Keynes Embraced Capitalism?

Roger Backhouse and Bradley Batemen think so. Backhouse is a historian of economic thought who I respect, so I am disappointed to see that he and Bateman have written an unfortunate article for the The Guardian. "The Case for Moral Capitalism" makes the case that throughout his career John Maynard Keynes refused to reject capitalism, insisting only that it be made more moral.

Backhouse and Bateman argue that Keynes never fell sway to the different varieties of socialism of his day becasue he thought that capitalism was essential for civilization.

Like many of those who turned to communism and fascism, Keynes had strong moral objections to capitalism – but he consistently repudiated socialism, communism, and fascism, for he believed that capitalism was essential both to create high standards of living and to guarantee personal liberty. In effect he sought a capitalist revolution.

What Keynes wanted, however, was a moral capitalism. One with less avarice, usury, and precaution one supposes.

It is not at all clear, however, that Keynes was as ideologically committed to the capitalist system as he's made out to be. As I and many before me have noted, Keynes was eager to note in the preface to the German edition of his General Theory, that his policy proposals were more suited to the German Nazi economy than a free market. Ralph Raico has also documented that Keynes thought the Soviet experiment "very impressive."

It is also worth noting that Keynes' perspective on the efficacy of capitalism to achieve the "good society" changed over time. He became progressively more statist thoughout the 1930s. On the transformation of Keynes' economic theories, I highly recommend the essential article, "The Development of Keynes' Economics: From Marshall to Millennialism."

It is clear that Backhouse and Bateman are using Keynes as a sort of model for thinking about how to interject morality into our commercial system. They quote Keynes from 1923 in which he warnes that too much business activity is done merely for profit and that in order to bear with his existence, a businessman's profits must be more correlated to some social benefit. Turning to the current scene, Backhouse and Bateman write:

We face the same challenge today – to develop a morally acceptable form of capitalism. As Keynes feared might happen, much business is now seen as no more than profiteering. Many people object to the bonus culture of the banking system because they don't believe those bonuses are earned. We have also learned that inequality not only undermines the legitimacy of capitalism (that was Keynes's concern) but it has corrosive effects: unequal societies are unhappier, less healthy, and have more crime.

There are many things in that paragraph with which we can sympathize. However, feeling sympathy is not the same as sound analysis.

The key to turning our present crony capitalism into a moral capitalism is private property. A society built on private property is a voluntary exchange economy. In such a society, no seller can force anyone to patronize him. When a firm reaps a profit, it must therefore be the happy consequence of his sowing productive services. In a free society there is no distinction between production for profit and production for social benefit. Instead, a firm reaps a profit precisely because he provides a benefit to someone. It would also be a system in which no one gets rich via predation.

Our present system is a long way from a private property society. In our present corporatist crony capitalism, for example, bankers can get rich making profligate mortgages and privatizing their own profit while socializing their risk as they quickly sell the same mortgages to government sponsored entities. And the entire operation is bankrolled by the Federal Reserve.

We could greatly reduce economic inequality by eliminating monetary inflation via fiduciary credit expansion. In our present system, those who get newly created money first tend to be the wealthy. With the new money, they are able to increase their spending first, thereby having wealth directed away from others toward themselves. And all of this wealth redistribution is due to monetary interventionism, not free market capitalism. What the world needs now is more genuine capitalism, not less.

Salerno on the Great Recession of 2008

Joseph Salerno has brought forth his explanation of the economic mess of 2008 and in doing so, refines Austrian Business Cycle. His paper, "A Reformulation of Austrian Business Cycle Theory in Light of the Financial Crisis," refutes critics who claim that Austrian business cycle cannot explain the most recent recession.

Salerno concludes,

Once we understand the ABCT [Austrian Business Cycle Theory] as a theory of the destruction and renewal of both the capital structure and monetary calculation, we are in a position to fully account for the events of the past decade. Furthermore, given the unprecedented monetary interventions by the Fed and the enormous deficits run by the Obama administration, ABCT also explains the precarious nature of the current recovery and the growing probability of a double-dip recession.

I saw Salerno present this paper at the most recent Austrian Scholars Conference and recommend it highly.

HT: Tom Woods

Economic Law Applies to the Arts: Handel Edition

Georg Friederich Handel

While browsing through Newman Flower's biography of Handel the other day, I came across a passage explaining why his opera Deborah failed and was surprised to see that much of the blame due to entrepreneurial error. In addition to other factors such as the lack of assistance from Court patronage (due to the public's being dissatisfied with its perceived preoccupation with all things German), Handel decided to significantly increase his ticket prices. He was led to do so because of his successes in the immediate past.

Raising prices was a mistake, because as the law of demand implies, many fewer buyers patronized his performances because they refused to pay the higher prices. And he did so at the worst possible time.

As Flower relates the story:

The greatest mistake of all was made by Handel himself. He increased the prices of admission all round. The boxes were a guinea: sets in the gallery half a guinea, so that only 120 people paid for admission to the first performance; the others forced themselves in.

Handel could not have made a greater blunder, for increased prices were at that time the principal topic of conversation. Sir Robert Walpole was floundering in a morass of the national excises, and, to save the Government from bankruptcy, he had revived the salt tax the year before, and now was about to impose a tax on tobacco, and two shillings on spirits and wine. The people were flaming. The muddle had been brought about by Walpole's reduction of a shilling off the land tax, which benefited, of course, the moneyed classes. Therefore he was not taxing the multitude to release those who had money enough to sp;are for taxation purposes. National hatred against Walpole surged up once; there should be, the mob declared, no taxation of the commodities of life. For Handel to put up his prices on top of the commotion, meant adding fuel to fire. They could not do without salt, tobacco, or wine, but they could do without Handel. Such was the import of the outcry.

Glory to God in the Highest!

In those days a decree went out from Caesar Augustus that all the world should be registered. This was the first registration when Quirinius was governor of Syria. And all went to be registered, each to his own town. And Joseph also went up from Galilee, from the town of Nazareth, to Judea, to the city of David, which is called Bethlehem, because he was of the house and lineage of David, to be registered with Mary, his betrothed, who was with child. And while they were there, the time came for her to give birth. And she gave birth to her firstborn son and wrapped him in swaddling cloths and laid him in a manger, because there was no place for them in the inn.

Annunciation to the Shepherds, Govaert Flink, 1639

And in the same region there were shepherds out in the field, keeping watch over their flock by night. And an angel of the Lord appeared to them, and the glory of the Lord shone around them, and they were filled with great fear. And the angel said to them, “Fear not, for behold, I bring you good news of great joy that will be for all the people. For unto you is born this day in the city of David a Savior, who is Christ the Lord. And this will be a sign for you: you will find a baby wrapped in swaddling cloths and lying in a manger.” And suddenly there was with the angel a multitude of the heavenly host praising God and saying,

“Glory to God in the highest,
and on earth peace among those with whom he is pleased!”

When the angels went away from them into heaven, the shepherds said to one another, “Let us go over to Bethlehem and see this thing that has happened, which the Lord has made known to us.” And they went with haste and found Mary and Joseph, and the baby lying in a manger. And when they saw it, they made known the saying that had been told them concerning this child. And all who heard it wondered at what the shepherds told them. But Mary treasured up all these things, pondering them in her heart. And the shepherds returned, glorifying and praising God for all they had heard and seen, as it had been told them.

(Luke 2:1-20 ESV)

On this Christmas Day, the day in which we celebrate the Incarnation, I invite you to meditate upon the unique magnitude of the advent of Christ. To this end I commend to you the essay "The Coming of Christ" by John Robbins.

