Thursday, September 30, 2010

Not Cadillac, CONDILLAC

Condillac  (1715 - 1780)
On this date in 1715 (or 1714 depending on your source), the french philosopher and economic liberal Étienne Bonnot, Abbé de Condillac was born. On the issue of property he was a Lockean and is credited by Guido Hulsmann with writing the first treatise on political economy based on subjective value. That treatise is Commerce and Government and appeared the same year as Adam Smith's Wealth of Nations. Regarding the importance of Condillac's influence on economics, Hulsmann has this to say in his biography of Mises:
The subjectivist theory of value survived only in this diffused form with one important exception: Etienne de Condillac’s great treatise, Commerce and Government. Published in the same year as Smith’s Wealth of Nations (1776), Condillac’s treatment gave the first full axiomatic presentation of political economy on the basis of the subjectivist theory of value. But the impact of his work was minimal because French economists rejected it. Condillac was already a famous philosopher when he published the book, and did not deem it necessary to follow the conventions of the disciples of Quesnay; rather, he presented his thoughts in an independent and original manner—an offense, it turns out, serious enough to prevent the translation of his work into English for more than two hundred years.
Still, Commerce and Government was one of the main sources of inspiration for Menger (who of course read French, among other languages) when he elaborated his economic value theory. Menger pointed out that value can only come into existence once human beings realize that economic goods exist and that each of them has a personal—or, as Menger would say “subjective” —importance. (Hulsmann, Mises, pp. 112-113). 

Hulsmann also notes that Menger quoted Condillac more than any other source besides Adam Smith and, whereas he was sometimes critical of Smith, his references to Condillac are always positive.

Wednesday, September 29, 2010

Ludwig von Mises (1881-1973)

Ludwig von Mises
Today is the 129th anniversary of the birth of Ludwig von Mises. He was the Roy Hobbs of economics--the best there ever was. That is pretty high praise, but there are occasions when high praise is true. Mises should be remembered for his brilliant mind that gave us so many seminal works in the social sciences as well as for his moral courage in the face of tremendous odds.

It was my reading Mises' Human Action that God used to convince me of my calling to pursue a vocation in economics. For my thoughts on the importance of that book for students of economics, I humbly recommend a lecture I delivered at the Mises Institute over a decade ago, "Human Action in the Life of a Student." It was that lecture that proved instrumental in my being asked to write an introductory text that turned out to be Foundations of Economics.

Those who would like a brief introduction to the importance of Mises will benefit from reading Murray Rothbard's The Essential Ludwig von Mises.  The most complete treatment of Mises' life and work is the monumental biography, Mises: The Last Knight of Liberalism by Jorg Guido Hulsmann.

Tuesday, September 28, 2010

More Evidence from Economic History that Fiscal Stimulus Does not Work

Last Monday I briefly discussed what U. S. economic history of the past decade reveals about the effectiveness of Keynesian macroeconomic policy. Like it or not, monetary inflation and government spending have not produced prosperity in the U.S. They have done just the opposite.

Robert Murphy has also written a nice piece on documenting the same thing. Drawing upon empirical work done by the European Central Bank and economists Carmen Reinhart and Kenneth Rogoff, Murphy compares actual historical examples from several different countries against the Keynesian rhetoric of Paul Krugman and Krugman comes out the loser. Contra Krugman, the various historical examples all tell the same story. Fiscal stimulus does not stimulate.

Monday, September 27, 2010

James Grant on John Kenneth Galbraith

James Grant is an author and editor of Grant's Interest Rate Observer and my favorite financial writer. Everything he writes is worth reading. He has good economic sense and a marvelous writing style featuring many elegant turns of phrases. His book Money of the Mind is an outstanding history of credit markets from the Civil War through the 1980s.

In Saturday's Wall Street Journal, Grant has a piece on John Kenneth Galbraith. As he says, Galbraith "avoided technical jargon and wrote witty prose—too bad he got so much wrong." In the accompanying box there is a nice list of economists who also wrote in plain English, but got much right. This list includes Murray Rothbard, Henry Hazlitt, and Benjamin Anderson.

Sunday, September 26, 2010

Leonard Read's "I Pencil"

Leonard Read
Leonard Read was born on this day in 1898. Read, an important figure of the post-war free market/libertarian movement of last century, was founder and president of the Foundation for Economic Education for many years. His most famous work was a rather brief essay entitled "I, Pencil" in which Read explains the division of labor necessary to produce a single solitary pencil. His point is that only in a free market can such activity be coordinated in a way so that all of the different factors from all over the world come together to produce something as common as pencil.

"I, Pencil" was the basis of an important section of Milton and Rose Friedman's Free to Choose that was subsequently turned in to a film series. Here is Friedman using a pencil as "exhibit A" to explain the benefits and operation of the free market price system.

Saturday, September 25, 2010

Easterly on the Failure of Millennium Development Goals and the Benefits of Trade

Ten years ago various world leaders signed the United Nations Millennium Declaration which included eight Millennium Development Goals (MDGs) that were to be achieved before 2015. The goals were targets for raising less developed countries out of poverty.

William Easterly has written a good piece published in the Financial Times explaining that "The millennium development goals tragically misused the world's goodwill to support failed official aid approaches to global poverty and gave virtually no support to proven approaches." This is a pity, because the proven approaches include letting the sources of prosperity do what they do so well.

Economic theory teaches that there are three sources of prosperity: the market division of labor, capital accumulation, and entrepreneurship.The market division of labor facilitates economic expansion because it allows people to specialize in those production activities at which they are relatively most efficient. By specializing in those production projects in which they are the low opportunity cost producer, everyone becomes more productive and therefore society in general is able to produce more goods, allowing people to satisfy more ends. Plugging into the global division of labor is one of the best and quickest way for less developed countries to experience economic expansion.

Of course, to participate in the market division of labor, one must be able to engage in exchange. It only makes sense to specialize in producing a specific good, if it is possible to trade to obtain other goods that you want. Without trade everyone would have to produce everything they want to consume themselves. There could be no specialization or the division of labor. Society would be a lot less productive, and vastly more poor.

