Writing over 230 years ago, Adam Smith noted the ‘juggling trick’ whereby governments hide the extent of their public debt through ‘pretend payments’. As the fiscal crises around the world illustrate, this juggling trick has run its course. This article explores the relevance of Smith’s juggling trick in the context of dominant fiscal and monetary policies. It is argued that government spending intended to maintain stability, avoid deflation and stimulate the economy leads to significant increases in the public debt. This public debt is sustainable for a period of time and can be serviced through ‘pretend payments’ such as subsequent borrowing or the printing of money. However, at some point borrowing is no longer a feasible option as the state’s creditworthiness erodes. The only recourse is the monetarization of the debt which is also unsustainable due to the threat of hyperinflation.
Policy Implications
The fear of deflation on the part of policy makers has led to an inflationary bias which neglects or underestimates the costs of inflation.
The debt–inflation theory of economic crises must be considered as a viable alternative to the standard debt–deflation theory of economic crises.
In order to curtail the tendency of using the tools of monetary and fiscal policy to concentrate benefits and disperse costs, policy institutions must effectively tie the rulers’ hands.
After centuries of only fleeting success at curtailing the deficit, debt and debasement cycle of public policy, we may have to consider seriously the possibility that the only way successfully to constrain the state is to eliminate from its purview the task of monetary policy.
Writing in 1776, Adam Smith noted the following regarding public debt:
When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. … publick bankruptcy has been disguised under the appearance of a pretend payment. … When it becomes necessary for a state to declare itself bankrupt, in the same manner as when it becomes necessary for an individual to do so, a fair, open, and avowed bankruptcy is always the measure which is both least dishonorable to the debtor, and least hurtful to the creditor. The honour of a state is surely very poorly provided for, when in order to cover the disgrace of real bankruptcy, it has recourse to a juggling trick of this kind … Almost all states, however, ancient as well as modern, when reduced to this necessity, have upon some occasions, played this very juggling trick (Smith, 1776, pp. 929–930).
The implications of Smith’s logic regarding public debt have come to fruition as evidenced by the violent situation in the streets of Athens, the situation facing the PIIGS (Portugal, Italy, Ireland, Greece and Spain) and the pending fiscal crisis facing US states such as California, Illinois and New Jersey. In each of these instances, the current predicament did not arise over the past year or two, but rather was the result of decades of public policy decisions resulting in fiscal imbalance. While pretend payments and the juggling of finances were able to hide the underlying realities for decades, the bill has now come due.
Over 230 years after Smith wrote The Wealth of Nations, the Great Recession has again brought debates about the public debt, and the role of government more broadly, to the forefront. The purpose of this article is to explore the relevance of Smith’s ‘juggling trick’ in the context of the dominant fiscal and monetary policies. Our central argument can be stated as follows: government spending intended to maintain stability, avoid deflation and stimulate the economy leads to significant increases in the public debt. This public debt is sustainable for a period of time and can be serviced through ‘pretend payments’ such as subsequent borrowing or the printing of money. However, at some point borrowing is no longer a feasible option as the state’s credit- worthiness erodes. This implies that the ultimate result of Smith’s juggling trick is the monetarization of the debt in order for the state to avoid bankruptcy. This too, however, is an unsustainable policy due to the threat of hyperinflation which has ravaging effects as evidenced by Russia and Germany in the early 20th century.
We proceed as follows. The next section shows how the current debates over public debt mirror the debate that took place during the 1930s between John Maynard Keynes and F. A. Hayek. We also highlight how concerns over the debt–deflation spiral emerged as part of this debate and continue to drive policy today. Section 2 discusses the mechanisms underpinning the debt–inflation cycle. We contend that the focus on deflation leads to an inflation-biased policy which neglects the cost of inflation and the logic of democratic politics that Smith highlighted in the opening quote. Section 3 lays out the dilemma we face. On the one hand we have theories indicating that active fiscal and monetary policies are necessary for recovery and growth. At the same time, we have public choice theories which indicate that increased public debt is ultimately unsustainable. Section 4 concludes with the lessons learned.
1. Back to the future
In the 1930s, the main macroeconomic debate in economic theory and policy centered around the question of who was right, Keynes or Hayek? In the wake of the Great Depression, Keynes argued that unless action was taken to stimulate aggregate demand the economy would sink further into an abyss of unemployment and lackluster economic growth. In contrast, Hayek argued that fiscal irresponsibility threatened the recovery and long-term economic health of the economy. The key to recovery and growth, according to Hayek, was private investment.
Keynes won the day in the 1930s, but in the 1970s that same debate resurfaced with a more ambiguous resolution, and since 2008 the debate has returned with a vengeance at a variety of levels. The current debate mimics the earlier one in that there is intense academic dispute about the causes of the Great Recession, as well as the best way forward. Further, as during the 1930s, the debate is also being played out in newspapers and magazines, as well as in vigorous political dialogue between conservative and liberal politicians on both sides of the Atlantic. Perhaps nothing illustrates more how the current debate mirrors that of the 1930s than the comparison of the writings in the pages of the major newspapers (see Boettke et al., 2010).
On 17 October 1932, D. H. Macgregor, A. C. Pigou, J. M. Keynes, Walter Layton, Arthur Salter and J. C. Stamp (Macgregor et al., 1932) published a letter in the Times of London noting that private spending was one of the primary causes for the continuation and severity of the Great Depression. They argued that immediate government action was necessary to counteract the fall in aggregate demand. Two days later, T. E. Gregory, F. A. von Hayek, Arnold Plant and Lionel Robbins (Gregory et al., 1932) responded in the same paper arguing that private investment was necessary to recovery and growth.
Eighty years later, a similar debate took place. On 14 February 2010, a group of economists led by Timothy Besley published a letter in the Sunday Times arguing for a credible fiscal plan to create confidence in the robustness of the UK system (Besley et al., 2010). Only by reducing the structural budget deficit, the authors argued, could the confidence of private investors be maintained. Four days later, a group of economists led by Lord Skidelsky, Keynes’ biographer, published a letter in the Financial Times arguing that the immediate concern should not be reducing the deficit, but instead ensuring robust growth through public spending (Skidelsky et al., 2010).
As the comparison of these two exchanges illustrates, the high stakes in the 1930s regarding government policy still exist decades later. However, the debate cannot be adequately understood in broad brush strokes of free market versus government intervention, or even in terms of the effectiveness of fiscal policy or monetary policy. It is much more subtle than that, even as it does turn ultimately on the question of the self-correcting capacity of the market economy. To understand the debate, one has to recognize the classic position carved out in the 1930s by Irving Fisher (1933). Fisher argued that a debt–deflationary spiral can sink an economy into a great depression unless the appropriate policies are performed to prevent the downward spiral of economic activity. Deflation, in other words, must be avoided by the monetary authorities, even at significant cost.
This preoccupation with avoiding deflation necessarily leads to an inflation-biased monetary policy. The ‘chief source of the existing inflationary bias’, Hayek wrote, ‘is the general belief that deflation … is so much more to be feared that, in order to keep on the safe side, a persistent error in the direction of inflation is preferable’ (Hayek, 1960, p. 330). The practical problem in monetary policy under this set of assumptions results in a situation where because ‘we do not know how to keep price completely stable and can achieve stability only by correcting any small movement in either direction, the determination to avoid deflation at any cost must result in cumulative inflation’ (Hayek, 1960, p. 330).
There are at least two major policy issues with the preoccupation with deflation. First, a positive case for declining price levels can be made since deflation, if it reflects generalized productivity gains that result from technological innovation in an economy, is good, not bad (see Selgin, 1997). It is complicated, if not impossible, to sort out as a matter of public policy good deflation from bad deflation. As a result, we are back again to the situation of cumulative inflation stressed by Hayek. Second, the self-reversing of the economic errors caused by inflation can be interpreted as a collapse in spending and a corresponding decline in economic activity as resources are reallocated, and thus those who fear deflation will call for a re-inflation to forestall the debt–deflation downward spiral. Hayek argues that the problem politically is that moderate inflation will be viewed pleasantly and will be revealed to be costly only in the future, whereas deflation is immediately observable and painful. Expediency in politics will reinforce the push for inflation, whereas politics by principle would demand permitting market adjustment and the reallocation of resources however painful in the short run (see Hayek, 1973, pp. 55–71).
The concern of deflation, and the neglect of inflation, have continued to the present day as evidenced by a recent speech by Federal Reserve Chairman Ben Bernanke (2010) in which he noted:
the FOMC [Federal Open Market Committee] will strongly resist deviations from price stability in the downward direction. Falling into deflation is not a significant risk for the United States at this time, but that is true in part because the public understands that the Federal Reserve will be vigilant and proactive in addressing significant further disinflation.
Recognizing Fisher’s concern for the debt–deflationary spiral is crucial because while the debate between Keynes and Hayek focused largely on fiscal policy, the fear of deflation shifted focus to monetary policy. The combined result was, and continues to be, a policy characterized by a proactive Keynesian case for fiscal policy to stimulate growth, and a proactive monetarist (and proto-monetarist) policy to avoid deflation. This, however, puts us in the very situation raised by Smith in The Wealth of Nations. How do we avoid the natural tendency of politicians and policy makers to engage in the juggling trick that hides the true costs of these proactive fiscal and monetary policies through increased borrowing and the monetarization of debt which can ultimately destroy an economy?
2. The public debt–inflation cycle
Smith’s recognition of the juggling trick regarding public debt is especially prescient because it correctly recognized the incentives facing elected officials well before the public choice revolution of the 1960s. This focus on basic incentives was lost with the Keynesian revolution. As Zingales (2009a) notes, ‘Keynes studied the relation between macroeconomic aggregates, without any consideration for the underlying incentives that lead to the formation of these aggregates. By contrast, modern economics base all their analysis on incentives’. This is a crucial point because fiscal and monetary policy is not designed in a vacuum. Instead, we must consider the incentives at two levels. First, we must understand the incentives facing policy makers when they design policy. Second, we must consider the incentives created by those policies. Let us consider each of these incentives in turn.
The logic of Smith’s ‘juggling trick’ insight was based on the basic incentives facing elected officials. Government can raise revenue in three ways: taxation, debt and inflation. To maintain popularity, governmental leaders prefer not to raise explicit taxes, so the preferred method of revenue generation is to borrow and then pay debts back with debased currency (an implicit tax). The democratic bias is to concentrate the benefits of public policy on well-organized and well-informed voters in the short run, and disperse the costs of public policy on the ill-organized and uninformed masses in the long run. The least informed and organized interest group at any point of time is future generations. Hence, the natural proclivity for the ruling regime is to run deficits that result in accumulated public debt, which is paid off with debasement. Throughout history this governmental habit of deficit, debt and debasement is what has brought down regimes and with that sometimes civilizations (see Groseclose, 1961, pp. 57–76; Rothbard, 1990 [1963], pp. 63–64).