 

Life Inside the North Korean Bubble

I came across this fascinating report by Sue Lloyd-Roberts of the BBC about a year ago and, given the recent events in North Korea, it seems like a good time to post it. Life Inside the North Korean Bubble is a revealing glimpse of the nature of existence in an explicit totalitarian state. The propaganda, lies, and threats are apparent, as is the economic regression that is always the consequence of socialism. One of the most important lessons from the report is that North Korea relies on foreign aid and must allow for pockets of market activity merely in order to feed its people. You can watch the film in two parts below.





If you interested in an introduction to the economics of socialism and why it always fails, I recommend chapter 18 of my book, Foundations of Economics. If you want a full analysis of the economics and sociology of socialism I recommend Socialism by Ludwig von Mises.

Union Threatens to Bring Down City Opera

That's the impression one gets from the latest news on an increasingly bitter labor dispute at New York City Opera. The Opera, facing very difficult financial circumstances. The most recent opening gala was a bitter disappointment, drawing only 250 people. Fundraising has been difficult, due, of all things, to regime uncertainty. George Steel, the opera's general manager, says“The labor strife puts a crimp in our ability to raise money. People are waiting to see what happens.”

In an effort to keep things afloat, the Opera has moved out of its home at Lincoln Center to different, less expensive office space, cut its administrative staff by 43% and is hoping to slash its budget from $31 million down to $13 million. That is serious cutting. In order to accomplish this goal, Steel says the Opera's labor contracts with the musicians must be restructured. Ah, as Hamlet might say, there's the rub. The musicians union is in no way appreciative of this effort and it is easy to understand why. Their present contract pays musicians $40,000 a year plus provides health insurance. The new contract desired by the opera company would reduce their salary to $4,000 a year and take away their health care coverage. The union has threatened a strike that they know full well could bring the Opera down completely.

The worst thing, however, from the point of view of the union is that Steel wants the freedom to hire non-union musicians. Gail Kruvand, a double bassist and chairwoman of the orchestra negotiating committee, is quoted in the report that“They want to turn this into a freelance contract and hire whoever they want." That is the crux of unionism. Labor unions ultimately fight for restrictionist wages. They do not wish increase their compensation through restricting their own labor. They hope to do so by restricting the labor of others.

The dispute has most recently went to arbitration where both sides of the dispute met with a federal mediator in an effort to keep the fat lady from singing.

New Book on the Pure Time Preference Theory of Insterest

The Ludwig von Mises Institute has just released The Pure Time Preference Theory of Interest, a book edited by my friend and department chairman, Jeffrey M. Herbener. The volume is a collection of essays devoted to developing the pure time preference theory of interest. That this theory has come under recent attach from various quarters makes this book more timely and interesting than ever (double-pun intended). Included are seminal essays by Rothbard, Mises, Roger Garrison, and Frank Fetter. Herbener wrote a masterful introduction surveying the field as well.

Mises Institute President Doug French contributed the forward which you can read by clicking here. French concludes his forward by summing up the importance of this volume by noting, the link between theory and practice. "The following essays parse through the uniquely Austrian insight of the pure time-preference theory of interest, but more importantly go to the core of why modern central bank monetary engineering leaves the economy further from recovery while at the same time providing a Petri dish for speculation and malinvestment." The entire book can be accessed digitally for free as a pdf document by clicking here.

Thornton on Krugman on Austrian Economics and Ron Paul

My former professor and current friend Mark Thornton has an insightful and concise blog post getting at the heart of Paul Krugman's most recent attack on Austrian economics. He exposes Krugman's faulty economic framework and highlights how, on point after point, his faulty framework leads to faulty conclusions. It is also a passionate piece of writing because, as Thornton says,

Had we not followed the advice of Krugman, Bernanke, Geithner, Summers, Paulson, Goldman Saks, etc. this economic crisis would have been over a long time ago. Instead we are forced to follow the madness of Paul Krugman and Ben Bernanke.

The Problem of Central Planning

If one wants to see how an economy without private property rights performs (or does not perform as the case may be), he does not have to travel to Cuba or North Korea. There are pockets of such systems on America's Indian reservations. In an excellent article on Forbes.com, John Koppish explains "Why Are Indian Reservations So Poor? A Look at the Bottom 1%"

The report highlights a Crow Indian reservation in Montana in which more than a third of the land on the reservation is privately owned, while the rest is owned communally. Koppish references a study co-authored by Terry Anderson, executive director of the Property & Environment Research Center that demonstrates that private agricultural land is 30-90% more productive than the communal land. Without enforcing private property rights, citizens have neither the incentive to be productive nor the incentive to invest in development of a region's natural resources.

The Welfare State's Offspring

My favorite conservative writer, Theodore Dalrymple, has provided a "postmortem" on the past summers riots in the U.K.. His essay is called, appropriately enough, "Barbarians on the Thames."

His piece makes an excellent follow-up to his earlier and compelling, "The Barbarians Inside Britain's Gates," in which he argues that the root causes of the English riots is the welfare state. In both, he explains how a sense of entitlement coupled with little threat of punishment created an environment ripe for social destruction.

The rioters in the news last week had a thwarted sense of entitlement that has been assiduously cultivated by an alliance of intellectuals, governments and bureaucrats. "We're fed up with being broke," one rioter was reported as having said, as if having enough money to satisfy one's desires were a human right rather than something to be earned.

When a culture fosters such values, it is playing with fire.

The culture in which the young unemployed have immersed themselves is not one that is likely to promote virtues such as self-discipline, honesty and diligence. Four lines from the most famous lyric of the late and unlamentable Amy Winehouse should establish the point:

I didn't get a lot in class

But I know it don't come in a shot glass

They tried to make me go to rehab

But I said 'no, no, no'

This message is not quite the same as, for example, "Go to the ant, thou sluggard, consider her ways and be wise."

Cochran on Hayek and the Great Recession

F. A. Hayek

The most recent issue of The Quarterly Journal of Austrian Economics is out and features, among other work, a new article by John P. Cochran, professor of economics at The Metropolitan State College of Denver. Cochran's piece, "Hayek and the 21st Century Boom-Bust and the Recession-Recovery" examines Hayek's thoughts on business cycles in light of our most recent recession. I saw Cochran present this paper at last year's Austrian Scholars Conference and highly recommend it. The article would make helpful instructional reading for Paul Krugman and J. Bradford DeLong. Cochran determines that Hayek was incorrect to abandon his criticism of price stabilization policy in the 1970s. The abstract of the article reads as follows:

ABSTRACT: Hayek’s writings on business cycle theory; the seminal work of the 1930s and 1940s and the modifications he made in the 1970s after he received the Nobel Prize, are useful starting points for understanding the cycle phenomena in the U.S. between 1995 and the present. Hayek in the 1970s abandoned his earlier condemnation of price stabilization as a goal of monetary policy. In his judgment, such a policy might be the best that could be achieved under existing monetary arrangements, and the misdirection of production resulting from such a policy would be minimal. A careful review of the writings, lectures, and interviews by Hayek in this period show that Hayek did not abandon, but consistently retained the basic elements of his “monetary theory of the trade cycle.” The period clearly exhibits a pattern of production over time consistent with the pattern predictions of Austrian business cycle theory, especially as extended by Garrison (and others). The severity of the recent crisis reinforces Hayek’s call for a significant reform of monetary institutions, a denationalization of money, to better prevent future monetary shock caused boom-busts. The current crisis illustrates that Hayek was premature in his assessment that the effects of money creation intended to keep prices stable [inflation targeting] in a growing economy would have impacts on the structure of production “too small to worry about.” Further work, both theoretical and historical, needs to be done to assess his 1970s claim that a monetary authority needs significant discretion in time of crisis to prevent a secondary deflation.