In order to exchange, however, it is necessary to have private property. You cannot exchange what you do not own. Therefore if we want to benefit from participating in the division of labor, we must be able to trade and to trade we must have private property. Therefore, the most important thing societies can do to promote economic expansion is to develop and defend the institution of private property.

The importance of private property and any recognition of the importance of private entrepreneurial and capitalist initiative is almost completely absent from the MDGs according to Easterly. Only one target of one goal makes reference to exchange by calling for a nondiscriminatory trading system.

Easterly goes on to note that the more developed nations actively work to hamper free trade in order to benefit specific producers. The United States hinders economic expansion in less developed countries by supporting American sugar farmers and cotton growers. Easterly writes
[T]rade-fuelled growth not only decreases poverty, but also indirectlyhelps all the other MDGs. Yet in the US alone, the violations of the trade goal are legion. US consumers have long paid about twice the world price for sugar because of import quotas protecting about 9,000 domestic sugar producers. The European Union is similarly guilty.

Equally egregious subsidies are handed out to US cotton producers, which flood the world market, depressing export prices. These hit the lowest-cost cotton producer in the global economy, which also happen to be some of the poorest nations on earth: Mali, Burkina Faso and Chad.

One of the most important things we can do to facilitate economic expansion in less developed countries is to put away protectionist measures. Such a move will strike a blow in favor of property rights and benefit domestic consumers and producers in poorer countries as they can participate in the global division of labor.

Friday, September 24, 2010

The Immorality of Government Inflation

My article about the ethical problems of government inflation appears today on Click the link and you'll hear Ritenour say:
If you or I tried to do that we would rightly be prosecuted for criminal activity. That fact that when the state does it is considered "monetary policy" does not make it more legitimate. 
We should get the state out of the monetary system altogether.

Thursday, September 23, 2010

Some Perspective on American Poverty

As predicted three days ago, the announced recent spike in the official poverty rate has already led to vague calls that politicians need to focus on and do more to fix the problem of poverty. It certainly makes sense to think long and hard about which institutions promote prosperity and which hinder it and, hence, make poverty more persistent. At the same time, it is also important that we do not get misled by government statistics into ever more interventionist policies to fix a problem that might be more phantom than real.

When we hear the word 'poor' it is natural to think of images of children who suffer from malnutrition, have little if any shelter, and very few and tattered articles of clothing. In other words, we think of real, dire poverty. As I pointed out a number of years ago in an article I wrote about the minimum wage, it turns out that the official poor in the U.S. are not that destitute. I drew upon the research of the Heritage Foundation's Robert Rector who has documented the material prosperity of our nation's officially poor people. In his most recent study, Rector tells us:
The following are facts about persons defined as "poor" by the Census Bureau, taken from various government reports:
  • Forty-three percent of all poor households actually own their own homes. The average home owned by persons classified as poor by the Census Bureau is a three-bedroom house with one-and-a-half baths, a garage, and a porch or patio.
  • Eighty percent of poor households have air conditioning. By contrast, in 1970, only 36 percent of the entire U.S. population enjoyed air conditioning.
  • Only 6 percent of poor households are overcrowded. More than two-thirds have more than two rooms per person.
  • The average poor American has more living space than the average individual living in Paris, London, Vienna, Athens, and other cities throughout Europe. (These comparisons are to the average citizens in foreign countries, not to those classified as poor.)
  • Nearly three-quarters of poor households own a car; 31 percent own two or more cars.
  • Ninety-seven percent of poor households have a color television; over half own two or more color televisions.
  • Seventy-eight percent have a VCR or DVD player; 62 percent have cable or satellite TV reception.
  • Eighty-nine percent own microwave ovens, more than half have a stereo, and more than a third have an automatic dishwasher.
As a group, America's poor are far from being chronically undernourished. The average consumption of protein, vitamins, and minerals is virtually the same for poor and middle-class children and, in most cases, is well above recommended norms. Poor children actually consume more meat than do higher-income children and have average protein intakes 100 percent above recommended levels. Most poor children today are, in fact, supernourished and grow up to be, on average, one inch taller and 10 pounds heavier than the GIs who stormed the beaches of Normandy in World War II.

We should never minimize the challenges facing those who live in real poverty. However, we should also have an accurate picture of the actual economic condition of the typical person declared poor by the U.S. Census Bureau.

Wednesday, September 22, 2010

What If People Owned Their Own Bank Deposits?

In a provocative piece in the Telegraph, Toby Baxendale, CEO of Seafood Shipping and chairman of the Cobden Centre, explains that "in a Cobden Centre/ICM survey 2,000 people, a staggering 74 per cent of the respondents think that they own the money in their bank account. Only 8 per cent know the correct answer - that the banks owns it." Because the bank effectively owns the money, they can lend it out when they want, which expands credit, stimulating malinvestment and the business cycle. What we need, says Baxendale is not more regulation of the current fractional reserve system, but instead
What is needed is to let people own their own money, with the banks keeping it safe for those that want complete peace of mind. Let the depositor decide if the money should be lent and for what period, until it matures. Remove all political control from banking. And let's have more language of the fiduciary rather than the gambler from bankers. recently posted Murray Rothbard's excellent article-length introduction to the economics of  fractional-reserve banking. You can be read it here.

Tuesday, September 21, 2010

Government Policy Versus Capital Accumulation

As I explain in the final chapter of my book, Foundations of Economics, if we want to increase our standard of living over time, we need to take advantage of the three sources of economic expansion: the division of labor, capital accumulation, and entrepreneurship. All three of these require the social institution of private property, which fosters the division of labor by allowing voluntary exchange. Private property also provides the ability and incentive to save and invest in capital accumulation by allowing people to keep what they earn, and also enables entrepreneurs to calculate profit and loss in market prices denominated in a common medium of exchange. To the extent that the state intervenes with economic policies such as socialization of industry, confiscatory taxation, monetary inflation, and regulation of business, it hinders the operation of the market, leading to economic regression and a lower standard of living.

Robert Higgs has done us all a great service by digging into the details of the latest releases of various government reports, providing a sober picture of our economic situation. He notes that there since the advent of the Great Recession there has been a great divergence between private investment and government power. Private investment has shrank while government power is on the rise. This does not bode well for our economic future.