It is this logic that has historically underpinned calls for an independent central bank, and various constraints on the policy discretion of both the treasury and the central bank. Ideally, rules must be designed to prevent policy cooperation ⁄ collusion between the fiscal and monetary policy makers precisely because we know the history of the political temptations to be seduced by the opportunity to engage in the juggling trick that Smith so long ago identified.
However, the problem goes beyond the incentives facing policy makers. The process of engaging in Smith’s juggling trick also creates perverse incentives in the private arena as proactive fiscal and monetary policies have led to increased efforts on the part of private actors to influence these policies for their personal gain. This raises the return to lobbying and rent-seeking activities relative to productive entrepreneurial activities, which are necessary not only for immediate recovery, but for long-term growth.
This interplay between the incentives facing policy makers and private businesspeople has resulted in a ‘vicious circle’ of favouritism and a lack of trust in financial and political institutions by citizens (see Zingales, 2009b). Politicians are intertwined with private markets as the logic of special interests discussed above (see Smith et al., forthcoming). At the same time, politicians seek to signal to citizens that they are independent of private interests. They do so by adopting strong policies against those private interests in the wake of crisis – increased regulation, threatened and actual taxes and fines, etc. This attempt to send a strong signal, however, has the unintended effect of creating an uncertain environment for subsequent investment which further exacerbates the fundamental problem of encouraging private investment for recovery and growth.
3. Misdiagnosing the sickness and cure
We are faced with a dilemma. On the one hand, the dominant theories of economic crises indicate that government must play a proactive role in getting the economy out of the depressed state of affairs. Active fiscal policy must be used to stimulate aggregate demand while active monetary policy must be used to avoid a deflationary spiral. However, we also have public choice theories dating back to Adam Smith which indicate that these very government actions are unsustainable and economically destructive.
The trends seem to support the Smith ⁄ public choice line of reasoning. In Capitalism and Freedom, Milton Friedman (1962, p. 75) pointed out that the primary justification of the expansion of public expenditure since the Second World War has been the ‘supposed necessity for government spending to eliminate unemployment’; an idea, Friedman goes on to argue, that has been thoroughly discredited by theory and practice. But, as he points out, ‘The idea may be accepted by none, but the government programs undertaken in its name, like some of those intended to prime the pump, are still with us and indeed account for ever-growing government expenditures’ (Friedman, 1962, p. 76). Close to 20 years later, Friedman noted that little had changed from when he first made those observations. ‘The repeated failure of well-intentioned programs is not an accident. It is not simply the result of mistakes of execution. The failure is deeply rooted in the use of bad means to achieve good objectives.’ But in spite of the overwhelming record of failure, these programs continue to expand. ‘Failures are attributed to the miserliness of Congress in appropriating funds, and so are met with a cry for still bigger programs’ (Friedman and Friedman, 1980, pp. 87–88).
Further, in the 25-plus years since those words were written little has changed in the day-to-day operation of politics, though Friedman was successful in transforming the rhetoric in the direction of market-economics language. At best, the growth of government was slowed, but it is important to stress that neither the Reagan nor Thatcher administrations reversed the trend line, and in the subsequent years even that slowing of the growth of government was reversed, especially after the 11 September 2001 terrorist attacks and the ensuing military conflicts and enhanced domestic security measures.
It is important to stress this because one of the great mythologies is that the Great Recession is evidence of the failure of unregulated capitalism. A similar mythology arose concerning the Great Depression. As Friedman and Friedman summed it up:
The depression convinced the public that capitalism was defective; the war, that centralized government was efficient. Both conclusions were false. The depression was produced by a failure of government, not of private enterprise. As to the war, it is one thing for government to exercise great control temporarily for a single overriding purpose shared by almost all citizens and for which almost all citizens are willing to make heavy sacrifices; it is a very different thing for government to control the economy permanently to promote a vaguely defined ‘public interest’ shaped by the enormously varied and diverse objectives of its citizens (Friedman and Friedman, 1980, pp. 85–86).
Failing to distinguish between unregulated capitalism and state-led capitalism, or mercantilism, has two negative consequences. The first is that it runs the risk of misdiagnosing the problem. If failures are attributed to capitalism when they are in fact the result of distortions caused by fiscal and monetary policies, this will lead to an incorrect diagnosis of the actual problem. The second, and related, consequence is that it runs the risk of misdiagnosing the solution. If, in fact, the cause of downturns is distortions caused by past fiscal and monetary solutions, then it is incorrect to assume that these same policies are the solution to the very problem they caused.
There is reason to believe that both types of misdiagnosis are at work in the current crisis. Zingales (2009a) notes that Keynesian policies have not only failed to avoid the current crisis but instead were a contributing factor to its onset. He writes that ‘The Keynesian desire to manage aggregate demand, ignoring the long-run costs, pushed Alan Greenspan and Ben Bernanke to keep interest rates extremely low in 2002, fuelling excessive consumption by the household sector and excessive risk-taking by the financial sector’ (Zingales, 2009a). Similarly, Taylor (2009) has documented how easy monetary policy combined with government programs that unintentionally shifted the incentives for risk taking caused and prolonged the current crisis. Finally, Rajan (2010) highlights how the role of loose monetary policy and the political push for easy housing credit contributed to the current crisis.
Prior to the onset of the crisis, economists too quickly identified the lack of macroeconomic volatility with the perfection of central banking, rather than seeing policies in terms of Smith’s juggling trick whereby fiscal and monetary policies paper over (literally) the efforts by market forces to correct for the misleading signals of the previous period of manipulation of money and credit in the economy. The Fed ‘getting off track’, to borrow Taylor’s (2009) apt phrase, was due to efforts to keep the previous misguided set of economic activities afloat rather than permitting the necessary adjustment to economic reality by market participants.
To the extent that Zingales, Taylor and Rajan are correct that past fiscal and monetary policies were a factor in causing the current situation, what confidence do we have that those same policies can now solve the existing predicament they helped to create? Further, to the extent that these policies are successful, they will only be so in the short run as they are just a continuation of the juggling trick. As the debt crises around the world illustrate, while payment can be delayed, eventually the bill becomes due.
4. Lessons learned
What have we learned from the Great Recession? We would like to highlight three lessons which we hope will be the subject of subsequent debate and discussion.
First, the debt–inflation theory of economic crises must be considered as a viable alternative to replace the debt–deflation theory of economic crises. Under the debt–deflation theory policy makers interpret every downturn in economic activity as a potential deflation, and therefore counteract it with easy monetary policy. When this happens market corrections will be cut short, and the previous boom is recreated through the manipulation of money and credit.
Ludwig von Mises (1966 [1949]) and F. A. Hayek (1979) were early expositors of an expectation-based macro-economics arguing that efforts to offset economic downturns through monetary policy enter a dangerous game of expectations and anticipated inflation. As Hayek argued, ‘We now have a tiger by the tail: How long can this inflation continue? If the tiger [of inflation] is freed, he will eat us up; yet if he runs faster and faster while we desperately hold on, we are still finished!’(Hayek, 1979, p. 110, emphasis added) It is this theory of the ‘crack-up boom’ (see Mises, 1966 [1949], pp. 426–428) that very well may be what we have seen manifesting itself in reality with the onset of the Great Recession in 2008. If this is accurate then the policy steps taken to date have merely reinforced, rather than ameliorated, the problem as a market correction to previous malinvestments has been turned into a global crisis by the very steps taken to prevent the market correction from occurring.
Second, to curtail the tendency of using the tools of monetary and fiscal policy to concentrate benefits and disperse costs, policy institutions must effectively tie rulers’ hands to eliminate the possibility of engaging in the juggling trick that Smith warned against. The importance of establishing credible and binding constraints on monetary authorities and government spending is by no means a new idea. However, modern history has demonstrated the elusiveness of the quest to establish binding and credible constraints on monetary and fiscal authorities.
This has important implications because the relevant question is not if constraints should be established, but instead whether binding constraints can be established within the existing institutional framework. If that institutional framework is vulnerable to the inevitable errors committed by policy makers – either innocent or malevolent – then the problem is not in the framework, it is the framework. Milton Friedman (1962, pp. 50–51) recognized this possibility when he wrote:
Any system which gives so much power and so much discretion to a few men that mistakes – excusable or not – can have such far reaching effects is a bad system. It is a bad system to believers in freedom just because it gives a few men such power without any effective check by the body politic – that is the key political argument against an ‘independent’ central bank. But it is a bad system even to those who set security higher than freedom. Mistakes, excusable or not, cannot be avoided in a system which disperses responsibility yet gives a few men great power, and which thereby makes important policy actions highly dependent on accidents of personality. This is the key technical argument against an ‘independent’ bank. To paraphrase Clemenceau, money is much too serious a matter to be left to the Central Bankers.
Similarly, Buchanan and Wagner are pessimistic of the ability to restrain the state from engaging in juggling tricks leading them to conclude that, ‘politically, Keynesianism may represent a substantial disease, one that can, over the long run, prove fatal for a functioning democracy’ (Buchanan and Wagner, 1977, p. 56, emphasis added).
This leads to our third and final lesson. After centuries of only fleeting success at curtailing the deficit, debt and debasement cycle of public policy, we may have to consider seriously the possibility that the only way successfully to constrain the state is to eliminate from its purview the task of monetary policy. Rather than a centralized and government monopoly control of the money supply, perhaps more decentralized and competitive institutional arrangements might have to be relied upon. Of course, what is required is the attention of economists to examine such institutional arrangements in depth and with all their critical attention. What cannot continue is the standard practice of looking at central banking theory and practice as if they were to be done by fully informed agents who act only in the public interest. Instead, a robust theory of the institutions of the monetary framework must be developed.
References
Bernanke, B. S. (2010) ‘The Economic Outlook and Monetary Policy’. Speech at the Federal Reserve Bank of Kansas City Economic Symposium, Jackson Hole, Wyoming, 27 August. Available from: http://federalreserve.gov/newsevents/speech/bernanke20100827a.htm [Accessed 22 February 2011].