Krugman's Intellectual History is Found Wanting Again

There has been much notice on Paul Krugman's dismissal of the importance of the work of F. A. Hayek in macroeconomics. Excellent responses can by found by Peter Klein and Robert Wenzel. 

When I read of Krugman's non-dealing with Hayek I was reminded of Ronald Reagan's favorite quip against Jimmy Carter in their presidential debate, "Well, there you go again."  The first piece of writing by Krugman I ever read was a column by Krugman, written for Fortune magazine. That was back in 1998 and the piece was "Why Aren't We All Keynesians Yet?" In the piece, Krugman not surprisingly sings the praises of Keynes essentially for being the great prophet and founder of macroeconomics.

Back then, referring to Keynes, he said,

But however eventful his resume, only one item on it really matters: his 1936 publication of The General Theory of Employment, Interest, and Money, which was to depression economics what The Origin of Species was to biology. Before the General Theory, economists could not explain how depressions happen or what to do about them. (I've tried going through the pre-Keynesian business-cycle literature; it's a vast wasteland.) After 1936, they could.

Of course, part of the "vast wasteland" of pre-Keynes business-cycle literature included the work of Hayek. I wrote a letter the the editor of Fortune, which they never published. An extended version was, however, published in The Free Market with the title "Keynes the Great?" To get a picture of Krugman's level of scholarship as a historian of thought, I encourage to you read the whole piece. About pre-Keynesian business cycle theory I said the following:

Additionally, Krugman's claims regarding Keynes' General Theory are repeatedly in error. Krugman states that he "tried going through the pre-Keynesian business-cycle literature" and found it to be "a vast wasteland." If he did, he did not try hard enough. In 1912, Austrian economist Ludwig von Mises's The Theory of Money and Credit, was published. Among other things, Mises did explain, more coherently and correctly than Keynes did, why depressions occur and what should be done about about them.

Keynes cited "insufficient aggregate demand" stemming from unstable business investment as the cause of depression. He offered no explanation for why an economy should suddenly experience insufficient aggregate demand. Mises, on the other hand, explained that the business cycle is due to credit expansion stimulated by the central banking authority. Such expansion lowers the interest rate below the market rate, encouraging investment that will not be met by future demand. Such investments are bound to fail. The only way back to economic prosperity is to allow market forces to liquidate unwise investments. Further credit injections will only start the process over again.

Keynes wrote a generally favorable review of Mises's book but criticized it for being unoriginal. He later admitted that he could not understand German well enough to understand original ideas. Such was the integrity of Mr. Keynes.

Mises followed his first great work with two monographs and an article in 1923, 1928, and 1931, respectively, that more fully described the cause and nature of, and the remedy for, economic crises. In 1931 his student F.A. Hayek published his Prices and Production outlining and developing Mises's theory. Hayek then followed in 1941 with The Pure Theory of Capital. Hayek's contributions to Krugman's "vast waste-land" were rewarded with a Nobel Prize in economics in 1974.

Law of Demand Applies to Museums

William Grampp in his book Pricing the Priceless, identified what he called the "arts mentality," a subset of the "anti-capitalistic mentality." Grampp was referring to the notion that something as profound as art had no relation to something as tawdry as economic principles.

Well, as reported by the BBC this week, it turns out that the laws of economics apply to art museums as well as other goods. Ten years ago the British government decided to remove admission fees for Britain's national museums and, not surprisingly, attendance went up--way up. As stated by the BBC, "Almost 18 million people visited the 13 attractions in 2010-11, compared with 7 million in 2000-01."

This news item reminds me of a quip made by Sherwin Rosen after presenting a keynote address at the 9th International Congress on Cultural Economics. He was asked a question by a performing arts theater manager who was seeking advice about how to fill the theater. She described her problem of having empty seats in certain sections come performance time. His response was classic, "That's easy. Just lower the price."

Salerno Compares Rothbard and Friedman

And finds Milton Friedman wanting as a monetary theorist. You can watch Joseph Salerno's lecture "Who was the Better Monetary Economist? Rothabard and Friedman Compared" below:




In this provocative lecture, Salerno reminds us that in 2002 Friedman advocated what we now call quantitative easing to prevent deflation after the recession of 2001. He also documents how, throughout the mid-2000s, Friedman utterly failed to see the investment imbalances that were building toward the housing bubble and resulting recession.

While listening, it occurred to me that the Fed did essentially what Friedman suggested. It would be interesting to know, if Friedman was still living, what he would think about his theory and policy now. Pursuing a policy in general agreement with Friedman produced the greatest period of financial upheaval in this country since the Great Depression. Would he, positivist economist that he was, take the Great Recession of 2008 as a giant data point which fails to verify his theory?

Higgs on the Persisitence of the Welfare State

A few weeks ago, I wrote a brief post discussing why it is so hard for politicians to cut spending, even if they wanted to. I noted that there is what seems to be an ever-increasing percentage of our population receiving a significant portion of their income from the government.

Robert Higgs has just provided additional excellent commentary affirming this very point. Using data compiled at the Heritage Foundation, Higgs notes,

[I]n 1962, 21.7 million persons depended on the programs they included in their index for benefits. By 2009, the corresponding number of dependents had grown to 64.3 million. Adding dependents not included in the Heritage study might easily increase the number to more than 100 million, or to more than a third of the entire population. Thus, the parasites verge ever closer to outnumbering their hosts.

This is shockingly scary. As I said in my earlier post, turning society back toward a free society and the prosperity that follows will require an ever-growing segment of the population to vote out of moral conviction and less out of pecuniary interest. It requires repentance.

Free Market vs. Government Intervention

The full report of the Economic Panel discussion sponsored by Slippery Rock University's Young Americans for Liberty is now available. It includes photos of the event, images of reports from local newspapers, and a video of the entire event. You can watch the video below:

Interest Rates and a Lender of Last Resort

A few days ago Joe Weisenthal at Business Insider posted a chart of the day article, "The Infection of Europe Is Now Complete." He is responding to a German government bond issue that failed to draw the anticipated number of buyer/lenders. Weisenthal thinks this especially remarkable given Germany's assumed status as a relatively safe haven in Europe.

Then he concludes with this:

Seeing Germany not catch this flight-to-quality bid is a major break in the pattern. And when it's combined with the lack of interest at the auction, then it hits you: Germany is more like Greece than the U.S. in the sense that neither it nor Greece has a central bank as a lender of last resort.

Given Weisenthal's economic and political biases, I assume he is here implying that the American banking system should get the nod over the European system because our central bank, the Federal Reserve, not only has a mandate to keep prices stable, but also is charged with maintaining financial stability by serving as a lender of last resort. Having a lender of last resort soothes fears some might have about a house made up of too many too-highly-leveraged financial cards.

There is another way to look at the situation. In the first place, it is not clear that the European Central Bank (ECB) is not acting, at least informally, as a lender of last resort. On the other hand, if the lack of demand for German bonds is due to a perception that the ECB is not a lender of last resort, this just means that interest rates should be higher than they are both here and abroad.

Magnanimous Review of Foundations of Economics

Jeffrey Herbener's magnanimous and very charitable review of my book Foundations of Economics: A Christian View is now available online. It was published in the Fall 2009 issue of The Journal of Faith and the Academy and that issue was just recently made accessible for internet readers everywhere. Herbener's piece is actually a review essay in which he discusses not only characteristics of my book but places the book in its historical context. In so doing, he masterfully provides a concise, yet tremendously insightful history of economic thought in the first ten pages of the review.