Monday, September 20, 2010

Inflation and Government Spending Do Not Provide Prosperity

Keynesian macroeconomists regularly call for increased inflation and/or increased government spending to "jump start" an economy in the doldrums, puting us back on the yellow brick road toward the Emerald City of economic prosperity. Paul Krugman recently advised that "the best thing government could do to help business would be to spend more, increasing demand." There are good reasons to believe that such policy, however, is unfounded. At best inflation merely raises overall prices, lowering the purchasing power of money, leaving us no better off. We have more money, but pay higher prices, so we are not able to produce or consume more. In fact, inflation is destructive because the money supply is increased through banks extending credit by artificially lowering interest rates, thereby, stimulating malinvestment, which is what got us into all this economic trouble to begin with.

At the same time increased government spending is merely government consumption, so scarce economic goods are allocated according to government dictate as opposed to their most highly valued and productive use. Therefore, we have no reason to believe that the state can either inflate or spend our society's way to prosperity.

We find this born out by the economic history of the last decade. If you think that government inflation and spending yields prosperity, surely Americans should be earning vastly more than they were a decade ago. That does not seem to be the case. Over the past decade, the Federal Reserve has overseen massive inflation. From 1999 through 2009, the money supply more than doubled, increasing 139%.

Money Supply 1999-2009

Government spending also more than doubled by increasing 107%. It expanded from $1.7 trillion to $3.5 trillion.

Government Spending

So what happened to median household income? It stayed flatter than a pancake (and a buttermilk one at that). In fact, it fell 5% (in constant 2009 dollars) from $52,388 in 1999 to $49,777 in 2009.

Median income moved the wrong way if inflation and government spending is the key to prosperity. The moral of the story is that if you more than double both the money supply and government spending, you do not double median income. Whatever you create, it is not economic progress.

Sunday, September 19, 2010

Helping the Poor

With the number of officially poor Americans jumping last year to the highest it has been since 1959, no doubt attention will be turned again to questions of what we can do to alleviate this problem.

Christians are right to have compassion on and be quick to truly help the poor. A key modifier in the previous sentence is "truly." Too often, professing Christians act as if the chief problem of the poor is merely material in nature. Like everyone else, however, the chief problem of a person who is poor is the same problem as those living in plenty. Without Christ we are lost in sin and are spiritually poor.

Nevertheless, God clearly expects us to minister to our poor neighbor materially as we have opportunity. God tells us that one who considers and is generous to the poor is blessed (Ps. 41:1; Pr. 14:21). On the other hand, whoever oppresses or even mocks the poor insults God (Pr. 14:31; 17:5). God promises poetic justice to the man who closes his ear to the cry of the poor by refusing to answer him when he cries to God (Pr. 21:13). We are called to defend the rights of the poor and needy (Pr. 31:9). Through the prophet Isaiah, God rebukes his people in Judah and Jerusalem for devouring the spoil and grinding the face of the poor (Is. 3:14-15).

Not surprisingly, many people, Christians included, think that to help the poor we must support and advance the welfare state, because only then will there be a guaranteed safety net that is ready to assist in poverty reduction. As I tell my students, however, there are two questions that need to be answered in the affirmative before we support any economic policy: 1) Will it accomplish its goal? and 2) Is the policy ethically sound?

Kel Kelly provides much food for thought as we consider whether the welfare state actually reduces poverty by helping the poor. As he points out, there are grave problems with the welfare state that keep it from accomplishing the stated goal of its advocates. Regardless of the intentions of the promoters of the welfare state, it works to institutionalize poverty by promoting idleness and punishing productive activity. It further results in capital consumption because it hinders saving and investment.

There are also ethical problems which cause us to negatively answer the second question as well. While it is indeed charitable to materially assist our neighbor who is truly poor, it is not charitable to force someone else to do it at the point of a gun.

Saturday, September 18, 2010

Higgs In-Depth: More than Regime Uncertainty

The concept of regime uncertainty is far from the only important contribution to political economy made by Robert Higgs. For example, he earlier explained the ratchet effect in which the state uses a crisis to accumulate power and, while after the crisis passes state intervention decreases, it always settles at a level above what it was before the crisis.

Anyone wanting to learn more about the life and work of Higgs should treat themselves to his interview on C-Span's In-Depth. This program originally aired over a year ago, but many may have never seen it. You can watch the three-hour program in its entirety by clicking here. If you are looking for something worthwhile to watch over the weekend, this is it!

In this interview Higgs provides much insight on a variety of topics related to economics, economic history, and the political process. He also serves as a model for anyone wanting to defend an unpopular conviction without resorting to bitterness, name calling, derision, or becoming mean-spirited.

Friday, September 17, 2010

If People Truly Value the Arts Why the Need for Government Arts Funding?

Britain's National Campaign for the Arts has launched its "I Value the Arts" initiative. Its goal is to organize members of the general public to lobby against cuts in government arts subsidies. The initiative's website calls for interested parties to "show decision makers that the arts are vital and valued."

Such initiatives beg the question, if the arts are truly vital and valued, why are people not willing to pay for aesthetic experiences themselves? Why do they insist, instead, on government subsidies? People are willing to pay for what is truly vital to them and allocate spending toward whatever they value the most. If they are unwilling to pay for artistic experiences, that demonstrates that they value them less than whatever they actually purchase. Could it be, perhaps, that those supporting the government arts funding initiative are truly saying I value the arts so much I want someone else to pay for it?

Thursday, September 16, 2010

Evidence of Regime Uncertainty

Robert Higgs
As I have written before, one of Robert Higgs' most important contributions to the political economy literature is his work on regime uncertainty. According to Higgs, regime uncertainty can occur when government intervention creates an environment in which capitalists and entrepreneurs have little idea when the next interventionist shoe will drop. Such heightened regulatory uncertainty adds to the normal uncertainty of any entrepreneurial endeavor and discourages potential investors from investing, thereby reducing overall productive activity.

Higgs has done excellent work explaining how regime uncertainty contributed to and greatly prolonged the Great Depression. He and Mary Theroux of the Independent Institute have both noted increasing evidence that regime uncertainty has also set in presently and is largely responsible for our sluggish non-recovery recovery.