Besley, T., Davies, H., Goodhart, C., Marcet, A., Pissarides, C., Quah, D. et al. (2010) ‘UK Economy Cries Out for Credible Rescue Plan’, Sunday Times, 14 February, p. 26.
Boettke, P. J., Smith, D. and Snow, N. (2010) ‘Been There Done That: Political Economy of Déjà vu’, mimeo.
Buchanan, J. M. and Wagner, R. E. (1977) Democracy in Deficit: The Political Legacy of Lord Keynes. New York: Academic Press.
Fisher, I. (1933) ‘The Debt–Deflation Theory of Great Depressions’, Econometrica, 1 (4), pp. 337–357.
Friedman, M. (1962) Capitalism and Freedom. Chicago, IL: University of Chicago Press.
Friedman, M. and Friedman, R. (1980) Free to Choose. New York: Harcourt Brace.
Gregory, T. E., Hayek, F. A., Plant, A. and Robbins, L. (1932) ‘Spending and Saving: Public Works from Rates’, Times of London, 19 October, p. 10.
Groseclose, E. (1961) Money and Man. New York: Frederick Ungar.
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Hayek, F. A. (1979) A Tiger by the Tail: The Keynesian Legacy of Inflation. San Francisco, CA: The CATO Institute.
Macgregor, D. H., Pigou, A. C., Keynes, J. M., Layton, W., Salter, A. and Stamp, J. C. (1932) ‘Private spending: Money for Productive Investment’, Times of London, 17 October, p. 13.
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Money. Auburn: The Ludwig von Mises Institute.
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of Nations, Volume II. Indianapolis, IN: Liberty Fund.
Smith, A., Wagner, R. E. and Yandle, B. (forthcoming) ‘A Theory of Entangled Political Economy, with Application to TARP and NRA’, Public Choice.
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Interventions Caused, Prolonged, and Worsened the Financial
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Jamie Whyte‘s superb BBC Radio 4 documentary, focusing on F.A. Hayek, is now available as a BBC podcast.
You can download it from here:
Yo, Hayek! (Broadcast on BBC Radio 4, 8:30pm, 31st Jan, 2011)
(iTunes users can also find the podcast on the iTunes store, for free subscription, if they search for ‘bbc radio 4 analysis’, though it may take a little time to appear.)
I would prefer to let you listen to the documentary yourselves, rather than try to annotate my own personal highlights (such as the mention of ‘factors of production’, the linking of ‘quantitative easing’ with ‘money printing’, or anything stated by Professor Robert Higgs and Steve Baker MP).
Basically, it’s all good.
However, I must just say that I was mightily impressed when the opening section began with the theme of the following video. I would therefore like to thank Jamie for giving me yet another opportunity to embed this video within a Cobden Centre article.
Having recently sold my food business, life is moving at a much slower pace, which gives time for thought and reflection before I undertake my next venture or ventures. One thought was: what did I learn from academia that I applied to my business dealings?
I concluded that my behaviour was moved by my instinct and alertness to opportunity, and my ability to provide strategic leadership to people and give them vision. With my actions over the years I was always Hayekian in outlook.
I could not say for sure if my reading of Hayek made me behave and structure my business as I did, or if I just did it because common sense always told me that local management, with profit and loss responsibility handed down to the smallest units possible, and as little reliance on the central head office function as possible, was the only way forward. In fact, to the day I sold, I never did have a head office. This perplexed bankers, accounts etc, but no one else.
I also used to say to my people, “if the man from Mars (read: management consultant, banker, accountant, anyone who’s good at spreadsheets and sits at a desk) came down and looked at our business, he would say we are mad”. We would sometimes send three vehicles to deliver fish down the same road to different people at different times of the day — we should surely consolidate these deliveries, and send one vehicle only. Also, we would buy some of the same species of fish from all the ports of the land, indeed from all over the world, and but not consolidate our buying power. “You are mad”, the Martian would say, “you are running an inefficient business”. To this I’d respond that the proof is in the bottom line of the P&L. We made more money than any of our competitors, by far. So do not worry, I told my people, with reason and conviction I knew our approach was right.
The Keynesian approach would be the opposite of the Hayekian, and would be just what my hypothetical man from Mars would advocate. The aggregation for efficiencies by central agents would have destroyed my business, as I saw happen with my major competitors once the spreadsheet whallas got involved.
Dispersed knowledge, collected locally and applied intelligently, told us that our customers were prepared to pay more for very convenient just-in-time deliveries. Some of our customers opened up their business for a lunch service that required delivery early in the morning; others were evening service only. Some were open 24 hours; others were night only. So we catered to all, as opposed to saying “we are only in this area from time X to time Y, on such and such a day”. This meant vans going out 1/4 full and “inefficient”, but up to three times a day with a higher margin payload delivering up more profit.
Dispersed knowledge, collected locally and dealt with intelligently, told us that buying wild-hunted local fish from various ports and harbours, and selling it locally having bought at different cost prices (rather than using our buying power to leverage the best deal with the cheapest central seller) actually meant we could sell fish to the local restaurant and hotel marketplace for more margin and hence more profit was delivered to the P&L.
The aggregating and centralising “Keynesian” approach would have been the end for us.
One influence that I must also add to this little reflective piece is Michael Oakeshott. His On Human Conduct has probably had more influence on me than Human Action by Mises. This being an economics-orientated web site, I think this is the first time I’ve mentioned the great political philosopher.
Tradition, intimation, and latent knowledge and talent are often hard to observe. Cooking a recipe is following a simple set of instructions, just like cutting fish. Some of us can perform only moderately well (even with lots of training), and others, like Gordon Ramsey, outstandingly. This talent is latent and cannot be written down and copied. It can’t be rationalised. It is the aim of most of the world’s all-encompassing philosophies to be rationalistic in outlook. Applied to business, there were many skills I could not objectify that key members of my staff displayed. If they produced a profit, I left alone. This is not to say you should not always attempt to fully understand what is going on, and why people do things in certain ways; you always should. My Oakeshottian contribution was to exhaust this process of understanding, only gently change if it was deemed wrong by me, and love and cherish it if it was a little bit off piste and entrepreneurial. This is why my bottom line was always bigger than my competitors.
Oakeshott famously criticised his LSE contemporary Hayek by saying that his political philosophy, as expounded in The Road to Serfdom, of less planning was just as much a rationalist ideology as the central planners he cautioned against, even if it may be a better approach. Irrationality, “quirkiness”, hidden skill, and entrepreneurial talent are all things that do not fit in the box. These I always sought to preserve and encourage in the business. So my rational leadership and vision was always tempered by respect for this insight of Oakeshott. This is also why I am a liberal philosophically, tempered with good doses of conservative wisdom and leanings.
We were pleased to see this thoughtful and enthusiastic write-up of Huerta de Soto’s Hayek lecture by Andreas Kuersten for the LSE student paper, The Beaver. We reproduce it here by kind permission of the editor.
Last Friday Professor Jesús Huerta de Soto, of the King Juan Carlos University of Madrid, delivered a lecture at the LSE on the recent financial crisis and economic recession. The event, hosted by Professor Tim Besley of the LSE Economics Department, was held in honor of the work of former LSE Professor and 1974 Nobel laureate Friedrich von Hayek.
Professor de Soto holds doctorates in both Economics and Law from the Complutense University of Madrid and an MBA from Stanford University. He is considered by many to be one of the principal exponents of the Austrian School of Economics, which is largely influenced by Hayek’s ideas, and some of his notable publications include the books Money, Bank Credit, and Economic Cycles and Socialism, Economic Calculation, and Entrepreneurship.
Professor de Soto began his analysis by attributing a great deal of responsibility for modern financial problems to the Bank Charter Act passed on July 19th, 1844 in the United Kingdom. This was a landmark act that sought to eliminate the boom and bust cycle of markets caused by artificial credit expansions induced by private banks which were financed not by savings but by fiduciary media issued in large amounts. In essence, credit granted without reserve backing. The Bank Charter Act required 100 per cent reserve backing for banknotes issued. Yet it did not address demand deposits, which is money created just on the books of banks but which are still part of the money supply. Banks therefore diverted their business from issuing banknotes to demand deposits and thus circumvented the act’s requirement for total reserve backing.
This sort of financial business has continued, unaddressed, since then and resulted in a six-step process which led to the recent financial crisis.
Firstly, consumers are not encouraged to save because banks can issue credit without significant reserve backing. De Soto commented that the lack of savings means that demand for consumer products remains high which causes producers of these products to compete with one another for the means of production. This, according to de Soto, causes a rise in prices of these means.
The second step results from an increase in the price of consumer goods at a faster rate than that of the means of production due to consumer producers having to compete so vastly for them.
De Soto identified the third step as accounting profits rise in the companies closest to final consumption of products by consumers due to the rising prices.
The fourth step occurs as the Ricardo Effect takes hold, an effect meant to occur in an environment of savings and reserve backing to allow production to shift from consumer to capital goods to keep jobs and wages and consumer goods production becomes more expensive. Instead real wages decrease so companies hire cheap labour rather than investing in capital to replace labour. Price of capital decreases and further decreases profits of firms further from consumption.
The fifth step is an increase in the interest rate as growth stagnates. Step six then comes as companies farther from consumption incur mounting accounting losses and investment projects are liquidated.
After identifying these six critical steps, de Soto commented that their growth ceases and the receivers of banks loans are seen to not be able to pay them back in which case the banks are discovered not to have the reserve backing to absorb and handle the losses. The banks are shown to be bankrupt and the central bank must step in to stop the collapse of the financial system.
In response to this situation Professor de Soto suggests austerity measures to decrease government need for money and then a reduction of taxes on firms which need to concentrate on paying down debt. All levels of the market also need to be liberalised in order to facilitate easier transition by companies between different sectors depending on profitability.
De Soto also outlined a three step process for recovery and prevention. To begin with, the demands of the Bank Charter Act must be put into law but this time applying to demand deposits and all transactions. 100 per cent reserve backing must be required in all banks dealings. The next step is to get rid of the inherent socialism of our current financial system by getting rid of central banks. They succumb to all of the inherent problems of a socialist system noted by Austrian School of Economics scholars. De Soto acknowledged that they are too large and unable to keep track of myriad dealings and types of dealings done by financial actors, follow changes in supply and demand, and are based on an enormous amount of privilege being given to private bankers who engage in fractional reserve dealings. They cannot coordinate the system.
The final step involves privatizing the source of money and replacing modern paper money with the classical gold standard which would ensure 100 per cent reserve backing.
