The (financial) world is currently long in questions but short in answers. We believe that gold is still one of the few right answers in times of chronic uncertainty.
In the preface to his classic work “The Theory of Money and Credit”, Ludwig von Mises says: “Nevertheless, the problem of money has remained one of the darkest chapters in economics to this day”. Unfortunately one has to admit the nothing much has changed. In my reports and in the following brief introduction I would therefore like to explain how and why money developed.
Carl Menger, the founder of the Austrian School of Economics, tried to find satisfying explanations for observable phenomena of human (inter)action. Menger assumed the subjective perspective (subjectivism) of the acting person in order to construct the economy in its entirety emanating from the human subject. For Carl Menger, human action is the source of insight. Friedrich Hayek is of the opinion that probably every meaningful insight into economic theory has just taken subjectivism a step further.
The Austrians owe the realisation that money is a good to subjectivism. For investors, this may well be the most important lesson the Austrian School has taught them. In our previous Gold Reports we already discussed at length how the most marketable good gradually turned into money in order for indirect barter trade to work. Ludwig von Mises pointed out that over the millennia gold had turned out to be the most suitable good to ensure the functioning of indirect barter trade. This also explains why central banks around the world still hold gold instead of copper or nickel. Gold is therefore unlike any other commodity. Investors who have realised this also understand why gold is gaining in importance on the free market in spite of attempts to the contrary.
The need for a stable means of exchange is as old as mankind. Cigarettes, seashells, salt, goats, dried fish, or paper all fulfilled that role at some point. Their scarceness in relation to annual production made them bad items of value storage; most commodities come with an annual flow that outweighs the stock by a long shot. Therefore in the long run only gold and silver prevailed.
The regression theorem that Ludwig von Mises postulated in “The Theory of Money and Credit” is a pivotal piece when it comes to our understanding of the monetary character of gold. It says that the expectation with regard the future purchasing power of money depends crucially on the knowledge about today’s purchasing power of money. Today’s evaluation of purchasing power in turn is derived from yesterday’s purchasing power. If we continue this regression, we find that at the beginning of the process there has to be a good that was generally needed and had an industrial use. This means that money has emerged from a tangible good. This also includes the demand for jewellery and thus gold. According to Mises only those goods that have a generally accepted utility value can turn into generally accepted, natural money. Gold and silver were already used as jewellery before they assumed their monetary functions. According to Mises, the past experience is the decisive factor for the future trust in monetary stability.
The trust in the stability and the future purchasing power is essential for the value measurement of money. According to the regression theorem people only trust in money as long as it offers a certain degree of safety with regard to the future money supply and thus to the future purchasing power. From our point of view, the high stock-to-flow ratio seems to play an important role in this context. In the following report we want to discuss this central and unique, and hitherto quite disregarded, feature of gold.
I follow Steve Baker’s speeches in Hansard with interest, and there have been many good ones, but his recent discourse on the IMF stands apart. It was made in the debate of the Draft International Monetary Fund (Increase in Subscription) Order 2011 by the “Second Delegated Legislation Committee”.
The unexcitingly-named proposal before this obscure-sounding committee would commit an additional £10 billion of British taxpayers’ money to the IMF.
11.39 am – Steve Baker
…
I begin by welcoming the Minister’s resolve and composure in what are clearly historic and contentious circumstances. We have seen today that there is broad agreement across the Committee that what matters is human prosperity, and we are all deeply worried about our constituents. I am going to make three points. First, I do not believe that we have this money and that we cannot afford the liability. I do not think that my constituents will understand why they should pick up the liability. It seems to me that one way or another, this country will end up borrowing in order to lend to fund present consumption, and funding present consumption through borrowing is simply not a route to prosperity. I wish I felt that it was not necessary to expand on that point, but it seems these days that we forget. If we consume on credit, we are in fact making ourselves poorer.
I find the notion of getting the money back quite worrying. It seems to me that we will borrow some of this money, at least, from commercial banks, inevitably monetising the debt and debasing the currency further after 40 years of continuous debasement. That will involve inflation and further distortions in the structure of the economy. In short, this measure would simply kick the can down the road. We might argue that that is the job of the IMF these days, but the Greek people are already rioting and we have to ask ourselves whether they would be any more sympathetic to such austerity measures simply because they were brought forward by the IMF. I question the action itself.
