Monday, February 28, 2011

John Stuart Mill Was a Masochist

John Stuart Mill
That, at least, is the judgement of Anthony Daniels in an essay on J.S. Mill entitled "A Taste for Wormwood and Gall." Daniels first discusses Mill's difficult childhood and youth under the draconian schooling by his father James, identifying a rather masochistic adoration of his father. Daniels sees Mill's apotheosis of his wife Harriet in a similar light. As Daniels summarizes Mill's description of Harriet in Mill's Autobiography, "Mill claims (without noticing it) to have had precisely the same intellectual relationship with Harriet Taylor as with his father, to have been in short the same low, slow, and indifferent amanuensis to both."

Some have sought to defend James' approach to his son by pointing to the greatness of the product. John Stuart turned out to be a great intellectual force, so James got what he wanted. Others, such as Murray Rothbard, more accurately view Mill  as a troublesome figure more double-minded than great. Without going into all of the biographical details Daniels draws upon, Rothabard in his Classical Economics, volume two of his magisterial Austrian Perspective on the History of Economic Thought describes the effect Mill's upbringing and subsequent marriage to Harriet had on the development of his thought:
After John's famous nervous breakdown at the age of 20, the younger Mill emerged as almost the opposite to his father in temperament and quality of intellect. Instead of possessing a hard-nosed cadre intellect, John Stuart was the quintessence of soft rather than hardcore, a woolly minded man of mush in striking contrast to his steel-edged father. John Stuart Mill was the sort of man who, hearing or reading some view seemingly at utter variance with his own, would say, 'Yes, there is something in that', and proceed to incorporate this new inconsistent strand into his capacious and muddled world-view. Hence Mill's ever-expanding intellectual 'synthesis' was rather a vast kitchen midden of diverse and contradictory positions. As a result,. Mill has ever since provided a field day for young Ph.D's caught in the game of publish or perish. Dispute over 'what Mill really believed' has become an unending cottage industry. Was Mill a laissez-faire liberal? A socialist? A romantic? A classicist? A civil libertarian? A believer in state-coerced morality? The answer is yes, every time. There is endless fodder for dispute because, in his long and prolific life, Mill was all of these and none, an ever-changing kaleidoscope of alteration, transformation and contradiction.

We should never underestimate the influence of a autocratic father or domineering wife (or husband for that matter).

Sunday, February 27, 2011

Machen on What the Church Should Do During Economic Depression

J. Gresham Machen (1881 - 1937)
William M. Hobbs has provided us with a fascinating article "The Church and Economic Recovery" published in the most recent New Horizons, the official magazine of the Orthodox Presbyterian Church. Hobbs draws upon an article written by J. Gresham Machen in 1932 entitled "The Responsibility of the Church in Our New Age." The article was Machen's contribution to a symposium on the Great Depression. The symposium was sponsored by the American Academy of Political and Social Sciences and included a labor-management consultant, a Jewish scholar, and a Christian scholar. The Christian scholar was J. Gresham Machen, a presbyterian theologian and professor at Westminster Theological Seminary.

Hobbs notes that Machen's "address stands today, not only as a remarkable warning against the "nanny state," but also as a beacon for a proper view of the church in such a troublesome climate." He rejected the growing spirit of collectivism and the "materialistic paternalism" of the state.

Machen's address to social scientists was also remarkable for its call for the Church to be the Church, meaning the Church was not to be a political lobby or primarily a society for social work. The mission of the Church is what it has been since it was ordained: to preach the gospel of Jesus Christ. As Machen put it:
The responsibility of the church in the new age is the same as its responsibility in every age. It is to testify that this world is lost in sin; that the span of human life—nay, all the length of human history—is an infinitesimal island in the awful depths of eternity; that there is a mysterious, holy, living God, Creator of all, Upholder of all, infinitely beyond all; that He has revealed Himself to us in His Word and offered us communion with Himself through Jesus Christ the Lord; that there is no other salvation, for individuals or for nations, save this, but that this salvation is full and free, and that whosoever possesses it has for himself and for all others to whom he may be the instrument of bringing it a treasure compared with which all the kingdoms of the earth—nay, all the wonders of the starry heavens—are as the dust of the street.

Saturday, February 26, 2011

Marx Was a Communist

On this date in 1848, Karl Marx's A Communist Manifesto was first published. Marx's Manifesto was a polemic, calling for social revolution and the implementation of a 10-point plan designed to begin the last turn of the historical wheel that would result in communism. The Trans-Atlantic Communist league has uploaded this video simply listing Marx's 10 points set to a rousing communist anthem.

It is interesting to note how many of Marx's points have been absorbed into U.S social policy over the past century.

