Not Cadillac, CONDILLAC

Condillac  (1715 - 1780)

On this date in 1715 (or 1714 depending on your source), the french philosopher and economic liberal Étienne Bonnot, Abbé de Condillac was born. On the issue of property he was a Lockean and is credited by Guido Hulsmann with writing the first treatise on political economy based on subjective value. That treatise is Commerce and Government and appeared the same year as Adam Smith's Wealth of Nations. Regarding the importance of Condillac's influence on economics, Hulsmann has this to say in his biography of Mises:

The subjectivist theory of value survived only in this diffused form with one important exception: Etienne de Condillac’s great treatise, Commerce and Government. Published in the same year as Smith’s Wealth of Nations (1776), Condillac’s treatment gave the first full axiomatic presentation of political economy on the basis of the subjectivist theory of value. But the impact of his work was minimal because French economists rejected it. Condillac was already a famous philosopher when he published the book, and did not deem it necessary to follow the conventions of the disciples of Quesnay; rather, he presented his thoughts in an independent and original manner—an offense, it turns out, serious enough to prevent the translation of his work into English for more than two hundred years.

Still, Commerce and Government was one of the main sources of inspiration for Menger (who of course read French, among other languages) when he elaborated his economic value theory. Menger pointed out that value can only come into existence once human beings realize that economic goods exist and that each of them has a personal—or, as Menger would say “subjective” —importance. (Hulsmann, Mises, pp. 112-113). 

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

Ludwig von Mises (1881-1973)

Ludwig von Mises

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

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

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

More Evidence from Economic History that Fiscal Stimulus Does not Work

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

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

James Grant on John Kenneth Galbraith

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

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

Leonard Read's "I Pencil"

Leonard Read

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

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

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

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

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

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

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

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

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

Easterly goes on to note that the more developed nations actively work to hamper free trade in order to benefit specific producers. The United States hinders economic expansion in less developed countries by supporting American sugar farmers and cotton growers. Easterly writes

[T]rade-fuelled growth not only decreases poverty, but also indirectlyhelps all the other MDGs. Yet in the US alone, the violations of the trade goal are legion. US consumers have long paid about twice the world price for sugar because of import quotas protecting about 9,000 domestic sugar producers. The European Union is similarly guilty.

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

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

The Immorality of Government Inflation

My article about the ethical problems of government inflation appears today on LewRockwell.com. Click the link and you'll hear Ritenour say:

If you or I tried to do that we would rightly be prosecuted for criminal activity. That fact that when the state does it is considered "monetary policy" does not make it more legitimate. 

We should get the state out of the monetary system altogether.