One of the more interesting questions put forth by the audience was a challenge to the reversion of the financial system to once again being based on the gold standard despite its links with the Great Depression. Professor de Soto responded that it was not the gold standard which led to this crisis but the actions of private bankers in seeking to subvert this system by ignoring it and undertaking fractional reserve transactions. The gold standard system was simply blamed when it failed due to these actions by bankers because it was the system officially recognized, even though it was not being followed.
Through his lecture Professor de Soto offered some very radical changes as solutions to the current financial crisis which were quite well received, the audience applauded them loudly. This was exemplified by spontaneous applause for the suggestion of returning to the classical gold standard. De Soto presented his arguments very passionately and, overall, they were received very positively by the audience.
There is a great article by Philip Booth over at CentreRight, on Hayek’s The Constitution of Liberty:
In essence it explains how a complex cooperative, great society can come about in an environment of freedom under the rule of law. It emphasises the importance of tradition and of limiting government discretion. Whilst Hayek might not have been a Conservative, The Constitution of Liberty, to some extent, sits at the juxtaposition of a certain strand of Conservatism and liberalism. Without question it is more “Big Society” than “Big State”. However, the work demonstrates why the Big Society should evolve spontaneously and not be created and cajoled by the government – a lesson not understood by the coalition.
A key argument is that civilisation depends on liberty and that the West has lost its belief in liberty as a guiding principle. Liberty, in turn, depends on the rule of law. But, the rule of law is not the same as enforcing the authority of the law: the rule of law involves, amongst other things, the constraints that we put on the domain of the law and on those who make and enforce the law. Governments must prevent individuals from coercing each other but, if this to be achieved, illegitimate coercion by government must be rejected.
A sophisticated and interconnected social order can then develop. People can make plans and economic and social arrangements knowing that they can achieve their legitimate ends individually and collectively. This is the lesson of economic development in nineteenth century Britain. The big society that existed then was not an accident. It would not have come about had the state used its coercive powers, as it does now, to spend half of national income and to interfere in almost all aspects of economic and social relationships.
We are delighted to bring you a great letter exchange from history where in public debate Keynes traded economic blows with Hayek over causes and solutions to the Great Depression in the letter columns of The Times. A mirror image of this debate, sadly still raging some 80 years later, took place in the letter columns of the Financial Times and the Sunday Times between the fantastic biographer of Keynes, Lord Skidelsky and Prof Tim Besley of the LSE.
Why have we not learned anything? Why does this debate continue today? Who if anyone “won” and who “lost.”
Is this spectacular video summary of the older debate still relevant today?
Readers what do you have to say on the matter?
The Times, Monday, October 17, 1932 (p13)
PRIVATE SPENDING
MONEY FOR PRODUCTIVE INVESTMENT
A COMMENT BY ECONOMISTS
TO THE EDITOR OF THE TIMES
Sir, —On October 10 you gave prominence in your columns to a letter inviting
the opinion of economists on the problem of private spending. There are a
large number of economists in this country, and nobody can claim to speak
for all of them. The signatories of this letter have, however, in various
capacities, devoted many years to the consideration of economic problems. We
do not think that many of our colleagues would disagree with what we are
about to say.
In the period of the War it was a patriotic duty for private citizens to cut
their expenditure on the purchase of consumable goods and services to the
limit of their power. Some sorts of private economy were, indeed, more in
the national interest than others. But, in some degree, all sorts of economy
set free resources — man-power, machine-power, shipping-power— for use by
the Government directly or indirectly in the conduct of the War. Private
economy implied the handing over of these resources for a vital national
purpose. At the present time, the conditions are entirely different. If a
person with an income of £1,000, the whole of which he would normally spend,
decides instead to save £500 of it, the labour and capital that he sets free
are not passed over to an insatiable war machine. Nor is there any assurance
that they will find their way into investment in new capital construction by
public or private concerns. In certain cases, of course, they will do this.
A landowner who spends £500 less than usual in festivities and devotes the
£500 to building a barn or a cottage, or a business man who stints himself
of luxuries so that he can put new machinery into his mill, is simply
transferring productive resources from one use to another. But, when a man
economizes in consumption, and lets the fruit of his economy pile up in bank
balances or even in the purchase of existing securities, the released real
resources do not find a new home waiting for them. In the present conditions
their entry into investment is blocked by lack of confidence. Moreover,
private economy intensifies the block. For it further discourages all those
forms of investment — factories, machinery, and so on— whose ultimate
purpose is to make consumption goods. Consequently, in present conditions,
private economy does not transfer from consumption to investment part of an
unchanged national real income. On the contrary, it cuts down the national
income by nearly as much as it cuts down consumption. Instead of enabling
labour-power, machine-power, and shipping-power to be turned to a different
and more important use, it throws them into idleness.
Conduct in the matter of economy, as of most other things, is governed by a
complex of motives. Some people, no doubt, are stinting their consumption
because their incomes have diminished and they cannot spend so much as
usual; others because their incomes are expected to diminish and they dare
not do so. What it is in any individual’s private interest to do and what
weight he ought to assign to that private interest as against the public
interest, when the two conflict, it is not for us to judge. But one thing
is, in our opinion, clear. The public interest in present conditions does
not point towards private economy; to spend less money than we should like
to do is not patriotic.
Moreover, what is true of individuals acting singly is equally true of
groups of individuals acting through local authorities. If the citizens of a
town wish to build a swimming-bath, or a library, or a museum, they will
not, by refraining from doing this, promote a wider national interest. They
will be “martyrs by mistake” and, in their martyrdom, will be injuring
others as well as themselves. Through their misdirected good will the
mounting wave of unemployment will be lifted still higher.
We are your obedient servants,
D. H. MACGREGOR (Professor of Political Economy in the University of
Oxford),
A. C. PIGOU (Professor of Political Economy in the University of Cambridge),
J. M. KEYNES,
WALTER LAYTON,
ARTHUR SALTER,
J. C. STAMP
The reply was published two days later:
The Times, Wednesday, October 19, 1932 (p10)
SPENDING AND SAVING
PUBLIC WORKS FROM RATES
TO THE EDITOR OF THE TIMES
Sir,— The question whether to save or whether to spend, which has been
raised in your columns, is not unambiguous. It involves three separate
issues:—(1) Whether to use money or whether to hoard it; (2) whether
to spend money or whether to invest it; (3) whether Government
investment is on all fours with investment by private individuals.
While we do not wish to over-stress the nature of our differences with
those of our professional colleagues who have already written to you
on these subjects, yet on certain points that difference is
sufficiently great to make the expression of an alternative view
desirable.
(1) On the first issue—whether to use one’s money or whether to hoard
it—there is no important difference between us. It is agreed that
hoarding money, whether in cash or in idle balances, is deflationary
in its effects. No one thinks that deflation is in itself desirable.
(2) On the question of whether to spend or whether to invest our
position is different from that of the signatories of the letter which
appeared in your columns on Monday. They appear to hold that it is a
matter of indifference as regards the prospects of revival whether
money is spent on consumption or on real investment. We, on the
contrary, believe that one of the main difficulties of the world
to-day is a deficiency of investment—a depression of the industries
making for capital extension, &c., rather than of the industries
making directly for consumption. Hence we regard a revival of
investment as particularly desirable. The signatories of the letter
referred to, however, appear to deprecate the purchase of existing
securities on the ground that there is no guarantee that money will
find its way into real investment. We cannot endorse this view. Under
modern conditions the security markets are an indispensable part of
the mechanism of investment. A rise in the value of old securities is
an indispensable preliminary to the flotation of new issues. The
existence of a lag between the revival in old securities and revival
elsewhere is not questioned. But we should regard it as little short
of a disaster if the public should infer from what has been said that
the purchase of existing securities and the placing of deposits in
building societies, &c., were at the present time contrary to public
interest or that the sale of securities or the withdrawal of such
deposits would assist the coming of recovery. It is perilous in the
extreme to say anything which may still further weaken the habit of
private saving.
But it is perhaps on the third question—the question whether this is
an appropriate time for State and municipal authorities to extend
their expenditure—that our differences with the signatories of the
letter is most acute. On this point we find ourselves in agreement
with your leading article on Monday. We are of the opinion that many
of the troubles of the world at the present time are due to imprudent
borrowing and spending on the part of the public authorities. We do
not desire to see a renewal of such practices. At best they mortgage
the Budgets of the future, and they tend to drive up the rate of
interest—a process which is surely particularly undesirable at this
juncture when the revival of the supply of capital to private industry
is an admittedly urgent necessity. The depression has abundantly shown
that the existence of public debt on a large scale imposes frictions
and obstacles to readjustment very much greater than the frictions and
obstacles imposed by the existence of private debt. Hence we cannot
agree with the signatories of the letter that this is a time for new
municipal swimming baths, &c., merely because people “feel they want”
such amenities.
If the Government wish to help revival, the right way for them to
proceed is, not expenditure, but to abolish those restrictions on
trade and the free movement of capital (including restrictions on new
issues) which are at present impeding even the beginning of recovery.
We are, Sir, your obedient servants,
T.E. GREGORY, Cassel Professor of Economics,
F. A. VON HAYEK, Tooke Professor of Economic Science and Statistics,
ARNOLD PLANT, Cassel Professor of Commerce,
LIONEL ROBBINS, Professor of Economics
University of London, Oct. 18
Almost eight decades later, the debate over public spending continues:
The Sunday Times, February 14, 2010
UK ECONOMY CRIES OUT FOR CREDIBLE RESCUE PLAN
IT IS now clear that the UK economy entered the recession with a large structural budget deficit. As a result the UK’s budget deficit is now the largest in our peacetime history and among the largest in the developed world.
In these circumstances a credible medium-term fiscal consolidation plan would make a sustainable recovery more likely.
In the absence of a credible plan, there is a risk that a loss of confidence in the UK’s economic policy framework will contribute to higher long-term interest rates and/or currency instability, which could undermine the recovery.
In order to minimise this risk and support a sustainable recovery, the next government should set out a detailed plan to reduce the structural budget deficit more quickly than set out in the 2009 pre-budget report.
The exact timing of measures should be sensitive to developments in the economy, particularly the fragility of the recovery. However, in order to be credible, the government’s goal should be to eliminate the structural current budget deficit over the course of a parliament, and there is a compelling case, all else being equal, for the first measures beginning to take effect in the 2010-11 fiscal year.