Herbener concludes his essay with the following:

Foundations of Economics stands in the august tradition of economic thought. Economics began in the High Middle Ages as a science of causal-realist laws about society built within a Christian framework and used in analyses of the ethics of commercial and political activity. In the nineteenth century, many economists were carried away by the errors of the British Classical School, which proved to be a dead end, and wasted their efforts. In similar fashion, the twentieth century has seen the efforts of many economists who have followed the Neoclassical School come to nothing. Yet, throughout the long history of economic thought, there have always been champions of the causal-realist view. Their numbers are swelling as dissatisfaction with the neoclassical approach grows. Perhaps we are on the cusp of another revolution in economic thought in which the causal-realist tradition will have opportunity as it did nearly 140 years ago to assert itself as the mainstream. For those who seek to study God’s natural social order, Foundations of Economics is now the gold standard of introductory treatments of economics in the causal-realist tradition.

You can read the review essay in its entirety by clicking here.

The FED Is Not the Only Central Bank Printing Money

In a Bloomberg interview, James Grant, editor of Grant's Interest Rate Observer and one of the top-drawer financial writers working today, talks about inflation and asset prices. He notes that the European Central Bank has "mightily expanded" its balance sheet and he anticipates that the ECB will further inflate in an attempt to deal with the European debt problem. Even the Swiss National Bank is increasing bank reserves "at astonishing rates of speed."

 

Thanks to Lew Rockwell.

Give Thanks to the One who Deserves It

Back in 2002 Gary Hull, a senior writer for the Ayn Rand Institute from 1997-2002, wrote a piece on Thanksgiving that has since appeared in many periodicals, including the Allied News and the Pittsburgh Tribune-Review.  He entitled the essay "Thanksgiving: The Producer's Holiday" Hull, devout Randian that he is, argues that God should have nothing to do with the holiday. Instead we should pay homage merely to human productivity.

Keeping God out of Thanksgiving is problematic to say the least because holiday is a word that derives directly from an Old English word that indeed means "holy day." In other words, it is by nature a day in which we turn our attention to the Lord of all creation to give thanks for His many blessings to us. 

Nevertheless, Hull argues that

Thanksgiving, a uniquely American holiday, celebrates man's productive ability. It is not a day of national guilt or a religious festival. This holiday is designed to celebrate, not faith and charity, but thought and production.

Hull goes on to say that by making the holiday a religious festival "is a slap in the face of any person who has worked an honest day in his life."

As the French say, au contraire. Hull's argument is entirely without reason. I wrote a letter in response to Hull's op-ed to editor of the Pittsburgh Tribune Review who kindly published it. Today I reproduce the letter in its entirety below.

Gary Hull's Thanksgiving commentary is an all-too-typical example of what happens when a free-market supporter rejects God ("The Producer's Holiday," Nov. 28). Hull rightly suggests that we should all be very thankful for our ability to produce wealth in this country. However, because of his hostility to God, he makes several key errors.

Hull begins by asserting that "Thanksgiving celebrates man's ability to produce." More correctly, Thanksgiving is a feast during which we give thanks to God for the blessings (material and spiritual) He has poured out upon us giving us the ability to produce.

Hull also claims political freedom is the precondition of production. While this is a common belief, it is nonetheless incorrect. Democratic elections do little to ensure that people are able to produce and accumulate wealth. The institution of private property is what makes exchange, the division of labor, saving and investment and capital accumulation possible.

Hull makes his grossest error, however, when he argues that "Many Americans make Thanksgiving into a religious festival," ascribing "our material abundance to God's efforts, not man's" and that "That view is a slap in the face of any person who has worked an honest day in his life."

It is true that production would not be possible without human effort. Giving thanks to God does not ignore this. It does, however, recognize that the ultimate source of all material wealth is God.

Thanking God for His blessings is not a slap in the face to anyone, but is simply giving credit where credit is definitely due.

Shawn RitenourGrove City

Austrian Economics Versus the Mainstream

The night before last in Slippery Rock, Pennsylvania, Jeffrey Herbener and myself were privileged to participate in a panel discussion with two economics professors from Slippery Rock University, David Culp and Frederick Tannery. It was sponsored and hosted by SRU's new chapter of Young Americans for Liberty.

An audience of over 300 students and community members were presented a fair-minded exposition of some similarities and key distinctions between conventional and Austrian, causal-realist economic analysis.

The panelists debated issues related to higher education tuition, health care policy, the 2008 economic crisis, and macroeconomic policy. I explained how government subsidization for higher education in the form of Pell Grants and government guaranteed student loans artificially stimulates demand for schooling and, consequently drives up tuition. Jeff Herbener compellingly argued that the best way to reform health care is to move it to a more market oriented system and then brilliantly explained why tax increases are never a good thing, because they take wealth away from those who are able to economize using market prices and puts it in the hands of bureaucrats who have neither the ability nor the incentive to economize.

It was then my turn to explain how the 2008 financial crisis was a product of government intervention from start to finish and not the fault of a free market (hint: we did not have a free market), and then went on to explain how the interventionist responses by both George W. Bush and President Obama have merely slowed the necessary capital restructuring process, thereby hampering economic recovery. Jeff Herbener finished by arguing that the best thing the Fed could do right now to mitigate the possibility of tremendous inflation is to raise legal reserve requirements to 100% and then transform the system to a free monetary, 100% reserve banking system.

Those in attendance seemed attentive and engaged in the discussion. It was an honor to be asked to be a part of the event. A video of the entire panel discussion should be posted in the days to come.

Do Corprations Have Too Much Power?

Many people (like many in the Occupy Wall Street movement) think so. If they do, a good question to consider is why?

An interesting story on Tech Ticker should give one pause before swallowing the line that corporations are powerful to control consumers. They document 15 disastrous product introductions that were quickly killed. The list includes the infamous new Coke and most recently Netflix's abandonment of Quickster before it even began.

If, as people like John Kenneth Galbraith used to claim, corporations do have tremendous power to force people to buy their products by shaping their demand, it is hard to explain such flops. Perhaps corporations are not all-powerful after all. In a free society, the only way for corporations to reap profits and maintain market share is to more successfully satisfy customers.

If, however, a corporation receives special privilege from the state, it is clear that we are not in a free society. In such circumstances, a favored firm would be able to reap profits without serving others. The root of this problem is the granting of state privilege, not the existence of the corporation per se.

Less Keynesian, More Austrian

In the same week that J. Brad DeLong irresponsibly accuses Ludwig von Mises of a "monetary mental disorder," Amity Shlaes does just the opposite. In a column in the San Francisco Chronicle, Amity Shlaes gives her suggestions for how introductory macroeconomics can be improved at Harvard. She is writing in response to the "dozens of students Harvard University undergrads who walked out of the school's famous introductory economics course this month." Part of the students' complaint is that in the current class there is a lack of diversity of economic opinion and that conventional economic opinion helped contribute to the economic mess of 2008-11.

Shlaes acknowledges that the students had a right to be dissatisfied with economists and their models that together failed to predict the financial meltdown and Great Recession and still cannot explain why it happened. She rightly recommends including more Austrian economics in formal macroeconomics courses. After citing Joseph Schumpeter's observations about the cyclical nature of the economy and the importance of entrepreneurship, she gets to the heart of the matter.

Schumpeter's fellow Austrian Ludwig von Mises noted that credit expansions and booms lead to misallocations of cash. The Austrian School of economics, of which Mises is the modern father, called such misallocations "malinvestment and overconsumption." Malinvestment, in turn, ensures that the boom is doomed. No better example has existed than the money that poured into obscure mortgage securities in 2006 and 2007. But there was no Schumpeter and no famous Austrian School philosopher at Harvard at the time.