Wednesday, September 15, 2010

God and Science Don't Mix?

In my class Foundations of Economics we discuss, as the name implies, the very foundations of economics as a social science. Because Grove City College is a Christian college, we have the freedom to examine not only human action as the practical foundation of human action, but have can dig deeper to investigate the divine origins of economics and science in general. In doing so, we investigate how the created order was fashioned in such a way to allow for scientific inquiry and do so from an explicitly theistic perspective.

Last year cosmologist Lawrence M. Krauss, had an op-ed in the Wall Street Journal arguing that "God and Science Don't Mix." Ostensibly Krauss argues that "a scientist can be a believer. But professionally, at least, he can't act like one." He seems to be arguing a methodological point that when doing science, the scientist cannot do his work if he assumes that God is going to interfere with his experiments. He goes on farther, however, to claim that a belief in a God who acts in the world is logically irreconcilable with science and scientific inquiry. Krauss writes, "Though the scientific process may be compatible with the vague ideal of some relaxed deity who merely established the universe and let it proceed from there, it is in fact rationally incompatible with the detailed tenets of most of the world's organized religions."

Herman Bavinck
Krauss's piece has been ably answered, especially about how the occurrence of miracles is not incompatible with natural law, by Stephen M. Barr at First Things. In fact, Krauss and those who think like him had been answered as early as 1895 by Hermann Bavink in the first volume of his Reformed Dogmatics. In his chapter "Revelation in Nature and Holy Scripture," Bavink makes the following points:
A natural law only means that certain forces, under the same conditions, work in the same way . . . All these elements and forces with their inherent laws, according to the theistic worldview, are from moment to moment upheld by God, who is the final, supreme, intelligent, and free causality of all things . . . It is God's omnipresent and eternal power that upholds and governs all things . . . God is present in all things. In him all things live and move and have their being. Nature and history are his work; he works always (John 5:17) . . . Every force that asserts itself in it originates from him and works according to the law he has put in it. God does not stand outside of nature and is not excluded from it by a hedge of laws but is present in it and sustains it by the word of his power . . . Science, accordingly has nothing to fear from the supernatural (pp. 369-71).
I explain to my Foundations of Economics students at the beginning of the semester that, because economics is a social science, what Bavink says about science in general applies to economics in particular.

The only reason we have a world in which we can do science, including economics, is that God made it that way. As Francis Wayland defined it, a science is "a systematic arrangement of the laws which God established so far as they have been discovered of any department of human knowledge." As such, there are two necessary conditions that must be true in order for us to undertake science. Scientific laws must exist and we must be able to discover them. If there were no scientific laws to be discovered, then no matter how hard we tried to seek them out, we would never find any so there would be no scientific discovery. On the other hand if scientific laws existed, but we had no way of discovering them, we would also be unable to do science.

There is much evidence from Scripture teaching Christians we have nothing to fear from science. Indeed Scripture provides us with the reasons to embrace scientific inquiry. In the first place Scripture teaches us the God created and sustains the universe (Gen. 1:1; Col. 1:16-17). As Gary North has noted, from the account of the creation of the sun, moon, and stars we find that God created a world with purpose and order (Gen. 1:14-17).

Additionally, the late Stanley L. Jaki points out in his book The Savior of Science that God repeatedly uses the stability and natural regularities of nature as evidence that we can trust Him to keep His promises (Jer. 33:20-21; Ps. 72:5-7, 89:34-37, 119:89-90). Jaki points to these passages while arguing that the Christian view of the cosmos is the reason science developed in the West while remaining "stillborn" in the ancient cultures of Greece, China, India, and in the Muslim world. From the Scriptures Christian scientists adopted the notion that because God created a universe with purpose and stable order, there are scientific laws out there for us to discover.

God also affirms what our own self-reflection indicates--that we have the cognitive ability to discover those laws. In Genesis 1:28 we read that God created us in His image. Our cognitive faculties are part of that image. God thinks and knows everything. As finite creatures we also think and can know some things. Even though the image of God in us has been marred by the fall, it has not been removed. Therefore, not only are there scientific laws for us to discover; we also have the mental ability to discover them. Additionally, we have nothing to fear from science and the thoughtful scientist has nothing to fear from special revelation, including the accounts of miracles, because the God who reveals Himself in His written word is the same God who reveals Himself in the created order. One cannot and will never contradict the other.

As I emphasize to my students, the above applies not only to the natural and physical sciences, but also to the social sciences, especially economics. Part of the image of God includes our use of reason in purposeful behavior. All humans engage in action. Action implies a number of social regularities we call economic laws. That is one of the reasons economics is so important. When people either individually or as participants in society seek to create institutions or policies or develop habits that contradict economic law, it can only lead to disaster.

Tuesday, September 14, 2010

A Great Biography of a Great Economist

My review of Guido Hulsmann's monumental biography of Ludwig von Mises, Mises: The Last Knight of Liberalism has been published by Grove City College's Center for Vision and Values. Hulsmann's work is easily the most authoritative treatment of Mises' life and work available. It is a scholarly tour de force and makes you want to re-read Mises in light of Hulsmann's interpretation.

Monday, September 13, 2010

It's the Spending

At the school where I used to teach economics, I became faculty advisor for our university's Students In Free Enterprise chapter. One special competition at which our team always excelled was the "Halt the deficit-Reduce the Debt" competition. The object was to educate the community on the evils of the national debt and deficit spending. It is almost quaint to think that back during the Clinton administration SIFE ended the competition by declaring victory after on official surplus. (By official I mean that it doesn't include the off-budget spending. If one compares total government receipts with total government spending, we did not run an actual surplus even then.)

Then Bush was elected and deficit spending was back on the agenda and following the massive fiscal stimulus spending coupled with large decreases in tax revenues due to the Great Recession, once again we are seeing astronomical budget deficits, pushing the national debt higher than it has ever been. It is understandable, then, that many people are concerned about the mountain of debt the U.S. Government it taking on and there have been many calls for fiscal austerity. Even President Obama, author of a significant part of our present debt has tried to appear deficit savvy by setting up a commission to investigate debt reduction. When it comes to policy alternatives to accomplish the goal, everything, it is claimed, is on the table. Most recently Obama said he opposed continuing the Bush tax cuts because he says we "can't afford them."