The bulk of this fiscal consolidation should be borne by reductions in government spending, but that process should be mindful of its impact on society’s more vulnerable groups. Tax increases should be broad-based and minimise damaging increases in marginal tax rates on employment and investment.
In order to restore trust in the fiscal framework, the government should also introduce more independence into the generation of fiscal forecasts and the scrutiny of the government’s performance against its stated fiscal goals.
Tim Besley, Sir Howard Davies, Charles Goodhart, Albert Marcet, Christopher Pissarides and Danny Quah, London School of Economics;
Meghnad Desai and Andrew Turnbull, House of Lords;
Orazio Attanasio and Costas Meghir, University College London;
Sir John Vickers, Oxford University;
John Muellbauer, Nuffield College, Oxford;
David Newbery and Hashem Pesaran, Cambridge University;
Ken Rogoff, Harvard University;
Thomas Sargent, New York University;
Anne Sibert, Birkbeck College, University of London;
Michael Wickens, University of York and Cardiff Business School;
Roger Bootle, Capital Economics;
Bridget Rosewell, GLA and Volterra Consulting
The advocates of continued borrow-and-spend replied in the FT:
The Financial Times, Thursday, February 18, 2010
FIRST PRIORITY MUST BE TO RESTORE ROBUST GROWTH
Sir, In their letter to The Sunday Times of February 14, Professor Tim Besley and 19 co-signatories called for an accelerated programme of fiscal consolidation. We believe they are wrong.
There is no disagreement that fiscal consolidation will be necessary to put UK public finances back on a sustainable basis. But the timing of the measures should depend on the strength of the recovery. The Treasury has committed itself to more than halving the budget deficit by 2013-14, with most of the consolidation taking place when recovery is firmly established. In urging a faster pace of deficit reduction to reassure the financial markets, the signatories of the Sunday Times letter implicitly accept as binding the views of the same financial markets whose mistakes precipitated the crisis in the first place!
They seek to frighten us with the present level of the deficit but mention neither the automatic reduction that will be achieved as and when growth is resumed nor the effects of growth on investor confidence. How do the letter’s signatories imagine foreign creditors will react if implementing fierce spending cuts tips the economy back into recession? To ask – as they do – for independent appraisal of fiscal policy forecasts is sensible. But for the good of the British people – and for fiscal sustainability – the first priority must be to restore robust economic growth. The wealth of the nation lies in what its citizens can produce.
Lord Skidelsky, Emeritus Professor of Political Economy, University of Warwick, UK
Marcus Miller, Professor of Economics, University of Warwick, UK
David Blanchflower, Bruce V. Rauner Professor of Economics, Dartmouth College, US and University of Stirling, UK
Kern Alexander, Professor of Law and Economics, University of Zurich, Switzerland
Martyn Andrews, Professor of Econometrics, University of Manchester, UK
David Bell, Professor of Economics, University of Stirling, UK
William Brown, Montague Burton Professor of Industrial Relations, University of Cambridge, UK
Mustafa Caglayan, Professor of Economics, University of Sheffield, UK
Victoria Chick, Emeritus Professor of Economics, University College London, UK
Christopher Cramer, Professor of Economics, SOAS, London, UK
Paul De Grauwe, Professor of Economics, K. U. Leuven, Belgium
Brad DeLong, Professor of Economics, U.C. Berkeley, US
Marina Della Giusta, Senior Lecturer in Economics, University of Reading, UK
Andy Dickerson, Professor in Economics, University of Sheffield, UK
John Driffill, Professor of Economics, Birkbeck College London, UK
Ciaran Driver, Professor of Economics, Imperial College London, UK
Sheila Dow, Emeritus Professor of Economics, University of Stirling, UK
Chris Edwards, Senior Fellow, Economics, University of East Anglia, UK
Peter Elias, Professor of Economics, University of Warwick, UK
Bob Elliot, Professor of Economics, University of Aberdeen, UK
Jean-Paul Fitoussi, Professor of Economics, Sciences-po, Paris, France
Giuseppe Fontana, Professor of Monetary Economics, University of Leeds, UK
Richard Freeman, Herbert Ascherman Chair in Economics, Harvard University, US
Francis Green, Professor of Economics, University of Kent, UK
G.C. Harcourt, Emeritus Reader, University of Cambridge, and Professor Emeritus, University of Adelaide, Australia
Peter Hammond, Marie Curie Professor, Department of Economics, University of Warwick, UK
Mark Hayes, Fellow in Economics, University of Cambridge, UK
David Held, Graham Wallas Professor of Political Science, LSE, UK
Jerome de Henau, Lecturer in Economics, Open University, UK
Susan Himmelweit, Professor of Economics, Open University, UK
Geoffrey Hodgson, Research Professor of Business Studies, University of Hertfordshire, UK
Jane Humphries, Professor of Economic History, University of Oxford, UK
Grazia Ietto-Gillies, Emeritus Professor of Economics, London South Bank University, UK
George Irvin, Professor of Economics, SOAS London, UK
Geraint Johnes, Professor of Economics and Dean of Graduate Studies, Lancaster University, UK
Mary Kaldor, Professor of Global Governance, LSE, UK
Alan Kirman, Professor Emeritus Universite Paul Cezanne, Ecole des Hautes Etudes en Sciences Sociales, Institut Universitaire de France
Dennis Leech, Professor of Economics, Warwick University, UK
Robert MacCulloch, Professor of Economics, Imperial College London, UK
Stephen Machin, Professor of Economics, University College London, UK
George Magnus, Senior Economic Adviser to UBS Investment Bank
Alan Manning, Professor of Economics, LSE, UK
Ron Martin, Professor of Economic Geography, University of Cambridge, UK
Simon Mohun, Professor of Political Economy, QML, UK
Phil Murphy, Professor of Economics, University of Swansea, UK
Robin Naylor, Professor of Economics, University of Warwick, UK
Alberto Paloni, Senior Lecturer in Economics, University of Glasgow, UK
Rick van der Ploeg, Professor of Economics, University of Oxford, UK
Lord Peston, Emeritus Professor of Economics, QML, London, UK
Robert Rowthorn, Emeritus Professor of Economics, University of Cambridge, UK
Malcolm Sawyer, Professor of Economics, University of Leeds, UK
Richard Smith, Professor of Econometric Theory and Economic Statistics, University of Cambridge, UK
Frances Stewart, Professor of Development Economics, University of Oxford, UK
Joseph Stiglitz, University Professor, Columbia University, US
Andrew Trigg, Senior Lecturer in Economics, Open University, UK
John Van Reenen, Professor of Economics, LSE, UK
Roberto Veneziani, Senior Lecturer in Economics, QML, UK
John Weeks, Professor Emeritus Professor of Economics, SOAS, London, UK
When I first started dipping my toe into writing and researching Catholic social teaching, I did not see a particular good picture. The economic thinking which seemed to inform Catholic comment on social issues seemed to be weak. Much Christian comment on economic matters has tended to ignore not just empirical evidence but also, more or less, incontrovertible economic laws as well as ignoring much in the tradition of Catholic social teaching itself.
But, before I move on, I would like to pay tribute to the recent English and Welsh Catholic Bishops’ letter. It demonstrates both a considerable effort in absorbing and articulating some of the best of the tradition of Catholic social teaching as well as considerable humility in terms of the authors recognising the limits to their competence on the technical detail of economic matters. And this humility is very important when talking about these issues. Unintended consequences, about which the French nineteenth-century Catholic economist Frederic Bastiat wrote so well, are so ubiquitous in economics that, if you google the three words together, you get 1,240,000 responses. It should be a sobering thought for clergy who comment on economic matters that this is actually more than the total worldwide google responses for the words Catholic social teaching!
Many Christians grudgingly accept a free economy because of the material benefits it brings. But, today, I want to go further than this. A free economy should be seen as something that is intrinsically good of itself. Similarly, we should be aware of the problems of government intervention not just because of the damage governments can cause to material welfare, but because it can undermine certain basic precepts of a great, virtuous society. It is notable, in fact, that there is growing acceptance of some of what I will say from those on the left. Last year, I gave one of the four public lectures at Westminster Cathedral and John Battle, the Labour MP, gave another. He may have disagreed with my lecture profoundly but, I agreed with much of his. What was interesting about his lecture is that when he talked about “socialism” he was referring to organisations such as cooperatives and so on which I would regard as part of and parcel of a free economy. There was almost nothing in his lecture I disagreed with except his use of terminology.
My thesis about the importance of a free economy, the primacy of voluntary action and the subservience of government to the individual and the family is firmly rooted in the great history of Catholic social teaching. It is of interest to note that both the free market Nobel Laureate F. A. Hayek and Pope John Paul II, in their last significant books on the subject, traced the evils of the world – though for different reasons – to Descartes. That should make us pause for thought. Indeed, it is also interesting that both Francis’ centre and those who argue from my perspective, get their inspiration from the late scholastics of Salamanca as do modern followers of F. A. Hayek.
The case I want to make is that Christians should be very content with a market economy. They should not be trying to undermine a market economy but trying to strengthen it and populate it with virtuous people. This is a position, in my view, which is certainly compatible with the late scholastics and which was most clearly revived in John Paul’s encyclical Centesimus annus. But let me begin with some quotations from encyclicals about socialism. We can often understand a concept such as the market economy better by discussing its opposite.
Socialism gets a rough ride in papal writings. It starts with Pius IX, (slide) the Tablet’s bete noire. Pius IX had a certain way with words. In the 1840s he argued that socialists misapply the terms ‘liberty’ and ‘equality’ and are preparing people for “plundering, stealing, and usurping first the Church’s and then everyone’s property.” He then described socialism as a pestilence. Having said that, though Pius IX was against socialism, he was against most things, so let’s move on.
A little later, in 1891, this is Leo XIII describing the effects of socialism, (slide) “The door would be thrown open to envy, to mutual invective, and to discord; the sources of wealth themselves would run dry, for no one would have any interest in exerting his talents or his industry; and that ideal equality about which they entertain pleasant dreams would be in reality the levelling down of all to a like condition of misery and degradation.” He then talks about how socialism offends the natural rights of mankind and that its main tenet, the community of goods, must be utterly rejected.
A century later, John Paul II’s critique of socialism strikes a similar chord. He examines socialism in the context of the God-given nature of man. And this is important because, it moves us away from the tired justification of the market economy that it simply provides the best basis for material prosperity. John Paul says, in Centesimus annus: (slide) “the fundamental error of socialism is anthropological in nature. Socialism considers the individual person simply as an element, a molecule within the social organism…Socialism likewise maintains that the good of the individual can be realized without reference to his free choice, to the unique and exclusive responsibility which he exercises in the face of good or evil.”