Shlaes also notes the crony capitalist aspect of the economic crisis in the form of Fannie Mae among others.That leads her to commend insights from public choice economics as well. She concludes by recommending, "Add in more Schumpeter, Austrian economics and public-choice theory in Ec 10, and at Harvard generally, and you'll be offering next year's freshmen diversity worthy of America's leading university."

Once More with Feeling: Fannie Mae Gets Another $7.8 Billion from the U.S. Treasury

Back in the old days before the housing crisis, bonds issued by Fannie Mae were considered almost risk-free. This was because, it was thought, while the company was a private entity, it was backed up by the full faith and credit of the U.S. government. Were those investors right! Fannie Mae, just got another $7.8 billion infusion. That brings the total Fannie bailout to $112.6 billion so far, with no end in sight in the near future. 

This is the sort of crony capitalism that the Occupy Wall Street movement is justified in protesting against. When one considers the examples from God's people such as Job, Abraham, and Solomon, it is clear that there is nothing evil about prosperity per se. Getting rich by ripping people off, is another matter. As James says,

Come now, you rich, weep and howl for the miseries that are coming upon you. Your riches have rotted and your garments are moth-eaten. Your gold and silver have corroded, and their corrosion will be evidence against you and will eat your flesh like fire. You have laid up treasure in the last days. Behold, the wages of the laborers who mowed your fields, which you kept back by fraud, are crying out against you, and the cries of the harvesters have reached the ears of the Lord of hosts. You have lived on the earth in luxury and in self-indulgence. You have fattened your hearts in a day of slaughter. You have condemned and imurdered jthe righteous person. He does not resist you (James 5:1-6).

You're a Mean One, Mr. Grinch

This just in from the "You've GOT to be kidding me!" department. According to the Federal Register, the US Department of Agriculture will assess a fifteen cent tax on the sale of Christmas trees to fund research on how to stimulate demand for real Christmas trees.

This is a classic case of fixing a tax small enough so that each individual family will not feel much pain, but will benefit the interested parties enough that they will lobby for it.

As Condy Raguet wrote in Essay No. XCVII of his Essays on the Principles of Free Trade, published in 1831,

Every one who has examined the subject, knows, that the reason why restrictive laws have been introduced into the commercial policy of most nations, is, that those who have a great and direct interest in the enactment can always bring their influence and power to bear upon the government more efficiently, than those, even thou vastly more numerous, whose interest is small and indirect (Itallics in the original).

The restrictive laws Raguet was speaking of included taxes on imports designed to make the price of imported goods higher.

Even if the per person cost of the tax is small, it is bad on principle. If live Christmas tree growers want to have someone study ways to increase demand for their product, they can fund it themselves. They have no right to have the USDA coercively take money from someone--even if it is only fifteen cents. No where is it written in Scripture, "Thou shalt not steal, except if it is a really small amount."

Expect Unemployment to Rise

In the unskilled labor sector anyway. CNN reports that the minimum wage is scheduled to increase in eight states. This means, of course, that it will make unskilled labor more expensive to hire for businesses. For those workers who do not generate enough income for their firms, they will be let go, adding to our nation's unemployment woes.

Some might argue that increased wages is just what the laboring poor need. While that sentiment is certainly understandable, the problem is that higher legal minimum wages make it harder to employ these very people. That is the main reason why the minimum wage does not reduce poverty. Those interested in more on the issue of the minimum wage might be interested in a piece I wrote a few years ago, "What You Need to Know About the Minimum Wage."

Costs of War

Today is Veteran's Day, a national holiday that used to be called Armistice Day, a day celebrating the end of World War I. In 1954 the name was changed to Veterans Day and the focus turned toward honoring all those who fought in all wars for the United States.

On days such as this, I think it important to remember that wars do come with a tremendous cost. Former CIA analyst Michael Scheurer reminds us, for instance, that our interventionist foreign policy bring with it serious costs as well as perceived benefits. Robert Higgs also recently noted that so-called monetary waste in war expenses winds up in someone's pocket. For those who would like a definitive word on the economics of war, I recommend Chapter XXXIV from Ludwig von Mises's Human Action.

In some of his most urgent prose, Mises finishes this chapter with the following:

How far we are today from the rules of international law developed in the age of limited warfare! Modern war is merciless, it does not spare pregnant women or infants; it is indiscriminate killing and destroying. It does not respect the rights of neutrals. Millions are killed, enslaved, or expelled from the dwelling places in which their ancestors lived for centuries. Nobody can foretell what will happen in the next chapter of this endless struggle.

This has little to do with the atomic bomb. The root of the evil is not the construction of new, more dreadful weapons. It is the spirit of conquest. It is probable that scientists will discover some methods of defense against the atomic bomb. But this will not alter things, it will merely prolong for a shorttime the process of the complete destruction of civilization.

Modern civilization is a product of the philosophy of laissez faire. It cannot be preserved under the ideology of government omnipotence. Statolatry owes much to the doctrines of Hegel. However, one may pass over many of hegel’s inexcusable faults, for Hegel also coined the phrase “the futility of victory” (die Ohnmacht des Sieges).3 To defeat the aggressors is not enough to make peace durable. The main thing is to discard the ideology that generates war.

Joseph Salerno on International Monetary Systems

The Ludwig von Mises Institute has recently posted videos of several lectures from this summer's Mises University. While all appear intriguing, I highly recommend Joseph Salerno's lecture on international monetary systems. He provides a masterful taxonomy of the various monetary systems that nations have used to facilitate exchange. In light of the uncertainty of the future value of the dollar and the viability of the Euro, Salerno's lecture is of more than mere academic interest.

Ideology Matters

Yesterday I argued that one reason that it is so hard to cut government spending is that so many people no are direct recipients of government money. Another important obstacle to a more sound economic system is our contemporary ideology of state provision.

Robert Higgs explains a significant change in American ideology that has taken place during the past 120 years. He uses a recent speech by President Obama in which the President warns, "if we don’t work even harder than we did in 2008, then we’re going to have a government that tells the American people, ‘you are on your own.'"

Higgs responds,

How horrible the prospect! On your own to pay for your own health care; on your own to pay for your own college expenses; on your own to pay for a lawsuit against a corporation that has harmed you unlawfully. How can anyone with an ounce of humanity in his body expect people to take such self-responsibility? The next thing you know, those callous, reactionary Republicans—you know, the ones who ran up the size, scope, and power of government consistently under every Republican president since Chester Arthur—will demand that people take care of their own children and aged parents! Where will it end? 

Higgs' shows how contrary Obama's rhetoric is to the historic American tradition by quoting from remarks made in 1887 by President Grover Cleveland as he vetoed a bill that authorized $10,000 to help farmers struggling with drought. "I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit."

Higgs concludes:

No politician seriously seeking the presidency today would dare to say what Cleveland—an exceptionally courageous and honest politician even in his day—said in the late nineteenth century. American politcos have learned that the people have come to crave government paternalism, indeed, that they pant for it and demand it at every turn. Obama is not the brightest light, yet he understands how to get elected, and in that quest he is pandering to the same personal irresponsibility and desire to prey on one’s fellows that have been the hallmarks American politics from the Progressive Era to the present.