The danger in all of this is that such concerns can easily become misguided, viewing the deficit and debt per se as the real economic culprits. Consequently, people can fall into the trap thinking that as long as we balance the budget and begin paring down the debt by any means necessary, then we will get back to prosperity. There are two ways to reduce the deficit, however. One is beneficial for economic activity and society, the other is destructive.

Cutting government spending benefits society by reducing the amount of money taken out of the private productive economy, allowing for more saving and investment in capital to be used in profitable production. Consumers are then able to obtain more goods at lower prices, leaving them better able to effectively meet more of their ends.

Reducing the budget deficit by raising taxes does just the opposite. As Murray Rothbard explains in his classic "Ten Great Economic Myths" included in his popular Making Economic Sense,
Curing deficits by raising taxes is equivalent to curing someone’ bronchitis by shooting him. The “cure” is far worse than the disease. . . .if taxes go up, your money is expropriated for the benefit of politicians and bureaucrats, and you are left with no service or benefit. The only result is that the producers' money is confiscated for the benefit of a bureaucracy that adds insult to injury by using part of that confiscated money to push the public around. No, the only sound cure for deficits is a simple but virtually unmentioned one: cut the federal budget. How and where? Anywhere and everywhere.

Sunday, September 12, 2010

Francis Wayland and the Morality of Private Property

I've previously noted that Lee Haddigan has done an excellent job identifying the importance of Christians in the 20th century libertarian movement. One of the main reasons that the Christians cited by Haddigan were led to support the free society was the Christian ethic of private property. These convictions did not spontaneously spring to life only in the middle of last century. Historically, Christians have embraced private property as required by Christian ethics.  The morality of private property was recognized by many of the patriarchs in the early church and the broader Scholastic tradition. What is not always recognized by contemporary evangelical Christians is that key thinkers in the Protestant tradition also argued for the legitimacy of private property.

One such figure was Francis Wayland, a Baptist minister and educator who was the president of Brown University for 28 years. An excellent introduction to Wayland and his social thought has been written by Laurence Vance, director of the Francis Wayland Institute. Wayland explained the Christian ethic of property in his treatise on ethics, The Elements of Moral Science. In his chapter on personal liberty, Wayland explains that everyone possesses a physical body, mental understanding, and will. He then argues that if a person uses them

in such manner as not to interfere with the use of the same powers which God has bestowed upon his neighbor, he is, as it respects his neighbor. . . to be held guiltless. So long has he uses them within this limit, he has a right, so far as his fellow-men are concerned, to use them, in the most unlimited sense, suo arbitrio, at his own discretion.

Wayland viewed the right to property as something God reveals to us in three ways: our conscience, the general consequences of a society either embracing or rejecting property, and Holy Scripture. that our conscience testifies to the ethic of private property is demonstrated by all people, as soon as they are old enough to begin to think, perceiving the difference between mine and yours. He notes that possessive pronouns are used in all languages.  People naturally feel that he who violates property rights is wrong.

Secondly the created order bears witness to the rightness of private property.  God has shown in history that both the existence and progress of society and the human race itself depends on the right to private property.  Wayland notes that in those lands without the right to property, people tend to labor only enough to manage their individual subsistence, neither accumulating capital goods nor planning for the future.  Consequently, there would be no accumulation of capital, no tools, no provision for future, no houses, and no agriculture.  As Wayland rightly observes with characteristic prose, without private property, “the human race must perish or exist in wretchedness.” Civilization progresses, therefore, in proportion to the right to private property being recognized, protected, and defended.

Finally, Wayland appealed directly to the Scriptures. He noted that they

treat the right to property as a thing acknowledged, and direct their precepts against every act by which it is violated, and also against the tempers of mind from which such violation proceeds. The doctrine of revelation is so clearly set forth on this subject, that I need not delay for the sake of dwelling upon it. It will be sufficient to refer to the prohibitions in the Decalogue against steeling and coveting, and to the various precepts in the New Testament respecting our duty in regard to our neighbor’s possessions.

Wayland further defended private property rights and developed its implications for economic society in his Elements of Political Economy. It was the leading economics text written by an American in its day and Donald Frey reports that it was so popular that, taking into account total college enrollment at the time, Wayland’s book had more per capita sales than Paul Samuelson’s Economics.

In a section about the incentives that apply labor to capital, Wayland explains that the motive to productively use capital can be destroyed by either common ownership of property or by theft.  He shrewdly notes that theft can be perpetrated by individuals or by the state, which he classifies as the most destructive.  Wayland writes:

Of all the destructive agencies that can be brought to bear upon production, by far the most fatal, is public oppression.  It drinks up the spirit of a people, by inflicting wrong through means of an agency which was created for the sole purpose of preventing wrong; and which was intended to be the ultimate and faithful refuge of the friendless.  When the antidote to evil, becomes the source of evil, what hope for man is left?

According to Wayland, whenever the state engages in theft by confiscatory taxation and wealth redistribution, this is an evil and economic prosperity will be slow in coming.

The implications of Christian ethics relating to private property are relatively straightforward.  As Francis Wayland explained in Elements of Moral Science, the right to property “is the right to use something in such manner as I choose, provided I do not so use it as to interfere with the rights of my neighbor.” Applying this principle to the actions of rulers, who Wayland saw as the agents of society, he concludes, “Each one has a right to use what is his own, exactly as he pleases. If society, interfere by directing the manner in which he shall appropriate it, it is an act of injustice.”

Such a view of property has clear implications for economic policy. Wayland counseled against usury laws, government trade restrictions, government funded internal improvements, and government intervention in the banking industry. He also opposed confiscatory taxation, government granted monopolies, and government regulation of money. He did so because he believed that interventionist economic policy is not only economically destructive, it also violates Christian ethics.

Saturday, September 11, 2010

Castro Says Cuban Model Does Not Work for Cuba

The Atlantic's Jeffrey Goldberg reports on his recent interview with Fidel Castro during which Castro made a stunning admission. As Goldberg describes it
I asked him if he believed the Cuban model was still something worth exporting.
"The Cuban model doesn't even work for us anymore," he said. 
So at the precise moment when the United States is adopting policies similar to the Cuban model--government ownership of firms like General Motors and the socialization of the health care system and financial markets--Castro is admitting that such a system is a failure.