Secondly, the IMF was created as part of the Bretton Woods system of currencies. We tend to talk as though our current monetary arrangements were a fixed point and had always been the same, but the present monetary orthodoxy has evolved over the years and centuries. Bretton Woods was constructed after the catastrophe of the second world war; the dollar was redeemable in gold, and all other currencies were pegged to the dollar. The job of the IMF was to stabilise exchange rates by bridging temporary gaps in nations’ balance of payments, but the IMF now seems to serve the purpose of ensuring the repayment of reckless financial institutions.
Above all, at all stages of its history the IMF has existed to bring financial stability, which I believe it has singularly failed to do. Turning to the monetary system and stability, I encourage Members to google a chart that I can make available, which shows the price of oil-index factor 1945, the origin of Bretton Woods-brought forward to today. It prices oil in dollars and in gold. I do not like to use the G-word, but I feel that since my hon. Friend the Member for Wellingborough has mentioned it already, I can continue. The price of oil has been high and volatile since 1971, but only when priced in dollars. If we price oil in gold, the price has been low and stable ever since the end of the second world war.
I simply make the point that our monetary arrangements are not fixed, that the IMF has not brought stability and that in fact many of our most important commodities are far more susceptible to the effects of our present, inflationary monetary arrangements than is generally considered. I would like to finish my point about the IMF with Hayek’s words. He said:
“monetary policy all over the world has followed the advice of the stabilisers. It is high time that their influence, which has already done harm enough, should be overthrown.”
He wrote that in 1932 in the preface to “Monetary Theory and the Trade Cycle“, which hon. Members can find by googling “prices and production.”
Thirdly, I want to talk about the contemporary mainstream. With great respect to hon. and right hon. Friends, although my right hon. Friend the Member for Wokingham foresaw many aspects of the crisis, the majority of the mainstream did not see this coming. I have sat at lunch with eminent economists who said that nobody saw this coming, to which I simply replied that they should read Huerta de Soto’s “Money, Bank Credit and Economic Cycles“. That book, which was written in 1998, clearly set out that this would happen and why, following in the footsteps of Hayek, Mises and others. The Queen asked why no one saw this coming. If she had asked me, I would have said that it was because economists pay too little attention to time-the simple matter of the importance of time. Production takes time and, in a market, interest rates should arise from people’s time preferences for consumption. In the jargon, the contemporary mainstream lacks an adequate theory of the inter-temporal structure of capital-that is, capital goods, or the means of production.
We are at the end of an extremely long credit expansion. I depart from my right hon. Friend the Member for Wokingham, but that is because I follow that particular theory of capital. Hayek, it is not often known, was a socialist and confesses as much in the preface to Mises’ book, “Socialism“, but he and Mises together worked out the theory of the trade cycle. Mises wrote:
“The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”
That is from “Human Action“, page 572.
At this point came an intervention to delight Cobden Centre readers:
Mr Cash: My hon. Friend’s contribution is very thoughtful; he knows a great deal about such things, in the tradition of Cobden. However, is the real problem one of human nature as well as of economics? People are competing in an environment in which there is no real or comparative advantage because the new world-if I may use that expression-of the Brits has a huge advantage over the others. Good money is being thrown after bad unless the real problem is tackled: cheap credit that is not based on real, tangible economic advantage.
Steve Baker: I absolutely agree with my hon. Friend. He makes an excellent point with which I am in full agreement.
Mr Redwood: Before my hon. Friend sits down, I hope that he will give the Committee the benefit of his advice on the order, because we are not yet quite clear what he would do about the £9.5 billion sub.
Steve’s concluding remarks pull no punches (emphasis mine):
The Government should avoid committing that sum of money; my view is that it will not help. I made a second point about the IMF and our monetary arrangements. If this is not the time of all times to question the fundamental basis of our financial system, I do not know when we ever shall. My third point was that I am afraid that the contemporary mainstream of economics is missing some vital information, which leads it to justify the very measures that we are discussing today. As I explained, as Mises set out, as Hayek followed in his steps and as others have predicted, we risk a final and total catastrophe for our currency system.
