redistributes vast sums of money for educational expenditures, or public housing, welfare and food stamps, or government defense contracts, and even “bridges to nowhere.”

This is also the political Santa who can magically fill the global skies with unmanned drones for surveillance and death, or fund decade-long trillion-dollar wars in far-off lands, or bankroll “friendly” governments in other places around the world while punishing “bad” countries for what Uncle Sam defines as “misbehavior.”

This is the Santa who claims the power and ability remake human nature, control human thought, and redesign some or even all of human society into various preferred shapes and forms.

This political Santa works hard to create the illusion that prosperity and improvement in the human condition cannot happen if not for the guiding, regulating, and manipulating hand of “benevolent” government.

The Political Myth of Something for Nothing

But while almost all children grow out of their belief in a Santa Claus with his home at the North Pole who “somehow” succeeds in manufacturing all those “goodies” that he carries on his sleigh on Christmas Eve, many people go through their entire life convinced of the Santa-like abilities of a paternalistic government that can “somehow” assure many, if not all, of the desired good things of life.

However, just as “Santa” is really Mom and Dad who buy the presents, and wrap them to put under the Christmas tree, governmental “Santa” are those in political office who have no ability to bestow desired benefits on “all” without, in fact, first taking from some to give to others.

Mom and Dad work. They assist in producing goods or in performing services for others in the marketplace, which earns them a salary or nets them a profit. They have had to first produce to, then, through the income they earned, have the ability to consume, including on the goods that their children find on Christmas morning.

The governmental Santa must, first, tax away the income and wealth of some to, then, redistribute it in one form or another to others in the country over which those in political power assert fiscal and regulatory authority.

For the mythical Santa at the North Pole there are no costs for anything he does. The resources, raw materials and tools with which his Christmas goodies are made just appear. The elves work, apparently, for nothing and their food and clothes do not need to be produced, either.

For our political Santa Claus to rain redistributive “gifts” on those he considers deserving and “nice,” he must take from those found to be “naughty” and not nice.

Santa vs. Government Giveaway cartoon

Political Santa’s “Gifts” Carry High Costs

Our political Santa Claus imposes real and meaningful costs on many in society to do his magical “social work.” First, he must appropriate part of the material wealth produced by those productive members of society. People who, in a free market, only earn what they have by peacefully offering to others things those others desire and value enough to pay an agreed-upon price to acquire.

A portion of the intellectual and material effort of real men and women are seized from them through compulsory taxation. The government classifies these net taxpayers in society as having more than they “really” need, and usually don’t ethically “deserve.”

They get “sack of coal” for being “bad” in the form of being left with less than the full value of their creative and hardworking effort. They are denied the opportunity and the right to enjoy the complete fruits of their mental and physical labors. Their choices to spend what they have honestly earned are narrowed to what the political Santa decides they should have available to spend.

The “good” little political citizens who are given the redistributive benefits, therefore, are the net recipients of what others have produced, and which they have received due the ideological and pressure group power they can bring to bear in collaboration with the political Santa in the municipal, state, and national halls of governmental control.

But the costs of political Santa’s generosity do not come just in the form of direct redistributions. They also come in the form of regulations, restrictions, and licensing requirements that determine who may allowed to compete, work, and earn a living in a particular line of enterprise, production, and trade.

This “sack of coal” for the “bad” citizens also comes in the form in the inability to start a business or expand and successfully run an enterprise as the result of the regulatory hand of political Santa. The costs also take the form of closed opportunities for those with little or no skills to find work or be hired at a starting wage that would give them a chance at improving their own lives through honest employment in the free marketplace.

It also costs the consumers who find their choices and options are more limited or nonexistent than the free market would have provided, if only the government had not imposed these barriers, walls, and hurtles in the way of those who merely wish to be left alone to go about their private and personal affairs of life by offering new, better, and less expense goods and services to their fellow men through honest, peaceful, and mutually agreed terms of trade.

The “good little citizens” in this case are those on the supply-side of the market who are sheltered from the competition of real or potentially more efficient and productive rivals. Their larger market shares, greater profit margins, and costly inefficiencies are protected by the political Santa’s regulatory power; he, in turn, receives the campaign contributions and implicitly bought votes on election days that keep him in office.

The Myth of Needing a Political Santa for Life

For political Santa to pursue his mythical game in governmental plunderland, he must do all in his power to persuade and convince his citizen “children” that they do not have a right to their own life and to live it in their own chosen way. They must be indoctrinated to either passively accept the role of life-long dependent upon the political Santa, or to serve as the self-sacrificing elves who must do the work to produce all the goods and services in the world that will be redistributed out of the political Santa’s sack of taxed and regulated benefits.

Santa will educate you; he will see that you have a job and that you receive a “fair” wage. He will make sure that you are safe and satisfied by controlling what is produced, how it produced, and the terms under which the “bad” business children under his regulatory supervision market and sell many of those “goodies” to you.

When sick or disabled, political Santa will give you medical care; and he will guarantee you a retirement free from the need for planning for these things yourself.

All you need to do is accept your status as a lifetime adolescent needing supervision, care, and oversight in everything and in all things that you do. The spirit and psychology of being political Santa’s dependent was captured in that government website cartoon during the first Obama Administration called “The Life of Julia.”

“Julia” needed government to supply the hospital in which she was born; to provide the pre-school education with which her political indoctrination began; too see that Julia was given not only a government high school diploma, but got taxpayer subsidies and special quotas to make it into a preferred college or university; to see that gender affirmative action laws guaranteed a “fair chance” to a good paying job and career that she otherwise could never get on her own; and to see that in later years Julia has the safety-net of government Social Security, without having to bear the responsibility of carrying for this herself.

President Santa Claus cartoon

Self-Sacrificing “Elves” to Serve Political Santa

The other side of political Santa’s plunderland is the indoctrination of the productive and producer “elves” who are needed to do the work that supplies all that government can give away. This requires convincing everyone that “society” comes before the individual; that anything that the individual has is not due to his own effort and his peaceful and voluntary associations with others, or as President Obama asserted, “You did not built it.”

Instead, what you have is due to the collective efforts of all, so that you cannot claim a right to anything or any more than what the collective deems you to deserve. And it is political Santa who represents and acts for the social collective in determining what shall be expected from you and in what form, and what you shall be allowed to have from “society” (or that you are allowed to keep) as bestowed by the government’s redistributive and regulatory activities.

But just as there is no Santa at the North Pole, there is no political Santa in society. Political Santa is really those who run for political office to gain and retain governmental control and power over other people’s lives. Political Santa is really all the special interest groups who wish to use the halls of governmental power to obtain through regulation and taxation what they cannot honestly earn in the open competition of the free marketplace.

Ethical Benevolence vs. Political Immorality

Benevolence and voluntary charity, and a properly understood spirit of “giving” to those you value and love at Christmas time are right and virtuous sentiments of free people in the open society.