For those interested in a good introduction into Marxist economics, I recommend chapters nine through thirteen in Murray Rothbard's Classical Economics.  In chapter nine he lays out the historical origins of communist thought. He then begins his discussion of Marx in chapter ten in which he explains the intellectual origins of Marx's thought in particular. As Rothbard reminds us:
The key to the intricate and massive system of thought created by Karl Marx (1818-83) is at bottom a simple one: Karl Marx was a communist. A seemingly banal or trite statement set alongside Marxism's myriad of jargon-ridden concepts in philosophy, economics, history, culture et al. Yet Marx's devotion to communism was his crucial point, far more central than the dialectic, the class struggle, the theory of surplus value, and all the rest. Communism was the goal, the great end, the desideratum, the ultimate end that would make the sufferings of mankind throughout history worthwhile.
Rothbard makes the compelling case that Marx developed a millennial vision of a secular kingdom of God on earth and then set out to build a scientific case explaining why history demands we end there.

Rothbard goes on to explain, at just the right level of detail, the importance Marx's theoretical system--historical materialism, the class struggle, Marx's economics of capitalism, and his theory of capitalism's inevitable collapse--to Marx's communist vision. In so doing, Rothbard shows how and why Marx's life project was ultimately doomed. In short, Rothbard's exposition of Marxist economics is a towering achievement. 

Friday, February 25, 2011

Bernanke Must Be Sleeping Better; Inflation is Here

This according to a very informative piece by Frank Shostak that was published yesterday at In his essay, "Inflation is Here, and It is Going to Get Worse," Shostak, does not paint a very rosy picture of our financial future.

Shostak makes the crucial distinction between monetary inflation and a general increase in overall prices. Higher overall prices are a result of the real inflation, an increase in the money supply. It is the increase in the money supply that causes higher prices. The newly created money is worked through the economy as those who have received the new money spend it. Those who receive the spending happily see their monetary incomes rise and increase their spending as well. In like fashion, the new money matriculates through the economy along with increased spending. As people spend more, the demand for goods rises, which in turn puts upward pressure on the prices of those goods. Hence, higher overall prices is the result of a process set in motion by an increase in the money supply.

 Shostak points out that because of the serious increase in the money supply in 2008, prices have begun to noticeably increase. Unhappily Shostak thinks prices will get worse before they get better. He concludes rather matter-of-factly:
Since September last year, the growth momentum of the US consumer price index (CPI) has displayed visible strengthening.

We suggest that the Fed's massive monetary pumping during 2008 to September 2009 is the key factor behind the strengthening in price inflation.

Based on past monetary pumping, we expect the growth momentum of the CPI to strengthen further.

Thursday, February 24, 2011

Hoover Was a Keynesian

The conventional wisdom among the second-hand dealers in ideas is that Herbert Hoover kept the US in depression because he championed fiscal austerity and liquidation. Such is the wisdom of New York Times' columnist Paul Krugman. Robert Murphy has adequately dispelled Krugman's characterization of Hoover.

In doing so, Murphy was furthering a line of thought developed by Murray Rothbard in his seminal America's Great Depression. While recently working through a section of Rothbard's discussion of the Great Depression in his A History of Money and Banking in the United States, I was struck that not only was Hoover not a laissez-faire liquidationist; he was a pre-Keynes Keynesian. Note the following excerpts from page 271-73 of Rothbard's History:
Hoover suffered from the fallacious view that industrial credit was productive and “legitimate” while financial, stock market credit was “unproductive.” Moreover, he believed that valuable capital funds somehow got lost, or “absorbed,” in the stock market and therefore became lost to productive credit. . .
Like Keynes, Hoover thought that only investment in physical production was economically sound, while investment in financial instruments such as stocks and bonds were wasteful (Keynes would view them as leakages).
For a decade, Herbert Hoover had urged that the United States break its age-old policy of not intervening in cyclical recessions. During the postwar 1920–1921 recession, Hoover, as secretary of commerce, had unsuccessfully urged President Harding to intervene massively in the recession, to “do something” to cure the depression, in particular to expand credit and to engage in a massive public-works program. Although the United States got out of the recession on its own, without massive intervention, Hoover vowed that next time it would be different. In late 1928, after he was elected president, Hoover presented a public works scheme, the “Hoover Plan” for “permanent prosperity,” for a pact to “outlaw depression,” to the Conference of Governors. Hoover had adopted the scheme of the well-known inflationists Foster and Catchings, for a mammoth $3 billion public-works plan to “stabilize” business cycles. . .

When the stock market crash came in October 1929, therefore, President Hoover was ready for massive intervention to attempt to raise wage rates, expand credit, and embark on public works. Hoover himself recalls that he was the very first president to consider himself responsible for economic prosperity: “therefore, we had to pioneer a new field.” Hoover’s admiring biographers correctly state that “President Hoover was the first president in our history to offer federal leadership in mobilizing the economic resources of the people.” Hoover recalls it was a “program unparalleled in the history of depressions.”

Again like Keynes, Hoover advocated credit expansion and public works programs to ameliorate recessions. It makes one ask, from Krugman's perspective, what's not to like?

Wednesday, February 23, 2011

Carl Menger, Fountainhead

Carl Menger (1841 - 1921)
One hundred seventy years ago today, the great Austrian economist Carl Menger was born. Menger was, as Joseph T. Salerno called him, the founder of Austrian economics. He deserves this title because, with the publication of his seminal work, Principles of Economics, he set modern economic analysis firmly on a foundation of causal-realism, an approach most fully realized in the Austrian economic tradition.