To conclude, we are in danger of simply kicking a can down the road and, as my hon. Friend the Member for Clacton said, ladling water into the boat. We are looking at further credit expansion, further monetisation of debts and further socialisation of risk. Throughout the western world, we are in danger of appearing as King Canute, trying to use politics to hold back the realities of social co-operation, which we usually describe as economics. The IMF is an institutional legacy from a monetary system that failed 40 years ago, and the successor to which is even now failing as well.
I looked at IFRS and how it boosts bank capital, and we found that RBS is possibly overstating its capital by £25 billion. That must meant that RBS at least is far more susceptible to financial shocks than is generally thought. It is my view, because of the weaknesses of IFRS, that all banks are substantially more susceptible to financial shocks than is generally understood. I therefore offer three points. First, the Government should please look at cross-cancellation of debt held by sovereign nations-I refer the Government to work by ESCP Europe and Dr Anthony Evans. Secondly, let us face the reality-not optional-and look at how we restructure outstanding debt. Thirdly, at this time of all times, rather than merely increasing our liability to the IMF, let us seriously rethink the foundations of the international financial system and, in particular, start planning for how to protect the payments system.
The remarkable thing about being an aspiring Rothbardian, is that no matter how much Rothbard you read, the next virgin Rothbard book up on your reading list is always a superb surprise.
The twists and the turns on the route are remarkable; though they are almost always consistently within the same Rothbardian memory palace and universe of thought.
As a searcher for truth in a world of lying politicians, bureaucrats, and technocrats, many of us at first pursue an initial tentative pathway through the Dead Marshes of state propaganda, state education, and other self-justifying political lies, via the guiding ministrations of Hazlitt, Rand, Heinlein, Hayek, and Mises. Eventually, however, the inevitable high pass of Rothbard is reached; it can no longer be put off, or deviated from, despite what the Cato Institute says. But what to read first when faced by that mountainous bibliography? The Bow-Tied and Bespectacled One looks down upon you from heaven and sniggers. ‘Be my guest,’ he says. ‘Pick one, while I eat a ham sandwich with Michaelangelo.’
Obviously, if you’ve read Human Action, you have to go to its ‘sequel’, Man, Economy, and State. Though that seems a dauntingly mighty effort, particularly when the book arrives on the delivery truck, usually man-handled to your door by at least two burly delivery van drivers, who puff and pant their way up your drive, with their insignia cards being sucked into the gravitational mass of this immense Magnum Opus.
At this point the aspiring Austrian may be temporarily satiated, and thus turn elsewhere for a little variety. Hoppe springs to mind, of course, and then Mises is revisited, particularly Socialism, Liberalism, Bureaucracy, Omnipotent Government, and The Anti-Capitalistic Mentality, this final one being a delightfully light snapshot of our modern socialistic world, in which music industry stars can go on MTV and speak such inane unchallenged drivel as, ‘I hate capitalism, but I love spending money.’
Despite the remarkable freshness of Mises, you soon hunger for more of the Master’s Apprentice, Rothbard.
So, now it’s the magnificent and monumental Conceived in Liberty, where you have to unlearn and revise much that you had formerly taken for granted in British and American history, seen through the hugely-detailed chromatic prism of individual motivation and perseverance in the face of enormous historical odds, which after 4,000 years finally created a society which threw off the Old Order of pharaohs, kings, warriors, and priests, much to the benefit of Europe, which had to adapt quickly to avoid losing all of its tax-paying population to the wonderful liberty of the New World.
(Oh what a shame it has proved that the Jeffersonian dream of America has become the Hamiltonian nightmare of the United States. For more on that, you need DiLorenzo and Woods, but I digress.)
Many who have followed this familiar literary trail from the elegant Manhattan apartment of Mises down to the more urbane Amsterdam Avenue home of Rothbard, past all the gilded creatures of that locale, will know that the next port of call has to be the most distilled Rothbard book of all.
This is the simply incredible Austrian Perspective on the History of Economic Thought, in which much becomes clear that was once hidden, buried, written out of thought, or gleefully atomised in the memory hole by ruling bandit gangs writ large and their priestly hordes of intellectual bodyguards who support these bandits and their parasitic Old Order predations upon the rest of us, in return for a dishonourable pew at the trough.
Perhaps after this colourful detour we’re ready for some more Rothbard? But where to go next? You may think you’re hardcore by now, but you’ve only scratched the first outer layer of that vast tottering pyramid of Rothbardian books, articles, videos, and speeches, which astonishingly sprang from the resolute and presumably much-battered typewriter of just one single man.