This critique is not just relevant to extreme forms of socialism but to all forms where families are subjected to illegitimate control by the state. Indeed, John Paul goes on to deal with the specific issue of the welfare state about which he said: (slide) “In recent years the range of such intervention has vastly expanded, to the point of creating a new type of State, the so-called “Welfare State”…[E]xcesses and abuses, especially in recent years, have provoked very harsh criticisms of the Welfare State, dubbed the “Social Assistance State”. Malfunctions and defects in the Social Assistance State are the result of an inadequate understanding of the tasks proper to the State.”
So there is little in formal Catholic teaching to give much comfort to those who believe in principle that the state should play the primary role in economic life and in the provision of welfare. If the Church rejects socialism does that mean she embraces the opposite? Of course, the answer is: “not necessarily”. The opposite economic system may be flawed too. As the old Polish joke goes, “socialism is the exploitation of man by man; capitalism is the opposite.”
Catholic social teaching has criticised capitalism at various times – sometimes in very strong language. Often, though not always, those criticisms relate to the culture of consumerism – consumption for its own sake – which the Popes have perceived is rooted in western societies. The production and consumption of addictive drugs (other than alcohol and cigarettes of which many Catholics approve wholeheartedly), pornography, and so on are undoubtedly disordered uses of economic resources. And the accumulation of material goods for their own sake, must be condemned. But the enemy here should be the sin of materialism and not the market economy.
State intervention in the economic sphere does not save us from materialism as socialism is intrinsically materialistic. It seeks to raise the human condition through increased production and the redistribution of material wealth, though, as Pope Leo noted, it does not succeed. So a debate about materialism does not really get us very far in a debate about socialism versus capitalism. Whether you live in a socialist economy or a market economy or something that combines the two, the love of money will still be the root of much evil – it just manifests itself in different ways in a socialist society.
Before moving on, there is an interesting issue of semantics it is worth bringing out. The term capitalism is often used to describe what I like to call a free economy. This was a term coined by its enemies. The phrase capitalism promotes a focus on structures (labour and capital) and outputs (goods and services) rather than promoting a focus on the human person and human flourishing – or the common good.
John Paul II makes this point. He asks whether capitalism should be the model sought by failed socialist countries and what he says is this: (slide) “If by ‘capitalism’ is meant an economic system which recognizes the fundamental and positive role of business, the market, private property and the resulting responsibility for the means of production, as well as free human creativity in the economic sector, then the answer is certainly in the affirmative, even though it would perhaps be more appropriate to speak of a ‘business economy’, ‘market economy’ or simply ‘free economy’.”
Personally, I prefer the term “free economy” because, as we shall see later, a free economy should be about much more than the production and consumption of goods and services that are bought and sold in the market, but let us look at the market sector of a free economy for a moment.
When we limit ourselves to praising the market economy for its role promoting the common good by providing for material needs we tend to find a grudging acceptance of the market economy by Christians – at best. Even this limited virtue is not unimportant but it is not the whole story. In the Pope’s 2009 Peace Day message, he noted that the eradication of the scandal of serious material poverty needs a thriving economy. Recognition of this should, in turn, lead us to change the way we approach policy in certain areas in which Christians are especially interested. For example, when asking how to approach the problem of poverty in the under-developed world, we should ask first – though development campaigners rarely do – “What causes prosperity?” The answer to that question is “business and enterprise”. We should then ask “what is the institutional framework that nurtures business and enterprise?” If we ask these two questions, we might put less emphasis on government-to-government aid to deal with the problem of under-development and more emphasis on the institutional structures that are necessary to nurture enterprise and that are generally missing in under-developed countries.
But, a free economy should not just be valued for the prosperity it brings. A free economy, being the opposite of the socialist economy that was criticised for anthropological, economic and political reasons by the popes, actually has inherent virtues that a government-directed economy lacks.
Firstly, in a free economy, economic resources are allocated by agreement, peacefully. I buy a pound of sausages from the butcher, he sells them to me. We both benefit from the transaction but we are not in competition and conflict. This is not to say that conflict and competition of a destructive kind do not occur, due to fallen human nature, in a market economy, but the process of mutual contracting substantially limits the damage caused by the pursuit of unrestrained selfishness. It is an extraordinary thing that a business can only prosper by co-operation with others and by serving others. It really should be a cause of some reflection.
A socialist system, on the other hand, involves allocating a fixed set of resources in a system that is necessarily beset by conflict. Whether it is the fight for the fixed number of places at state schools or the inter-generational conflicts that are being acted out on the streets of Greece, bargaining and political positioning are the very mechanisms by which governments come to resource allocation decisions.
Allocation of resources by government planning may be tolerably peaceful in a society with a very high degree of consensus. But we no longer live, if we ever did, in a society which has Christian values that are sufficiently widely shared for the democratic system to be effective in allocating economic resources without conflict.
Markets generally harness self interest – a motive that is completely different from that of selfishness with which the term is often conflated – in a way which genuinely promotes the common good. In diligently pursuing my own objectives, I can only generally succeed if I help others achieve theirs. The brewer earns nothing from producing beer unless people want to consume it. We should therefore welcome the free economy and empathise with it because, with business at its heart, it allows human beings to meet their own needs whilst, at the same time, serving the needs of others. As Pope John Paul II put it, (slide) “The social order will be all the more stable, the more it takes this fact into account and does not place in opposition personal interest and the interests of society as a whole, but rather seeks ways to bring them into fruitful harmony.” In other words the common good – the conditions for human flourishing for all – are quite compatible with the pursuit of benign self interest within a market economy. This is another insight from the late scholastics of Salamanca.
Now, it is, of course, possible for self interest to become disordered – or bent – and turned into selfishness. In the business economy the pursuit of self can do much damage. But the damage is more limited than if the selfish take their place in government and use powers of coercion to achieve their objectives in a centrally planned economy. I would rather a selfish, greedy person worked in a manufacturing or service business than as Finance Minister of an under-developed country or as chief of the secret police. Ultimately, a business must be mindful of the “other” it seeks to serve or it will go out of business.
Now, there is a temptation to think that the market economy needs to be tamed, regulated and controlled for the sake of the common good. It is dangerous, though, to assume that a modern state should through discretionary powers of taxation and regulation – and we should remember that, for example, the state will spend more than the citizen in most EU states next year – direct the market economy towards politicians’ own interpretation of the common good. The market has many self-regulating institutions mechanisms which government intervention has frequently undermined. Once a general regulatory role is given to government, restraining it becomes very difficult – governments like to regulate the market, but who regulates the government? A government is disciplined only by a quinquennial election. My baker is disciplined three times a week by my visits – or otherwise – to his shop.
Government intervention is simply the wrong tool to deal with a problem of a lack of virtue: remoralisation and evangelisation is the correct tool. I have always been genuinely puzzled why so many clergy put so much trust in government and so little trust in evangelisation to make society a better place. If we see a lack of virtue in markets, we cannot assume that this will be tamed by government and that those in government and regulatory bureaus will exhibit the virtues the rest of society lacks.
There is a branch of economics here that is very important called public choice economics. Those – including Christians – like to criticise the concept of self interest at work in markets. But, public choice economics suggests that we cannot assume that people switch off the self-interest switch when they are bureaucrats or political representatives. For this reason, regulatory bureaus tend to expand and acquire more powers. Those who enjoy exercising such powers are attracted to work in such institutions. The middle way is, then, inherently unstable. This is not a pessimistic view of human nature. It is just pointing out that we criticise the concept of self interest in markets then we cannot assume the concept away when government is responsible for the allocation of economic resources. Just look at the budget situation of the US, Japan and almost every EU country. They are all, through the democratic process, piling burdens on future generations in order to finance today’s consumption encouraged by the self interest of voters and politicians.
Interestingly, also, economists increasingly understand the implications of the limitations of human knowledge for political and economic policymaking, and for institutional design. The argument is really quite straightforward. Humans lack the knowledge to centrally plan the economy and achieve outcomes that ensure that goods and services are produced that meet needs and demands. The collapse of the communist economies was, of course, the great manifestation of that but it applies on a smaller scale too. This particular critique should resonate with Christians who should surely be aware of the limitations of the human mind and human planning to try to improve and perfect society. And this is where the problem of unintended consequences that I mentioned at the beginning comes in. Frank Field could address you for hours about the unintended consequences of the welfare system in the UK in terms of destroying families and work incentives. In short, an imperfect human institution – the state – cannot bring to perfection another imperfect human institution – the market.
But, a free economy goes beyond a free market. Indeed, some research suggests that our societies look materialistic not because we have transferred economic power from the government to the market – something which has not, in fact, happened – but because we have transferred economic activity from within the family and civil society (where we provide a service out of love and reciprocity) and into government, and to some extent, the market, where everything has to be paid for.
Furthermore, the free economy has been made to look more like a crude process of materialistic getting and spending as the state has taken primary responsibility for less conspicuous and more wholesome goods and services such as health, education, arts and culture, social insurance, pensions and the regulation of financial markets – all of which were mainly provided, a couple of generations ago, by a mixture of profit-seeking companies, mutual associations, foundations, charities, professions and community associations. The free economy can be a richer and deeper institution than it is currently, and the opportunities for mutuality and solidarity could be much more profound, enriching and effective.
Exploring this further, there are several potential areas where I believe that a renewal of understanding of Catholic social teaching, and its intrinsic compatibility with an economic and social order in which families are at the centre of decision making can make a valuable contribution to political debate. This contribution is based, unsurprisingly on the application of the principles of solidarity and subsidiarity. That renewal, I should add, has begun.
The Church, and certainly many commentators, often talk as if these two concepts are held in tension. Solidarity, it is argued, demands government action to help the poor, the homeless, the sick and so on, whereas the idea of subsidiarity provides a warning to politicians to use the lowest possible layer of government to implement policy and to leave decisions with the family if possible. This is an extreme over-simplification.
When the popes have talked about solidarity and the “preferential option for the poor” they have generally been referring to it in the context of charity – love and service in providing for one’s neighbour without expecting anything in return. This is true from the early uses of the phrase by Pope Paul VI to Pope Benedict’s 2009 World Peace Day Message in which he said (slide) “it is timely to recall in particular the ‘preferential love for the poor’ in the light of the primacy of charity, which is attested throughout Christian tradition, beginning with that of the early Church”.