Menger's modus operandi was to demonstrate that there are economic laws that are not merely hypothetical, but are indeed relevant for the real world in which we live. He emphasized the logical law of cause and effect and explicitly began his analysis with human action. Menger's method, therefore, was sharply distinct from other popular approaches of that time, such as the British Classical approach (which relied on fictitious postulates and arbitrarily constructed aggregates such as the price level, the capitalist class, landowners, and labourers, and an objective labor or cost of production theory of value) and the German Historicist Approach (which began with viewing economic phenomena such as prices as mere historical data without trying to explain them as resulting from more fundamental factors).

Menger, on the other hand used his causal-realist method to demonstrate that marginal value is of fundamental importance for explaining all economic phenomena. He also explained the distinction between consumer goods and producer goods, noting that the value of the producer goods is derived from the value of the goods they are used to produce. He also explained why inherent in the concept of economizing is the concept of property. Private property, consequently, is not an arbitrary invention, but a foundational category of human action.

Menger's legacy is one of profound impact. He heavily influenced Eugen von Bohm-Bawerk, who began with Menger's framework and developed it. His ideas then were most fully developed by Bohm-Bawerk's student Ludwig von Mises. Mises' lifetime project of developing economic theory culminated in the publication of Human Action which I began to read as a sophomore in college and made me want to be an economist. One could say that, in God's providence, because there was Carl Menger, there is Foundations of Economics.

Tuesday, February 22, 2011

Dearth of Private Investment Keeps Economic Progress Anemic

As Robert Higgs notes, the so-called recovery has been absolutely nothing to write home about. In two blog posts (here and here), he explains why this is the case. The key is that private net investment has not recovered to anywhere near its pre-Great Recession level. Net private investment is the investment that is over and above the amount necessary merely to maintain capital previously accumulated. Consequently, if we want growing prosperity, we need growing net private investment.

Higgs also explains why private, not government investment is the key. He also rightly notes that the cyclical action in the Great Recession, as in all business cycles, is in investment, not consumer spending. Consequently, he rightly concludes that we should put to bed the myth that there is a "pressing need for the government to stimulate consumer spending.

Monday, February 21, 2011

Congratulations to the Richard E. Fox Prize Winners!

Congratulations are in order to the winners of the Richard E. Fox Prizes awarded for the three best papers presented at this year's Austrian Student Scholars Conference. The level of papers at this year's conference was quite high.

First Prize was awarded to Malavika Nair, graduate student at Suffolk University, for her paper, "Money or Money Substitutes?: Implications of Selgin's Small Change Challenge."

Second Prize went to Xavier Mera, graduate student at the University of Angers in France, for his paper, "The Social Function of Derivatives Markets."

Third prize was awarded to G. P. Manish, graduate student at Suffolk University, for his paper, "Central Economic Planning and India's Economic Performance (1950-1965)."

Congratulations also goes to all of the other participants who presented an excellent body of papers. It is encouraging to see such good work being produced by young scholars.

Sunday, February 20, 2011

Connections Between Christianity and Austrian Economics

As my book, Foundations of Economics makes abundantly clear, I think there is no doubt that economics in the causal-realist tradition of Mises and Rothbard is compatible with the Christian doctrine of man and the created order. I am not alone in this conviction. Back in 2003 Paul Cleveland had an article published in Markets and Morality that highlights some connections between Christianity and economics that takes the totality of human action into account. The article's abstract reads as follows:
The aim of this article is to clarify why the Austrian approach to economic analysis provides a good anthropological fit with Christian theology in seeking to develop an integrative science. In doing so, the article affirms and supports the three-volume work of the Acton Institute, which aims to provide a foundational basis for economic personalism.

Saturday, February 19, 2011

Can Entrepreneurs Provide Health Care in a Free Market?

At least one man, Ron Templeton thinks so. In a recent lecture entitled, "Healthcare Entrepreneurship in the ObamaCare Era," Templeton, CEO of Templeton 360, discussed ObamaCare and how entrepreneurs can respond to demand for health care in ways that economically provide for the needs of people in a market without state interference. He was recently interviewed by the chairman of GCC's Entrepreneurship Department. He has a number of interesting things to say including:
Ultimately, if there is a healthcare crisis in this country, I believe this is the way to fix it: If we put the consumer back in the driver’s seat, we will see better quality, more innovation, greater choice, and lower prices.

Entrepreneurs that empower consumers in this way will do very well in the coming decade.

Friday, February 18, 2011

Austrian Student Scholars Conference

This weekend Grove City College is hosting the annual Austrian Student Scholars Conference. It features the largest and most internationally diverse group of participants we have ever had. This conference just continues to grow and blossom in terms of both quantity and quality. The papers this year especially are of quite high quality. A detailed schedule of the conference, complete with links to the papers being presented is available by clicking here.