Mises.org spoil us for choice, of course, with their innumerable windows through to the soul and collected wisdom of Rothbard, with most of his books freely available to download, and every audio tape and video tape that can be harvested from a chaotic world up there on YouTube and discussed in depth at Mises University.
One feels like Neo in that final lamentable Matrix movie, where our martial arts hero is faced with a billion Agent Smiths; which one do you attack first?
Fortunately, to shorten your quest, I now know the next one you should read; Egalitarianism As a Revolt Against Nature. It was a long time in the finding, but I finally got there.
Where to begin? As Man, Economy, and State is to Human Action, so you might say that Egalitarianism As a Revolt Against Nature is to The Anti-Capitalistic Mentality, though much expanded when compared in size to that tiny work of Mises, with perhaps a little soupçon of Hayek’s Fatal Conceit thrown in for taste.
Although the History of Economic Thought is still hard to beat, and perhaps remains the pinnacle of Rothbard at his finest, I think Egalitarianism has to be right up there challenging for that coveted top spot.
This collection of essays opens in predictable enough fashion:
“For well over a century, the Left has generally been conceded to have morality, justice, and ‘idealism’ on its side; the Conservative opposition to the Left has largely been confined to the ‘impracticality’ of its ideals. A common view, for example, is that socialism is splendid ‘in theory,’ but that it cannot ‘work’ in practical life.”
Pure music to your eyes, of course, as an aspiring Rothbardian. But later in the next chapter, after the usual glorious bubbling stream of sparkling Rothbard, there’s this:
“Or rather, to be more precise, there were from the beginning two different strands within socialism: one was the right-wing, authoritarian strand, from Saint-Simon down, which glorified statism, hierarchy, and collectivism and which was thus a projection of conservatism trying to accept and dominate the new industrial civilization. The other was the left-wing, relatively libertarian strand, exemplified in their different ways by Marx and Bakunin, revolutionary and far more interested in achieving the libertarian goals of liberalism and socialism; but especially the smashing of the state apparatus to achieve the ‘withering away of the State’ and the ‘end of the exploitation of man by man.’”
The relatively libertarian strand? Of Karl Marx?!?
Crazy.
Well, that’s what the Cato Institute would say too, perhaps, but if you persevere it works. It fits. Like a pearly piece of grit in an oyster shell.
And these pearls just keep being strewn throughout the book, explaining how socialism was the wrong answer to the right question of challenging the Old Order, and how this wrong answer has metastasised into the horrific creatures of IMF austerity and world global government that we see gathering around us today, as vampire squid elites keep foisting their socialist paper fiat nonsense upon us, to try to drag us back a few thousand years to some kind of horrific murderous New World Order (read, Old Order) and a borderless global Romanesque Empire.
Soon we will all realise that one of the important sub-definitions of money, perhaps the most important one of all, is that money should be a store of value, and that therefore printed-from-the-Brow-of-Zeus socialised ‘currencies’ are simply not money, but are more akin to Soviet ration tickets. When that shoe eventually drops, the Old Order may try one last throw of the dice with their IMF SDR gambit or their usual joker card, a global world war.
However, these efforts will also fail, claims Rothbard.
The revolutions of the last few hundred years, particularly the Industrial Revolution, have made the world too complex for the Old Order to rule over in the manner to which it aspires. Yes, it can rule agrarian non-industrialised societies, as it did with the Inca Empire, the Roman Empire, and the Athenian-dominated Delian League — though you’ll notice that none of these once-mighty edifices lasted — however the world’s population will no longer stand for such serfdom and penury, even if it currently tolerates a pelf-extraction rate of forty or fifty percent. The ratchet of liberty has clicked, and there’s no turning back the mass-industrial technological clock, says Rothbard.
Even if we claim to be socialists, and allow the state to continually extract a pelf ‘protection’ tax rate from us of forty percent, or more, we will only tolerate a society in which we can have our iPhones, iPads, and MacBooks, along with foreign travel, exotic food, windsurfing opportunities, the potential of an exciting career, and most of all some fun in our lives, rather than the endless unendurable austerity, tedium, and deference, of terminal servitude to a ruling criminal oligopoly and its supportive caste of privileged bureaucratic and priestly technocratic tax eaters.