But belief in and actions based upon the idea of a “political Santa” only succeeds in weakening and finally destroying the spirit and ethical health of a free and prosperous society.

So, yes, Virginia, there is no Santa Claus. Neither a North Pole Santa who comes down the chimney in a red suit, nor a political Santa who can give people “something for nothing” in a world in which all that people want and desire must be creatively produced by someone before it may used to satisfy those wants and desires.

What makes the mythical belief in a political Santa far worse than the short-lived childhood belief in the North Pole Santa, is that the idea of a political Santa challenges and destroys the spirit of individualism upon which the good, free and prosperous society ultimately rests.


Böhm-Bawerk: Austrian Economist Who Said “No” to Big Government

[Editor’s note: this piece, by Richard M. Ebeling, was originally published at EpicTimes]

We live at a time when politicians and bureaucrats only know one public policy: more and bigger government. Yet, there was a time when even those who served in government defended limited and smaller government. One of the greatest of these died one hundred years ago on August 27, 1914, the Austrian economist Eugen von Böhm-Bawerk.

Böhm-Bawerk is most famous as one of the leading critics of Marxism and socialism in the years before the First World War. He is equally famous as one of the developers of “marginal utility” theory as the basis of showing the logic and workings of the competitive market price system.

But he also served three times as the finance minister of the old Austro-Hungarian Empire, during which he staunchly fought for lower government spending and taxing, balanced budgets, and a sound monetary system based on the gold standard.

Danger of Out-of-Control Government Spending

Even after Böhm-Bawerk had left public office he continued to warn of the dangers of uncontrolled government spending and borrowing as the road to ruin in his native Austria-Hungary, and in words that ring as true today as when he wrote them a century ago.

In January 1914, just a little more than a half a year before the start of the First World War, Böhm-Bawerk said in a series of articles in one of the most prominent Vienna newspapers that the Austrian government was following a policy of fiscal irresponsibility. During the preceding three years, government expenditures had increased by 60 percent, and for each of these years the government’s deficit had equaled approximately 15 percent of total spending.

The reason, Böhm-Bawerk said, was that the Austrian parliament and government were enveloped in a spider’s web of special-interest politics. Made up of a large number of different linguistic and national groups, the Austro-Hungarian Empire was being corrupted through abuse of the democratic process, with each interest group using the political system to gain privileges and favors at the expense of others.

Böhm-Bawerk explained:

We have seen innumerable variations of the vexing game of trying to generate political contentment through material concessions. If formerly the Parliaments were the guardians of thrift, they are today far more like its sworn enemies.

Nowadays the political and nationalist parties … are in the habit of cultivating a greed of all kinds of benefits for their co-nationals or constituencies that they regard as a veritable duty, and should the political situation be correspondingly favorable, that is to say correspondingly unfavorable for the Government, then political pressure will produce what is wanted. Often enough, though, because of the carefully calculated rivalry and jealousy between parties, what has been granted to one [group] has also to be conceded to others — from a single costly concession springs a whole bundle of costly concessions.

He accused the Austrian government of having “squandered amidst our good fortune [of economic prosperity] everything, but everything, down to the last penny, that could be grabbed by tightening the tax-screw and anticipating future sources of income to the upper limit” by borrowing in the present at the expense of the future.

For some time, he said, “a very large number of our public authorities have been living beyond their means.” Such a fiscal policy, Böhm-Bawerk feared, was threatening the long-run financial stability and soundness of the entire country.

Eight months later, in August 1914, Austria-Hungary and the rest of Europe stumbled into the cataclysm that became World War I. And far more than merely the finances of the Austro-Hungarian Empire were in ruins when that war ended four years later, since the Empire itself disappeared from the map of Europe.

A Man of Honesty and Integrity

Eugen von Böhm-Bawerk was born on February 12, 1851 in Brno, capital of the Austrian province of Moravia (now the eastern portion of the Czech Republic). He died on August 27, 1914, at the age of 63, just as the First World War was beginning.

Ten years after Böhm-Bawerk’s death, one of his students, the Austrian economist Ludwig von Mises, wrote a memorial essay about his teacher. Mises said:

Eugen von Böhm-Bawerk will remain unforgettable to all who have known him. The students who were fortunate enough to be members of his seminar [at the University of Vienna] will never lose what they have gained from the contact with this great mind. To the politicians who have come into contact with the statesman, his extreme honesty, selflessness and dedication to duty will forever remain a shining example.

And no citizen of this country [Austria] should ever forget the last Austrian minister offinance who, in spite of all obstacles, was seriously trying to maintain order of the public finances and to prevent the approaching financial catastrophe. Even when all those who have been personally close to Böhm-Bawerk will have left this life, his scientific work will continue to live and bear fruit.

Another of Böhm-Bawerk’s students, Joseph A. Schumpeter, spoke in the same glowing terms of his teacher, saying, “he was not only one of the most brilliant figures in the scientific life of his time, but also an example of that rarest of statesmen, a great minister of finance. … As a public servant, he stood up to the most difficult and thankless task of politics, the task of defending sound financial principles.”

The scientific contributions to which both Mises and Schumpeter referred were Böhm-Bawerk’s writings on what has become known as the Austrian theory of capital and interest, and his equally insightful formulation of the Austrian theory of value and price.

The Austrian Theory of Subjective Value

The Austrian school of economics began 1871 with the publication of Carl Menger’s Principles of Economics. In this work, Menger challenged the fundamental premises of the classical economists, from Adam Smith through David Ricardo to John Stuart Mill. Menger argued that the labor theory of value was flawed in presuming that the value of goods was determined by the relative quantities of labor that had been expended in their manufacture.

Instead, Menger formulated a subjective theory of value, reasoning that value originates in the mind of an evaluator. The value of means reflects the value of the ends they might enable the evaluator to obtain. Labor, therefore, like raw materials and other resources, derives value from the value of the goods it can produce. From this starting point Menger outlined a theory of the value of goods and factors of production, and a theory of the limits of exchange and the formation of prices.

Böhm-Bawerk and his future brother-in-law and also later-to-be-famous contributor to the Austrian school, Friedrich von Wieser, came across Menger’s book shortly after its publication. Both immediately saw the significance of the new subjective approach for the development of economic theory.

In the mid-1870s, Böhm-Bawerk entered the Austrian civil service, soon rising in rank in the Ministry of Finance working on reforming the Austrian tax system. But in 1880, with Menger’s assistance, Böhm-Bawerk was appointed a professor at the University of Innsbruck, a position he held until 1889.

Böhm-Bawerk’s Writings on Value and Price

During this period he wrote the two books that were to establish his reputation as one of the leading economists of his time, Capital and Interest , Vol. I: History and Critique of Interest Theories (1884) and Vol. II: Positive Theory of Capital(1889). A third volume, Further Essays on Capital and Interest, appeared in 1914 shortly before his death.