This discussion brings to mind a passage from Ludwig von Mises' Human Action. When discussion the importance of a person's ideology on his actions he uses a anthropomorphic allusion:

If we hypostatize or anthropomorphize the notion of ideology, we may say that ideologies have might over men. Might is the faculty or power of directing actions. As a rule one says only of a man or of groups of men that they are mighty. Then the definition of might is: might is the power to direct other people's actions. He who is mighty, owes his might to an ideology. Only ideologies can convey to a man the power to influence other people's choices and conduct. One can become a leader only if one is supported by an ideology which makes other people tractable and accommodating. Might is thus not a physical and tangible thing, but a moral and spiritual phenomenon. A king's might rests upon the recognition of the monarchical ideology on the part of his subjects (pp. 188-89).

Given the power of ideology as described by Mises, if Obama is right and we have adopted dependency as a reigning ideology, I am less than optimistic that we live amongst a people who will be willing to abide shrinking the size of government. Alas, drastic shrinking is necessary for a return to true economic prosperity.

Why Is It So Hard to Cut Spending?

One reason is that so many people rely on government largesse. As a story at Bloomberg News points out,

A record 49 percent of Americans live in a household where someone receives at least one type of government benefit, according to the U.S. Census Bureau. And 63 percent of all federal spending this year will consist of checks written to individuals for which the government receives currently no services, the White House budget office estimates. That’s up from 46 percent in 1975 and 18 percent in 1940.

With so many people receiving so noticeably direct financial benefits from the government, it is easy to see why congressmen elected by the people do not find it in their interest to cut spending. It would be like taking the knives away from those who butter their bread.

Reduce spending in this environment will require the people to possess a significant amount of character. I am not sure we have the right stuff. I would be happy to be wrong.

Review of Foundations of Economics

The Fall 2010 issue of Faith & Economics includes a very charitable review by K. Brad Stamm of my book, Foundations of Econocmics: A Christian View. Faith & Economics is a journal published by the Association of Christian Economists. The review is on pages 148-52 of Volume number 56. Unfortunately an on-line version of the review is not yet available, but should be in January.

Right off the bat, Stamm's review made me glad by describing my book as "both a text and a treatise combining various scriptures with the philosophical contributions of free market advocates such as Ludwig von Mises [and] Murray Rothbard. . ." That shows me that Stamm understands the nature of the book. It is not meant to be merely a text in the conventional sense, but it also is not meant to be a work of theology. It is meant to be an introduction to the foundations of economics and economic principles within a Christian theological and ethical framework.

Stamm concludes his review by putting me in some rather distinguished company:

As we move further away from a market-oriented economy, the likelihood of Friedrich A von Hayek, Peter J. Boettke of George Mason University, or Shawn Ritenour, being vindicated, seems to be ever increasing. Finally, Foundations of Economics adds to the literature important concepts and applications that could assist Christian economists in developing a Christian economics taxonomy. . . .

I did note is that there is an error when Stamm quotes me on the issue of poverty on page 151 of the review. He quotes me as saying "God does not make it clear that we are to help the poor" p. 441). My text actually reads as follows:

God does make it clear that we are to help the poor. We are to be imitators of God and he tells us that he cares for the poor (Ps. 35:10). God tells us that the poor and orphaned are to be defended from would-be oppressors (Ps. 82:3). We definitely should not turn a deaf ear to the cry of the poor. In fact, God tells us that whoever ignores the plight of the poor himself shall not be heard when he calls for help (Prov. 21:13). God tells us that in times of trouble, he will deliver the one who has consideration on the poor (Ps. 41:1). Whoever is charitable to the poor lends to the Lord and God will repay him for his generosity (Prov. 19:17). The mandate to minister to the poor even includes our poor enemies (Prov. 25:21).

Economic Freedom and the Quality of Life

This weekend I am participating in a colloquium sponsored by the new Institute for Faith, Work, and Economics. At the end of the remarks of the opening evening's speaker, he showed the following video, which makes the case for economic freedom very succintly.

Good News From Cuba

The Cuban government is going to allow its citizens to buy and sell property. This will be the first time such exchanges will be legal since Fidel Castro came to power. The new rules are set to go into effect on November 10. This past Valentine's Day, I noted that there appeared to be hope for entrepreneurship due to legal reforms. May the movement toward real private property continue.

Energy Policy and the Cost of Good Intentions

Timothy Terrell is one of the most insightful economists writing and lecturing on environmental economics today. He is to be commended for his outstanding new policy paper published by the Cornwall Alliance. The paper is entitled "The Cost of Good Intentions: The Ethics and Economics of the War on Conventional Energy" and is a tremendous exposition and critique of contemporary energy policy with the goal of helping Christians, and especially pastors, make sense of energy issues. Everyone interested in the stewardship of creation should read it.

The following is from the paper's Executive Summary:

The pastoral call requires shepherding a congregation through difficult circumstances, including challenges from the spiritual message and economic consequences of environmentalism. It is difficult to develop the knowledge and wisdom necessary to give biblical counsel on such issues, especially in light of complex scientific problems and intense policy debates. Yet the church must evaluate alarms raised about the environment and policies to address them. This paper is intended to assist ministry leaders, policy makers, regulators, and the public in understanding and applying biblical worldview, theology, and ethics, coupled with excellent science and economics, to promote a free, prosperous, and just society in a fruitful, beautiful, and safe environment.

Did the Repeal of Glass-Steagall Make Possible the Financial Crisis?

Noted historian Tom Woods says no, it was irrelevant. The Glass-Steagall Act of 1933 separated commercial banking and investment banking. The so-called repeal in 1999, Woods notes, revoked only one paragraph of the original law and allowed the same holding company to control both investment and commercial banks.

Woods argues:

Because Glass-Steagall was passed during the Depression, it is assumed that it was addressing a pressing need of the time. In fact, the lack of government-enforced division between commercial and investment banking had precisely zero to do with bank problems during the Great Depression. The 9,000 bank failures during the early 1930s had far more to do with the damage done by government regulation — namely, the unit-banking laws that made it difficult for banks to diversify their portfolios (by limiting them to a single office and making branching illegal) — than with a lack of regulation. These were small banks, not the behemoths for which Glass-Steagall would have been relevant. Canada had none of these stifling regulations, and had zero bank failures. (Incidentally, Canada also avoided all the post-Civil War bank panics that struck the U.S., even though Canada did not have a central bank until 1934 — yet again, reality refuses to conform to the where-would-we-be-without-our-wise-overlords comic-book version of events.)

Thoughts on Idolatry of the Market

Last week I wrote a blog critical of the document "Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority" published by the Vatican's Pontifical Counil on Justice and Peace. I was predominantly critical of the document, however I did note they were right to criticize making the market an idol. I have been developing some thoughts about how we should view this particular criticism of our current economic system. To say we should not make an idol of the market is as easy to say as that we should not make an idol of anything. Properly respond to the exhortation against idolizing the market requires serious thought.

In the first place, as Tom Woods has masterfully explained, however we want to characterize the nature of the financial crisis, it should be clear to everyone that it was in no way caused by the free market. It was created by a state-privileged fractional-reserve banking system bankrolled by the Federal Reserve System. Gobs (a techical term) of bad mortgages were issued by financial institutions becasue they had more than ready buyers at Fannie Mae and Freddie Mac. Lenders were encouraged and even mandated to make sub-prime loans by the Community Reinvestment Act and similar programs.

As Tom Woods puts it:

Had we really been engaged in “idolatry of the market,” as the Vatican document suggests, we might have listened to the market. Instead, the central authorities drowned out what the market was trying to tell us.

It’s been idolatry not of the market but of central banks, institutionalized sources of moral hazard and financial instability around the world, that has yielded us the boom-bust cycle. (The aura of infallibility and the cult of personality surrounding Fed chairmen make the language of idolatry more than mere poetic license.)