We are excited to again have two outstanding keynote speakers at this year's conference. The Hans Sennholz Memorial Lecture will be given tonight at 7:00 in Sticht Auditorium by Robert P. Murphy. His lecture is entitled "Why Only Austrians Understand the True Danger of Ben Bernanke." Saturday night at 7:00 also in Sticht Auditorium, Joseph T. Salerno will present the Ludwig von Mises Memorial Lecture entitled "Hyperinflation and the Abolition of Human Personality."

Thursday, February 17, 2011

A Tale of Two Sets of Stock Markets

The folks at Business Insider provide graphical information substantiating the concern that tighter monetary policy begets lower equity values.

Economists at Morgan Stanley see future interest rate increases as potential threats to equity markets. They cite data showing that in those countries in which the central bank has increased interest rates since October 1, 2010, total stock market returns have decreased. Whereas in those countries where the central bank has cut or held rates steady, stock returns have increased.

This is not surprising given what we know about monetary theory. As Jesus Heurta de Soto has so thoroughly explained, in his Money, Bank Credit, and Economic Cycles, when banks hold interest rates artificially low, that artificially raises the value of capital assets because the future streams of income generated by those assets are discounted at a lower rate. Because the value of capital assets of businesses increase, the value of stocks that represent shares of ownership of those assets rise as well. Additionally, a good share of money that is created via the credit expansion process is spent directly in the stock market. That is why, as Heurta de Soto argues,
Only when the banking sector initiates a policy of credit expansion unbacked by a prior increase in voluntary saving do stock market indexes show dramatic and sustained overall growth. In fact newly-created money in the form of bank loans reaches the stock market at once, starting a purely speculative upward trend in market prices which generally affects most securities to some extent. Prices may continue to mount as long as credit expansion is maintained at an accelerated rate. Credit expansion not only causes a sharp, artificial relative drop in interest rates, along with the upward movement in market prices which inevitably follows. It also allows securities with continuously rising prices to be used as collateral for new loan requests in a vicious circle which feeds on continual, speculative stock market booms, and which does not come to an end as long as credit expansion lasts. As Fritz Machlup explains:
If it were not for the elasticity of bank credit, which has often been regarded as such a good thing, the boom in security values could not last for any length of time. In the absence of inflationary credit the funds available for lending to the public for security purchases would soon be exhausted.
Therefore (and this is perhaps one of the most important conclusions we can reach at this point) uninterrupted stock market growth never indicates favorable economic conditions. Quite the contrary: all such growth provides the most unmistakable sign of credit expansion unbacked by real savings, expansion which feeds an artificial boom that will invariably culminate in a severe stock market crisis (pp. 461-62).
Artificially low interest rates can indeed inflate stock prices, among other things. However, this is not the result of increased savings generating sustainable economic expansion. The monetary inflation via credit expansion that makes interest rates artificially low breeds malinvestment and inflationary booms that culminate in economic recession.

Economic theory indicates that, while a risk facing equity markets may indeed be higher interest rates, a risk facing the entire social economy are interest rates that are held artificially low.

Wednesday, February 16, 2011

Too Many Theaters? NEA Chairman Appeals to Basic Economics

When arts advocates make economic pronouncements connected to arts and especially the economic benefits of arts subsidies, I most often am less than convinced. Sometimes, however, an NEA Chairman speaks the truth. This happened recently when Rocco Landesman caused quite a stir at a conference last month when he said:
There are 5.7 million arts workers in this country and 2 million artists. Do we need three administrators for every artist?

This is an excellent question when, as Landesman notes"

"What I'm seeing is more and more organizations struggling to pay their bills. There's a survival crisis, certainly in the theater and probably across the board. I don't think the answer is to put your head in the sand."

When asked about declining attendance at performing arts events, he replied:

There are too many theaters. Look, you can either increase demand or decrease supply. Demand is not going to increase. So it is time to think about decreasing supply.

It is refreshing when a government bureaucrat so embraces fundamental economic law.

Tuesday, February 15, 2011

Second Thoughts on Giving Goods in Kind to Less Developed Countries

In a blog post fabulously titled "In Zambia, Pittsburgh won the Super Bowl", William Easterly documents the unhelpful practice of sending less developed countries stuff we don't want. He criticizes World Vision for sending them loads of NFL t-shirts that are unwanted in the U.S. because they were printed featuring the Super Bowl losing teams. The NFL does this so fans of the victors can get their team paraphernalia as soon as possible no matter who wins. World Vision has an agreement to take the loser shirts and give them to people in less developed countries. Why would an expert in foreign aid be critical of providing necessary clothing to the less fortunate? Three reasons:

  1. It’s not needed. Seriously, neither the developing world as a whole nor the specific recipient countries named by World Vision suffer an undersupply of T-shirts.
  2. It’s not cost effective. The cost of collecting, sorting, shipping and distributing bulky, low-value items like a bunch of T-shirts does not justify the (very questionable) benefit. And don’t forget to include the opportunity cost, the lost chance to allocate those same, considerable resources to provide something better, like clean water or medicine. (A World Vision PR rep told the New York times in 2007: “Where these items go, the people don’t have electricity or running water.)
  3. It can perpetuate local community’s dependence on free handouts and stifle home-grown economic initiatives, not to mention putting out of business local shirt sellers.