In the first volume of Capital and Interest, Böhm-Bawerk presented a wide and detailed critical study of theories of the origin of and basis for interest from the ancient world to his own time. But it was in the second work, in which he offered a Positive Theory of Capital, that Böhm-Bawerk’s major contribution to the body of Austrian economics may be found. In the middle of the volume is a 135-page digression in which he presents a refined statement of the Austrian subjective theory of value and price. He develops in meticulous detail the theory of marginal utility, showing the logic of how individuals come to evaluate and weigh alternatives among which they may choose and the process that leads to decisions to select certain preferred combinations guided by the marginal principle. And he shows how the same concept of marginal utility explains the origin and significance of cost and the assigned valuations to the factors of production.

In the section on price formation, Böhm-Bawerk develops a theory of how the subjective valuations of buyers and sellers create incentives for the parties on both sides of the market to initiate pricing bids and offers. He explains how the logic of price creation by the market participants also determines the range in which any market-clearing, or equilibrium, price must finally settle, given the maximum demand prices and the minimum supply prices, respectively, of the competing buyers and sellers.

Capital and Time Investment as the Sources of Prosperity

It is impossible to do full justice to Böhm-Bawerk’s theory of capital and interest. But in the barest of outlines, he argued that for man to attain his various desired ends he must discover the causal processes through which labor and resources at his disposal may be used for his purposes. Central to this discovery process is the insight that often the most effective path to a desired goal is through “roundabout” methods of production. A man will be able to catch more fish in a shorter amount of time if he first devotes the time to constructing a fishing net out of vines, hollowing out a tree trunk as a canoe, and carving a tree branch into a paddle.

Greater productivity will often be forthcoming in the future if the individual is willing to undertake, therefore, a certain “period of production,” during which resources and labor are set to work to manufacture the capital — the fishing net, canoe, and paddle — that is then employed to paddle out into the lagoon where larger and more fish may be available.

But the time involved to undertake and implement these more roundabout methods of production involve a cost. The individual must be willing to forgo (often less productive) production activities in the more immediate future (wading into the lagoon using a tree branch as a spear) because that labor and those resources are tied up in a more time-consuming method of production, the more productive results from which will only be forthcoming later.

Interest on a Loan Reflects the Value of Time

This led Böhm-Bawerk to his theory of interest. Obviously, individuals evaluating the production possibilities just discussed must weigh ends available sooner versus other (perhaps more productive) ends that might be obtainable later. As a rule, Böhm-Bawerk argued, individuals prefer goods sooner rather than later.

Each individual places a premium on goods available in the present and discounts to some degree goods that can only be achieved further in the future. Since individuals have different premiums and discounts (time-preferences), there are potential mutual gains from trade. That is the source of the rate of interest: it is the price of trading consumption and production goods across time.

Böhm-Bawerk Refutes Marx’s Critique of Capitalism

One of Böhm-Bawerk’s most important applications of his theory was the refutation of the Marxian exploitation theory that employers make profits by depriving workers of the full value of what their labor produces. He presented his critique of Marx’s theory in the first volume of Capital and Interest and in a long essay originally published in 1896 on the “Unresolved Contradictions in the Marxian Economic System.” In essence, Böhm-Bawerk argued that Marx had confused interest with profit. In the long run no profits can continue to be earned in a competitive market because entrepreneurs will bid up the prices of factors of production and compete down the prices of consumer goods.

But all production takes time. If that period is of any significant length, the workers must be able to sustain themselves until the product is ready for sale. If they are unwilling or unable to sustain themselves, someone else must advance the money (wages) to enable them to consume in the meantime.

This, Böhm-Bawerk explained, is what the capitalist does. He saves, forgoing consumption or other uses of his wealth, and those savings are the source of the workers’ wages during the production process. What Marx called the capitalists’ “exploitative profits” Böhm-Bawerk showed to be the implicit interest payment for advancing money to workers during the time-consuming, roundabout processes of production.

Defending Fiscal Restraint in the Austrian Finance Ministry

In 1889, Böhm-Bawerk was called back from the academic world to the Austrian Ministry of Finance, where he worked on reforming the systems of direct and indirect taxation. He was promoted to head of the tax department in 1891. A year later he was vice president of the national commission that proposed putting Austria-Hungary on a gold standard as a means of establishing a sound monetary system free from direct government manipulation of the monetary printing press.

Three times he served as minister of finance, briefly in 1895, again in 1896–1897, and then from 1900 to 1904. During the last four-year term Böhm-Bawerk demonstrated his commitment to fiscal conservatism, with government spending and taxing kept strictly under control.

However, Ernest von Koerber, the Austrian prime minister in whose government Böhm-Bawerk served, devised a grandiose and vastly expensive public works scheme in the name of economic development. An extensive network of railway lines and canals were to be constructed to connect various parts of the Austro-Hungarian Empire — subsidizing in the process a wide variety of special-interest groups in what today would be described as a “stimulus” program for supposed “jobs-creation.”

Böhm-Bawerk tirelessly fought against what he considered fiscal extravagance that would require higher taxes and greater debt when there was no persuasive evidence that the industrial benefits would justify the expense. At Council of Ministers meetings Böhm-Bawerk even boldly argued against spending proposals presented by the Austrian Emperor, Franz Josef, who presided over the sessions.

When finally he resigned from the Ministry of Finance in October 1904, Böhm-Bawerk had succeeded in preventing most of Prime Minister Koerber’s giant spending project. But he chose to step down because of what he considered to be corrupt financial “irregularities” in the defense budget of the Austrian military.

However, Böhm-Bawerk’s 1914 articles on government finance indicate that the wave of government spending he had battled so hard against broke through once he was no longer there to fight it.

Political Control or Economic Law

A few months after his passing, in December 1914, his last essay appeared in print, a lengthy piece on “Control or Economic Law?” He explained that various interest groups in society, most especially trade unions, suffer from a false conception that through their use or the threat of force, they are able to raise wages permanently above the market’s estimate of the value of various types of labor.

Arbitrarily setting wages and prices higher than what employers and buyers think labor and goods are worth — such as with a government-mandated minimum wage law — merely prices some labor and goods out of the market.

Furthermore, when unions impose high nonmarket wages on the employers in an industry, the unions succeed only in temporarily eating into the employers’ profit margins and creating the incentive for those employers to leave that sector of the economy and take with them those workers’ jobs.

What makes the real wages of workers rise in the long run, Böhm-Bawerk argued, was capital formation and investment in those more roundabout methods of production that increase the productivity of workers and therefore make their labor services more valuable in the long run, while also increasing the quantity of goods and services they can buy with their market wages.