Additionally, before we condem supporters of the free market too roundly, we should pause to recognize that the free market is a social institution that results from private property. To support and institution because it is mandated by the Christian ethic of property is not idolatry. To claim it is is like comdemning those who believe the church should preach the gospel because that is what Christ calls us to do for making preaching an idol.

The only case in which it makes sense to think someone is making an idol of the market is when we embrace every outcome of voluntary exchange simply because it happens in a market. Some applaud any form of action if it is the result of voluntary exchange. Only then do we make the market an idol. Those who praise the music of Lady Ga-Ga, for example,  merely because she has sold a lot of records in the market are guilty elevating the market above a Godly aesthetic and ethic. The market is not the arbiter of truth and beauty. The minute we conceive of the market as such, we embrace it as an idol.

If market outcomes are truly undesirable, however, the problem is not with the market as a social institution,  but with the people in the market. The market does not impress its values on any one. Rather people, through their actions, impress them values on the market. The market remains the social institution that develops when a society embraces the Christian ethic of private property. How people behave in a free society is another matter.

Justice is Not Served by Government Economic Planning

That is a primary point of my most recent op-ed released by Grove City College's Center for Vision and Values. It draws heavily by my blog post about the Vatican’s Pontifical Council for Justice and Peace's new document, ”Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority.” You can read my piece by clicking here. I make many of the same points in my book, Foundations of Economics: A Christian View.

Is the World Overcrowded?

Nita Bhalla asserts this is so. In an article published by Reuters, she reports that the "Crowded, stretched world awaits the 7 billionth baby." Bhalla documents the two sides of the explosion/implosion debate quite nicely:

To some demographers the milestone foreshadows turbulent times ahead: nations grappling with rapid urbanization, environmental degradation and skyrocketing demand for healthcare, education, resources and jobs.

To others, a shrinking population, not overpopulation, could be the longer-term challenge as fertility rates drop and a shrinking workforce is pushed to support social safety for an aging populace.

As the article reveals, the world is not over populated or even stretched, but certain locales are. The solution to any poverty problems exacerbated by localized population growth is to allow people in densely populated regions to integrate into the global division of labor. As that happens, people are more productive and standards of living rise. There is a reason that global calorie consumption per person has been increasing since the mid-1960s. More and more regions are embracing markets, even while we seemingly embrace economic fascism here in the U.S.A.

The pessimistic view of population flies in the face, but the way, of the Biblical perspective. From the early chapters of Genesis, we find that God favors being fruitful and multiplying, with the command to be fruitful always given in the context of blessing. Population growth was a promise for those who keep the covenant, while population decline was a promised curse for the people of Israel if they disobeyed God. Individual children are portrayed as a blessing to specific parents. This is spelled out very nicely in an essay by E. Calvin Beisner called "Population Growth as Blessing or Blight?"

Do We Need a Supernational Authority to Enforce Social Justice?

The Vatican's Council for Justice and Peace seems to think so. According to Reuters, the Vatican has called for a "global public authority" and a "central world bank" to rule world financial institutions in an effort to enforce social justice. Additionally, the new document, "Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority," calls for various specific state interventions in the market such as taxing specific financial transactions.

As Jeff Tucker notes, this call for increased economic statism is particularly unfortunate because the document diagnoses the cause of the economic crisis pretty well. The problem was created by government control of the monetary system and the inflation it fostered. It seems unlikely that the solution will be the same thing that caused the problem.

Additionally, there is a severe problem of mistaken jurisdictions. The Reuters piece quotes from the Vatican report.

It condemned what it called “the idolatry of the market” as well as a “neo-liberal thinking” that it said looked exclusively at technical solutions to economic problems. “In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale,” it said, adding that world economics needed an “ethic of solidarity” among rich and poor nations.

The Vatican is making a big mistake in thinking that behaviors such as selfishness and collective greed can be solved through global economic planning, or any state action for that matter. The church is the institution that exists to make disciples of all nations. As I explain in my book when discussing the issue of government regulation of the market,

Some Christians might fear that such a free market economic policy will result in an unbridled capitalism that produces a society characterized by harsh, greedy, unrestrained industrialists who stop at nothing as they increase their fortunes. This worry misconstrues the nature of the free market. In a free market entrepreneurs cannot force anyone to buy their products. To receive revenue, firms must convince people to voluntarily purchase from them. The action of a profit-seeking entrepreneur is far from unregulated. In a free market, the entrepreneur may not be regulated by the state but he will be regulated by his conscience and especially by consumer preferences. If people do not want to buy from an entrepreneur with a reputation for wrong-doing they are free to refrain. The accounting firm Arthur Andersen went into bankruptcy at the mere allegation of improper accounting.

In this way that the church can properly act to regulate the economy. The Christian ethic of private property does not allow them to use the coercive state to achieve their ends for a better society. Instead Christians are called to evangelize and disciple converts in the paths of righteousness. As the church does what it is called to do, people will change their preferences. They will begin to be more loving and kind to their neighbors. If Christians really want different market outcomes, they should be obedient in their calling and have faith that God can transform the hearts and minds of men and women (pp. 476-77).

I simply do not understand the charge that the economic crisis has revealed a hoarding of goods on a great scale. Calls for a super-national central bank and global economic regulation are the sort of economic policy suggestions we get when people do not understand basic economics or the nature and role of the Federal Reserve and state intervention in the economy.

A Complication of Fractional Reserve Banking

One of the complications of fractional reserve banking is that a bank's demand deposit customer's can be held hostage, so to speak, to a bank's investment follies. Recent portfolio movements at the Bank of America illustrate this quite nicely.

According to Bloomberg News, the Bank of America has moved its Merrill Lynch derivatives unit to "a subsidiary flush with insured deposits." Officials at the Federal Reserve liked this move, because it gave some relief to the bank holding company. Moving bad assets off a balance sheet will do that. Officials at FDIC, however, understandably do not like the move, because such a move greatly weakens the balance sheet of the subsidiary, making it more likely to fail with the FDIC on the hook for the losses. The Bloomberg story reminds us that even three years after the financial crisis, things are not yet cleaned up.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

The frustrating thing is that banking does not have to be like this. It is possible to have deposits that are entirely secure. The way to do it is to practice 100 per cent reserve banking. Instead of allowing banks to lend out their clients demand deposits and create additional demand deposits out of thin air, banks could be required to maintain enough reserves to cover 100 per cent of their outstanding demand deposits all of the time. In such a banking environment, there would be no risk of clients losing their deposits due to foolish investments. Banks could still make entrepreneurial error and still exhibit losses, but there would be no link between their investment practices and their deposit banking.

As Guido Hulsmann notes in his article, "Free Banking and the Free Bankers," under 100 percent reserve banking,

[T]here could be crises of confidence, but there can be no crises of the payments system. This is because the monetary aggregate that is relevant for payments--the money supply in the larger sense, that is, money plus fiduciary issues--could not differ from the supply of money. Its quantity could only vary to the extent that the quantity of money varies.

The money supply plus fiduciary money (in our present system demand deposits not fully redeemable by bank reserves) would equal the money supply, because there would not be any fiduciary money. In which case there could be financial panics, but they would not inhibit a bank's ability to redeem its clients' checking deposits, because they would always have enough reserves on hand to redeem every penny. In such a happy environment, there would be no need for FDIC. 

One of the Riskiest Things You Can Do in America Is Hire Somebody

So says Peter Schiff, President and CEO of EuroPacific. In this testimony before the House Subcommittee on Government Reform and Stimulus Oversight, he explained how the regulatory burden makes hiring a very dicey game and why government stimulus programs, such as President Obama's recent proposal is like "pouring gasoline on a fire."