Monday, February 14, 2011

Hope for Entrepreneurship in Cuba

Hopeful news is coming out of Cuba. Bloomberg's Business Week reports that recent changes in Cuba's economic system is sparking the beginnings of entrepreneurial activity. Even though the move toward a market is small and there are still huge obstacles for business, "including high taxes, a lack of raw materials, an uncertain customer base, labyrinthine bureaucratic rules and limited access to startup capital," since Jan. 7 over 75,000 citizens have been granted licenses to operate private firms. That there are that many willing to bear the risk of production in the face of such challenges says a lot for the spirit of enterprise. For the sake of the people of Cuba, we can only hope that these men and women will be successful. Who knows what could be accomplished if the state would really get out of the way?

Sunday, February 13, 2011

What Would Jesus Cut?

A few days ago I received an e-mail from the Christian leftist organization, Sojourners. The subject line asked "What Would Jesus Cut?" The body of the e-mail contained the following two paragraphs:

The biblical prophets make clear that a nation’s righteousness is ultimately determined not by its GNP or military might -- but by how it treats its most vulnerable people. Jesus says our love for him will be demonstrated by how we treat the “least of these.”

We can’t move backwards on programs proven to work: international aid targeted at empowering women; vaccines and bed nets combating deadly diseases; school lunch programs and early childhood education that give poor children the opportunity to thrive; tax credits that reward work and help stabilize families. These are dollars we can’t afford not to invest.
As I've noted before, we certainly are called to love our neighbor as ourselves and this love, when directed toward the poor and needy, must manifest itself by providing real material help to those who truly need it. I have also warned about treating as materially poor those who merely have less prosperity than others. I have also written many times about the need for using ethical means to achieve ethical ends. Good intentions are not enough.

We should keep these principles in mind when considering the above exhortation from Sojouners. They are correct when they say that societal righteousness is not measured by GDP or our military spending. Also one of the good works demonstrated by righteous people is charity to the poor. A fundamental problem with the rest of the statement, however, is its assumption that what "we" do must be done by the state. It is a large an not logically necessary leap from "We are called to be charitable to the poor," to "A righteous society will have an extensive welfare state."

In the first place, it is not clear at all that the programs mentioned above have been proven effective. There is a large literature documenting the ineffectiveness of foreign aid to produce sustainable development, which is the best way to reduce poverty in less developed nations. The link between domestic welfare programs and personal development is also tenuous.

Another problem with the message from Sojourners is the assumption that the money spent on these projects are "investments." In fact, they more resemble government consumption. Investment is the voluntary directing of saved income toward capital accumulation and the employment of that capital in its most productive use. Calling government spending funded by coercive taxation or monetary inflation "investment" is doing violence to language.

Forcing taxpayers to pay for such programs, even if worthwhile, likewise does violence to the citizenry. It is a violation of the Christian ethic of property and, hence, cannot be accepted as a truly Christian approach to ministering to the poor. If Christ wishes us to adhere to the ethics He has revealed to us in Scripture, perhaps Jesus would want us to cut a lot more government spending than Sojourners assumes.

A better solution would be for the church to be the church. Churches should fully fund their diaconate and charge them with earnestly ministering to the needs of the poor as they become aware. The diaconte should be pro-active and eager to minister. However, they should be wise in their ministration, so as not to promote the very problems they seek to alleviate. More importantly, the church should preach the Gospel to all, making disciples of all people. This two-pronged approach will minister to both the material poverty of the poor, and, more importantly, the spiritual poverty of those who do not know Him.

Saturday, February 12, 2011

The Economic Legacy of Lincoln

On Wednesday Ron Paul chaired his first hearing of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. One of the key witnesses asked to testify was Loyola professor of economics Thomas DiLorenzo who has published scores of scholarly articles in peer-reviewed journals. He was critical of the Federal Reserve's policy of monetary inflation and this did not sit well with Paul Krugman, who attacked both he and Paul in both his blog and his column at the New York Times. He noted that, in addition to his work on economic theory and policy, DiLorenzo has also written two books (you might want to sit down for this) critical of Abraham Lincoln.  A good analysis of Krugman's attacks has been written by my friend, William L. Anderson.

Since the issue of Lincoln has been brought up by Krugman and since today is Lincoln's birthday, it seems not inappropriate to consider the legacy of Lincoln's economic policy. Regardless of what one might think about Lincoln in general, it should be understood that his economic legacy was decidedly negative. This is one of the points historian Richard Gamble makes in his essay, "Rethinking Lincoln" in the book The Costs of War, edited by John Denson.

Gamble notes that Lincoln was a staunch supporter of Henry Clay's "American System," a collection of policies that included national banking, internal improvements, and trade protectionism. As Gamble rights, "under the political and social opportunities afforded by the war, the Republicans crafted, and Lincoln approved, a raft of nationalist legislation, including a large public debt, an income tax, subsidies to railroads, the bureaucratic Department of Agriculture, and protective tariffs for American business nearing 48 percent."