I have an entire chapter of my book Foundations of Economics devoted to explaining the disastrous economics and ethics of socialism. In a society in which the state owns all of the factors of production, central planners cannot calculate profit and loss, so have no guidance in making sound economic decisions, and socialism's severance of income from productive activity kills the work ethic. Socialism does not usher us into the economic promised land. It results in poverty, death, and cultural decline.

You can read more about Cuba's socialist experiment here and here. Castro's admission should serve as a warning to us all. Economic law cannot be thwarted forever.

Friday, September 10, 2010

Eat Locally, Save Globally?

The notion that ethically correct eaters need to be carbon-footprint conscious has been around for several years.The thrust of the argument is that just as those wanting to lose weight should be aware of the calories in the food they eat, all of us who don't want to destroy the planet should be aware of how much carbon-based energy it takes to produce various food items.

The food miles concept, arguing for eating local food to cut down on fuel burnt in transportation, was developed, but later criticized for being too simplistic and not taking into account the big energy picture. A lot of energy, for example, could be expended by a local farmer. Attention turned to estimating the total carbon footprint for producing various foods, thereby accounting for all of the energy used to bring food to your table.

Stephen Budiansky has a very revealing op-ed in the New York Times of all places on the true allocation of energy costs incurred in our food production and distribution system. It turns out that , despite the rhetoric that large-scale agriculture is sending our planet on a climate-change death spiral, Budiansky notes the following:
  1. "[T]ransportation accounts for about 14 percent of the total energy consumed by the American food system."
  2. The use of fertilizer and pesticides accounts for 8 percent.
  3. "Home preparation and storage account for 32 percent of all energy use in our food system, the largest component by far."
 Budiansky's main point is this:
Agriculture, on the other hand, accounts for just 2 percent of our nation’s energy usage; that energy is mainly devoted to running farm machinery and manufacturing fertilizer. In return for that quite modest energy investment, we have fed hundreds of millions of people, liberated tens of millions from backbreaking manual labor and spared hundreds of millions of acres for nature preserves, forests and parks that otherwise would have come under the plow.
What Budiansky had identified, without possibly even noticing, is the blessings of capital accumulation. We are the beneficiaries of past saving and investment in machinery, laboratories, chemicals, and research and development, so that, as I report in my book,
The United States Department of Agriculture estimates that in 1987 it took the average American farmer three hours to produce one hundred bushels of wheat, compared to 275 hours it took the average farmer to do the same thing in 1830. That is a 3,233% increase in farming productivity over 157 years.
As Budiansky notes, there a many fine reasons for growing your own produce or by buying it from local farmers; pleasure, satisfaction in growing one's own food, aesthetics, and superior flavor come to mind. Guilt and anxiety over spent carbon-based energy, however, ought not be one.

Thursday, September 9, 2010

Sweatshops and Economic Development

Should we feel guilty if the clothes we wear were made in so-called sweatshops? Benjamin Powell, assistant professor of Economics at Suffolk University and a Senior Economist with the Beacon Hill Institute, does not think so. In fact, he explains how buying new clothes produced in developing countries in factories known as sweatshops actually helps the world's poor. He and David Skarbek has co-authored an article that shows the benefits of sweatshops to workers in less developed countries. The abstract of the article reads:
Many studies have shown that multinational firms pay more than domestic firms in Third World countries. Economists who criticize sweatshops have responded that multinational firms' wage data do not address whether sweatshop jobs are above average because many of these jobs are with domestic subcontractors. We compare apparel industry wages and the wages on individual firms accused of being sweatshops to measure of the standard of living in Third World economies. We find that most sweatshop jobs provide their workers an above average standard of living.
Powell's work calls to mind this piece from a year and a half ago explaining why garbage dump scavengers in Phnom Penh, Cambodia would be grateful to work in a sweatshop.

Wednesday, September 8, 2010

New Book on Eminent Domain and Property Rights

I've written before on the importance of the Christian ethic of private property as it relates to economic policy. One issue that starkly illustrates this fact is eminent domain, a fancy name for government theft of property.

The Independent Institute has just published a new book edited by Bruce Benson on government confiscation of property via eminent domain and other regulation. Property Rights: Eminent Domain and Regulatory Takings Re-examined looks to be the new go-to book on this issue. It should be of great interest for anyone interested in the nature of consequences of state violation of private property rights.

Tuesday, September 7, 2010

China and Mercantilism

My colleague Tracy Miller has an excellent post, contra Paul Krugman, refuting the notion that a trade war with China would be a good thing for the U.S. economy. Among other things, he points out that China's policy of devaluing its currency actually harms the Chinese and benefits American consumers (i.e. all of us). Miller also notes a link between Krugman's Keynesianism and his mercantilism.
Mercantilism and Keynesianism have much in common and represent a faulty understanding of how an economy works. The large US trade deficit is not the cause of high unemployment in the US. Trade deficits mean that instead of buying US goods with the dollars they obtain from trade, foreign citizens or their governments are purchasing US financial assets. The Chinese government uses the dollars it accumulates from trade surpluses to buy US government securities. This increases the supply of savings in the US, which, by reducing interest rates, should lead to more investment. Krugman argues from the paradox of thrift, that in a time of mass unemployment, if anyone (including the Chinese government) tries to save more, demand and investment fall because there is excess capacity in the economy.
I've often found it ironic that American politicians and even some economists get overwrought about the Chinese government purposely devaluing its currency. These same people embrace the Federal Reserve and which has been devaluing the dollar since 1913.

The mercantilist mindset is driven by a conflict mentality. It assumes when one party benefits from trade the other party must be a loser. From this ideological perspective mercantilism appears reasonable, because there are no trade partners, only trade rivals, so why not stick it to the Chinese. Doing so, however, does not exactly promote loving thy neighbor.

Monday, September 6, 2010

Why Not Capital Day?

Today is Labor Day, a national holiday. Now I am just as happy to get a paid day off work as the next person. However, I've always been slightly uncomfortable with a holiday that was originated to celebrate labor unionism. There is certainly nothing wrong, in a free society, with workers using their right to assembly to agree to collectively bargain with their employer.