All of what we want as modern people can only be delivered via complex industrial society, tied together with trillions of streams of disparate information held within the minds of billions of individuals. Complex industrial society, and these myriad communication pathways, can only be achieved through freedom and the final elimination of the Old Order, a fate which Rothbard brands as inevitable, in a seemingly deliberate and playful historicist swipe at Marx, the libertarian.
Witness the Soviet Union. The socialists made the terrible still-unacknowledged mistake of using Old Order methods to generate paradoxical freedom from the despised Old Order societal structure; for instance, by replacing the hated Okhrana secret police of the Tsar with the hated NKVD secret police of Stalin.
The world’s socialists were still shocked, nevertheless, when the Berlin Wall came down, despite their ideological brethren having inflicted this mass-murdering criminal regime upon the people of Russia and other countries, with one Soviet agent, Vasili Blokhin, being personally responsible, one bullet at a time, for the murder of of 7,000 Poles in one protracted session, and perhaps tens of thousands of other innocent victims over his career, all of them shot by Blokhin in the back of the neck, for which Stalin awarded this Soviet hero both the Order of the Badge of Honor and the Order of the Red Banner.
At last, despite a cover-up which had lasted many decades, aided and abetted by western governments, the socialist system was eventually seen by one and all to have failed, thus forcing many western socialists into the green socialist movement to escape from having to defend the busted flush of the laughable economic merits of red socialism, which found it impossible to even marry a right shoe together with a left shoe, without first threatening to kill someone.
And let’s not mention the laces. Those were last seen on a train to Murmansk, along with all of those one-ton nails and giant cubes of window glass.
What was best, however, was that this monstrous grey socialist dead-hand construct had been overthrown by ordinary people, as Rothbard had predicted it would be, in a relatively bloodless collapse.
This hated political construct had previously sent tens of millions of these ordinary people to die in its mindless socialist Gulag, a number far outweighing the murderous national socialist, Adolf Hitler. And yet still we see inane music industry stars wearing T-shirts branded with scarlet hammers, stars, and sickles.
The only thing the Soviet Union was perhaps good at was killing ordinary people, exporting Kalashnikovs, and producing vodka; such glory for socialism and the socialists.
However, look at Russia now, even under the former KGB general, Putin? Look what a little freedom did. For example, who would have believed 40 years ago that Max Keiser would now be broadcasting hard money truths from Moscow, while the Chairman of the Federal Reserve would be broadcasting soft money lies from Washington? Or that Russia may itself be contemplating a hard gold rouble, of which we hear constant unsubstantiated whispers, while the west descends into a sea of political paper currency?
Perhaps if Daniel Craig remakes Goldfinger as James Bond, the pivotal scene with Oddjob will be set in the Russian State Depository for Precious Metals and Gems rather than Fort Knox, to complete the monetary inversion, with perhaps a return for Xenia Onatopp instead of Pussy Galore?
And look what a little freedom did for China, which may itself be contemplating a gold or silver yuan, almost in a pastiche of Henry Hazlitt’s novel, Time Will Run Back, a book almost quite literally ahead of its time.
This unwinding of socialism will continue, says Rothbard, until it truly does wither away, to fulfil the misguided dream of Bakunin and Marx.
Naturally enough, Rothbard predicted communism’s fall, in 1974, in the pages of his startling collection of energetic essays, barely contained within Egalitarianism:
“For only liberty, only a free market, can organize and maintain an industrial system, and the more that population expands and explodes, the more necessary is the unfettered working of such an industrial economy. Laissez-faire and the free market become more and more evidently necessary as an industrial system develops; radical deviations cause breakdowns and economic crises. This crisis of statism becomes particularly dramatic and acute in a fully socialist society; and hence the inevitable breakdown of statism has first become strikingly apparent in the countries of the socialist (that is, communist) camp. For socialism confronts its inner contradiction most starkly. Desperately, it tries to fulfill its proclaimed goals of industrial growth, higher standards of living for the masses, and eventual withering away of the State and is increasingly unable to do so with its collectivist means. Hence the inevitable breakdown of socialism.”