Indeed, it is a fundamental error to conflate the role of the political system in seeking to help the poor through coercive redistribution with that of people acting spontaneously out of charity. The state should create a just order which promotes the common good. The state may intervene, as a last resort, to try to assist the poor. But, the virtue of solidarity, represented by love and works of charity, arises in the first place from the individual, the family and spontaneously from the community. The political order should not be the main vehicle for the practice of solidarity as it has become in the West. The state, is the last resort because it can only achieve its objectives using coercion and because it is so remote from the needs it is trying to meet – one of the messages of Deus Caritas Est.
As Christians, we need to put the state back in its place. We should make clear the need to give families, voluntary institutions and civil society room to breathe and fulfil their legitimate functions. After all, the first and biggest provider of welfare is the family. The working wife provides for the unemployed husband. Husband and wife provide for the needs of their children. Children will look after their parents and so on. Yet, over a 20 year period at least, the state has acted decisively to undermine the family as a provider of welfare.
Why does the state need putting back in its place? The reason is because of our understanding of the term subsidiarity. The state exists to help individuals, families, the community and civil associations achieve their legitimate objectives. If it does more than this our dignity and freedom in the economic sphere, which natural law demands we are allowed to exercise, is undermined. Indeed, on occasions (perhaps on increasing occasions in the UK) the government can compel us to do things that we, as Catholics, believe to be against God’s will: especially in the fields of healthcare and education.
Subsidiarity means “to help” and from a proper understanding of subsidiarity many direct policy implications follow. I will mention just one – education – where finally the penny is dropping in the Catholic Church in England and Wales. We could have interesting discussions about the environment too, as another issue where similar considerations apply.
With regard to education, we need to clearly articulate the fact that the state exists to provide the framework within which parents, including Catholic parents, can obtain education for their children of the sort that parents desire. The state exists to help families obtain an education for their children. No more. That is what the principle of susidiarity demands. We are increasingly finding that this relationship is being reversed – though the rot set in with the immediate post-war settlement. Catholic schools are becoming agents of the government providing a service of educating children on behalf of the government – albeit in a more or less Catholic context. Indeed, it is interesting that the implicit – and sometimes explicit – message of papal Catholic social teaching in this field is that the state should provide the same support to parents to have their children educated in a private school as is provided in state schools. In others words, the parent and the family should be at the centre of decision making and the state merely provides financial assistance to those families who need it. Such a system – financing parents to obtain education and not controlling and financing schools – would set Catholic parents and schools free: again as is demanded by natural law. It would also, I suspect, lead to the creation of many more Catholic schools that would provide more alternatives for parents that better suited the varied needs, character and aptitude of their children.
In concluding, let me stress that, as the Catechism makes clear, quoting from Centesimus annus, the market economy must be circumscribed in a framework of law so that the market is the servant of human freedom. Where that framework should begin and end is not something determined directly by Catholic social teaching. But, it must protect property – something which is demanded by natural law and which is the basis of a free economy. Throughout the last 200 years, Catholic social teaching has responded positively to the claims for workers rights and condemned certain manifestations of the market economy. Precisely where the relative roles of the state, the market, moral restraint and civil society begin and end is certainly a matter for prudential judgement and is historically contingent. For some Christian economists, the current financial crisis is a failure of the market economy. For others, it is a failure of over-regulated financial institutions, government monetary policy and the inevitable result of governments – especially in the US – underwriting the building up of risks in the financial system. Each view will probably solicit a different policy response consistent with Catholic social teaching.
In summary, my message is this. We need, at least, to empathise with the free economy. All too often as Christians we see certain social objectives that we would like to see fulfilled: the elimination of poverty, education and housing for all, good health services and so on. As a result we call upon the one institution (government) that we know can pass laws that we believe can help us achieve these objectives directly. We should resist the temptation to think in this way because when the state acts it undermines the autonomy of individuals, families, businesses, charities, cooperatives, mutuals and professional and civil associations to act separately and in solidarity to meet the varied needs of families and the joint needs of the community in their own ways. We also frequently find that the result of government action is often precisely the opposite of that intended. If we do not like what we see in a market economy then our response should be to promote virtue, not big government.
We should empathise with the market economy not just because the alternative has proven so disappointing but, because its inherent virtues chime with God-given human nature. The fact that a market economy involves allocating economic resources peacefully, by agreement, is a tremendous thing; the fact that it allows people to use their creativity in the economic sphere for the own benefit but also requires them to serve others in the process is something to be celebrated. The institutional variety in terms of the different types of business and employment relationships – and the variety of goods and services – that we see in a market economy in a small way mirror the uniqueness of each individual whilst the charitable and reciprocal relationships we develop in the non-market part of the free economy reflect the social obligations that we have as a result of being unique members of the same human family.
It is with good reason that the Compendium of Catholic social doctrine states that government intervention in the economic sphere must be a last resort and only continue as long as the special circumstances that require it continue. That is a strong statement and we should take note.
Now it is time to argue. It has been said about Bartalome de Las Casas that in his writing “there was a clear excess of superlatives owing to the fact that [he] thinks in extremes, even in his grammar; he rarely uses one noun when two or three will serve the same task.” He would have pulled no punches so let us now engage in dispute.
The current debate about bankers’ bonuses is often seen as one of fairness pitted against the greed of those nasty capitalists,.
To me, bankers are lawfully working within the system – one that is rotten to the core. The banking system is the greatest of all examples of State corporate capitalism. We have a central bank that is State owned, we have a legal tender law that prevents competition in the provision of the production of money, and we have private sectors banks which are licensed by the State to be its agent when it wants to monetise its very own debts and create inflation at the expense of its citizens: people who have been prudent and thrifty as well as those on fixed income.
The State has one important central intention: to hide its prolific over spending. We have private sector banks that have legal privilege granted to them so they can use their depositors’ money to lend out many times over to entrepreneurs. They are the only type of business in the whole country permitted do this. All other commercial enterprises at all points in time need to keep their current creditors whole, otherwise they are insolvent. There is no requirement at all in this country for any bank to keep even one penny in reserves against their depositors’ funds. In fact, it has been a stated fact of law since 1811 in Carr V Carr that “his” deposited funds are not his, but are in fact the banks’.
This fractional reserve banking system we have can only work with a lender of last resort i.e. the State owned central bank with legal tender laws. This means that in partnership with the State, the State can monetise its debts (at the expense of you and me) and the banks can keep as little reserves as they can get away with to make a return on capital that you and I in the real capitalist private sector could never do. This encourages risk. Indeed with the banks now able to borrow at the taxpayers’ expense via the discount window (heavily subsidised short term central bank funding) and know there is a guarantee of a bail out should their gambles go wrong makes the state and the bankers two equal partners in a very unjust process.
The resulting situation is what I call ‘corporate capitalism’ (thoroughly amoral) as opposed to ‘capitalism’, which is totally moral. This needs some explaining, as I suspect worthy people are shooting arrows at the wrong target.
We know that the free market capitalist system is without doubt the most efficient creator and allocator of resources. Adam Smith taught us that “It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest” in his Wealth of Nations. Self interest or the profit motive drives man to create and to provide all the multiplicity of goods and services we have enjoyed and will enjoy.
Mises in his famous book Socialism, showed us that if Society was run by planners, the price system which allows resources to flow to their most desired uses would not function. Indeed it would impoverish anyone nation that tried it. If, say. the planner could not correctly witness all the competing bids and resource allocations for metals that were capable of being used in the construction of railroad tracks (that involves many companies competing for scarce resources) he would never know which metal would be the most cost effective to build his railroad. No one planner would be able to economically calculate, or indeed, no army of planners would be able to calculate and allocate all the resources of Society in the socialist economy better than the many millions of participants in the economy allocating resources via the price mechanism. The experiment in the Soviet bloc with socialism impoverished at least three generations and lead to wide scale death and a general shortage of life, and misery.
Hayek, in his very famous essay “The Use of Knowledge in Society” added to the critique of Mises by pointing out that absenting the price system would mean that the central planning officials would need to absorb the entire knowledge of all the people in society to effectively plan their needs. This was absurd and impossible.
All State planned schemes, from the provision of money to the provision of health and education – even in our cosy mixed economy – could be done better by an unhampered market. We are thus weary of all bloated government departments and officials who say they can do something better for us – they can’t.
The efficiency case for an unhampered market, or free market capitalism is clear and unchallengeable. The subjective actions of freely consenting adults in a capitalist system produce the most amount of goods in the most efficient way. But is there an objectively moral case for the capitalist system? I attempt to answer it in the remaining part of this Insight article.
First Principles: Secular Argument
I Argue
One thing that distinguishes human beings from all other life forms is our ability to communicate with each other via talking. Only human beings can make a proposition. The question of what is just or unjust only arises because I can debate or argue this point with another person. To be able to argue my position I must be in control of my physical and mental self. I must own myself in order to be to be a human being. I have the total right to use all my physical and mental faculties to participate in life, otherwise I cannot even exist as a human being expressing an opinion. I do not know many people who would argue with this. If I did not own my own faculties I could not participate in life except under the command of who owned me. This also implies that just so much as I own myself, I do not own anyone else. It also follows that if I do something that violates another human being without their consent I violate their right to express their very humanness.
Thus, I deduce that by my very being , I own myself , I own my own property as me, I have a right not to be interfered with so long as I do not interfere with anyone else. It clearly follows that if I were to interfere with someone else’s property, they would not own it. This would deprive them of their own humanity, I suggest. This is a deduction from the axiom that to exist I need to argue. I come to this conclusion via the Haberrmasian axiom of interpersonal argument that has been so cleverly adapted by Hans Herman Hoppe in his book The Economics and Ethics of Private Property.
To argue against this you explicitly acknowledge control of your faculties, at the very least. Following Kant’s Golden Rule that a norm should be universal in its applicability should it be objectively valid, this proposition surely fulfils this requirement to be a totally objective axiomatic principle.
All ethical propositions, such as socialism, that say that you owe a duty to the State to provide for others, are violations of the very distinguishing thing that makes you a human being and not a rock or a colony of ants. To advocate any form or socialism, be it of the democratic variety, the communist variety, or indeed the mixed economy is to violate your very essence of being a human.
John Locke in his “Two Treatises of Government” spells out that property or, if you like all resources exist prior to any government. Man mixes his labour with what he finds and it is by right his. Government cannot ‘dispose of the estates of the subjects arbitrarily’. Locke left us with a conundrum called “Locke’s proviso.” This is where if a man mixes his labour to own something that was not owned before; he must always leave a “sufficient” amount for other human beings.