Perhaps the most damaging specific economic policy of his administration was the passage of the National Banking Act in 1863. In his annual report to the Congress in December 1862 he asked for a national banking system with an more easily inflatable paper currency. In 1863 he got it.

The National Banking System provided for a much more centralized banking system that was inflationary, created financial crisis after financial crisis, and paved the way for the creation of the Federal Reserve. As Murray Rothbard explains in his The Mystery of Banking:
National banking destroyed the previous decentralized and fairly successful state banking system, and substituted a new, centralized and far more inflationary banking system under the aegis of Washington and a handful of Wall Street banks. Whereas the greenbacks were finally eliminated by the resumption of specie payments in 1879, the effects of the national banking system are still with us. Not only was this system in place until 1913, but it paved the way for the Federal Reserve System by instituting a quasi-central banking type of monetary system. The “inner contradictions” of the national banking system impelled the U.S. either to go on to a frankly central bank or to scrap centralized banking altogether and go back to decentralized state banking. Given the inner dynamic of state intervention, coupled with the common adoption of a statist ideology after the turn of the twentieth century, the course the nation would take was unfortunately inevitable.
As John Klein summarized in his Money and the Economy,
The financial panics of 1873, 1884, 1893, and 1907 were in large part an outgrowth of . . . reserve pyramiding and excessive deposit creation by reserve city and central reserve city banks. These panics were triggered by the currency drains that took place in periods of relative prosperity when banks were loaned up.

The public reaction to the panic of 1907 was great enough to provide support for the formation of the Federal Reserve and we all know what has happened to the value of the dollar since then. When Krugman entitled his above-mentioned op-ed "Abraham Lincoln, Inflationist" he was more accurate than he knew.

Friday, February 11, 2011

Voluntary Exchange Is Mutually Beneficial: Massage Edition

I have explained before that when parties engage in voluntary exchange, both benefit in the sense that each party obtains a good they value more than the good they trade away. When the state hampers the market in a way the reduces mutually beneficial exchange, this harms citizens by frustrating their preferences.

We should keep these foundational economic principles in mind when considering new legislation from Michigan that will now requires all masseuses to be licensed by the state. This new law in Michigan is just one example of a growing trend throughout the country documented by the Wall Street Journal. The number of people employed in industries that require a government license is on the rise.

What may surprise some is that pressure for such regulation is coming from those in the industries themselves. Why would they do that? To restrict competition. If it becomes harder to enter an industry because, in addition to normal economic costs of operation, participants must spend time and money for government approved training and licensing, these additional costs make it more difficult for potential workers to enter the regulated field. This restricts the supply and thereby raises the price for whatever is licensed. Morris Kleiner, a University of Minnesota labor professor, has shown that in occupations that are licensed in some states and not in others, from 1990 to 2000 employment growth in states without regulation grew 20% more than in those states with licensing requirements. In another study by Kleiner and Alan Krueger, they found that licensed workers earn 15% more than workers in the same occupation in states that do not require licensing.

So what has government licensing wrought? Consumers paying higher prices for fewer services. Fewer mutually beneficial exchanges take place and more people have their preferences frustrated.

Thursday, February 10, 2011

A Legal Duty to Fund the Arts?

A report published by the National Assembly of Wales asserts that all local governments should have a legal duty to support art and culture. No clear reason why is given. According to The Stage, the report claims:
“[We] consider that a duty on local authorities to support arts and cultural experiences would entail a requirement for all local authorities to provide a clear account of their existing expenditure on arts and cultural experiences, and the intended outcomes of such expenditure.

“We also anticipate that this would entail minimum standards for the accessibility of arts and cultural activities for people with disabilities.”
Dai Lloyd, a member of the committee that crafted the report, said that "general qualifying criteria" would be established requiring certain subsidy recipients "rise to a certain level of agreed performance, excellence and quality."

A fundamental question that needs to be dealt with is whether such a policy would accomplish its goals. Assuming that the goal of such a policy is to support art and culture, that leaves the targets of the mandate a tremendous problem. It turns out that their is now such thing as "the Arts" with a capital A. Every artistic work is different in some way. Each contributes differently to culture. There are those critics who defended not just the rights but the quality of work by Mapplethorpe, Serrano, and Finley. At the same time, there were those who understandably thought that they contributed to further cultural corruption.

It is not at all easy for bureaucrats to establish what constitutes artistic excellence and quality.  A major problem they face is that when a mandate is handed to local governments in a democracy, democratic aesthetic values are expected. As Paul Cantor has explained in a lecture on "The Economic Basis of Culture,"our current system of government arts subsidization in the U.S. requires a rejection of taste. Grant criteria is officially separated from the personal tastes of the grants makers. The illusion is that government bureaucrats can arrive at objective rules about which art that is worth supporting without some aesthetic criteria. If local governments have a duty to support culture, which culture is it called to support?