Overall, it is Rothbard’s unquenchable optimism which marks him out. Although as pessimistic as the best of us, in the short-run, when discussing Boobus Americanus or Boobus Anglicus, he is absolutely certain of the long-run outcome of our global societal fate, and that is a future of honest money, peace, freedom, prosperity, and the death of the Old Order, much though the tax-eating beneficiaries of that Old Order will kick and scream at the rest of us, on their way down and out, before we make them earn a living rather than continuously feasting upon the rest of us.
In the end, the productive will slough off the unproductive, and the Old Order will die, says Rothbard.
And so it goes on, with essay after glorious essay exploring all forms of egalitarianism and smashing them all with typical twinkling Rothbardian glee.
It is a rip-roaring masterpiece of a book, and one I’m sure Mises himself would have loved.
For all aspiring Rothbardians, it is also an essential weapon in your intellectual armoury and it will be a boost to your morale if you’re struggling to maintain a grip on your sanity in this currently insane world of hilarious Keynesian nincompoops.
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.
Russ Roberts interviewed me on EconTalk about the life, work and continuing relevance of Ludwig von Mises. I just hope I did justice to the great work of Mises and his heroic life, and thank Russ for the opportunity.
“Germany cannot keep paying for bail-outs without going bankrupt itself,” said Professor Wilhelm Hankel, of Frankfurt University. “This is frightening people. You cannot find a bank safe deposit box in Germany because every single one has already been taken and stuffed with gold and silver. It is like an underground Switzerland within our borders. People have terrible memories of 1948 and 1923 when they lost their savings.”
The refrain was picked up this week by German finance minister Wolfgang Schäuble. “We’re not swimming in money, we’re drowning in debts,” he told the Bundestag.
Now, we certainly don’t always agree with Ambrose but there is a certain weary inevitability about the worsening of financial news. Where will all this deficit financing, QE and so on end? See also Is inflation now beyond the Bank’s control? by Jeremy Warner.
One of the greatest contributions of Ludwig von Mises to the modern world was his sweeping demolition of the intellectual case for Karl Marx’s scientific socialism, which Mises first proposed in 1919, wrote up in 1920, and expanded in 1922. My own personal favourite book by Mises is the 1922 expansion, Socialism, which he later extended in 1935, for the first English translation, and subsequent to that too, in 1951. This exploding neutron star of a book forensically examined every extant and extinct form of socialism — from Russian soviet communism to German national socialism — and systematically applied Mises’ core idea that all of these multi-variant forms of socialism are simply incapable of carrying out rational economic calculation.
Without free market prices to determine the best use of scarce resources, it becomes impossible for central planners of all stripes to work out what to do with these scarce resources, to least wasteful effect, without resorting to mere political whim and fancy. This Misesian idea, which stood firm against all of the subsequent feeble socialist attacks upon it, was the primary reason why the Soviet Union eventually collapsed, and why Nazi Germany would have collapsed too, eventually, even if it had succeeded in invading England’s shores and creating SS-GB.
What is surprising, then, is not that the Soviet Union collapsed, but that it took so long to do so. That particular mystery is a long dark story of Gulags, bloody tyranny, and various forms of western support, which can be told in another time and place.
For those, though, who find this idea challenging, that socialism cannot calculate, Professor Joseph T. Salerno recently gave a superb lecture which covers the subject in depth.
At over an hour, this extensive lecture is a large commitment in time. However, if you have ever been a socialist, or you are trying to give socialism up, or you have socialist friends who you feel need a little life-enhancing re-education, then the time spent watching Professor Salerno explaining why socialism will always fail — unless it first manages to turn us all into ants — will prove an excellent investment of your time.
It would also be useful to watch if you are a government-appointed central planner in the Bank of England. You never know, you might then learn why all of your currency manipulation plans are falling about your ears:
The Subjectivist Revolution in Economics Continues
Humans act and they act purposefully: this is the axiom of action proposed by Ludwig von Mises, teacher of Hayek. From this he claimed that the whole of economics could be deduced. As Mises shows, in order to be, we act purposefully. Not being, we would not act, indeed we would not exist. We act upon satisfying our most urgent needs first, then our second most urgent needs, and so on and so forth, ranking our preferences, with the most urgent needs/demands being satisfied first, the least urgent, and the furthest away in time. From this hierarchy we derive the law of demand, the downward sloping demand curve, the law of diminishing marginal utility (see here for a good illustration) and on and on it goes. Lord Lionel Robbins in a masterful 1932 book, The Nature and Significance of Economic Science shows in very clear terms how all the laws of Economics are derived from the a-priori thought process.