To his last, Eugen von Böhm-Bawerk defended reason and the logic of the market against the emotional appeals and faulty reasoning of those who wished to use power and the government to acquire from others what they could not obtain through free competition. His contributions to economic theory and economic policy show him as one of the greatest economists of all time, as well as his example as a principled man of uncompromising integrity who in the political arena unswervingly fought for the free market and limited government.


Pulitzer’s Advice Applies To Krugman: “Put It Before Them…Above All, Accurately”

[Editor’s Note: We will keep our readers apprised of developments in the exchange between Paul Krugman and The Cobden Centre regular Ralph Benko.] 

Professor Paul Krugman, in his New York Times blog last week, says my most recent column, about him, is “funny and scary.”  Last week’s column here inferred that Prof. Krugman is leaving Princeton in quiet disgrace.  It drew pretty wide attention.

It also drew over 150 comments. Many commentators merrily berated me. (Comes with the territory.)  The column, quite flatteringly, even drew a riposte from Prof. Krugman himself, in hisTimes blog, entitled Fantasies of Personal Destruction:

A correspondent directs me to a piece in Forbes about yours truly that is both funny and scary.

Yep, scurrying away with my tail between my legs, I am, disgraced for policy views shared only by crazy people like the IMF’s chief economist (pdf).

One thing I’ve noticed, though, is how many people on the right are drawn to power fantasies in which liberals aren’t just proved wrong and driven from office, but personally destroyed. Does anyone else remember this bit from the O’Reilly scandal?

“Look at Al Franken, one day he’s going to get a knock on his door and life as he’s known it will change forever,” O’Reilly said. “That day will happen, trust me. . . . Ailes knows very powerful people and this goes all the way to the top.”

And people wonder why I don’t treat all of this as a gentlemanly conversation.

English: Paul Krugman at the 2010 Brooklyn Boo...

English: Paul Krugman at the 2010 Brooklyn Book Festival. (Photo credit: Wikipedia)

Prof. Krugman’s prestige, and the immense influence provided him by the New York Times, gives his opinions enormous political weight.  What he writes has impact in liberal, and Democratic, quarters.  Yet he by no means is infallible.

The critique this columnist offered drew on commentaries by figures of real stature.  One of these is Niall Ferguson, economic historian, Harvard professor (and Senior Research Fellow of Jesus College, Oxford University, and Senior Fellow at the Hoover Institution, Stanford University).  The other commentary came from Paul Volcker who made a disparaging comment fairly interpreted as aimed at Prof. Krugman.

What’s really odd about Prof. Krugman’s Fantasies of Personal Destruction is its abrupt segue into likening my critique to a statement made by someone this columnist never met to someone this columnist never met. What could have motivated this non sequitur?

Perhaps some psychological force is at work? Prof. Krugman, echoing a clever critique by Keynes, himself has invoked Freud as key to understanding proponents of the gold standard.  Freud,speculating on subconscious associations between excrement and money, referenced the Babylonian doctrine that “gold is the feces of Hell.” Thus, implies Prof. Krugman, proponents of a gold standard are stuck in an infantile “anal-retentiveness.”

Keynes, perhaps not getting it quite right, alludes to Freud in Auri Sacra Fames(September 1930):

Dr. Freud relates that there are peculiar reasons deep in our subconsciousness why gold in particular should satisfy strong instincts and serve as a symbol.

It presumably is this to which Prof. Krugman obscurely alludes in a blog entitled The She-Devil of Constitution Avenue:

I’ve been saying for a long time that we aren’t having a rational argument over economic policy, that the inflationista position is driven by politics and psychology rather than anything the other side would recognize as analysis. But this really proves it beyond a shadow of a doubt; if you really want to understand what’s going on here, the Austrian you need to read isn’t Friedrich Hayek or Ludwig von Mises, it’s Sigmund Freud.”

Put aside the demonstrable fact of Prof. Krugman’s consistently sloppy conflation of gold investors and gold standard proponents.  Put aside his failure to engage with the arguments of the many gold standard proponents not predicting imminent virulent inflation.  (Such as this writer.)

Eruditely ridiculing gold proponents as, well, full of s*** is clever. It likely will tickle those readers who find monkeys flinging poo at each other hilarious.  Ridicule is much easier, and cheaper, than grappling with scholarly analyses such as that from the Bank of England which provided, in 2011, Financial Stability Paper No. 13, a genuinely interesting critique of the real world performance of fiduciary currency.

That paper is a rigorous analysis of the empirical performance of the fiduciary Federal Reserve Note standard in comparison to the Bretton Woods gold-exchange standard and the classical gold standard.  It does not, at least not explicitly, advocate for either predecessor standard.  It simply assesses that the Federal Reserve Note standard in practice has proved substantially worse than its predecessors (and calls for the exploration of a rule-based system).  A thoughtful response by Prof. Krugman to this paper would be far more interesting, and edifying, than sly scatological insults.

One of the wittier of the commentators to last week’s column accused me of impudence.  Guilty as charged.  This writer confesses to having committed, in broad daylight, an act of lèse-majesté against the Great and Imperious Krugman.  My critics are right to point out that this columnist is a minor figure.  Still, do consider: the counsels of integrity to Pinocchio by the tiny Talking Cricket proved, in the end, well founded.   One, also, could wish that more of Prof. Krugman’s defenders would tender more persuasive arguments (say, fact-based) than their many variants of “How dare you!”

In responding to my column Prof. Krugman states that “many people on the right are drawn to power fantasies in which liberals aren’t just proved wrong and driven from office, but personally destroyed.”   Given Prof. Krugman’s vilification of his adversaries this could be dismissed as rich with irony. Yet there may be more to say.

Prof. Krugman has introduced the great Sigmund Freud into the conversation.  Thus it might be fair to say that his consistently rude denigration of his adversaries appears to be what Freud called “projection” (“in which humans defend themselves against unpleasant impulses by denying their existence in themselves, while attributing them to others“).

Consider Prof. Krugman’s public admission that he does not regularly read that which he presumes to criticize.  Prof. Krugman states forthrightly:

Some have asked if there aren’t conservative sites I read regularly. Well, no.

Carefully reading one’s opponents’ arguments is not a requisite in life. Yet critiquing arguments one has not thoroughly assimilated is lazy, louche, intellectually slovenly, and — one might fairly infer — unacceptably beneath the standards of, say, Princeton University.

Prof. Krugman dismisses me as “funny and scary.”  My several columns pointing out the errors of fact and unsupportable interpretations in his op-eds had been — and surely again will fall — beneath his notice.  Still, inaccurately presenting that which one is criticizing is just bad journalism.  Readers  should be able to rely on editors to assure that a columnist is shooting straight.

As many of my commentators correctly point out I do not command (nor do I presume to deserve) the elite social status of Prof. Krugman. Yet had Prof. Krugman taken even a moment to aim before he fired he could have discovered a right winger who has offered many respectful words, and, when warranted, praise for Barack Obama,Hillary ClintonElizabeth WarrenGeorge, and Occupy Wall Street (among others with whom he has disagreements).  There’s no agenda of “personal destruction.”