Too often, however, union rhetoric perpetuates the fallacious notion that our current standard of living is due to the great effort of the "working man." No doubt laborers do work hard and labor is a productive virtue, however labor effort is not what explains our prosperity. Workers in Bangladesh and Barundi most likely work as hard as American workers do with a lot less to show for it. The difference maker is capital.

As Ludwig von Mises points out in his essay "Wages, Unemployment, and Inflation" originally published in Christian Economics and reprinted in Planning for Freedom; and Twelve Other Essays, workers receive higher real wages and enjoy high standards of living, not from working harder per se, but because they have access to more and better capital goods.
The buyers do not pay for the toil and trouble the worker took nor for the length of time he spent in working. They pay for the products. The better the tools are which the worker uses in his job, the more he can perform in an hour, the higher is, consequently, his remuneration. What makes wages rise and renders the material conditions of the wage earners more satisfactory is improvement in the technological equipment. American wages are higher than wages in other countries because the capital invested per head of the worker is greater and the plants are thereby in the position to use the most efficient tools and machines. What is called the American way of life is the result of the fact that the United States has put fewer obstacles in the way of saving and capital accumulation than other nations. The economic backwardness of such countries as India consists precisely in the fact that their policies hinder both the accumulation of domestic capital and the investment of foreign capital. As the capital required is lacking, the Indian enterprises are prevented from employing sufficient quantities.of modern equipment, are therefore producing much less per man-hour and can only afford to pay wage rates which, compared with American wage rates, appear as shockingly low.
There is only one way that leads to an improvement of the standard of living for the wage-earning masses, viz., the increase in the amount of capital invested. All other methods, however popular they may be, are not only futile, but are actually detrimental to the well-being of those they allegedly want to benefit.

In light of the contribution of capitalists to the well-being of all of us, including laborers, it is high time to consider establishing Capital Day. Until then perhaps we should all take a little time during our celebration of labor to acknowledge the contributions of capital.

Sunday, September 5, 2010

Nice Plug from Compass Cinema

Timothy at Compass Cinema gave my book a nice plug the other day. Compass Cinema is a company that produces innovative films and documentaries on a variety of subjects including a series of modern parables including Prodigal Sons. You can watch the trailer here:

Saturday, September 4, 2010

Troubled Banks Hit an All-Time High

This is another indication we still have malinvestment in the economy. Business Insider's Chart of the Day notices that, according to the FDIC, the number of troubled banks insured by the FDIC reached an all-time record in June.

Notwithstanding significant increases in quarterly earnings compared to a year ago, the number of "problem banks" continues to grow.  Despite Bernanke's massive liquidity injection, for much of the banking industry things have continued to get worse.

Friday, September 3, 2010

Bernanke III: The Track Record of a Fed Chairman

The past two days I've been blogging about thoughts that occured to me as I read Ben Bernanke's address to the Economic Symposium last week sponsored by the Federal Reserve Bank of Kansas City. The third thing Bernanke revealed in his speech that I found striking was the number of forecasting errors made by the Fed.

When discussing his current economic outlook, Bernanke admits that the pace of economic growth since last year "appears somewhat less vigorous than we expected." He also notes that "household saving has been higher then we thought." Regarding our balance of payments he reveals, "Like others, we were surprised by the sharp deterioration in the U.S. trade balance in the second quarter." Bernanke summarizes the economic performance of the past year by reporting, "Overall, the incoming data suggest that the recovery of output and employment in the United States has slowed in recent months, to a pace somewhat weaker than most FOMC participants projected earlier this year."

All of these cases in which reality did not match expectations brought to mind Bernanke's past forecasting errors including his 2005 claim that the housing market was not in a bubble and that market fundamentals were sound. You can see a collection of market forecasts Bernanke made on financial television going back to July 2005 here:

Bernanke got it wrong on the housing bubble, sub-prime mortgage market, and the economy in general repeatedly from July 2005 through 2007.

Now the point here is not to take cheap shots at Bernanke. It would be easy to find many others who made similar wrong forecasts in the middle of the decade. We should remember, however, that Bernanke was making these pronouncements as a professional PhD economist, author of an economic principles textbook, Chairman of President Bush's Council of Economic Advisers, and Federal Reserve Chairman. In other words, when commenting on the economy he gets paid a lot of money for knowing what he is talking about.

Bernanke's track record highlights the difference between private entrepreneurial management and government bureaucratic management. If a private entrepreneur made mistake after mistake after mistake, he would soon pile up so many losses that he would be in danger of being forced out of the ranks of the entrepreneur and have to go to work for someone else. On the other hand, if the government bureaucrat makes several important forecasting errors, he can still have a very good career in Washington.

This also demonstrates the danger of giving so much power over the economy to a single chairman on a single board. In a decentralized free banking market, there would still be bank presidents who make forecasting errors and perhaps even place their bank in financial jeopardy. However, the effects would be relatively localized. Because the Federal Reserve has so much centralized power over the monetary system and because money is used in all markets, when the Fed makes a mistake, its consequences ripple though the entire economy.

We have never had a central cola fountain designed to ensure an elastic supply of cola is available for cola drinkers and, lo and behold, we've never had a cola crisis in the over 120 year history of the industry. Yet the more centralized our banking system became since our nation's founding, the faster our currency has lost its value and the more extreme and widespread our financial crises have become. There is a lesson there somewhere.

Thursday, September 2, 2010

Bernanke II: Bad Economics Yield Bad Policy

As I tell students in my Foundations of Economics class, our evaluation of the efficacy of various economic policies will only be as good as the economic theory we use to do the evaluation. If our theory is bad, that will lead to bad policy analysis.

This fact was also strikingly revealed in Ben Bernanke's remarks to the annual Economic Symposium in Jackson Hole, Wyoming I discussed yesterday. When discussing what the economy needs to achieve sustainable recovery and what the Fed can do to help the process along, Bernanke affirmed that the Fed would inflate as necessary to ward off falling prices. I have written many times about the negative economic consequences of such inflationary monetary policy.