To try to refute it, you cannot, as you act purposefully to do so. Just as Pythagoras’s Theorem is implied in the concept of a right angle triangle – and we knew about the concept of the right angle triangle before Pythagoras “discovered” his Theorem – so, too, do the laws of economics flow from the one irrefutable axiom that humans act purposefully. It is a bit like saying Darwin “discovered” the Theory of Evolution, when what he actually did was articulate it and find very plausible data sets to help explain it to the sceptical mind. Evolution was always there.
So What can this Axiom tell us About Entrepreneurship?
When we act, we choose to satisfy our most urgent needs first, and we forego other opportunities which form our subjective costs. Action implies a sacrifice: what opportunity you forgo is your cost, and what you hope to gain is more than your cost: this is your entrepreneurial profit. This entrepreneurial profit does not have to be measured in money; it can be the choice between going to the theatre or staying at home and watching a TV program.
The entrepreneur is someone who is good at generating entrepreneurial profit, not only for himself but in the way he/she can help many more others in achieving and consuming the results of entrepreneurial profit. He is more alert at spotting opportunities that will satisfy people’s most urgent needs in quicker and in better formats, and for this he is rewarded usually with more money for his efforts.
According to Jesus Huerta De Soto in his book called Socialismo Calculo Economico Y Funcion Empresarial” 1992 soon to be published in English by Edward Elgar in Association with the IEA and called: “Socialism, Economic Calculation and Entrepreneurship” 2010, there are six characteristics of the information and knowledge that the entrepreneur captures to use to provide better goods and services to all in society.
Knowledge is Subjective and not Objective and Scientific
I have just watched my local farmer bring in a grass crop frantically in 3 days as he assessed a window of opportunity for him to do so, since rain was coming. He could not send this up to a State planner to make a decision for him – only his local knowledge about this particular time and circumstance, and his informed intuition regarding the weather could lead to this decision. He has crop that he can sell now. A planner in Whitehall would neither have all the information necessary nor respond quickly enough to make this all happen.
Knowledge is Exclusive and Dispersed
In my farmer example, this knowledge about when to bring the crop in is exclusively his and resides in him alone. In the same way, knowledge across the whole economy is broken up into little pockets of subjective knowledge held by millions of different people.
Knowledge is Tacit and it Cannot be Articulated
My farmer’s knowledge is tacit and in him, yet he probably cannot objectively articulate why he is doing it. Michael Oakeshott in “Rationalism in Politics”, 1962, gave us a very good example of a chef who is after all only following a formulaic procedure of putting together a recipe — add X of this to Y of that and cook at 200 degrees for 10 mins. But the instincts and unconscious background knowledge of an uber chef like Gordon Ramsey will allow him to produce outstanding food which I cannot hope to match simply by following the same recipe.
Entrepreneurship is Creative
There is no cost to an entrepreneurial idea, it is created ex novo. Bill Gates, when he created his first operating system, had his vision and his thought process, the idea, and then he got creating. Profits are thus created new and from nothing.
The Creation of New Information
Each creative new act of entrepreneurship creates new information which is used by others to profit them as well. A new software solution developed by the creative minds of Apple alerts all their users to new ways of doing things that benefit them in a quicker, faster and better way.
I recently had a conversation with a potential entrepreneur who has identified an abundant source of farm waste product that could be excellent for fish feed. If his business is developed, farmers will suddenly be made aware that what was once a cost can now be a source of revenue for him. Thus he will adapt his farming processes to now harvest this waste and costly product for profit. The fish farmers will eagerly await this new source of protein and adapt their newer and better buying accordingly.
The Transmission of Information
Although the price system is objective and allows the allocation of resources, the fish farmer does not need to know all the subjective information of the entrepreneur who has developed the new feed out of the farms’ waste, just that he can buy it. Likewise, the farmer does not need to know the detail of how it is going to be made useful to the fish farmer. All this knowledge is subjective and the briefest communication of it happens to facilitate trade.
Entrepreneurship is the foundation of society in that it insures the co-ordination of individuals’ behaviours. Without it, society would not exist.