Schiff is more right than wrong in his testimony.

Ron Paul Is Right To Criticize the Fed

Congressman Ron Paul

I have criticized a number of politicians and other members of the ruling class for not understanding what got us into our current economic mess and, consequently, for not knowing how to get us out of it. Readers of this blog will remember my criticisms of Ben Bernanke's monetary policy and President Obama's fiscal stimulus plan. I have also criticized the previous Bush Administration for setting the stimulus body in motion, for starting the commotion.

In yesterday's Wall Street Journal, however, there is an op-ed from Congressman Ron Paul. He is the lone presidential candidate who surely gets it right. The Fed is to blame for the financial crisis. Paul gets it right because he uses the best economic framework when analyzing economic policy. Citing Ludwig von Mises and F. A. Hayek, he draws on Austrian, causal-realist economics to explain how and why business cycles occur:

The great contribution of the Austrian school of economics to economic theory was in its description of this business cycle: the process of booms and busts, and their origins in monetary intervention by the government in cooperation with the banking system. Yet policy makers at the Federal Reserve still fail to understand the causes of our most recent financial crisis. So they find themselves unable to come up with an adequate solution.

Because Paul rightly sees our central money printing organization as the chief economic culprit, he also rightly calls for abolishing this important tool of the leviathan state. He concludes his essay by noting that giving a central bank monopoly over our monetary system is the antithesis of liberty:

What exactly the Fed will do is anyone's guess, and it is no surprise that markets continue to founder as anticipation mounts. If the Fed would stop intervening and distorting the market, and would allow the functioning of a truly free market that deals with profit and loss, our economy could recover. The continued existence of an organization that can create trillions of dollars out of thin air to purchase financial assets and prop up a fundamentally insolvent banking system is a black mark on an economy that professes to be free.

No other economic candidate even comes close to Paul's understanding of economic theory and policy.

It's the Fed

Heleen Mees in Foreign Policy gets it. . . at least partly. In her article "The Perils of Loose Living," she explains how too much debt fueled our economic crisis and that the Fed bankrolled the whole thing. (Thanks to my friend and colleague Sam Stanton for alerting me to this article). As she correctly notes:

The real culprit was the Federal Reserve. With its ultraloose monetary policy in the early 2000s, the Fed single-handedly created the refinancing boom and ushered in the housing bubble. The record-low interest rates not only fed the boom that had to go bust, but also favored that sector of the U.S. economy that is predominantly financed with debt, i.e., the financial sector, at the expense of sectors that are more reliant on risk capital, such as manufacturing. That might explain why, by the mid-2000s, bank profits accounted for 30 percent of all profits reported by S&P 500 companies. In other words, Americans stopped making stuff and relied on paper earnings instead.

Mees also rightly understands that the Fed pushing for even more monetary expansion will not solve our problem.

Unfortunately, her prescription is not nearly as insightful. She plays our ailing economy off against that of the Chinese and the Germans. She asserts that both of their economies of booming and implies that the secret to their success is government spending on research, development, and innovation. That is what they used to say about Japan's economy before it took a nosedive back in the early 1990s. If the Chinese have to "cool down" the economy, that is an indication that the boom is a product of monetary inflation and, hence, unsustainable.

No, government spending of any kind is not the solution either. The only thing that will put our economy back on a firm footing is to free the market: stop increasing the monetary base, cut government spending, and reduce business regulation. This will allow for more saving and investment in productive activity, which is the true job creator.

A Theory of Political Entrepreneurship

Yet another paper presented at the most recent Austrian Student Scholars Conference has just been published. The article, "A Theory of Political Entrepreneurship" co-authored by Matthew McCaffrey and Joseph Salerno was presented by McCaffrey this past February. McCaffrey and Salerno's paper was published in the September 2011 issue of Modern Economy. The abstract reads as follows:

This paper adapts the entrepreneurial theory developed by Richard Cantillon, Frank Knight, and Ludwig von Mises to the theory of “political entrepreneurship.” Political entrepreneurship is an outgrowth of the theory of the market entrepreneur, and derives from extending entrepreneurial theory from the market into the political sphere of action. By applying the theory of the entrepreneur to political behavior, we provide a basis for identifying political entrepreneurs, and for separating them analytically from other government agents. The essence of political entrepreneurship is the redirection of production from the path it would have taken in an unregulated market. Nevertheless, this production does produce an income stream to political entrepreneurs which closely resembles the profit of market entrepreneurs.

The Motive

One of the important things detectives need to identify for any crime they are trying to solve is a suspect's motive. This is also a good thing to do when analyzing economic policy. While not the foundation for macroeconomic analysis, if we want to change things for the better it is helpful looking for reasons why rulers maintain certain economic regimes that create macro-scale problems.

Hans-Hermann Hoppe has another provocative article seeking to answer "Why the State Demands Control of Money." He documents the benefits monetary authorities and their friends in other branches of government receive from government monopolization and manipulation of the money supply.

Business and the Literati

Algis Valiunas has a thoughtful piece of literary criticism in National Affairs examining the treatment American writers have given commerce and businessmen over the years. He provides a broad survey of works by Lincoln Stevens, Upton Sinclair, Thorstein Veblen, Ida Tarbell, Theodore Dreiser, Sinclair Lewis, Joe Keller, Arthur Miller, David Mamet, Saul Bellow, Tom Wolfe, and Ayn Rand. Valiunas is unsatisfied with the efforts of all of the above, because they fail, in his eyes, to move beyond a mere caricature "portraying corporations large and small, and the people who run them, as heartless, soulless agents of greed." If these were only so many men and women's opinion, such caricatures would be unremarkable, however, as Valinuas also notes, "These caricatures have shaped our implicit understanding of the nature of the business world, so much that they have come to pass for conventional wisdom."

This same point was not lost on Ludwig von Mises in his The Anti-Capitalistic Mentality.

In this vein dozens and dozens of novels and plays report the transactions of the villain of their plot, the businessman. The tycoons became rich by selling cracked steel and rotten food, shoes with cardboard sales and cotton goods for silk. They bribed the senators and the governors, the judges and the police. They cheated their customers and their workers. It is a very simple story. It never occurred to these authors that their narration implicitly describes all other Americans as perfect idiots whom every rascal can easily dupe (p. 71).

In the same book, Mises also offered up a reason why the anti-capitalistic mentality is more prominent in American literature than in its European counterpart.

In Europe "society" includes all those eminent in any sphere of activity. Statesmen and parliamentary leaders, the heads of the various departments of the civil service, publishers and editors of the main newspapers and magazines, prominent writers, scientists, artists, actors, musicians, engineers, lawyers and physicians form together with outstanding businessmen and scions of aristocratic and patrician families what is considered the good society. They come into contact with one another at dinner and tea parties, charity balls and bazaars, at first-nights, and varnishing days; they frequent the same restaurants, hotels and resorts. When they meet, they take their pleasure in conversation about intellectual matters, a mode of social intercourse first developed in Italy of the Renaissance, perfected in the Parisian salons and later imitated by the "society" of all important cities of Western and Central Europe. New ideas and ideologies find their response in these social gatherings before they begin to influence broader circles. One cannot deal with the history of the fine arts and literature in the nineteenth century without analyzing the role "society" played in encouraging or discouraging their protagonists (pp. 18-19).

In the United States, however, the intelligentsia do not socialize with real businessmen as much and, hence, find it easier to caricature that of which they are ignorant.