If Prof. Krugman had dug a little deeper he might have discovered that my columns routinely are informed by The New York Review of Books, the New Yorker, theAtlantic Monthly, and, yes, the New York Times, all of which I read regularly, usually with pleasure.  He would discover that my use of  them is not, by and large, to ridicule but to learn and, when in disagreement, to present their claims fairly and dispute them honestly.

Scary stuff?  Prof. Krugman, if you find the words of this extremely minor pixel-stained wretch “scary” … what does that say?  Perhaps speaking truth to power is scary … to those with power? Yet let me speak a little truth to the powerful, and indispensable,New York Times.

The Nobel Prize in Economics is one of the greatest laurels bestowed in that field.  Should Prof. Krugman be permitted to rest on this laurel?  Joseph Pulitzer’s directive still applies: “Put it before them… above all, accurately….”

It is not the purpose of this column to see Paul Krugman driven from his virtual office within the paragovernmental New York Times.  This columnist makes only a modest call for the Times to assign an editor to fact check his work and help him refrain from reckless disregard for the truth.


2 days, 2 weeks, 2 months: A proposal for sound money

In light of recent events, we’re bringing forward this proposal from June 2010.

There’s two ways to view the financial meltdown that occurred in 2008. The first is that it was a rare and unfortunate blip that can be remedied with calm and enlightened improvements in the regulatory framework. The second is that it exposed a serious flaw in the entire monetary system, and is likely to be repeated unless a radical transition takes place.

It’s no surprise that politicians, bankers and regulators – the architects of the banking industry – favour the first idea. This is why their response has skirted around the edges instead of dealing with the core. Even supposedly extreme measures such as nationalising banks are in fact attempts to preserve the status quo.

For those of us who favour the second idea, 2008 provided a golden opportunity to join the public debate and present a credible alternative. Perhaps we missed it. But if indeed another crisis is coming, this article attempts to outline a 14-point plan that could be implemented quickly and genuinely reform the institutions that create financial instability.

The key aspects of this proposal have been made previously, notably by economists Kevin Dowd and Richard Salsman. It could be implemented in three phases:

Over 2 days the aim is to ensure that all operating banks are solvent

  1. Deposit insurance is removed – banks will not be able to rely on government support to gain the public’s confidence
  2. The Bank of England closes its discount window
  3. Any company can freely enter the UK banking industry
  4. Banks will be able to merge and consolidate as desired
  5. Bankruptcy proceedings will be undertaken on all insolvent banks
    1. Suspend withdrawals to prevent a run
    2. Ensure deposits up to £50,000 are ring fenced
    3. Write down bank’s assets
    4. Perform a debt-for-equity swap on remaining deposits
    5. Reopen with an exemption on capital gains tax

Over 2 weeks the aim is to monitor the emergence of free banking

  1. Permanently freeze the current monetary base
  2. Allow private banks to issue their own notes (similar to commercial paper)
  3. Mandate that banks allow depositors to opt into 100% reserve accounts free of charge
  4. Mandate that banks offering fractional-reserve accounts make public key information (these include: (i) reserve rates; (ii) asset classes being used to back deposits; (iii) compensation offered in the event of a suspension of payment)
  5. Government sells all gold reserves and allows banks to issue notes backed by gold (or any other commodity)
  6. Government rescinds all taxes on the use of gold as a medium of exchange
  7. Repeal legal tender laws so people can choose which currencies to accept as payment

Over 2 months the aim is the end of central banking

  1. The Bank of England ceases its open-market operations and no longer finances government debt
  2. The Bank of England is privatised (it may well remain as a central clearing house)

You can download a copy of the plan in pamphlet form here.


Money is not working.

A speech to the Policy Exchange on 31st March 2009 by Cobden Centre sponsor James Tyler. This article first appeared on but it remains as relevant today.

I want to talk about two things today;

Number 1: Free markets did NOT cause this crisis… Governments did.

Number 2: Inflation targeting has failed. Money has failed. What should we do?

Free markets did not cause this problem.

In theory, markets work by reacting to prices and direct capital towards where it will be most productively used. This is how wealth is created. Usually this works well, but markets are made up of humans, and can be fooled into overshooting by false signals.

Bubbles build up, expanding until people lose confidence. Bubbles then burst. It’s a corrective process that, relatively benignly, irons out imbalances.

The problem only comes when bubbles go on for too long, because once they get too big, the pop can be terrifying. And that’s what we’ve got now – one hell of a big bang.

False signals have caused a spectacular mal-investment in real estate and its derivatives.

But these false signals did not come from the market, but from government.

False signals.

False signals came from Greenspan’s introduction of welfare for markets. Markets were taught that no matter how much risk they took, they would always be saved. 1987, 1994, 1998, 2001. Each bust bigger than the last, and disaster was only staved off with aggressive rate cuts and increased money supply.

Clearly this was not laissez faire. Just think if events had been allowed to take their course. I bet if LTCM had gone bust then a badly burned Wall Street would have learned a lesson and Lehman’s would still be around today.

In 1999 Clinton mandated that Fannie Mae and Freddie Mac reduce lending standards. The poor were encouraged into debt. This intervention triggered a race to the bottom of lending standards as commercial banks were forced to compete against the limitless pockets of Uncle Sam.

False signals came from deposit insurance. Deposit your money in a boring mutual? Why bother when you can lend it to a lump of volcanic rock in the Atlantic at 7% and be guaranteed to get your money back.

The Basle banking accords required banks to replace rock solid reserves with maths.

Government protected and regulated ratings agencies produced negligent ratings duping pension funds, who were obligated to buy high quality paper, into buying junk cleansed by untested mathematical models.

Central banks create boom-bust.

But most damaging of all was the absurdly low interest rates set between 2001 and 2004.

The resultant glut of cheap money fueled an unsustainable boom encouraging more mortgages to be taken out, and pushing property prices ever higher.

The market responded by pushing scarce economic capital towards highly speculative property development.

As prices rose people remortgaged, and borrowed to consume more. This unchecked process tended to be destructive, as scarce economic capital flowed out of our economy and headed to those economies efficiently producing consumer goods, such as China. Rampant asset inflation clouded our ability to see this depletion process in action.

Everyone had a great time whilst the party lasted, not least Governments who were incentivised to let it run, blinded by ever larger tax revenues.

But all parties come to an end, and central banks had to prick the bubble eventually. Interest rates went too high, and sub prime collapsed, and then all property prices plummeted. Trillions of dollars were ripped out of the financial system, and the credit crunch began.

It’s happened before.

But, despite its complexity, there was nothing new or unpredictable about this process. All the great busts of the 20th century were preceded by a Government sanctioned fiat currency booms.

In the 1920’s, the Fed pursued a ‘constant dollar’ policy. This was the era of the innovation, Model T Fords, radios and rapid technological advancement.