Competition and Entrepreneurship
There is always a competitive and on-going process of rivalry and discovery as this society-wide coordination process happens. It is limitless and produces progress if left uninterrupted. It is the single most important process which unites society and permits its harmonious advancement.
The Division of Knowledge v the Division of Labour
The division of labour as suggested by Adam Smith shows us how, in a pin factory, if people concentrate on certain tasks and specialise, more production happens. This is an objective measure. Underneath this, and prior to it, is the subjective division of knowledge. In-depth knowledge is held in widely dispersed formats, often tacitly, precluding its articulation across society; thus it is impossible for any one person body or machine or government department to know all of this information. Also, only tiny amounts need to be communicated to make coordination in society possible. So Huerta De Soto introduces a new concept into the body of knowledge concerning economics: the universal division of knowledge that exists as a deduction from the axiom that humans act and takes the subjectivist revolution started by Menger into our very understanding of the division of labour. He also moves man on from being the Robbinsian homo oeconomicus to the homo empresario. Acting man is entrepreneurship.
Once again Huerta De Soto has given some great new insights into economics in the field of economics. He has stood on the shoulders of Adam Smith, Mises, Hayek and Kirzner to great effect to knock the objective division of labour off its pedestal and put in its place the division of knowledge. This is what Einstein did to Newton in physics. Both still have their place, but the latter being of more fundamental importance.
Following the success of our lunchtime event, we’re pleased to announce an evening of Austrian economics at the IEA next Thursday, focusing on the works of Ludwig von Mises:
The credit expansion is built on the sands of banknotes
and deposits. It must collapse. – Ludwig von Mises, 1949
An IEA special event – 4pm, Thursday July 22nd, 2010
2 Lord North Street, Westminster, SW1P 3LB
Many free marketers are familiar with the works of Hayek and Friedman.
But how many have read the original works of Ludwig von Mises? Or know of his relevance today?
Mises laid the foundations on which Hayek built – and he made crucial and timeless contributions to economic thinking.
His theories foretold how mismanaged monetary policy by nationalised central banks would lead to booms, busts and crashes.
This special IEA event – featuring three stimulating sessions and a distinguished gathering of authors and thinkers – will demonstrate how Mises’ work should be at the very heart of today’s practical policy thinking.
And all attendees will receive a free copy of the IEA’s acclaimed Ludwig von Mises – a primer, by Dr. Eamonn Butler.
Programme
Session One 4:00pm-4:45pm
The life, work, importance and influence of Ludwig von Mises
Chairman: Prof Philip Booth, Institute of Economic Affairs
Speaker: Dr Eamonn Butler, Adam Smith Institute
Session Two 4:45pm-5:40pm
NHS reform: how the new government can learn from Ludwig von Mises
Chairman: Toby Baxendale, The Cobden Centre
Speaker: Dr John Meadowcroft, King’s College London
Commentator: Steve Baker, Conservative MP for Wycombe
Tea/coffee 5:40pm-6:00pm
Session Three 6:00pm-7:00pm
Booms, busts and crashes: what Austrian economics tells us about the crash of 2008
Chairman: James Tyler, Tyler Capital
Speaker: Dr Anthony Evans, ESCP Europe Business School
Commentator: Allister Heath, Editor, City A.M.
Each session will have ample time for discussion.
Places are sure to be in demand, so If you’d like to attend please RSVP by email now to IEA Reception or call: 020 7799 8900.
Ludwig von Mises was one of the greatest economists and political scientists of the twentieth century. He revolutionised the understanding of money, inflation and recessions; comprehensively refuted the arguments for socialism; and provided a devastating critique of the methodologies of mainstream economics. His contributions to the Austrian School laid the intellectual groundwork for thinkers such as F. A. Hayek, Murray Rothbard and Israel Kirzner.
In Ludwig von Mises – A Primer, Eamonn Butler provides a comprehensive yet accessible overview of Mises’ outstanding achievements. At a time of economic crisis, this monograph makes it clear that Mises’ work is highly relevant today. Indeed, while mainstream economics has been found wanting, the latest recession appears to have been entirely consistent with his analysis. Furthermore, the poor performance of state health and education services can be explained by Mises’ Austrian theories. Nevertheless, Mises remains neglected by the economics profession, policymakers and academics. This readable primer explains why his work should be at the core of economic thinking.
With a foreword by yours truly, of course I highly recommend it. Buy or download the book here.