The above does not even take into account, of course, the moral problem with such a policy. The only way for a government to fund such subsidies is by forcibly taking money from other people. Unless we can identify a Divine right to arts consumption, I fail to see how such subsidies can be justified ethically.

Wednesday, February 9, 2011

Terrell on Inflation: Better than Bernanke

The review of my book that appeared in Markets and Morality was written by Timothy Terrell, associate professor of economics at Wofford College. I am honored he gave my book such a positive review, because he is a top notch economist.

Here is a brief lecture he gave recently last November at Furman University. It is entitled "Currency Failures from Argentina to Zimbabwe: A Brief History of Inflation."

Bernanke may not fully comprehend the pernicious consequences of inflation, but Terrell does.

Tuesday, February 8, 2011

Bernanke: Inflation? Don't Look at Me!

Sometimes Blodget and Trask get it right. In this TechTicker discussion of Bernanke's remarks about what is causing the noticeably higher global commodity prices, they get it way more right than wrong.

As Trask writes in an accompanying article:
But Bernanke's refusal to acknowledge the Fed's role in rising commodity prices is, at best, another blow to his credibility, as was his attempt to take credit for the stock market rally while simultaneously deflecting any blame for commodity price inflation.

At worst, Bernanke's comments are yet another sign of the crass politicization of the Fed and its chairman, who might feel the need to please both powerful opponents in Congressional and friends at Treasury, who share frustrations with China's currency regime. (The enemy of my enemy is my friend, right?)

An important point that Trask makes is that the consequences of monetary inflation work themselves out in many different ways. When officials say there is no inflation, they are depending on CPI numbers. The weighted average of stocks in the Dow Jones Industrial Average, however, increased 2.1% just last week alone. Such asset price inflation is not a sign of instant prosperity. It may very well be a sign of further malinvestment.

Blodget is also right to point out that despite Bernanke's not wanting to accept responsibility to commodity price inflation, he really loves the ideal of inflation and longs for price inflation rates that are much higher than they appear to be now.

Monday, February 7, 2011

Outrageous Public Debt

Yesterday, I blogged about the need for the U.S. Government to take on more debt merely to pay off its debt, which seems outrageous to me. Last year, economist Guido Hulsmann appeared at Grove City College and presented a lecture entitled "Outrageous Public Debt." You can watch the lecture by clicking here.

In an interview given the same week of his talk he explained his thesis as follows:

Public debt helps politicians to pretend that they are solving problems, while in fact they create more problems. It shifts decision-making into the future, while burdening the present and the future. It reduces the funds available for investment and entails excessive consumption. When public debt is high, it makes the economy more prone to be hit by financial crises, and it also poses a great threat to the stability of all savings. But even when it is low, public debt undermines the economic foundation of a free republic and thus paves the way for tyranny.

Sunday, February 6, 2011

Ronald Nash on the Morality of the Market

One of my intellectual inspirations when I was a young economics major at Northwestern College was the incomparable Ronald H. Nash. He was a philosopher by training, spending man years as professor of philosophy at Western Kentucky University and then taught at Reformed Theological Seminary and the Southern Baptist Theological Seminary. He authored 35 books.

In the late 1980s, Nash lectured at my campus as part of the Staley Lecture Series and, providentially, he had just written a book on economics called, Poverty and Wealth: The Christian Debate Over Capitalism. Consequently, his public lecture was entitled "The Achilles Heel of Socialism" in which he presented an Austrian analysis of the calculation and incentive problems inherent in socialism and rightly presented the free market as the polar opposite of both fascism and communism.

I recently came across this video of a lecture he gave at about the same time he visited my school. The lecture was sponsored by the Foundation for Economic Education and Nash speaks on the topic, "The Morality of the Market."

Morality of the Market from FEE on Vimeo.

Saturday, February 5, 2011

Employment News Is Still Bad

Despite the decrease in official unemployment, the jobs scene is still pretty bad. Asha Bangalore of Northern Trust provides this disappointing summary, "The main takeaway from these numbers is that the number of jobs created since the recovery commenced in June 2009 is troubling and raises the level of concern for policymakers."  She notes that "the level of employment. . .is still significantly below the prior peak even after nineteen months of economic growth." She could just as easily said "apparent economic growth." The same employment story is told by Business Insider's "scariest Jobs chart ever." 

Of course, our rulers want to appear on the job doing what they can. According to a Bloomberg news story,"President Barack Obama is stressing job-creating public investments in education, technology and infrastructure as he prepares to send a budget to Congress." One should note that these are less examples of investment than they are of government consumption.

If we really want to lower the unemployment rate, we should cut government spending and taxation, eliminate unemployment compensation, and abolish the minimum wage. Lower taxes and government spending would foster private capital accumulation and work to increase demand for productive labor. Getting rid of unemployment subsidies and minimum wages would greatly work toward achieving market clearing wage rates.The longer we hamper labor markets from freely adjusting to new economic realities, the longer we perpetuate unemployment.

Friday, February 4, 2011

It Takes Debt to Pay Debt?