Things should have got cheaper for millions of people, but money supply was boosted to try and keep prices constant. All that extra money flowed into the stock market, pushing prices to crazy levels, and we all know how that ended.

In the modern day, targeting price changes has been an utter disaster for us too.

It let the Bank of England pretend they were doing their job, when money supply was growing at a double digit rate. It let the authorities relax whilst an economy threatening credit bubble was building up.

And it gave Gordon Brown the leeway to convince people that boom and bust was over.

Things should have got cheaper.

Inflation targeting made no allowance for globalisation, the rise of India and China, and the benign falls in general prices that should have been triggered. Think about it; if all those cheap goods were to become available, consumer prices should fall. We would have had greater purchasing power, and become wealthier for it.

But, the Bank of England was aiming at a symmetrical plus 2% target. Falling prices in some goods necessitated stimulating rises in others. They unleashed an avalanche of under priced debt and we had our own crazy asset boom.

Inflation targeting was a myopic policy.

Governments make terrible farmers.

When a central bank sets interest rates, they set the price of credit. Inevitably they create distortions.

Consider this; Governments cannot set food prices without causing a glut -or- painful shortages. Now, food is a pretty simple commodity, yet we all understand that central planners simply cannot gather enough information to set the price accurately.

It has to be left to the spontaneous interaction of thousands of buyers and sellers to set the price.

So, why do we think that enlightened bureaucrats can put an exact price on something as vital, yet complicated, as credit?

In a nutshell, if I can’t tell how much my wife will spend on Bond Street this weekend, how can they?

Let’s wake up from this fantasy.

There is a better way.

What’s the cure? Let the invisible hand to do its time honoured job. Leave interest rates to be set by the millions of suppliers and users of capital.

Get the central planners out of the way.

It’s the way it used to happen. The period of fastest economic growth the world has seen was America between the civil war and the end of the 19th century. Money was free and private and the Fed did not exist.

So, how do we get back to freedom in money? Fredrich Hayek – the great Austrian economist – did the best thinking on this. What he proposed was that private firms should be allowed to produce their own currencies, which would then be free to compete against each other. People would only hold currency that maintained its value, firms that over-issued would go bust Producers of ‘sound’ money would prosper.

History gives us plenty of successful examples of private money working well, 18th Century Scotland had competing banks, all with their own bank notes. People weren’t confused. It worked. There are many other examples.

In the modern age, technology makes the prospect of monetary competition even more tantalising. Mobile phones, oyster cards, smart tags, embedded chips, wireless networks. The internet. Prices could flash up in the shopper’s preferred currency.

A proposal.

Here’s an idea of how to kick the process off;

Tesco’s want to get into banking. Why not currencies as well? Tesco would print one million pieces of paper. Let’s call them Tesco pounds. It would be redeemable at any time for £10 or $15. They would then be auctioned, and the price of a Tesco set.

Anyone who owns a Tesco has a hedge against either the £ OR $ devaluing therefore the Tesco has an additional intrinsic value. Maybe they’ll auction at £12.

Tesco would specify a shopping basket of goods that cost £60. It would promise that 5 Tesco Pounds would always buy that weekly shop. The firm would use its assets to adjust the supply of Tesco Pounds so that they kept this stable value.

They would need to otherwise their shelves would be cleaned out!

As central banks inflated the £ and $ away over time, the convertibility into these currencies would matter less. We would be left with a hard currency that meant something.

There would be other competitors and a real choice about which money to hold your wealth in.

McDonalds has a better credit rating than Her Majesties Government, so maybe people would be happy to hold Big Mac tokens? I don’t know – it will be a free choice.

Currencies would sink or swim depending on how well they performed. What’s more, firms issuing the currencies would come up with different ways of maintaining their value. Some would offer Gold. Manufacturers may use notes backed up by steel, copper and oil.

Let’s see what a free market chooses. Somebody might have a brainwave and come up with an idea that nobody has thought of.

That is what free markets are best at.

I can guess the reactions that my proposal might inspire in some. How would the man on the street cope? Well, nobody would outlaw the Government’s money, and people could carry on as before. Through the operation of the market, we would find out what worked best . Step-by step, the economy would be transformed and standards driven up.

In economics, spontaneous orders are always so much more rational and stable than planned ones. Always.


This is not a crisis caused by free markets. A free and unregulated market in money has not existed for over a century.

This is a Government crisis. A crisis over the monopoly of money.

Inflation targeting seemed so persuasive…. but it was a false God, and we deserve better. Stability and sound money can only come if we put the money supply back where it belongs…

Under the control of the free market.


The Staggering Economic Errors Behind The Policy of Quantitative Easing

In September of last year, I placed this article up on our web site detailing the theoretical errors behind the policy of quantitative easing. Clearly, as the MPC has now been given the green light by our chancellor, we expect this currency debasement to be starting soon. All it will “achieve” is a wealth transfer from those lucky enough to get the newly minted money, from those not luckily enough. I aimed to expose the faulty crank-economics that lies behind such thought processes last year and did not think a Tory government would be so foolish to let this happen under their watch, especially as they condemned it under a Labour government. Sadly, articles like this one need to be reproduced so that a new set of readers can hopefully have influence on the present administration.

The mainstream economists hold that the volume of money in circulation, times its velocity is equal to the prices of all goods and services added up. This is the famous Theory of Exchange, MV=PT, or the mechanistic Quantity Theory of Money, where:

  • M is the stock of money,
  • V is the velocity of circulation: the number of times the monetary unit changes hands in a certain time period,
  • P is the general price level,
  • and T is the “aggregate” of all quantities of goods and services exchanged in the period.

It is held by the overwhelming majority of all economists, that if the velocity of money falls, the price level will fall and thus it is the duty of government, the monopoly issuer of money, the chief Central Planner of the Money Supply, to create more money to keep the price level where it is and thus preserve the existing spending habits of the nation.

Error One — the stock of money

It is held that if you can count the monetary units in the economy and their velocity, you can say what the price level is. As people find it very difficult to count the money in an economy, they cannot see the statistical relationship showing up mechanistically in the price level as expected: the authorities do not have a measure of the money supply which correlates to economic activity.

Working from a sound theoretical basis, I and my colleague Anthony Evans can show you how to count money exactly and how that measure of the money stock correlates to economic activity:

Measures of the UK money stock

Note that changes in the mainstream measures — M0 and M4 — are quite different to changes in our measure — MA. However, it is MA which shows the best correlation to economic activity and not the measures used by the Bank of England and HM Treasury:

MA vs GDP, 12 month lag
MA vs Retail Sales, 12 month lag

The monetary authorities do not have an adequate measure of the money supply.