Jesus Huerta de Soto, one of the greatest living polymath Austrian School teachers in his essay “The Ethics of Capitalism” , shows us how possibly the other living giant of the Austrian School, Israel Kirzner in “Discovery, Capitalism, and Distributive Justice” has solved this proviso of Locke. And allows us to build the objective moral ethic of capitalism.
Socialist, social democrats and a large body of modern day liberals and conservatives have a distributive conception of justice that is about a top down approach of redistribution of scarce resources from those who do have to those who that have less, or nothing, or whose lobby groups has succeeded in extracting something from those that have. Kirzner shows us how as all human being are creative actor: they are always engaging in entrepreneurial activity to generate new goods and services. All human beings are alert to opportunity, some to a greater degree than others. The fruits of this alertness arises via their actions. This is universally so. To not act would not create these things. So he proposes an axiom that all human beings have a natural right to the fruits of their own entrepreneurial creativity. As these things are created out of nothing, it implies that the acting person has an undoubted right to the quiet and peaceful enjoyment of the fruits of his or her labour. If it did not exist before, it cannot be a negative to anyone else. So Locke’s proviso is overcome by the understanding of society as dynamic and spontaneous constantly evolving process with alert actors constantly creating new goods and services that they must have an unquestionable right to own.
De Soto coins the term ‘Dynamic Efficiency’ to describe this process. He also points out that the free market capitalist system – that we know is the most efficient system – is also the most just and in fact, these two concepts are indeed two sides of the same one coin. Any form of intervention is immoral as it impedes the creative capacity of individuals to express their creativity and create all the wide range of goods and services we have. It should be pointed out that top down provision of health, education, transport, industry etc is inefficient and hence unjust as it suppresses the creative activity of human beings. Absent the profit motive and you will get sub optimal results.
Do Soto points out that the last Pope, Pope John Paul II in his Centesimus Annus, which built on the earlier work of the Rerum Novarum of Pope Leo XIII, established the universal moral capitalist ethic by acknowledging the natural right (God given) to express your very creativity unhindered so long and you hinder no one else.
First Principle: Theological – God Endowed Rights
I Exist
Writing about the morality of capitalism in glowing positive terms as I have done above and setting it in the backdrop of universally applicable objective axioms is not as unfashionable as talking to any thinking person about God, but only just! Such is the secular society we live in; you are considered to be an ill informed mystic should you engage in “god bothering.” The See of Peter would naturally see this differently and I am very grateful for De Soto to direct me to the pro capitalist teachings of the Catholic Church.
Are the above self evident axioms that are universally applicable in all times and in all places to everybody there because we are human or are they there because they are God endowed?
I can ague both, but I favour self evident God endowed over self evident secular, although the latter can stand on its own legs. Why?
I wrote an article about the proof God three years ago for LewRockwell.com. In short, I take the Aristotelian inspired position that as I exist I know that other physical things exist. I know that each and every one of these physical things must have been caused by another physical thing. I know that nothing is infinite. If it was, I would not exist as for it to be infinite, it would occupy all time and space and I would not exist. As I exist, I know this cannot be the case. I know there is a beginning to the universe and that there are physical boundaries to the universe, therefore I know there cannot be an infinite series of physical causes and effects as there would be no boundary and no beginning. Therefore what caused the first physical thing must indeed be immaterial if it cannot be a physical cause. This immaterial thing is what I label as ‘God’. So I conclude God does exist and the only act I can attribute to God by a priori reasoning is that God created everything. As I like to exist I am very grateful for this and can only conclude that God has good intentions. If I do not like to exist, I can choose not to and commit suicide. God is therefore good for me and objectively good for all human beings. As God has created everything, he has endowed us with the ability to reason and engage in the formation of reasoned propositions, the latter which is undoubtedly a unique attribute to mankind the former quite possible unique to mankind, sets the foundation for the derivation of the rights of man and the very ethics of capitalism.
I founded the Cobden Centre inspired by the writing of F A Hayek, particularly his reference in “Denationalization of Money: the Argument Refined” (IEA, 1976) from which the following quote is taken.
Free Money Movement
What we now need is a Free Money Movement comparable to the Free Trade Movement of the 19th century, demonstrating not merely the harm caused by acute inflation, which could justifiably be argued to be avoidable even with present institutions, but the deeper effects of producing periods of stagnation that are indeed inherent in the present monetary arrangements.
Now of course that Free Trade Movement was the movement set up by the businessman and radical social reforming liberal, Richard Cobden. Hayek knew that the original founders of that movement attacked the import tariffs or “Corn Laws” that harmed ordinary people. The Corn Laws forced the price of basic food stuffs so high that the working man was almost paying what we would pay today on our mortgages.
The legal privilege that this gave landowners to price gouge the masses at the expense of the privileged few was an outrage and the courageous corn law reformers did away with this invidious protection by repealing the Importation Act of 1815 with the Importation Act of 1846.
In Bright, J. and Thorold Rogers, J.E. (eds.) [1870](1908) Speeches on Questions of Public Policy by Richard Cobden, M.P., Vol. 1, London: T. Fisher Unwin, republished as Cobden, R. (1995), London: Routledge/Thoemmes, they cite a quote from a working man who sums up the iniquities of the Corn Laws that Richard Cobden used:
When provisions are high, the people have so much to pay for them that they have little or nothing left to buy clothes with; and when they have little to buy clothes with, there are few clothes sold; and when there are few clothes sold, there are too many to sell, they are very cheap; and when they are very cheap, there cannot be much paid for making them: and that, consequently, the manufacturing working man’s wages are reduced, the mills are shut up, business is ruined, and general distress is spread through the country. But when, as now, the working man has the said 25s. left in his pocket, he buys more clothing with it (ay, and other articles of comfort too), and that increases the demand for them, and the greater the demand…makes them rise in price, and the rising price enables the working man to get higher wages and the masters better profits. This, therefore, is the way I prove that high provisions make lower wages, and cheap provisions make higher wages.
Sir Robert Peel, who was Prime Minster at the time, was very educated in the works of Hume, Ricardo and Smith: he understood the law of comparative advantage. With a massive starving Irish population (the “potato famine”) and pressure from the likes of Cobden at home, Peel powered through the repeal of the laws. In Morley, J. (1905) The Life of Richard Cobden, 12th ed., London: T. Fisher Unwin, 985 p., republished by London: Routledge/Thoemmes (1995), Peel said in his resignation speech after the repeal had been done for the UK:
In reference to our proposing these measures, I have no wish to rob any person of the credit which is justly due to him for them. But I may say that neither the gentlemen sitting on the benches opposite, nor myself, nor the gentlemen sitting round me—I say that neither of us are the parties who are strictly entitled to the merit. There has been a combination of parties, and that combination of parties together with the influence of the Government, has led to the ultimate success of the measures. But, Sir, there is a name which ought to be associated with the success of these measures: it is not the name of the noble Lord, the member for London, neither is it my name. Sir, the name which ought to be, and which will be associated with the success of these measures is the name of a man who, acting, I believe, from pure and disinterested motives, has advocated their cause with untiring energy, and by appeals to reason, expressed by an eloquence, the more to be admired because it was unaffected and unadorned—the name which ought to be and will be associated with the success of these measures is the name of Richard Cobden. Without scruple, Sir, I attribute the success of these measures to him.
The pound Sterling has lost some 99% of its value since the suspension of commodity-backed money post World War I, as successive governments have chosen not to confront their electorates in an honest fashion and say how much all the activities they say they are doing for you to get your vote will cost you. Instead, tax receipts pick up the majority of the costs of government, but there is always a bit of debt they choose to monetize. This means printing it out of nothing or creating it electronically our of nothing, a term which today is now called QE or quantitive easing.
So, instead of a Free Money Movement, I have started what I call the “Honest Money Movement”.
Why do I use the word honest?
Well I simply use it to show that, like the iniquitous Corn Laws that our forefathers sought to destroy as they gave privilege and wealth to one minority party at the expense of the masses, governments can take everyone’s wealth to benefit them and the few who organize this wealth transfer for them, i.e. the Central Bank and its client banks in the private sector who organize bond sales and purchases. They get the new money wealth effect first, just like the aristocratic land owners of old got the excess price of corn at the expense of the masses of working people.
If honest money is demanded, a government can no longer monetize debt it has to live or fall by its tax receipts only. This means when a politician comes to you at election time with a menu saying “we are going to give you X and Y” they will now have to say, “we propose to take £A and £B from you and give £A and £B to Mr X and Mrs Y” and you can then decide the merits of this knowing what you are getting yourself involved with.
Sir Robert Peel plays another role in our story. He was the first Prime Minster to do something about the bad effects of private sector bankers issuing notes purporting to convert into gold on demand. The trouble being, just as the landed aristocrats kept corn high at the expense of the wealth of the people, so the goldsmiths issued promises to pay on demand on bits of paper that functioned as money, over the actual amount of gold in their safe keeping. This criminality was stopped by the Bank Charter Act of 1844: the original text can be seen here and the amended text, that is still in force today, can be seen here.
Unfortunately for us, there was no restriction on the creation of demand deposits. A demand deposit is where a bank creates an IOU or a bank deposit out of thin air which functions as money.
You as the deposit holder can make payments to anyone who will accept your transfer of this IOU to them. Whenever you write a cheque it is drawn on a bank deposit, whenever you make an electronic payment, you make it from a bank deposit. In Peel’s day, there were over 20 bits of paper, called promissory notes, issued by the goldsmiths of the day, to every unit of gold. When people tried to redeem in gold, there was a “panic” and bust followed the boom.
The rapid creation of bank demand deposits since then has had the same effect. I seek to encourage an amendment to the Bank Charter Act to include deposits and finish off the job that Peel so courageously started. This would stop credit-fuelled boom and bust. All booms and busts, even the South Sea Bubble and the Tulip Mania, can be traced back to credit-fuelled binges that have been created by governments. Remove this power from the governments and their proxies, the bankers, and we can have honest money, peaceful enjoyment of the fruits of our labours and the enrichment of only those who earn it.
A starting point to advance this honest money movement is our banking reform proposal is available here. I hope you will help push for reform and end dishonest money and dishonest government.
More information
Toby’s interview with Brian Micklethwait explores Toby’s philosophy in more detail: it can be found here.
In The Causes of the Economic Crisis, Mises forecasts and explains the breakdown of the German mark and the market crash of 1929: buy here or read online here (PDF).