As my students will often ask, if it is true that monetary inflation provides no social benefit, but actually stimulates capital consumption because of malinvestment undertaken during an inflationary boom, why would smart people like Ben Bernanke advocate such policy? Such policy advocacy is partly explained by the different economic framework used by Bernanke and his comrades in inflation.

In his speech to the Economic Symposium he revealed that he operates within a Keynesian/Monetarist world view. Now given the potted history of 20th Century economic thought, most people would say it is impossible to possess a world-view that is both Keynesian and Monetarist. After all were not Paul Samuelson and Milton Friedman always at odds with one another? Many times, perhaps, but not always.

As Jesus Huerta de Soto points out in his magisterial treatise Money, Bank Credit, and Economic Cycles, there are enough fundamental similarities between Keynesians and Monetarists to place them both in a single category he simply calls "Macroeconomists." These modern macroeconomists tend to ignore the influence of time in production, see the economy as a circular flow of goods rather than a complex structure of production, and focus on macroeconomic aggregates which prevents analysis of underlying microeconomic factors such as malinvestment. In this modern macro framework, economic downturns are understood as being due to insufficient aggregate demand resulting from exogenous causes such as pessimistic animal spirits, technological glitches, or monetary policy mistakes.

Keynes' plan A for maintaining full employment was to fully socialize credit markets, so that all saving and investment would be controlled by the state. Recognizing the political unpalatablilty of that plan, he recommended monetary inflation as his plan B. Inflation would lower interest rates and stimulate investment in production. Milton Friedman's views on the efficacy of inflation during recessions were similar. He said the Great Depression was due to the Fed's not being activist enough to restore liquidity and recommended inflation for Japan's 20-year "lost decade." Friedman's position was that the central bank had to maintain liquidity (i.e. inflate the money supply enough) to provide economic stability.

This is the mindset revealed by the remarks of Bernanke. Discussing the economic outlook Bernanke said "For a sustained expansion to take hold, growth in private final demand--notably, consumer spending and business fixed investment--must ultimately take the lead." He later adds net exports as a third source of aggregate demand.

The notion that aggregate demand drives the economy is one of the most troublesome popular economic fallacies. It tends to mistake money income with wealth as if money is what we eat, wear, and live in. In fact, more money might raise monetary incomes, but it will not necessarily make us more wealthy because more money does not equal more land, labor, or capital goods. Therefore more money does not generate more consumer goods. More money generates prices that are higher than they would be otherwise.

What is required for real recovery is a rebuilding of the capital stock, which requires saving and investment, and a reallocation of convertible capital out of unsound investments and into projects producing what people really want. Bernanke's policy of inflation will not accomplish this. The reason he persists with that policy, however, is because of his faulty economic framework. As the title of Richard Weaver's most famous book says, ideas have consequences.

Wednesday, September 1, 2010

Bernanke: Apoplithorismosphobist-in-Chief

Last week the Federal Reserve Bank of Kansas City hosted its annual economic symposium at Jackson Hole, Wyoming. Various economists and central bank governors provided analysis on various topics of monetary policy. As is common the sitting Fed Chairman, presently Ben Bernanke, presented remarks covering "The Economic Outlook and Monetary Policy." While the entirety of his speech provides much grist to the commentary mill, I found the speech revealing in three different ways I'll be discussing for a few days.

In his speech, Bernanke, again affirmed (and I should say unsurprisingly so) that he is the quintessential deflation-phobe. As such, Bernanke is not our economic friend.

I've linked before to Mark Thornton's excellent article diagnosing the fear of deflation consuming so many Keynesian and Monetarist economists. Over the past several years, Ben Bernanke has revealed himself to have particularly acute deflation-phobia. Ben Bernanke is to be credited with convincing Alan Greenspan to step on the monetary gas in 2002-03 because of fears of deflation.  In November of 2002, then Fed Governor Bernanke presented an address with the title reminiscent of a 1950s sci-fi horror film: "Deflation: Making Sure It Doesn't Happen Here." In it Bernanke said we could not rule out the specter of deflation from rearing its hideous head, but never fear for the Fed has many ways of increasing the money supply to ward off falling prices.

Greenspan followed his advice a little too earnestly and oversaw a massive increase in the money supply.

We all know the rest of the story. Interest rates were held down too low for too long, capital malinvestment ensued and what has become the Great Recession began.

How did Ben Bernanke respond to the financial crisis that followed? Give him credit for acting as advertised. He oversaw the largest increase in commercial bank reserves in the history of the planet.

His remarks last week indicate we should expect more of the same. As almost an aside he implies that financial markets--not the market division of labor, savings and investment, or entrepreneurial activity--are the  foundation of the global economy. Given that presupposition, it is easier to understand why Bernanke is so driven to prevent any hint of deflation.

Bernanke essentially reiterated what he said in 2002. Assessing the current situation he says
Maintaining price stability is also a central concern of policy. . .At this juncture, the risk of either an undesirable rise in inflation or of significant further disinflation seems low. Of course, the Federal Reserve will monitor price developments closely.
Bernanke clearly is trying to calm those who also see deflation as the ultimate economic nightmare.
The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation. We do.
He notes
[T]he 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.
Notice that Bernanke is not only afraid of absolute deflation, but also a fall in the rate of inflation. He uses the word disinflation five times. It is not enough that we ensure prices do not fall. In Bernanke's mind, price stability demands perpetually rising prices, albeit at a relatively low rate.

The upshot is that Bernanke is committed to inflation. It is almost as if there is no economic crisis more money cannot solve. In discussing Federal Reserve policy he reveals that he cannot even abide market driven "passive tightening" of the money supply that would occur if the Federal Reserve's securities portfolio were allowed to shrink as bonds it is holding came to term. He further affirms
We will continue to monitor economic developments closely and to evaluate whether additional monetary easing would be beneficial. In particular, the Committee is prepared to provide additional monetary accommodation through unconventional measures if  it proves necessary, especially if the outlook were to deteriorate significantly.
Like that of Paul Krugman, the case of Ben Bernanke reveals the true danger of deflation-phobia. It drives those in power toward destructive inflationism, all in the name of price stability. And inflationism is a recipe for a falling purchasing power of money and further capital malinvestment that prolongs the recessionary agony.