Error Two — the velocity of circulation

Velocity is defined as the average number of times during a period that a monetary unit (I will call this MU) is exchanged for a good or service. It is said that a 5% increase in money does not necessarily show itself up with a 5% increase in the price level. It is argued that this is because the velocity of money changes. The trick is to measure by how much the velocity has declined and then create new money — cross your fingers, pray to the Good Lord, do a rain dance around a fire, and hope that the new money will be spent — to fill in this gap left by the fall in velocity.

When you buy a house, we do not say it “circulates”: money is exchanged against real bricks and mortar. The printer who sold me books would have had to sell printed things (i.e. real goods) and saved (forgone consumption) for the future purchase (act of consumption) of the house.  Imagine selling your house backwards and forwards between say you and your wife 10 times: the mainstream would argue that the velocity of circulation had risen!

Yes as daft as it sounds, this is the present state of economics.

Thus, if the velocity has gone up by a factor of 10, the price level has increased by the same factor. Here is the suggested rub: therefore, when the velocity of circulation falls, if you increase the money supply by the same factor that the velocity of circulation has fallen by, the price level will stay the same.

Note, as explained above and in detail here, the mainstream do not actually know what money is. Well, let us be clear: it is the final good for which (all) other goods exchange. All of us who are productive make things for sale or sell services, even if it is only our own labour. We sell goods and services which we produce or offer for other goods and services we need. The most marketable of all commodities, money, is accepted by you and other citizens and facilitates exchange of your goods and services for other goods and services. Note that, at all times, money facilitates the exchange of real goods for other real goods.

Party one and a counterparty exchanging or “selling” the house between one another 10 times causing an “increase in velocity” and thus an increase in the price level as an idea is utter garbage. If one party had sold real goods and saved in anticipation of buying the house — real bricks and mortar via the medium of money — this would facilitate a transaction of something (the party’s saved real goods) for something (the counterparty’s real house). Printing money to make sure the price level stays stable to facilitate the “circulating” house in the first example will facilitate a transfer of nothing (the paper) for something (the house). This is commonly called counterfeiting.

This may be another helpful example of why velocity is utterly meaningless. Consider a dinner party: Guest A has a £1. He lends it to Guest B at dinner, who lends it to Guest C who lends it to Guest D. If Guest D pays it back to Guest C, who pays it back to Guest B pays Guest A, the £1 is said to have done £4’s worth of work. The bookkeeping of this transaction shows that £1 was lent out 4 times and they all cancel each other out! Just to be clear, £1 has done £1’s work and not £4’s work. No real wealth or value is created.

The velocity of circulation makes no economic sense.

Error Three — the general price level

Since the monetary authorities have no means to sum the price and quantity of every individual transaction, they must work instead with the “general price level”, ignoring the vital role of changes in relative prices.

As early as 1912, Ludwig von Mises demonstrated that new money must change the structure of relative prices. As anyone who has lived through the past year could tell you, new money is not distributed equally to everyone in the economy. It is injected over time and in specific locations: new money redistributes income to those who receive it first.  This redistribution of income not only alters people’s subjective perception of value, it also alters their weight in the marketplace. These factors can only lead to changes in the structure of relative prices.

Mainstream economists believe that “money is neutral in the long run”. They do not have a theory of the capital structure of production which can account for the effects of time and relative prices. They believe increases in the money supply affect all sectors uniformly and proportionately. This is manifestly untrue: look at changes in the Bank of England’s balance sheet and your bank statement.

Hayek wrote that his chief objection to this theory was that it paid attention only to the general price level and not to the structure of relative prices. He indicated that, in consequence, it disregarded the most harmful effects of increasing the money supply: the misdirection of resources and specifically unemployment. Furthermore, this wilful ignorance of relative prices explains the mainstream’s lack of an adequate theory of business cycles, something Hayek provided.

The general price level aggregates away a vital factor: the relative structure of prices.

Error Four — the aggregate quantities of goods and services sold

Since the sum of price times quantity for every individual transaction is not available, the authorities must use the “aggregate quantity of goods and services sold”. This is nonsense: the quantities to be added together are incompatible. It makes no sense to add a kilogram of potatoes to a kilogram of copper to a litre of petrol to a day’s software consultancy to a 30-second television advert.

The aggregate quantity of goods and services sold is an impossible sum.

Error Five — the equation is no more than a tautology

Consider this, if I  buy 10 copies of Adam Smith’s Wealth of Nations from a printing company for 7 monetary units (or MU), an exchange has been made: I gave up 7 MU’s to the printer, and the printer transferred 10 sets of printed works to me. The error that the mainstream make is that “10 sets of printed works have been regarded as equal to 7 MU, and this fact may be expressed thus: 7 MU  = 10 printed works multiplied by 0.7 MU per set of printed works.”  But equality is not self-evident.

There is never any equality of values on the part of the two participants in exchange. The assumption that an exchange presumes some sort of equality has been a delusion of economic theory for many centuries. We only exchange if each party thinks he is getting something of greater value from the other party than he has already.  If there was equality in value, no exchange would happen! Value is subjective and utility is marginal: each party values the other’s goods or services more highly than their own.

Thus, while the mainstream believe that there is a causal link between the “money side” of the equation and the “value of goods and services side”, it is just a tautology from which no economic knowledge can be gained.  All we are saying, if the Quantity Theory holds, is that “7 MU’s = 10 sets of printed works X 0.7 MU’s per set of printed works”: in other words, “7 MU = 7 MU”. Thus what is paid is what is received. This is like announcing to the world that you have discovered the fabulous fact that 2=2.

The mechanistic Quantity Theory of Money is not a causal relation but a tautology.


The mechanistic Quantity Theory only provides us with a tautology and every term of “MV = PT” is seriously flawed. Public policy should not rest on the foundation of this bad science.

If the money supply contracts as it has done so spectacularly since late 2008 (see the chart above), you will have less goods and services supporting less economic activity. This for sure is bad. We now have less money and less exchanging of real goods and services for other real goods and services.

The only way to get more goods and services offered for exchange is if entrepreneurs get hold of their factors of production — land, labour and capital — and reorganise them to meet the new demands of the consumers in a more efficient way than before. The only thing that the government can do is to make sure it provides as little regulatory burden as possible and the lightest tax regime that it can run in order  to allow entrepreneurs to facilitate this correction.

Certainly in my business of the supply of fish and meat to the food service sector — — I have never witnessed such an abrupt change in consumption patterns as people have traded down from more expensive species and cuts to less expensive ones. Thus I have to reorganise my offer to my customers and potential customers. No amount of fiddling about with the level of newly minted money in the economy will help this reorganisation of my factors of production: they need to be retuned to the new needs and desires of my customers.

Quantitative easing, as I have said before, is firmly based on a belief in the so called “internal truths” held in the Quantity Theory of Money. I hope any reader can see that this belief is based on very faulty logic.  Bad logic gives us bad policy. A policy of QE says that because the velocity of circulation has fallen, we can print newly minted money, out of thin air, at the touch of a computer key, and create more demand for the exchange of goods and services.