I was quite young when I first heard the popular saying, "It takes money to make money." That statement, of course, refers to the fact that in order to invest in any profitable opportunity, one must have funds to do so.

Now it seems that it takes debt to pay debt. Both Timothy Geithner and Ben Bernanke are concerned that if Congress does not raise the federal debt ceiling and, hence, make it legally possible for the U. S. Government to borrow more money, it may default on current debt. Last month "Geithner warned that a failure to raise the debt limit would mean the government would not be able to make the payments on the current debt, which stands at $13.96 trillion." Yesterday Bernanke told the National Press Club that not raising the debt ceiling would have "catastrophic consequences" and put the United States Treasury in the possible position of defaulting on previously issued debt.

So we need to take on even more debt to pay back money we have already borrowed?!? You know things are a fiscal wreck if the government has to borrow more money merely to keep from defaulting. Bernie Madoff's Ponzi scheme worked on just the same principle, we have to keep money flowing in to pay clients who were promised phenomenal returns. 

It is customary for normal people, if they have taken on too much debt, to alleviate the problem by not borrowing anymore and by reducing spending until the debt is paid down. In fact the website of the Board of Governors if the Federal Reserve includes a page devoted to helping people manage their credit. About credit cards they tell us:
To get the most from your credit card, do your homework. Review your income and expenses, estimate how much money you might have available to pay down your credit card debt, and consider cutting back on, or eliminating, optional expenses.
If you've fallen behind, are using cash advances from one credit card to pay off another, or your credit cards are maxed out--that is, at or near your credit limit--there are steps you can take to help yourself.
These steps to do not include borrowing more money from Peter to pay our existing debt to Paul. That is exactly, however, what Bernanke and Geithner say we must do to avoid catastrophe. The phrase, "Physician heal thyself" comes to mind. Alas, it seems that the government, like Nick Caraway said about the rich, are different from you and me.

Thursday, February 3, 2011

Law and Praxeological Economics Applied to Pennsylvania's Inheritance Tax

A former student of mine, Timothy Witt has written a provocative article applying Austrian economics to Pennsylvania Tax Law. Witt is a J.D. candidate at Penn State's Dickinson School of Law. While at Grove City College, Witt did an independent study with me applying praxeology to legal theory. It was a fascinating study. He went on to apply some of what he learned to state tax law. His article, "Individuals and Inheritance Taxes: A Praxeological Examination of Pennsylvania's Inheritance Tax" has been published in Volume 114, Issue 3 of the Penn State Law Review. His introduction opens with the following:
Much has been written regarding the economic effects of the federal estate tax, but relatively little has been published about state inheritance taxes and their economic consequences. Additionally, what has been written has not been addressed primarily to a legal audience. The legal literature discussing the Pennsylvania inheritance tax, one of the eleven effective state inheritance or estate taxes found across the country,is no exception to this observation; beyond practice guides, few legal resources have discussed the tax, and virtually none have substantively and systematically examined its economic effects. Furthermore, Pennsylvania's inheritance tax, like those of other states that have such taxes, has never been specifically analyzed in a legal context from the unique perspective of praxeology, an economic framework rooted in the study of individual human action. This praxeological approach, with its recognition of "the market" as the aggregation of the actions and exchanges of individual persons, provides several significant and relevant insights into the nature of Pennsylvania's inheritance tax, which has taken and will likely continue to take various forms.

It is exciting to have economics in the tradition of Mises and Rothbard applied to tax law in journals lawyers, judges, and lawmakers might actually read. Congratulations Timothy!

Wednesday, February 2, 2011

Calvin and Commerce

As part of the Calvin 500 series, David W. Hall and Matthew D. Burton have co-authored a book they describe as a "primer" on the economic theory of the great reformer John Calvin. It is called Calvin and Commerce: The Transforming Power of Calvinism in Market Economies.You can read a brief review of the book by Orthodox Presbyterian Minister, Mark J. Larson here. According to the review, Hall and Burton stress five tenets of Calvin's views on economic issues:
  • Work is a moral duty.
  • Charging of interest on loans is ethically legitimate.
  • Private property is a proper social institution.
  • Because wealth is given by God, there is no Christian mandate for forced income equality.
  • Wealth brings with it the opportunity for and responsibility of charity.
The book is published by P & R Publishing which has made available a copy of the full table of contents here.

Tuesday, February 1, 2011

Markets and Morality Reviews Foundations of Economics

I am happy to announce that a very positive review of my book, Foundations of Economics, appears in the Fall 2010 issue of Markets and Morality published by the Acton Institute. The review is by Timothy Terrell who concludes:
Students who have become accustomed to segregating their academic thought into secular and sacred categories will find their thinking challenged by this book. Foundations of Economics helps bring faith to all of life, without being dry or difficult. Every student can gain from the clear and precise explanations of economic tools of analysis. Professor Ritenour's book should be of great interest to Christian colleges and universities, and even high schools that can use it for an advanced course. It is a magnificent and much-needed achievement.

There is no on-line version of this issue available yet, so if you want to read it in its entirety, you'll have to run down a hard copy.