Money has been historically rooted in gold and silver because these cannot “vanish” overnight as we are seeing under our present state monopoly of money — fiat money, money by decree, i.e. bits of paper we are forced to use as legal tender. Remember, since 1971 when Nixon broke the gold link, money is just bits of paper, notwithstanding a promise to pay the bearer on demand. In the near future, this will no doubt remain the case. Indeed, anyone who dares to mention that the final good, for which all goods exchange, should be a real good that is scarce (hard to manipulate it, hard to destroy it) unlike paper and electronic journal entries (easy to manipulate, easy to destroy) is considered a lunatic!

On a point of history, it is worthwhile remembering that, as we have mentioned here, the 1844 Peel Act did remove the banks’ practice of issuing promissory notes (paper money) over and above their reserves of gold (the most marketable commodity i.e. money) as this was causing bank runs, “panic”, boom and bust. They did not resolve the issues of demand deposits to be drawn by cheque. Both features allow banks to issue new money — i.e. certificates that have no prior production of useful economic activity such as our printer printing books or my selling of meat and fish — while retaining real money — claims to the printing of books and selling of my meat and fish — only to a percentage of the deposited money, i.e. the Reserve Requirement of the bank. In the UK, there is no Reserve Requirement anymore as far as I am aware, hence banks going for massive levels of leverage. It is no surprise that the house of cards has fallen down.

Our proposal for a 100% reserve requirement is offered for discussion as the only sure-fire way of delivering lasting stability.  Listening to economists talking about the “velocity of circulation” falling and thus suggesting that we should conduct large scale Quantitative Easing to hold the price level is not economics, but the policy of the Witch Doctor and the Mystic.

It is staggering that so much garbage, posing as sound knowledge, hinges on these grave errors.

Further reading


Honest Money through bearer shares, a proposal

By kind permission of Paul Birch, we reproduce his essay setting out a proposal for honest money through bearer shares, previously published on this site in October 2009. Paul’s own site may be found here:

1. Introduction

Nobody understands money, least of all economists. Too sweeping a statement? Perhaps. But every analysis of the workings of monetary systems that I have ever read has been seriously in error at one or more crucial points. This is true not only of the supposedly impartial opuses of academic economics, but also of the writings of Marxists, socialists, Keynesian dirigists, free-marketeers, anarcho-capitalists, libertarians and utopians of every flavour.

On important issues of monetary policy, then, and whether a free market in money is either workable or desirable, the protestations of the experts must be considered unreliable. In particular, the claims of libertarian-leaning economists, such as Ludwig von Mises, that the operation of “free banking” would be both stable and superior to the system of government monopoly called “central banking” need to be treated with scepticism; they have not proved what they think they have proved.

Here I intend to give a description of certain aspects of the creation and use of money free of major error; it is conceivable that I may not entirely succeed. I shall argue that free banking, as it is usually understood, may be liable to gross instabilities and inefficiencies, especially in a free-market environment, and that a centralised fiat currency has definite advantages. However, I shall then describe an alternative form of free-market banking that appears not to suffer from these deficiencies and into which the current system of state control could be metamorphosed. I shall argue that it is the innate honesty or dishonesty of the banking method that most distinguishes good money from bad; and that it is of the greatest importance to ensure that the laws under which banking takes place are able effectively to restrain all dishonest forms of banking, including those in which the dishonesty is most subtle.

2. What is Money?

So what is money? A deceptively easy question, that. Answers from the past include “gold”, “silver and gold”, “a medium of exchange”, “a promise to pay”, “a store of value”, “a measure of demand”, “just another commodity”. Such answers hold a germ of truth, but only lead to controversy, because they miss the essential point. All along we’ve been asking the wrong question. Instead, let us ask a new one:

What is the function of money?

The function of money is to keep track of who owes what to whom. In a world in which there is division of labour and in which we obtain diverse satisfactions by the voluntary exchange of goods and services we have need of an accounting device to permit this exchange to take place at minimal cost and without undue coercion or confusion. This accounting device we call money. Simple barter is not enough, because the goods I want are seldom held by the person to whom I can render service.

Imagine a central register, detailing every transaction entered into by each and every person, and containing a list of all the favours owed by each and every person to each and every other person. That would do it. It would be hideously complicated, but it would work. Fortunately, though, we needn’t go to such lengths, because in a market economy most of that data is redundant. All we really need to know is the current balance to the account of each person — how much the rest of the world owes him or how much he owes the rest of the world — and even that need not be centrally recorded.

In a market economy, then, the function of money is to reduce the transaction costs of honest trade (including gifts and bequests other than those directly in kind) by reliably and efficiently registering the indebtedness resulting from previous transactions. The details of those previous transactions no longer matter; only the present net position counts (except for incomplete transactions, such as when you have bought an item but not yet paid for it).

So, if the function of money is to keep track of honest trade, can we now answer the original question in a more enlightened and constructive way? I think we can.

Continue reading “Honest Money through bearer shares, a proposal”


Public Attitudes to Banking

A key question in the debate over fractional reserve banking is the extent to which people know that banks lend their deposits out to others. People must accept that if they all went to get back their deposits, the banks would not be able to pull in all the money they have lent on, and the system would collapse. The fact is that not all people want their money back at the same time, so the scheme works and allows interest to be paid. I have always held that people would be horrified if they knew what was actually done with their money. In the absence of any empirical data, the Cobden Centre commissioned a group of students at ESCP Europe working under our Founding Fellow, Dr Anthony Evans, with the market research company ICM, to survey the views of 2000 people. Anthony has written an informative and useful summary. The report considers the key questions of solvency and liquidity, and concludes that “by reasonable auditing standards, high street banks are insolvent”.

Preview: Public Attitudes to Banking

My take is that people are confused. 74% think they own their money, when of course they do not, the bank does. 15% want safe keeping and 67% want easy access. Easy access implies safe keeping to me as there is no access if you have a bank run. I do feel that clarity, more so than ever, is required to start the clearing up of this mismatch of understanding between what a bank actually does and what people think it does. This can only be resolved by a change in law as mentioned in this article. At the same time, our fractional reserve free banking colleagues may take comfort from our finding that 61% of those surveyed do not mind having their money lent out so long as the lending isn’t reckless. This strengthens the position of allowing FRFB between consenting adults. The debate will roll on. We hope this will add an empirical edge that will sharpen the focus of some of the best thinking Austrian economists.

I am minded to return at a later date and commission a further survey that helps spell out to the public the actual bank credit creation multiplier as this is not brought out by our questions, and see what the empirical data throws back at us. I suspect that hairs will stand up on the back of necks, with a general sense of horror, but these are my prejudged views and I would be interested to see the evidence.

In the meantime, I recommend this video of Anthony’s presentation of our findings to the Liberty 2009 Conference: