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Why Drafting Women Is a Terrible Idea

11 February, 2016 - 07:00

During last Saturday’s GOP presidential debate, the candidates were asked if they would support mandatory registration for women with the Selective Service System now that women are allowed combat positions in the US military. The Selective Service, of course, is the federal agency that maintains a list of potential conscripts should the US government ever decide to reinstitute the draft.

Most of the candidates applauded the idea while Ted Cruz denounced the notion. But, as is often the case, Cruz was right for the wrong reasons. Cruz seemed to base his reaction on sentimentalism and gender politics. He should be opposing an expansion of the draft for the simple reason that it’s potentially a massive tax increase. Here’s why:

Make no mistake about it. Expanding Selective Service from 50 percent of young adults to 100 percent is not about equality, or progress, or patriotism. While these notions will no doubt be used to bully people into supporting such a move, the real-world effect will be a massive expansion in government power over the lives of the population. Conscription, after all, is simply a draconian tax on the conscripts who lose their freedom for the duration, but who may also be coerced into being killed in order to promote the state’s policy agendas:

“Conscription is slavery,” Murray Rothbard wrote in 1973, and while temporary conscription is obviously much less bad — assuming one outlives the term of conscription — than many other forms of slavery, conscription is nevertheless a nearly-100-percent tax on the production of one’s mind and body. If one attempts to escape his confinement in his open-air military jail, he faces imprisonment or even execution in many cases.

Conscription remains popular among states because it is an easy way to directly extract resources from the population. Just as regular taxes partially extract the savings, productivity, and labor of the general population, conscription extracts virtually all of the labor and effort of the conscripts. The burden falls disproportionately on the young males in most cases, and they are at risk of a much higher tax burden if killed or given a permanent disability in battle. If he’s lucky enough to survive the conflict, the conscript may find himself living out the rest of his life as disfigured or missing his eyesight and limbs. He may be rendered permanently undesirable to the opposite sex. Such costs imposed on the conscript are a form of lifelong taxation.

Fortunately for those who escape such a fate, the term of slavery ends at a specified time, but for the duration, the only freedom the conscript enjoys is that granted to him by his jailers.

If the debate over this issue continues, we’re likely to hear a lot about how “fairness” and egalitarianism requires an expansion of the Selective Service System. But those claims are all distractions from the central issue here, which is the state’s power over the citizen.

After all, if women want to go help out Al-Qaeda in Syria (which is what the US is doing there), they are free to volunteer. Whether or not women can be directly involved in blowing up revelers at Afghani weddings, however, is a completely separate issue from conscription and the Selective Service.

The two issues are already being conflated, as was made clear by Chris Christie’s comment at the debate when he pounced on the issue of female conscription and declared it’s important that "women in this country understand anything they can dream, anything that they want to aspire to, they can do."

After hearing this, one is left wondering if Christie is aware that there’s a difference between being a soldier and being forced to be a soldier by the state.

Besides, if fairness is a concern, there’s an easy way to achieve fairness on this issue: abolish the Selective Service for everybody. It’s as easy as that. It wouldn’t even cost a dime of taxpayer money. Simply shred the records, fire everyone who works for Selective Service, and lease out the office space to organizations that do something useful. Then, we won’t have to hear anything about “discrimination” or the alleged sexism implicit in a policy that outrageously neglects to force women to work for the government against their will.

But Isn’t This Just a Symbolic Gesture?

Some who want to expand Selective Service for egalitarian reasons are claiming that it’s all just symbolic anyway, because the draft “will never happen.”

“The US hasn’t had the draft since the early 1970s,” one columnist loftily intoned as if that were evidence that the draft could never return. Wow, the 1970s? Did they even have electric lights back then?

Moreover, it’s a mistake to think that the draft could never return because people would overwhelmingly oppose people being forced into combat. Even if that is the case, there is no reason at all why conscription could not be used to draft people for non-combat positions. After all, only a very small portion of the military ever sees combat. The vast majority of soldiers are involved in logistics, transportation, and desk jobs such as computer programming.

Only a small portion of military deaths occur in combat. Most deaths in the military are due to accidents.

Additionally, there is no reason that Selective Service could not be modified to be used to draft people for so-called “national service” positions in which conscripts would perform non-combat bureaucratic and manual-labor jobs. Austria and Switzerland (which have conscription) allow this option for those morally opposed to combat. And historically — such as during World War II — “service” was imposed on conscientious objectors who were forced to work on farms or perform other types of manual labor in special camps.

So no, the draft is not “hypothetical,” “symbolic,” or something that “will never happen.”

Numerous countries in Latin America, Europe, and Asia still employ conscription, and it is hardly some kind of never-used relic from the distant past.

Alas, much of the opposition to the expansion of Selective Service has taken the form of National Review’s opposition which is based on the idea that conscripting women is some kind of special unique evil, quite unlike conscripting men. Military service is one thing, the editors write, but forcing women into it is “barbarism,” they admit. They’re half right. It is barbarism to force women to fight wars for the state. But the same is also true of conscription for men.

European Central Bank Gets Ready for More Easy Money

10 February, 2016 - 07:00

On January 21, 2016 European Central Bank (ECB) President Mario Draghi signaled that the governing council may provide more stimulus at its next meeting in March. “There are no limits to how far we're willing to deploy our instruments,” Draghi predicted.

The ECB president is of the view that the monetary stimulus undertaken by the central bank since June 2014 had strengthened the euro area’s resilience to recent global economic shocks. The yearly growth rate of the ECB balance sheet (an indicator of monetary pumping) jumped from minus 8.5 percent in December 2014 to 31.3 percent by December 2015, whilst the policy rate of the ECB stood at a record low of 0.05 percent.

Notwithstanding this, the president of the ECB holds that so far the central bank has failed to bring the rate of inflation to its target of around 2 percent.

A major factor behind this is a sharp fall in the price of oil, according to Draghi. The yearly growth rate of the CPI stood at 0.2 percent in December.

According to my own models, the growth rate could fall to minus 0.1 percent in December this year. By December next year, I forecast a figure of 0.8 percent. Based on this, it is reasonable to conclude it is likely that the ECB is going to further strengthen the pace of monetary pumping.

The loose monetary stance of the ECB is manifested in the strengthening of the momentum growth of eurozone money supply (as measured by the Austrian money supply or AMS) with the yearly growth rate climbing to 13 percent in November 2015 from 6.5 percent in November 2014.

A strong rebound in the growth momentum of this monetary measure for eurozone AMS bodes well for economic activity in terms of industrial production in the months ahead (see chart).

So, it is likely the eurozone will again see growth, but as it is engineered by the central bank, it will be experienced in bubble industries, which will have the effect of destroying wealth in true wealth-creating industries. That is, we shall see growth in areas that are recipients of malinvested money.

Meanwhile, most mainstream economists and commentators regard monetary pumping as the correct policy to keep the economy “healthy.” For them, an increase in money raises the demand for goods and services, and via the famous Keynesian multiplier, strengthens overall economic activity. Their position is that demand creates supply. This way of thinking is flawed, however, since an increase in money supply always sets in motion an exchange of nothing for something. It is exactly the same dynamic that is generated by a money counterfeiter.

While mainstream thinkers would likely oppose ordinary money counterfeiting, they are totally supportive of monetary pumping by the central bank, which sets in place the same dynamic as a counterfeiter. It impoverishes the true wealth generators in favor of bubble industries.

This sort of thing can go on as long as the pool of real wealth is still growing. But, once it starts to stagnate or shrink, then no amount of new pumping can boost general economic activity. The amount of real funding needed to support more false activities (i.e., bubble activities) is no longer there.

Why I Have Hope

9 February, 2016 - 07:00

[This article appears in the January-February 2016 issue of The Austrian.]

I think the most exciting message for me today is that things are changing.

Often, when I come to these events, people ask me, “isn’t this grueling, isn’t this very tough?” It’s not, though, and it’s actually a little bit selfish on my part, because I get energized when I meet all the young people here. It’s true there is a spread of ages here, but there are a lot of young people and some of them even come up to me and say “you introduced me to these ideas when I was in high school a few years ago.”

And it’s not just people at events like these. When I landed at the airport on my way here, I was approached by two young people who came up to talk to me. They didn’t know each other, but both spoke with foreign accents, and both said they were from Africa. They said they heard the message of liberty over the Internet, and they had been following me ever since 2008.

Positive Trends

These are just examples, but I do think they represent a larger change that is taking place right now. Things are changing dramatically and in a favorable way.

We’re in this transition period right now where the attitudes are changing. But our views have been out there a long time, so we have to ask ourselves why we’re seeing more success now among the young and many future leaders.

Part of this is just due to greater availability of ideas. The Internet certainly helps, and a lot of the credit must go to organizations like the Mises Institute that make the ideas of liberty more easily available to everyone.

I also never imagined that my presidential campaigns would get the attention they did for our ideas. Our success in bringing new young people into the movement surpassed anything I thought was possible.

Change Will Come Whether We Like It or Not

But the reason we see more success for these ideas is not just because it’s easier to find them and read them. We’re living in a time when people — especially young people — can see that the old ideas aren’t working any more.

The young generation has inherited a mess from the older generations, and the young can see that what they’ve been told isn’t true. It’s not true that you can just go to college, run up a bunch of student debt, and then get a good job. The young can see that the middle class is being destroyed by our current economic system. And they can see that our foreign policy is failing.

Whether we like it or not, change will come. The troops will come home. They probably won’t come home for ideological reasons, but simply because the United States is broke and can’t afford all its wars anymore.

We’re also living in a time when the economic system is going to come unglued. The old Keynesian economic system isn’t working and young people can see it.

If it is true that we’re in the midst of an end of an era, though, the question remains as to what’s going to replace the system we have now. There are still plenty of socialists — popular ones — who are out there saying that what we need is more government control and more war to fix the economy and the world. So, we still have a lot of work to do, but I think we’re in a better place now than we’ve been in a long time.

We Don’t Need a Majority

When thinking about all the work we still have to do, it’s important to keep in mind that we don’t need majority support. If you’re waiting for 51 percent of the population to say “I’m libertarian and I believe everything you say,” you’ll lose your mind. What we need for success is intellectual leadership in a country that can influence government and the society overall.

That’s where the progress is being made. We’re only talking about 7 or 8 percent of a country that is necessary to provide the kind of influence you need. This was the case during the American Revolution, and it’s true today. You are part of that 8 percent.

When doing this work, though, there are many things that can be done. People often ask me “what do you want me to do.” My answer is: “do what you want to do.”

There is no one way. Some people can use the political system, and others can go into pure education. Lew Rockwell started the Mises Institute, but what you do for the cause of liberty is personal to you, and you have to find what makes sense for you.

Also, you can’t know all the positive effects your work is having. I certainly had no way of knowing all these years how I was having an effect on those young Africans I met at the airport. You can’t always know what effect you’re having either.

Where To Start

So, say that we are successful, and our 7 or 8 percent continues to gain influence. What should we be doing? I think there are three basic places we need to start.

First off, we would see to it that there would be no income tax in the United States ever again.

Second, we would take the Federal Reserve and all its leadership and relegate them to the pages of history.

We would then pass a law that the US government cannot commit any crime that it punished other people for. It’s wrong to steal and hand people’s property over to other people, no matter how much people who do that win the applause of others.

And finally, we would bring all the troops home. Randolph Bourne was right when he said that war is the health of the state. Peace is the friend of liberty and prosperity.

We Need Humility

As a final note, I’d like to say that humility and tolerance need to be an important part of our efforts.

Yes, we need a foreign policy based on humility. We can’t know what’s right for people around the world, and we certainly shouldn’t force anything on them.

But right here at home, we need humility also. In fact, libertarianism is based on humility. We can’t know what’s best for other people. No one can, and that is why we want people to have the freedom to do what they think is best for themselves.

This is true in economics, of course. Do you think Janet Yellen knows what the “correct” interest rate is? There are many things that economic planners can’t possibly know. And for that reason — and others — there are so many things they shouldn’t be doing.

And yes, there are a lot of people out there living their lives in ways we might disagree with. But intolerance is what government is based on. The far left, they are very intolerant and are happy to have people with guns tell other people how to live.

We need to keep in mind that if other people aren’t hurting us or using government to force their way of life on us, they should be left alone.

Unlike the left, we want tolerance for other people’s morals and for how other people work for a living and what they choose to do with their money.

We need more tolerance and humility in every aspect of life, and that’s how we get a free society.

So, let’s all go to work and preserve the cause of liberty.

Thank you very much.

2016's Economy Begins with a Whimper

8 February, 2016 - 07:00

January was the winter of our discontented stock market. It was the worst January since 2008, when the Great Recession officially began. It was, in fact, the worst January in the history of the New York Stock Exchange. According to Citigroup, Inc., it was also the worst January ever for credit markets.

During many Fed tightenings, the stock market and overall economy improved for years afterward because the Fed stimulus had actually brought a temporary form of economic recovery. But rarely, if ever, has the mood turned dark so fast after the Fed officially announced that the recovery is sound and the life support can be removed.

So, even while I knew the global economic news was bleak, I didn’t expect the market bulls to snuff out their own ecstasy the day after the ball began. I can only imagine how much the permabulls wanted to go on air that next morning to revel in their we-told-you-sos about how the economy would do just fine after a Fed rate hike. Only they could not. They woke up to face reality.

Now that the Fed has decided to hold the Fed Funds target rate steady at their January meeting, everyone is nervously guessing which way the market will continue.

The Party in the Bull Pen Is Over

In December, Federal Reserve Chair Janet Yellen looked visibly happy when she was able to make the announcement of her lifetime — the claim that things looked optimistic enough for the Fed’s recovery that the Fed could finally end its economic aid. Never before has a Fed chairman looked less dour and more ready to crack open the champagne for the big Fed Christmas party.

Markets gleefully rewarded her with an immediate rise of 200 points in the Dow Jones Industrial Average during the remains of the day (December 16) after she delivered her glad yule tidings.

The market, however, decided to crash the party along Wall Street the next morning by dropping 253 points on December 17 — farther than it had risen during the celebration. The real gravity of those numbers was proven when the fall picked up speed for a 367-point plunge the next day, bringing the stock market down over 600 points before it closed at the end of last week.

And, so, the Fed’s rate hike made December the most volatile December for the Dow since the economic crisis of 2008. Moreover, since 1990, Decembers have been the least volatile month of the year. So, something is different this time. Something is very deeply and disturbingly different if you compare this seventy-degree day of winter solstice in Washington to any other.

It wasn’t your typical placid and merry December. Friday’s sell-off was the sharpest one-day plunge since September (up until January 7th’s 374-point plunge), and trading volume has been higher than usual in December as investors jockeyed to position themselves for the Fed’s anticipated rate rise. This is the feel of something big beginning to creep.

The sharp sell-off in stocks across all sectors of the Dow in the heaviest trading of the year came because of news that oil prices were still falling and fear over what this means for banks that are heavily involved in financing highly leveraged oil companies. For the past several years, such news would have caused the stock market to rise because it would mean another year of struggle in which the Fed would be hard at work trying to re-inflate the economy by giving free money to its friends in the financial sector.

All ten sectors of the S&P 500 also closed in negative territory the week of the Fed’s announcement. For the Dow, it was the third weekly decline in four weeks. Reality, in other words, hit the face like a glass of ice water the morning after the party. For the market bulls, it was off to work with a hangover.

The sobering fact that bank stocks were the first to decline was a surprise to many (including myself). Common wisdom throughout the market expected bank stocks to rise the fastest when the Fed raised rates because the rise in interest would actually improve bank profits since so many of their adjustable-rate loans and credit cards are pegged to interest rates that are strongly affected by the Fed’s target.

Banks will be collecting more in interest but they will be slow to start paying more interest on deposits, so were expected to benefit. Yet, financials went down because banks ensnared in a commodities massacre look edgy.

Even high-tech stocks, which have been supporting the narrowly traded market have been falling with the king of stocks — Apple — down 15 percent since the rate hike.

The global market had gone into a similar slide two weeks earlier when the European Central Bank did a little “quantitative wheezing” that didn’t satisfy the demands of its junkies. It was the same with Japan, where five rounds of QE have now failed to jack up the economy any longer than the QE lasted. QE is so unsuccessful that Japanese income and household spending are in decline again, even with the Bank of Japan embracing negative interest rates for the first time ever.

 

The Week in Review: February 6, 2016

5 February, 2016 - 07:00

This week’s Iowa caucuses mean that election season has officially begun, though the truth about politics stays the same. While the names may change, the spectacle every four years represents, as Lew Rockwell notes, “the triumph of compulsion over cooperation, coercion over freedom, and propaganda over truth.” Party banners are waved, campaign consultants gets paid, and government continues to grow — regardless of its consequences. Though while governments across the world — and the central bankers that enable them — continue to look for ways to tighten its grasp on an increasingly fragile globe, history will show it is no match for the human spirit. Innovation, reason and markets.

Or in the words of Jeff Deist at last weekend’s Mises Circle: The future is centralized vs. decentralized, it’s what works vs. what doesn’t. It’s reasonable people vs. unreasonable people. It’s political correctness vs. the truth.

The next Mises Weekends features Dr. Ron Paul’s speech from Houston. Dr. Paul puts today’s battle for liberty in historical perspective, highlighting how advancements in society have been rooted in respect for individual rights. Pointing to today’s technology that allows for the global dissemination of Austrian economics, freedom, and peace, Dr. Paul explains why he maintains his infectious optimism ­— even in the face of today’s depressing electoral season.

And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:

The Truth About Politics by Llewellyn H. Rockwell Jr.The Cozy Relationship between the Treasury and the Fed by David HowdenThe Continuing Demonization of Cash by Paul-Martin FossAre Harsh Sentencing Laws Driving Up Homicide Rates? by Justin MurrayHow the Blockchain and Gold Can Work Together by Thorsten PolleitMeasuring the Global ECONOMIC Temperature by Mark ThorntonAfter Lego, Barbie Now Criticized for Being Too PC by Ryan McMakenHow Would "President Rothbard" Keep Out the Zika Virus? by Ryan McMakenWas the Ethanol Lobby the Big Loser in Iowa this Year? by Ryan McMakenA Crack in the Central Bankers’ Armor? by Paul-Martin Foss"Reformulation of Austrian Business Cycle Theory" Now in PolishThe Fed Wants to Test Drive Negative Interest Rates by Joseph SalernoMises: The Case for Reason by Ludwig von MisesAlt-Right vs. Socialist Left: What It Means for Liberty by Jeff DeistFlint MI. Whistle Blower Says Public Science Broken by Mark ThorntonA Surprising Opponent of the War on Cash by Joseph SalernoMore Thoughts on Libertarian Populism by Jeff DeistMises on the War on Cash by Carmen Elena DorobățEven José Canseco Thinks Negative Interest Rates Are "Dumb" by Joseph Salerno

Three Reasons to Be Worried About the Economy

3 February, 2016 - 07:00

On January 12, America’s central planner-in-chief gave his State of the Union address. The president promised nothing less than to feed the hungry, create jobs, shape the earth’s climate, and make everyone a college graduate. There’s nothing new here, though. We’ve heard variations of this silly song and dance every year under both Democrats and Republicans. The president lambasted naysayers as fear-mongers that were too partisan to admit we have a booming economy. The fact that the Dow Jones cratered roughly 9 percent in the same thirty-day period President Obama gave his address did nothing to quell Obama's optimism about America’s future. In fact, he labeled the US economy “the strongest and most durable in the world.”

Despite our leader’s unwavering confidence in America’s fortunes, a quick peak under the hood reveals a pretty grim state of American commerce.

1. The Federal Reserve and US Government Have Warped the American Economy

In just the past decade, the Federal Reserve’s balance sheet has grown from roughly $800 billion to over $4 trillion. Our central bankers engaging in massive asset purchases to pummel interest rates downward is not news to anyone. We’ve been living in a world of falling interest rates since the 9/11 terrorist attacks. Yet, few mainstream economists have taken a good look at the destructive effects of this unprecedented monetary expansion. The calamitous distortions Fed policy has created for actors on both Main Street and Wall Street since 2008 have laid the groundwork for yet another crash.

Low interest rates stemming from a growing money supply are the only reason the US government has managed to service its gargantuan debt in recent years. The Congressional Budget Office itself has pointed out that even a slight rise in interest rates could potentially result in anywhere from $700 to $900 billion in annual tax payments just to service the interest on our debt. At this pace, paying the republic’s creditors will become our largest government program in no time. Future Americans might go to work and have 50 percent of their paychecks seized not to pay for government services, but simply to service debt forced on them by central planners.

But public debt is far from the only distortion artificially low rates have wrought. Mortgages, auto loans, credit cards, and student loans have ballooned total consumer debt to $12 trillion, and this number is only trending upward. The easy credit economy manufactured by central bankers has obliterated American savings and replaced them with debt. The average American consumer has less than $1,000 in his bank account. He lives praying for no car trouble or a broken arm. There was a time when Americans were rewarded for saving their earnings with double-digit interest rates but this is a distant memory. If Americans want to earn a return nowadays they must play the central-bank sponsored stock market casino. In fact, calling the stock market a casino is a little insulting to casinos — at least Blackjack has consistent rules.

2. American Corporations Are Debt-ridden and Unproductive

The post-recession bull market inspired a lot of confidence in the American economy and Obama’s recovery, but this is akin to praising great happy hour specials on the Titanic. Soaring stock market prices are not a result of increased productivity or innovation — they are a symptom of central bank fueled asset inflation and corporate debt. In fact, since 2008, corporate debt has doubled. Almost 100 percent of all corporate issued debt has been used to buy back stocks and prop up equity prices. This bears repeating. Almost none of America’s recently issued corporate debt has gone toward investing in plant and equipment, increasing the workforce, research and development, or expanding operations in any meaningful way.

Our central bankers, regulatory agencies, and fiscal policies have created a financial system so distorted and removed from real assets and real cash flow generation that corporate executives can rake in billions in bonuses while producing almost nothing of real value. Investing in the real American economy is just not worth the risk. The massive long-term obligations assumed by American companies high on low interest rates will slowly crush the life out of our economy. The only answer is to start producing real goods and begin generating real cash flow. But this won’t happen in the bubble-finance nightmare cycle we’re now in.

Our current money commissar, Janet Yellen, recently “raised rates” from 0.25 percent to a paltry 0.5 percent. If this rounding error of a rate hike can send the market tumbling off a cliff, what would happen if the fed raised the target rate back up to 6 percent like in 2000?

3. American Entrepreneurship is Dying and American Workers Are Unproductive

Financial chicanery aside, we have to come to terms with the fact that Americans themselves just aren’t built like they used to be. President Obama’s administration constantly cites low unemployment as a sign that our economy is back on track. To say unemployment numbers are massaged is an understatement. Of course unemployment recovered since 2008, President Obama was sworn in at the end of a market crash! But more importantly, the American economy is not producing architects, engineers, machinists, or other high value, goods-producing workers. We are pumping out an army of waiters, social workers, and associate professors with worthless six-figure degrees they have no hope of paying off in this life or the next. American workers are not interested or encouraged to start businesses, learn new skills, or innovate in some way. The typical American graduate firmly believes he can turn a six-year sociology degree into a job that doesn’t involve bringing people mimosas for brunch.

Our unproductive workforce is not all the fault of its members.The disincentives for entrepreneurship and wealth creation are colossal in this country. Dealing with licensing boards, zoning commissions, health inspectors, unions, and other regulatory bodies at the federal, state, and municipal level is extraordinarily burdensome, particularly for the poor and nascent immigrants. Successful entrepreneurs then have taxes levied at the federal, state, and local level across a cavalcade of confusing forms and attachments. The state and its many institutions make it nearly impossible for the average American citizen to just try something. This is the lifeblood of a “durable economy.” Unfortunately, business failures are now outpacing business startups.

The political class has completely disrupted the American structure of production, made American workers uncompetitive, snuffed the life out of entrepreneurs, and burdened the entire nation with a debt obligation the size of Jupiter. The US economy is not the strongest and most durable in the world — it is an unskilled thirty-two-year-old waiter crashing at his parent’s place and trying to pay down an $80,000 international relations degree.

The Truth About Politics

3 February, 2016 - 07:00

The very first votes of the 2016 presidential election season were cast this week in the Iowa caucuses. This is supposed to fill us with happy thoughts about self-government, civic virtue, rational deliberation, and about politics as the way the people’s will is put into effect.

But to the contrary, we should spurn what the establishment would have us celebrate. Politics operates according to principles that would horrify us if we observed them in our private lives, and that would get us arrested if we tried to live by them. The state can steal and call it taxation, kidnap and call it conscription, kill and call it war.

And yet we are taught to fear capitalism, of all things.

But what, after all, are capitalism and the free market? They are nothing more than the sum total of voluntary exchanges in society.

When we engage in a voluntary exchange — when I buy apples for $5, or when you hire someone for $25 per hour — both sides are better off than they would have been in the absence of the exchange.

We can’t say the same for our interactions with the state, since we pay the state under threat of violence. The state sure winds up better off, though. That’s for sure.

Business firms that increase their profits thanks to some new innovation cannot rest on their laurels. Other firms will adopt the innovation themselves, and those abnormally high profits will dissipate. The original firm must continue to press forward, striving to devise still newer ways to please their fellow men.

The state operates under no such conditions. It can remain as backward as it likes. Other firms are typically prohibited from competing with it.

The state’s priorities arbitrarily override your own. Ethanol “is important for the farmers,” one candidate says. So because the state has decided some interest group’s foolish and economically nonsensical pet project is “important,” what you yourself would have preferred to do with your money is simply set aside and ignored, and you are forced to subsidize what the state seeks to privilege.

Our schools and media portray corporations as sinister, and government as benign. But who wouldn’t rather take a sales call from Norwegian Cruise Line than an audit demand from the Internal Revenue Service?

Or imagine if a corporation fabricated a web of untruths, used them as a pretext to launch a violent attack on a people that had never caused Americans any harm, and brought about as many as a million deaths and millions more internal and external refugees. That corporation would be broken up and never heard from again. It would be denounced ceaselessly until the end of time.

Now all those things did happen, but they were carried out by the state. And as we all know, there have been no repercussions for anyone. No one has been punished. In fact, the perpetrators earn six-figure speaking fees. The whole thing is shrugged off as at worst an honest mistake. Some people are still outraged about it, but even they seem to take for granted that there’s really nothing that can be done about behavior like this on the part of the American regime.

Imagine there were a corporation that was somehow so entrenched that despite being responsible for a staggering death toll, it evaded all responsibility and simply carried on as before. The outrage would be deafening and overwhelming.

But so relentless has been the propaganda, ever since all of us were children, about the state’s benign nature that many people simply cannot bring themselves to think as badly about the state as they have been taught to think about corporations — even though the crimes of the state put to shame all the misdeeds of all existing corporations put together. Meanwhile, opponents of the state are routinely portrayed as incorrigible misanthropes, when in fact, in light of the state’s true nature, we are mankind’s greatest advocates.

The market brings people together. People of divergent and sometimes antagonistic racial, religious, and philosophical backgrounds are happy to trade with one another. Beyond that, the international division of labor as it exists today is the greatest and most extraordinary example of human cooperation in the history of the world. Countless firms produce countless intermediate goods that eventually combine to become finished consumer products. And the entire structure of production, in all its complexity, is aimed at satisfying consumer preferences as effectively as possible.

The state, on the other hand, pits us against each other. If one of us wins a state favor, it comes at the expense of everyone else. For one group to be benefited, another must first be expropriated. At one time or another the state has pitted the old against the young, blacks against whites, the poor against the rich, the industrialists against agriculture, women against men.

Meanwhile, all the anti-social effort devoted to extracting favors from the state is effort that is not available to produce goods and services and increase the general prosperity.

The market is about anticipating the needs of our fellow men and exerting ourselves to meet those needs in the most cost-effective manner — in other words, by wasting the fewest possible resources, and making what we offer as affordable as we can for those we serve.

Ah, but we need the state, virtually everyone tells us. Whether it’s “monopoly,” or drugs, the bad guys overseas, or the scores of other bogeymen the state uses to justify itself, we’re constantly being reminded of why the state is supposed to be indispensable. To be sure, these and other rationales for the state sound plausible enough, which is why the state and its apologists use them. But the first halting steps toward intellectual liberation come when someone considers the possibility that the truth about these things might be different from what he hears on TV, or learned in school.

The small minority of people who administer the state with funds expropriated by the productive private sector need to justify this situation, lest the public become restless or entertain subversive ideas about the real relationship between the state and themselves. And this is where the state’s various platitudes about the people governing themselves, or taxation being voluntary, or government employees being the servants of the people, enter the picture.

Think for a moment just about this last claim: that government employees are our servants. These people staff an institution that decides how much of our income and wealth to expropriate in order to fund itself. They will imprison us if we do not pay. And we are to believe that these people are our servants?

For those not gullible enough to fall for such a transparent canard, the rationales become mildly more sophisticated. All right, all right, the state may say, it’s not quite right to say that the people govern themselves. But, they hasten to add, we can offer the next best thing: the people will be represented by individuals chosen from among them.

As Gerard Casey has argued, though, the idea of political representation is not meaningful. When an agent represents a business owner in a negotiation, he ensures that the owner's interests are pursued. If the owner’s interests are defended only weakly, ignored, or downright defied, the owner chooses different representation.

None of this bears any resemblance to political representation. Here, a so-called representative is chosen by some people but actively opposed by others. Yet he is said to “represent” all of them. But how can this be, when he can’t possibly know them all, and even if he did, he’d discover they have mutually exclusive views and priorities?

Even if we focus entirely on those people who did vote for the representative, is their vote supposed to imply consent to his every decision? Some of them may have voted for him not for his positions or merits, but simply because he was less bad than the alternative. Others may have chosen him for one or two of his stances, but may be indifferent or hostile on everything else. How can even these people — who actually voted for the representative — seriously be said to be “represented” by him?

But the idea of political representation, while meaningless, is not without its usefulness to the modern state. It helps to conceal the brute fact that, despite all the talk about “popular rule” and “governing ourselves,” even the “free societies” of the West amount to some people ruling, and others being ruled.

When the results are announced this primary season amid cheers and celebration, then, remember what it all represents: the triumph of compulsion over cooperation, coercion over freedom, and propaganda over truth. The civics textbooks may write with breathless awe about the American political system, but this is by far the worst thing about the US. Rather than celebrate the anti-social world of politics, let us raise a glass to the anti-politics of the free market, which has yielded more wealth and prosperity through peace and cooperation than the state and its politicians could with all the coercion in the world.

The Cozy Relationship between the Treasury and the Fed

2 February, 2016 - 07:00

Last year was a tough one for investors. Gold was down 10 percent. The Dow Industrials fell 2.5 percent, and most bond indexes finished down by at least that much.

One institution that performed remarkably well in 2015 was the Federal Reserve. It just finished its most profitable year on record. The $100 billion in net income earned last year was a slight improvement over the previous year. That total was also roughly three times higher than the Fed’s income from 2007, the last year before it initiated its Quantitative Easing programs in the wake of the financial crisis.

Since the Fed does not exist to generate profits, some may be confused as to how it could have such a great year at doing so.

Here’s how it works. Every time the Fed expands the money supply it buys an asset. Typically the asset is a financial security, like a US Treasury bond, and the counterparties are typically large banks. Figure 1 gives a simplified look at the Fed’s balance sheet at the end of 2015 and how it evolved over the year:

Figure 1: Simplified Federal Reserve Balance Sheet (in millions of dollars)

Compared to previous years, 2015 was relatively uneventful at the Fed. Having completed the tapering of its Quantitative Easing programs in October 2014, the Fed’s asset holdings held constant over the year. This was in stark contrast to the previous six years, during which the Fed purchased $3.5 trillion of assets. The Fed earns interest on its assets but most of its liabilities are non-interest bearing, like the $1.4 trillion worth of Federal Reserve notes crumpled in people’s pockets or buried under our mattresses. The Fed does pay interest on Reserve Bank balances, but at the current rate of 0.5 percent, this figure was a drop in the bucket relative to its total income. (Almost all of the Fed’s assets earn interest, while it incurs an interest expense on less than half of its liabilities.

What Does the Fed Do With All That Income?

The question that arises is what the Fed does with its profits.

Each year, the Fed remits to the US Treasury its net income, and thus provides the federal government with an important source of funding. Figure 2 shows how this figure has evolved since 2001.

Figure 2: Treasury Interest and Fed Remittances (in billions of dollars)

A decade ago, back when the Fed was a smaller size, Fed remittances were fairly steady, in the neighborhood of $20 billion a year. This all changed after 2008 as the Fed’s Quantitative Easing programs increased the amount of interest-earning assets that would generate funds to transfer back to the Treasury. This year’s figure of $97.7 billion is more than four times the amount transferred just ten years ago, an annual growth rate of more than 16 percent. (At least something is growing quickly in this economy.)

Big Bucks for the US Treasury

For the US Treasury, Fed remittances are something of a free lunch. When someone buys a Treasury bond, the government must pay them interest. This applies to the Fed as well, but then at year-end the Fed remits the interest back to the Treasury.

The federal government paid out $223 billion in interest payments last year. The Fed remitted almost $100 billion back, leaving the net interest expense at around $125 billion. It’s not just historically low interest rates that are making it easier for the Treasury to borrow in a way that, if it were done by anyone else, would classify them as subprime. The Fed is also chipping in and helping out where it can.

Also shown in figure 2 is the percentage of the federal interest expense that is remitted back by the Fed. For 2015, this figure neared 45 percent. That figure is a good way to think about the free lunch that the Fed gives to the Treasury.

In more “normal” times (i.e., prior to 2008) around 10 to 15 percent of the Treasury’s interest payments were paid back to it by the Fed. This figure has grown to almost four times that amount over the past seven years and it doesn’t look likr this trend will abate anytime soon.

Implications for Fed “Independence”

As much as economists talk about the independence that the Fed holds from Congress, these remittances represent a strong link. In fact, since they enable federal spending they create a form of quasi-fiscal policy for the Fed to use, in addition to its more common monetary policy options.

Consider that since Treasury debt is almost never repaid in net terms (old issues are retired but replaced with new debt issuances), the true cost of financing the US government’s borrowing is not the gross amount of debt outstanding but the annual interest expense it faces. Viewed this way, nearly half of the Treasury’s borrowing was financed by the Fed last year. Absent these Fed remittances, Congress would need to look at either an alternative funding source (though I am not sure how many takers there are for the Fed’s $2.5 trillion Treasury holdings) or make some serious cuts.

How serious? NASA’s operating budget was roughly $18 billion last year, so a lack of Fed remittances would cause the Treasury to cut around five NASA-sized programs. Alternatively, the governments Supplemental Nutrition Assistance Program (previously known as “food stamps”) cost $70 billion in 2014. Without the Fed’s remittances, Congress would have to stop paying out all food stamp recipients plus it would be forced to defund almost two NASAs.

More important in many Americans’ hearts is their monthly social security check. In 2014, $830 billion of social security checks were mailed out. Without Fed remittances, retirees might see their monthly check cut by about 12 percent.

For those concerned with the burgeoning size of the federal government, putting a stop to Fed remittances would put a serious dent in public finances and force some serious thought as to what programs need to be cut.

The Continuing Demonization of Cash

2 February, 2016 - 07:00

The insidious nature of the war on cash derives not just from the hurdles governments place in the way of those who use cash, but also from the aura of suspicion that has begun to pervade private cash transactions. In a normal market economy, businesses would welcome taking cash. After all, what business would willingly turn down customers? But in the war on cash that has developed in the thirty years since money laundering was declared a federal crime, businesses have had to walk a fine line between serving customers and serving the government. And since only one of those two parties has the power to shut down a business and throw business owners and employees into prison, guess whose wishes the business owner is going to follow more often?

The assumption on the part of government today is that possession of large amounts of cash is indicative of involvement in illegal activity. If you’re traveling with thousands of dollars in cash and get pulled over by the police, don’t be surprised when your money gets seized as “suspicious.” And if you want your money back, prepare to get into a long, drawn-out court case requiring you to prove that you came by that money legitimately, just because the courts have decided that carrying or using large amounts of cash is reasonable suspicion that you are engaging in illegal activity. Because of that risk of confiscation, businesses want to have less and less to do with cash, as even their legitimately-earned cash is subject to seizure by the government.

Restrictions on the use of cash are just some of the many laws that pervert the actions of a market economy. Rather than serving consumers, businesses are forced to serve the government first and consumers last. Businesses act as unpaid tax agents, collecting sales taxes for state governments and paying excise taxes to the federal government, the costs of which they pass on to their customers. Businesses act as enforcers of vice laws, refusing tobacco sales to those under eighteen or alcohol to those under twenty-one. Financial institutions, which includes coin dealers, jewelers, and casinos, are required to report cash transactions above $10,000 as well as any activity the government might deem “suspicious.” Cash becomes such a hassle that it is almost radioactive, and many businesses would rather not deal with the burden. Using cash to buy a house is becoming impossible and it is probably only a matter of time before purchasing a car with cash will become incredibly difficult also.

Centuries-old legal protections have been turned on their head in the war on cash. Guilt is assumed, while the victims of the government’s depredations have to prove their innocence. Governments having far more time and money to devote to asset forfeiture cases than the citizenry, most victims of cash seizures decide to capitulate rather than attempt a Pyrrhic victory. Those fortunate enough to keep their cash away from the prying hands of government officials find it increasingly difficult to use for both business and personal purposes, as wads of cash always arouse suspicion of drug dealing or other black market activity. And so cash continues to be marginalized and pushed to the fringes. Stemming the anti-cash tide will require a societal attitudinal adjustment that views cash not as something associated with crime, but as a bastion of consumer freedom and a bulwark against overzealous governments.

The Week in Review: January 30, 2016

29 January, 2016 - 07:00

The topic of our Mises Circle going on in Houston this weekend is “Where Are We Headed in 2016?” (Click here to watch live on Saturday.) While Austrians understand that the future is unknowable, this week give us some clues as to what may be ahead. The Fed will continue to attempt to avoid blame for the cracks emerging in global markets, elites will desperately seek new means to maintain their power, politicians will call for more taxes, and vital issues like terrorism will continue to be misdiagnosed. But while there is never hope to be found in the wheels of government, it can always be found in the market. It is what frees us all to find the best ways to enjoy our lives and help others all around. Even if that sometimes means offending music snobs.

If you couldn’t make it to Houston for our #MisesCircle, you can follow it live here.

Want to join the conversation? Tweet us your questions using #AskMises

Our event schedule (times are Central Standard Time)

10:00 a.m. Jeff Deist, “Alt-Right vs. Socialist Left: What It Means for Liberty”10:25 a.m. Corie Whalen Stephens, “Liberty Will Always Be Popular”10:35 a.m. Bob Murphy, “Why the Fed’s Magic Trick Won’t Work”11:00 a.m. Q&A11:20 a.m. Break (last chance to purchase books to be autographed)11:40 a.m. Panel Discussion, “Where Are We Headed in 2016?”12:20 – 1:30 p.m. Lunch Break1:20 – 1:50 p.m. Photos with Ron Paul (on stage)1:50 p.m. Lew Rockwell, “3 Reasons for Hope”2:10 p.m. Ron Paul, “What’s Ahead”2:40 p.m. Q&A3:00 p.m. Adjourn 

On this week's episode of Mises Weekends, we feature a 2011 talk at the Mises Institute given by Hans-Hermann Hoppe on the subject of praxeology: the science of human action. It's a term and topic that can be intimidating to some people — and at nearly 50 minutes, Hoppe's talk is quite a bit longer than our usual weekend show — but it is vitally important to understand why praxeology is the proper economic methodology. Listeners will enjoy and benefit from Hoppe's razor-sharp discussion.

In case you missed any of them, here are this week’s most popular Mises Daily and Mises Wire articles:

The Fed Passes the Buck: Blame Oil and China by C. Jay EngelBrazil's Easy-Money Problem by Lucas VazMises on Protectionism and Immigration by Matt McCaffreyThe Market Doesn't Solve Problems; People Do by Louis RouanetAre Government Regulators More Virtuous than Everyone Else? by Iván CarrinoSoaking the Future Poor, by Carmen Elena DorobatNorway's Largest Bank Proposes a Raid on Cash by Joseph T. SalernoIs Terrorism a Disease? by Peter G. KleinNotes from Snowmageddon by T. Hunt TooleyThe Minimum Wage and Progressive Eugenics, Again by Ryan McMakenBubble Watch: Planes, Trains, and Automobiles by Paul-Martin FossConsumers Embrace the Bass by Peter G. KleinMises on Immigration: A Selected Bibliography by Matt McCaffreyCash Still Rules! by Joseph T. SalernoFed Leaves Interest Rates Unchanged, Markets Head Down by Ryan McMakenBank of Canada Holds Overnight Rate at 0.5%, Following Multiple Cuts in 2015 by Ryan McMakenBank of Japan Goes Negative, "Strong Dollar" Surges by Ryan McMakenMises.org Now at Business Insider

Are Harsh Sentencing Laws Driving Up Homicide Rates?

26 January, 2016 - 07:00

In recent years, there has been a growing awareness fact that the United States imprisons a far larger percentage of its population than many other nations. Much of this is due to the fact that what we call crime in the US is often not an imprisonable offense in the EU nations.

In the US, for example, a prison term is commonly employed for small-time drug offenders. According a study done by the Vera Institute of Justice, such sentences are rarely used for drug offenses in Germany and the Netherlands.

This is even true of more serious crimes. The report notes:

In most cases — even for relatively serious crimes such as burglary, aggravated assault, or other crimes considered felonies in the United States — prosecutors divert offenders away from prosecution or judges sanction offenders with fines, suspended sentences, or community service. In both the Netherlands and Germany, fines are used extensively as a primary sanction.

This reflects a basic difference in sentencing in the US. In the US, imprisonment is the primary sanction in many cases, leading to an unusually large prison population:

Jurisdictions across the U.S. and around the world grapple with the same basic questions regarding the role of punishment in their criminal justice systems: Who should be punished? How should offenders be punished? Under what conditions? For how long? By no means are these questions answered uniformly. Within the U.S., the rate of incarceration and the proportion of offenders sentenced to prison and community supervision differ from state to state. Indeed, the rate of imprisonment in state prison in the U.S. ranges from 147 per 100,000 residents in Maine to 865 per 100,000 residents in Louisiana. The overall imprisonment rate in the United States, including the jail and federal population, is 716 per 100,000 residents. The comparison to European rates is startling: 79 per 100,000 residents in Germany and 82 per 100,000 residents in the Netherlands are in prison.

The use and sale of prohibited narcotics makes up a majority of the US’s prison population. If we include immigration offenses and the category of extortion, fraud, and bribery, the non-violent prison population is almost 68 percent of all inmates and, therefore, nearly 68 percent of all individuals with a criminal record. Further non-violent offenses are buried in the remaining categories such as “other,” which includes a broad range of imprisonable offenses such as not paying the tag tax on your automobile or getting lost in a snowstorm.

Source: Bureau of Prisons, February 2009Does the Extensive Use of Prison Increase Violence?

Despite the formal sentence handed down by a judge, a prison sentence is a life sentence. The simple fact is that being branded a criminal cuts off individuals from nearly all forms of employment opportunities. Non-violent offenses average between three to five years combined with prison and supervised parole. Even if employers ignored a person’s prior prison history in hiring decisions, the length of time absent from the workforce is significant, while the lost income during incarceration is frequently insurmountable. Being a guest of the State often carries an added sentence of perpetual state-induced poverty.

Prison itself is a dehumanizing experience. Confining people in degrading conditions generates a different attitude and behavior. Because of the philosophy of isolation as a means of punishment, individuals exposed to that environment develop behavioral patterns and mentalities vastly different from those necessary to function in civil society. These individuals are then thrown back into the general public or transitioned through ineffectual halfway homes where the social network of former inmates continues to be dominated by other unemployed ex-cons.

Indeed, both inside and outside prison walls, convicted criminals who are unable to find employment often end up spending their prime years learning new criminal trades and behaviors that only perpetuate criminal behavior.

In turn, this has led to a phenomenon in which we find an enormous correlation between having a criminal past and being a victim of homicide.

Statistics in several major metropolitan areas, including Milwaukee, Baltimore, and Newark, have shown a clear connection between the two. According to USA Today:

In Milwaukee, local leaders created the homicide commission after a spike in violence led to a 39% increase in murders in 2005. The group compiled statistics on victims' criminal histories for the first time and found that 77% of homicide victims in the past two years had an average of nearly 12 arrests. … Philadelphia also has seen the number of victims with criminal pasts inch up — to 75% this year from 71% in 2005. ... In Newark ... roughly 85% of victims killed in the first six months of this year had criminal records, on par with the percentage in 2005 but up from 81% last year, police statistics show.

A Connection Between Incarceration and Homicide?

So, does the cycle of imprisonment and impoverishment actually lead to more serious crime? Given the economic impacts of a prison sentence, and thus the increased likelihood that one will continue to associate with others who have criminal records, it’s plausible that extensive use of prisons for so many offenses encourages the formation of violent social enclaves outside of prison.

This in turn leads us to the fact that a disproportionate number of homicide victims have criminal records.

In fact, if we look for a connection between incarceration rates and homicide rates in US states and European countries, we find a clear correlation (x and y axes: n per 100,000):

This chart compares the homicide rate of each of the fifty US States and a number of Western and Central European nations. The incarceration rate of the US is 716 per 100,000 compared to the average of Western and Central European nations, which is 102.

Making comparisons between countries and states on homicide is very problematic, and any number of factors can be at play. It’s difficult to show clear connections between homicides and other factors, such as gun ownership. Moreover, one might be tempted to claim that incarceration rates are higher because Americans are more violent due to some other outside factors. However, given the prevalence of criminal records among homicide victims, and the American propensity to create large numbers of people who have spent time in prison, it may be worth a second look at how our immense prison population may be a contributing factor to overall violent criminal activity. It may be just another example of one of the state’s efforts to “protect” us gone wrong.

How the Blockchain and Gold Can Work Together

26 January, 2016 - 07:00

A look into monetary history shows that people, when given freedom of choice, opted for precious metals as money. This doesn’t come as a surprise. Precious metals have the physical properties a medium must have to serve as legal tender: They are scarce, homogenous, durable, divisible, mintable, and transportable. They are held in high esteem and represent considerable value per unit of weight. Gold fulfills these requirements par excellence, and this is why it has always been peoples’ first choice in terms of money. Gold has proven its merits as money for millennia; it is the ultimate means of payment.

More recently, gold has been replaced by the state’s unredeemable fiat money — for reasons rather more political than economic. The state prefers money whose value can be altered at will — say, to influence overall demand, redistribute income, and to benefit some at the expense of the many. Gold money stands in the way of such machinations. Fiat money doesn’t. On the contrary, fiat money can simply be printed up; can be created out of thin air.

Fiat money has serious economic and ethical drawbacks, though. It is chronically inflationary, widens the gap between poor and rich, triggers boom-and-bust cycles, and compounds the economy’s debt burden. Most important, a fiat money regime allows the state to expand actually without limit, over time potentially transforming even a minimum state into a maximum state at the expense of individual liberty and freedom.

In the wake of the most recent financial and economic crisis of 2007–2008, many people have become concerned that their savings, mostly invested in fiat-denominated bank accounts and bonds, could be devaluated. This has prompted a search for “good” money.

Somewhat new to the mix are the digital currencies, most famous of which is the virtual unit “bitcoin.” It is a digital currency generated by decentralized, internet-based computers rather than a central authority.

Transactions through digital currencies such as bitcoin are confirmed, or validated, by a decentralized consensus system that uses a “blockchain.” The latter is essentially a public digital ledger, an account statement for transactions among computers. The blockchain is saved on many computers so that it is practically impossible to manipulate. In the case of bitcoin specifically, the blockchain ensures that only the bitcoin’s owner can make a transaction with his bitcoin, that the same bitcoin cannot be created manifold.

In this article, I’ll use bitcoin as my main example, although this technology can be applied to any number of similar digital currencies.

However, this technology has now been used to provide a new means of transferring assets among people: the “colored bitcoin.” A colored bitcoin — or something comparable using blockchain technology — represents a certain asset. For instance, physical gold can be made available for day-to-day transactions — for purchases and sales in supermarkets and on the internet — simply by transferring a gold-backed colored bitcoin from the bitcoin wallet of the buyer to the bitcoin wallet of the seller.

How could one obtain such a gold-backed bitcoin? You would buy, say, physical gold at a gold shop. The latter then issues a colored bitcoin, which represents the ownership of physical gold. The colored bitcoin is, economically speaking, a gold substitute (a money substitute, fully backed by physical gold). It can be used for making purchases and, upon the wish of its owner, it can be redeemed into physical gold at the gold shop at any time.

A colored bitcoin represents a physical thing or asset that exists outside the bitcoin network. It therefore carries with it a risk that the issuer will not live up to his promise. However, there are market solutions to this problem. For instance, the gold can be stored with a particularly trustworthy third party. Or, people hold colored bitcoins issued by various issuers. If the latter are seen to be of the same riskiness, they would trade at par to each other (after making allowance for possible storage and handling costs).

That said, the gold-on-the-blockchain technology appears to hold great potential when it comes to making possible a world of digital gold money transactions. So far, governments use regulation and taxation to inhibit and even prevent unencumbered competition among monies. However, the evolution of the blockchain largely circumvents many of the obstacles governments put in the way of a free market in money. Where it will lead is, of course, is impossible to predict with certainty.

In any case, when we’re comparing to government fiat money, digital currencies can offer attractive alternatives. The same goes for gold lovers, who may see blockchain technology as the means of conveying physical gold; and in the end digitized gold money could become a practical option.

Are Government Regulators More Virtuous than Everyone Else?

26 January, 2016 - 07:00

In their new book, Phishing for Phools, Nobel-prize winning economists George Akerlof and Robert Shiller use a behavioral economics approach to criticize the “manipulation and deception” that can exist between businesses and consumers.

According to Shiller,

[a] fundamental concept of psychology is that people often make decisions they’re not happy about. … If businesses have a chance to profit by tempting us into making decisions that are good for them but bad for us, they will take it. They have just as powerful an incentive to provide us with what we don’t want as to provide us with what we do want.

According to the Wall Street Journal, this is one of the main contributions of the book: the market is the best mechanism to offer people things they do not want to have.

We Do Not Buy What We Do Not Want

No one denies that sometimes we do things we later regret. Most of us once bought something that we later regretted spending money on.

However, the fact that these errors in judgment may occur — on the part of the consumers — is not evidence that businesses attempt to sell products that customers do not want.

It’s important to understand that individual decisions are made prospectively, looking forward in time. When an individual buys a product or service, he does so because he expects it to remove his “uneasiness.” At the time of the transaction, this person making the purchase is indeed revealing his desire to have that good. Otherwise, he would not make the purchase. This does not mean that, in retrospect, our decision may be judged to have been a success or a failure, depending on whether it really served the purpose it was meant to serve.

But it doesn’t follow from here that the market is as good at delivering what people want as it is at delivering what people do not want. If this was the case, then business would continue to sell audio cassettes, VHS videotapes, and other products to consumers who have been “manipulated” into buying them.

Obviously, this is not what happens.

Who Regulates the Regulators?

Another weak point in Akerlof’s and Shiller’s argument is their implied solution: government regulation. In a recent article, Shiller writes

While we confirm the importance of free markets, we have found that market regulation has been crucial, and believe that will continue to be true in the future. [Standard economic theory] usually ignores the fact that, given normal human weaknesses, an unregulated competitive economy will inevitably spawn an immense amount of manipulation and deception.

One can’t help but notice the central contradiction in this analysis. On the one hand, it is assumed that markets fail because of “normal human weakness.” On the other hand, it is assumed that regulation, which must necessarily be implemented by human beings with equal or greater “weaknesses,” will somehow solve the problem.

Akerlof and Shiller simultaneously demonize human beings who operate in the private sector while idealizing human beings who operate in the public sector.

Lessons From South America

For evidence of the problem with this approach we need look no further than South America where government agents are quite adept at giving people “what we do not want.”

For example, we can note the fact that a process of impeachment recently began against the president of Brazil because, according to the allegations, she tried to hide the true extent of increases in public spending. Meanwhile, in Argentina, former Vice President Amado Boudou cannot leave the country because he is accused of misappropriating funds from the company responsible for printing pesos bills.

These are just some recent examples in a nearly endless list of corruption cases, and if democratically elected officials such as these are capable of such large-scale deception and malfeasance, why should we think that these same people can help reduce “manuipulation and deception” in the market place?

The situation we face in South America is exactly the opposite of the free-wheeling under-regulated markets described by Shiller and Akerlof. We live in highly regulated economies which are being suffocated and corrupted by an excess of political power.

Meanwhile, according to the latest IMF estimates, Venezuela, Brazil, and Argentina have been among the slowest growing economies from 2011 to 2015. Not surprisingly, all three of these countries have been implementing highly interventionist policies, boosting public expenditure, manipulating credit markets, and controlling prices of certain goods and services.

And, of course, South America is hardly the only place on earth that experiences political corruption.

The focus, then, contra Shiller and Akerlof, must be placed on how to dismantle this system, not in providing it with more weapons and arguments to continue growing.

The Market Doesn't Solve Problems; People Do

26 January, 2016 - 07:00

It is wrongly accepted by many liberals (i.e., libertarians) that most, if not all, social problems can be “solved by the market.” But clearly, the “market” cannot magically solve our problems. Let it be clear that there is no doubt that the best way to have social progress is to have a free market economy. However, free markets are not solutions to problems, per se, but are rather what gives us the opportunity to find our own solutions to our own problems by finding the most valuable way to serve one another. For example, Frédéric Bastiat famously wrote in The Law that: “At whatever point of the scientific horizon I start from, I invariably come to the same thing — the solution of the social problem is in liberty.”

By speaking about the virtues of the market, we tend to forget that markets do not have virtues, only people do. As Murray Rothbard once wrote, “it is overlooked that the ‘market’ is not some sort of living entity making good or bad decisions, but simply a label for individual persons and their voluntary interactions. … The ‘market’ is individual acting.”

The “What Should Government Do?” Bias

During each crisis, politicians and intellectuals systematically presume that “we should do something.” Thus, when liberals emphasize the importance of not violently intervening in the free market order because of the harmful, but yet unseen, consequences of state intervention, they are often accused of favoring inaction. This is a misconception of the liberal argument.

The free market is not superior because it offers solutions. It is superior because its basis is freedom, a freedom that is used by individuals to find new ways for them that are in harmony with the interests of their fellow men. Of course, there are many problems and abuses with the market, but entrepreneurs — if not prevented from entering the marketplace by governments — seek to solve these problems in the pursuit of profits. Through these entrepreneurs, the market is a process that tends to satisfy the most urgent, not-yet-satisfied, needs of the consumers.

To be clear, liberalism — used here to denote the philosophy of laissez-faire — should not be considered as being the utopian opposite of socialism. It is not a magic recipe that guarantees perfect solutions at all times and for all things. Socialists like to imagine that liberals believe the market can cure every ill. In other words, they think liberalism is a mirror reflection of socialism. It is not. True liberalism does not promise perfection, it does not even promise a solution. There will always be problems. Our goal should be to find the best way to improve the situation, not to achieve an ideal world of fantasy.

When a social problem arises and somebody asks a liberal what must be done, he instinctively argues that “we” should free the markets, that “we” should liberalize, or that “we” should commit to deregulation.

But those proposals are not solutions to our problems at all, they are just a necessary step in the process of setting people free to solve problems. By pretending that “the market” is the solution that “we” should adopt, many liberals are victims of the top-down fallacy and deny the polycentric nature of markets. By calling “the market” a solution, we create the illusion that the free market is just another kind of government policy where the rulers offer us a solution. But the real solutions are offered by free individuals, by the free innovator, the free worker, the free capitalist, and the free entrepreneur.

Solutions to problems are not offered by the market, they are offered on the market. As development economist William Easterly brilliantly writes:

The “what should we do?” industry does not show any signs of going out of business soon. It gives us public intellectuals something to do and it gives politicians something to recommend. Much more positively, it does engage the very welcome idealism of altruists who want to make the world a better place. But the Sustainable Development Goals may be the best demonstration yet that action plans don’t necessarily lead to action, “we” are not necessarily the right ones to act, and that there are alternative routes to progress. Global progress has a lot more to do with the advocacy of the ideal of human freedom than with action plans.

Thus, free markets are a sort of meta-solution. They are the solution to the problem of finding solutions. And it is striking that liberalism might be the only political philosophy that does not have a blueprint for an ideal society.

The “Market Provides Incentives” Myth

As the market is not a solution, the market does not give incentives. Leading institutional economists Acemoglu and Robinson, in their celebrated 2012 book Why Nations Fail, focused mainly on “incentives.” Whereas they — moderately — praise capitalism as an “inclusive institution,” they criticize “extractive institutions” because they “fail to protect property rights or provide incentives for economic activity.” They also write:

As institutions influence behavior and incentives in real life, they forge the success or failure of nations. … Bill Gates, like other legendary figures in the information technology industry … had immense talent and ambition. But ultimately responded to incentives.

There is no doubt that Why Nations Fails is, for the most part, a good book. However, Robinson and Acemoglu’s appraisal of incentives seems to be problematic. First of all, they assume that institutions should give “incentives.” But this is a constructivist fallacy, to use Hayek’s concept. It implicitly supposes that some external force should direct human actions.

Furthermore, it gives too much importance to top-down approaches. Acemoglu, like many other economists, seems to think something — e.g., the government — should incentivize. But what does it mean to say that government, property rights, or institutions give you an incentive? In fact, when wrongly used, the term “incentive” seems to invoke determinism. This is why Acemoglu writes that people “ultimately responded to incentives,” as if a mysterious force called incentives was influencing the choices each one of us make.

Incentives are not something that can be understood as being independent of individuals, they are purely subjective. An incentive can only be understood as the correct discovery of an individual’s own subjective preferences in order to lead him to act as you wish. Therefore incentives are not something you can “give,” it is something you have to discover.

The free market does not “provide” an incentive to work, it lets you work freely. The free market does not “provide” an incentive to invest, it lets you use your savings in order to make a profit by serving the consumer. There is no such thing as a god called “market” that will furnish you some incentive to be productive. However, the market is the best institutional framework to create harmony between the plans of a vast number of individuals — hence the title of Frédéric Bastiat’s magnus opus Economic Harmonies.

Because they are free, different individuals can understand each other’s preferences and exchange. Only in this way do people “give an incentive” to each other in order to commit to exchange and enhance their situation. Therefore, institutions do not provide incentives, people do. The sentence “the market provides incentives” contains the same problem as the sentence “the market is the solution.” It is just not so. The market is merely an institutional framework in which people can make plans freely. As Hayek says in a famous rap song “the question I wonder is who plans for who, do I plan for myself, or I leave it to you? I want plans by the many, not by the few.”

Conclusion

The modern state can be defined as the institution that pretends to have the monopoly of solutions to social problems. But since the state operates like a monopoly, it behaves like a monopoly and therefore exploits the very people it is supposed to serve. In fact, proponents of government action imply that the members of the civil society are not able to find their own solutions nor able to identify what the problems are. But the most competent men do not need the state to answer our problems, they just need freedom. When a problem arises, the right question is not “what can the government or the market do,” the right question is “what can I do.”

The Market Doesn’t Solve Problems; People Do

26 January, 2016 - 07:00

It is wrongly accepted by many liberals (i.e., libertarians) that most, if not all, social problems can be “solved by the market.” But clearly, the “market” cannot magically solve our problems. Let it be clear that there is no doubt that the best way to have social progress is to have a free market economy. However, free markets are not solutions to problems, per se, but are rather what gives us the opportunity to find our own solutions to our own problems by finding the most valuable way to serve one another. For example, Frédéric Bastiat famously wrote in The Law that: “At whatever point of the scientific horizon I start from, I invariably come to the same thing — the solution of the social problem is in liberty.”

By speaking about the virtues of the market, we tend to forget that markets do not have virtues, only people do. As Murray Rothbard once wrote, “it is overlooked that the ‘market’ is not some sort of living entity making good or bad decisions, but simply a label for individual persons and their voluntary interactions. … The ‘market’ is individual acting.”

The “What Should Government Do?” Bias

During each crisis, politicians and intellectuals systematically presume that “we should do something.” Thus, when liberals emphasize the importance of not violently intervening in the free market order because of the harmful, but yet unseen, consequences of state intervention, they are often accused of favoring inaction. This is a misconception of the liberal argument.

The free market is not superior because it offers solutions. It is superior because its basis is freedom, a freedom that is used by individuals to find new ways for them that are in harmony with the interests of their fellow men. Of course, there are many problems and abuses with the market, but entrepreneurs — if not prevented from entering the marketplace by governments — seek to solve these problems in the pursuit of profits. Through these entrepreneurs, the market is a process that tends to satisfy the most urgent, not-yet-satisfied, needs of the consumers.

To be clear, liberalism — used here to denote the philosophy of laissez-faire — should not be considered as being the utopian opposite of socialism. It is not a magic recipe that guarantees perfect solutions at all times and for all things. Socialists like to imagine that liberals believe the market can cure every ill. In other words, they think liberalism is a mirror reflection of socialism. It is not. True liberalism does not promise perfection, it does not even promise a solution. There will always be problems. Our goal should be to find the best way to improve the situation, not to achieve an ideal world of fantasy.

When a social problem arises and somebody asks a liberal what must be done, he instinctively argues that “we” should free the markets, that “we” should liberalize, or that “we” should commit to deregulation.

But those proposals are not solutions to our problems at all, they are just a necessary step in the process of setting people free to solve problems. By pretending that “the market” is the solution that “we” should adopt, many liberals are victims of the top-down fallacy and deny the polycentric nature of markets. By calling “the market” a solution, we create the illusion that the free market is just another kind of government policy where the rulers offer us a solution. But the real solutions are offered by free individuals, by the free innovator, the free worker, the free capitalist, and the free entrepreneur.

Solutions to problems are not offered by the market, they are offered on the market. As development economist William Easterly brilliantly writes:

The “what should we do?” industry does not show any signs of going out of business soon. It gives us public intellectuals something to do and it gives politicians something to recommend. Much more positively, it does engage the very welcome idealism of altruists who want to make the world a better place. But the Sustainable Development Goals may be the best demonstration yet that action plans don’t necessarily lead to action, “we” are not necessarily the right ones to act, and that there are alternative routes to progress. Global progress has a lot more to do with the advocacy of the ideal of human freedom than with action plans.

Thus, free markets are a sort of meta-solution. They are the solution to the problem of finding solutions. And it is striking that liberalism might be the only political philosophy that does not have a blueprint for an ideal society.

The “Market Provides Incentives” Myth

As the market is not a solution, the market does not give incentives. Leading institutional economists Acemoglu and Robinson, in their celebrated 2012 book Why Nations Fail, focused mainly on “incentives.” Whereas they — moderately — praise capitalism as an “inclusive institution,” they criticize “extractive institutions” because they “fail to protect property rights or provide incentives for economic activity.” They also write:

As institutions influence behavior and incentives in real life, they forge the success or failure of nations. … Bill Gates, like other legendary figures in the information technology industry … had immense talent and ambition. But ultimately responded to incentives.

There is no doubt that Why Nations Fails is, for the most part, a good book. However, Robinson and Acemoglu’s appraisal of incentives seems to be problematic. First of all, they assume that institutions should give “incentives.” But this is a constructivist fallacy, to use Hayek’s concept. It implicitly supposes that some external force should direct human actions.

Furthermore, it gives too much importance to top-down approaches. Acemoglu, like many other economists, seems to think something — e.g., the government — should incentivize. But what does it mean to say that government, property rights, or institutions give you an incentive? In fact, when wrongly used, the term “incentive” seems to invoke determinism. This is why Acemoglu writes that people “ultimately responded to incentives,” as if a mysterious force called incentives was influencing the choices each one of us make.

Incentives are not something that can be understood as being independent of individuals, they are purely subjective. An incentive can only be understood as the correct discovery of an individual’s own subjective preferences in order to lead him to act as you wish. Therefore incentives are not something you can “give,” it is something you have to discover.

The free market does not “provide” an incentive to work, it lets you work freely. The free market does not “provide” an incentive to invest, it lets you use your savings in order to make a profit by serving the consumer. There is no such thing as a god called “market” that will furnish you some incentive to be productive. However, the market is the best institutional framework to create harmony between the plans of a vast number of individuals — hence the title of Frédéric Bastiat’s magnus opus Economic Harmonies.

Because they are free, different individuals can understand each other’s preferences and exchange. Only in this way do people “give an incentive” to each other in order to commit to exchange and enhance their situation. Therefore, institutions do not provide incentives, people do. The sentence “the market provides incentives” contains the same problem as the sentence “the market is the solution.” It is just not so. The market is merely an institutional framework in which people can make plans freely. As Hayek says in a famous rap song “the question I wonder is who plans for who, do I plan for myself, or I leave it to you? I want plans by the many, not by the few.”

Conclusion

The modern state can be defined as the institution that pretends to have the monopoly of solutions to social problems. But since the state operates like a monopoly, it behaves like a monopoly and therefore exploits the very people it is supposed to serve. In fact, proponents of government action imply that the members of the civil society are not able to find their own solutions nor able to identify what the problems are. But the most competent men do not need the state to answer our problems, they just need freedom. When a problem arises, the right question is not “what can the government or the market do,” the right question is “what can I do.”

Mises on Protectionism and Immigration

25 January, 2016 - 07:00

The economic causes and consequences of immigration are among the most important issues facing the world today. Both pro- and anti-immigration advocates are digging in their heels, and both sides look increasingly unlikely to relent. Despite the bleak outlook, however, there is still hope for a peaceful and charitable discussion of the economics of immigration.

With that in mind, I want to consider Mises’s thoughts on the topic. For Mises, emigration and immigration are motivated by a simple economic fact: the conditions of production are not the same in all places. Natural and human conditions change constantly, and as a result, the productivity of land, labor, and capital do so as well. Therefore in order to take advantage of changing conditions and produce in the most productive ways possible, people must constantly migrate to those places where their contributions are most valuable (1919, pp. 84–85).

The desire to move from low-productivity to high-productivity regions is for Mises the fundamental explanation for the migration of peoples, and limits overpopulation (1919, p. 85). We can say a country is relatively overpopulated when the same amount of capital and labor is less productive there than in another nation. Reducing overpopulation means reducing this “disproportion” by allowing for the mobility of persons and goods (1919, p. 86). In Mises’s view, mobility was an achievement of liberalism:

The principles of freedom, which have gradually been gaining ground everywhere since the eighteenth century, gave people freedom of movement. … Now, however — as a result of a historical process of the past — the earth is divided up among nations. Each nation possesses definite territories that are inhabited exclusively or predominantly by its own members. Only a part of these territories has just that population which … it would also have under complete freedom of movement, so that neither an inflow or an outflow of people would take place. The remaining territories are settled in such a way that under complete freedom of movement they would have either to give up or to gain population. Migrations thus bring members of some nations into the territories of other nations. That gives rise to particularly characteristic conflicts between peoples. (1919, pp. 86–87)

Mises has two types of conflict in mind: economic and social. Economic conflict occurs because domestic workers resent that fact that immigration bids down their wages:

[I]n territories of immigration, immigration depresses the wage rate. That is a necessary side effect of migration of workers and not, say, as Social Democratic doctrine wants to have believed, an accidental consequence of the fact that the emigrants stem from territories of low culture and low wages. (1919, p. 87)

Social conflict can also arise. Mises emphasized, however, that in most cases immigrants are obliged to give up their national identity and adapt themselves to the culture of their new home. Only in relatively extreme cases, such as European imperialism, was it historically possible for immigrants to replace original inhabitants and their cultures (1919, p. 89). In fact, according to Mises, strong cultures need not resort to government in order to protect themselves:

A nation that believes in itself and its future, a nation that means to stress the sure feeling that its members are bound to one another not merely by accident of birth but also by the common possession of a culture that is valuable above all to each of them, would necessarily be able to remain unperturbed when it saw individual persons shift to other nations. A people conscious of its own worth would refrain from forcibly detaining those who wanted to move away and from forcibly incorporating into the national community those who were not joining it of their own free will. To let the attractive force of its own culture prove itself in free competition with other peoples — that alone is worthy of a proud nation, that alone would be true national and cultural policy. The means of power and of political rule were in no way necessary for that. (1919, pp. 103–04)

However, for Mises, cultural considerations are mainly an aside. In general, he saw conflicts over immigration as being driven mostly by protectionism rather than insurmountable differences in human beings or cultures (1935). In particular, domestic unions support government policies to restrict immigration and thus keep low-wage competition out of the labor market:

Public opinion has been led astray by the smoke-screen laid down by Marxist ideology which would have people believe that the union-organized “proletariat of all lands” have the same interests and that only entrepreneurs and capitalists are nationalistic. The hard fact of the matter — namely that the unions in all those countries which have more favorable conditions of production, relatively fewer workers and thus higher wages, seek to prevent an influx of workers from less favored lands—has been passed over in silence. (1935)

As Per Bylund notes, this is precisely what is happening in Sweden, where unions prevent the integration of immigrants so as to keep wages high. Protectionism at home also breeds protectionism abroad, as foreign nations try to cope with lower productivity through their own regulations designed to counter “unfair” competition on the world market. As economic conditions worsen in those countries where migration is prevented by the state, conflict becomes inevitable:

[People in these countries] will certainly still have just as much cause to complain as before — not over the unequal distribution of raw materials, but over the erection of migration barriers around the lands with more favorable conditions of production. And it may be that one day they will reach the conclusion that only weapons can change this unsatisfactory situation. Thus, we may face a great coalition of the lands of would-be emigrants standing in opposition to the lands that erect barricades to shut out would-be immigrants. … Without the reestablishment of freedom of migration throughout the world, there can be no lasting peace. (1935)

In this way, protectionist policies inevitably lead to conflict and the destruction of human life and welfare. In fact, Mises even hints that government policies aiming to control the movement and employment of individuals suffer from the same problems socialist central planning does (1919, p. 85). At the same time, entrepreneurship and the division of labor are the foundations of a rational social order, and neither is possible without free labor markets.

The main threat facing society then is illiberal ideology, and the only solution to this “principle of violence” is to develop a consistent liberal philosophy to serve as the basis for a peaceful society (1951, p. 49).

Mises believed that any society that rejected the values of liberalism was doomed. In an age of nationalism, protectionism, and war, it’s easy to see what he meant.

Brazil's Easy-Money Problem

25 January, 2016 - 07:00

Brazil is undergoing what is considered its worst economic crisis in seventy years, and there is usually no agreement when it comes to the causes of this situation. President Rousseff and the Labor Party say that it was the corollary of the “International Crisis,” a ghost of the 2008 depression created in their minds. The reality, however, is different. Since ex-president Lula Da Silva of the Labor Party entered office in 2003, the government has clung to the typical Keynesian project of growth-by-government-spending. Interest rates were lowered constantly, the amount of loans grew to an unprecedented level, savings per capita dropped, and government spending continued to grow.

For the advocates of government intervention, the country’s economy was heaven on earth. It should be of no surprise that Paul Krugman, the defender of America’s Quantitative Easing, said that Brazil was not a vulnerable country. However, those policies so strongly defended by some economists and by bureaucrats led the country toward the terrible situation in which it is now.

From the Brazilian government’s point of view, it could hardly get any worse: the country is facing an economic depression that is likely to last at least two more years, the country’s rating was downgraded to junk by Standard & Poor’s, and a corruption scandal may lead to the impeachment of the country’s president, Dilma Rousseff. We must recognize, however, that even though this was the result of the government’s action, it simply put in practice the most prevalent ideologies of the country, which is a mixture of Marxism in politics and in the universities with Keynesianism in economics. This national ideology praises, in general, a complete dependence of the people on the government. The fact that “Brazil’s tax burden already amounts to 36 per cent of GDP” is held with pride by professors and economists throughout the country, who spread the word that public policies will create jobs and contribute to people’s welfare.

Brazil and the Austrian Business Cycle Theory

In order to grasp what is happening to Brazil, and to understand why some economists have long ago predicted the current disaster, it is crucial to understand Austrian business cycle theory, since it yields a concrete critique of government’s involvement with currency and credit expansion — two factors that the Brazilian government used as tools for economic growth — and its misuse is what generated the crisis.

As Mises pointed out, “the cyclical fluctuations of business are not an occurrence originating in the sphere of the unhampered market, but a product of government interference with business.”

Indeed, those “boom-bust” cycles, as the one that happened in Brazil, are generated by monetary intervention in the market in the form of bank credit expansion. Thus, they are an outcome of central planning and government intervention, the very opposite of a free market.

It is, however, important to make the distinction between bank credit expansion in the form of loans to business and other forms of credit expansion. The former is usually a method that government uses to boost the economy of the country, lowering the interest rates “below the height at which the free market would have fixed it,” and this is why it is so important in our analysis.

On the graph below we can see the absurd rise in the amount of loans (given in millions of reais, the Brazilian currency) made to businesses, especially since 2006 (and reinforced from 2008 on, as a way to “fight” the international crisis) when the government tried to generate an unsustainable boom. (The red line represents the loans given by public banks and the blue line the loans given by private banks.)

Figure 1. Amount of Credit Lent to Business in Brazil Over Time

This new type of credit that would not be available without the interference of the government generating the so-called “boom.” This boom caused businessmen to, as described by Rothbard in America’s Great Depression, “take their newly acquired funds and bid up the prices of capital and other producers’ goods, and this stimulate[d] a shift of investment from the ‘lower’ (near the consumer) to the ‘higher’ orders of production (furthest from the consumer) — from consumer goods to capital goods industries.”

This shift of investment from consumer to capital goods is a characteristic mark of the boom and explains, as opposed to other theories, why capital goods’ industries are affected first in the beginning of the depression. We can see on the next graph how those industries were affected in the Brazilian scenario. The green line represents the capital goods industries, and the slump that we see happened during the very early stages of the depression, in the end of 2013.

Figure 2. Index of Industrial Production and Key Components

It is also worth noticing that this slump happened right after the government started to raise the interest rates again, which occurred after a period of an all-time low in the interest rates of the country. As we can see below the Brazilian government lowered the interest rates to an unprecedented low level, and when the government tried to raise interest rates to curb the inflation generated by its “easy money” policies, the boom came to an end. 

Figure 3. Brazil’s Interest Rates Over Time (Source: Financial Times.)

As Murray Rothbard observed (again from America’s Great Depression),

businessmen were misled by bank credit inflation to invest too much in higher-order capital goods, which could only be prosperously sustained through lower time preferences and greater savings and investment; as soon as the inflation permeates to the mass of the people, the old consumption — investment proportion is reestablished, and business investments in the higher orders are seen to have been wasteful. Businessmen were led to this error by the credit expansion and its tampering with the free-market rate of interest.

As observed by Mises in his essay “Middle-of-the-Road Policy Leads to Socialism,” we must pay attention to the fact that “the attempts to lower interest rates by credit expansion generate, it is true, a period of booming business,” which in Brazil’s case occurred mostly between 2006 and 2013. “But the prosperity thus created is only an artificial hot-house product and must inexorably lead to the slump and to the depression. People must pay heavily for the easy-money orgy of a few years of credit expansion and inflation.” The depression that is currently happening in the country is, therefore, not an evil that should be fought against with more and more government policies. The depression is the cure.

As we have seen, most of what the Austrian business cycle theory described can be well applied to Brazil. It is important to admit that other factors also played important roles, such as the price of the dollar relative to the real and the slowdown of China’s demand on Brazilian commodities, but most of them were usually, and to some extent, only a consequence of the policies that we have already analyzed. The bottom line is that the country went through a major credit and money supply expansion, together with years of low interest rates. It is crucial to note that, contrary to other explanations, “Mises’s theory of the trade cycle … meshes closely with a general theory of the economic system. The Mises theory is, in fact, the economic analysis of the necessary consequences of intervention in the free market by bank credit expansion.”

Consequently, we can see how Brazil’s current crisis is nothing but an outcome of government’s meddling with the market. The scenario of the country’s economy is indeed scary, but we have reason to believe that Brazil’s intellectual situation is going through a new and promising change. It may be true, as Lord Keynes said, that “in the long run we are all dead,” but if we are to get out of this terrible crisis, to prosper and to enjoy a constant improvement in our standard of living, “it is high time to transform the country’s state capitalism into a free market system.”

The Fed Passes the Buck: Blame Oil and China

22 January, 2016 - 07:00

There are a handful of themes out there on recent market action that are either totally wrong or otherwise highly misleading. For instance, regarding the recent calamity in the capital markets, one especially apparent dichotomy has presented itself as offering two choices as to what, exactly, is causing the painful turbulence.

There are some who, in a complete echo of the news headlines, are quick to point the finger at both oil and China. And yet there are others who point the finger at the Fed for “raising rates too early.” Along with the second is the observation that “inflation is totally MIA” and therefore it was ludicrous that the Fed felt the need to “raise interest rates.” Both of these tend to express anguish over the “strong dollar.”

Both of these miss the entire point, and the cause of the current trouble. For one thing, it is ridiculous to blame oil for the falling markets when the falling oil is the very thing that needs to be explained. It is wholly unsatisfactory to explain something by describing it. It works well for headlines, and for shifting the blame away from where it really belongs, but one must learn to look deeper. One cannot expect to impress anyone by explaining that the plane is crashing to the ground because it is no longer flying. What is the cause of oil’s magnificent plummet toward the bottom? That is the true question.

Moreover, the problem with the “China thesis” is that it doesn’t explain anything either. It merely observes a correlation in the markets and therefore makes it highly convenient to put the blame on “the other guys.” Let me not be misunderstood here: the Chinese and US economies are certainly influenced by each other, especially in our age of fluctuating fiat currencies. But ultimately, both China and the US — indeed the entire world — are being dragged down by past actions of their respective central banks and more specifically the illusion of prosperity via monetary and credit expansion.

Which leads to the second theme: putting the blame on the Fed for “raising rates” too early. That is, there are a good many who argue that if the Fed had never announced in December that it was going to seek minuscule increases in the Federal Funds rate, none of the recent market drops would have happened. They will say things like “inflation was never a threat, so the Fed was irresponsible to raise rates.”

Money-Supply Inflation vs. Price “Inflation”

This is confused. First, it must be constantly emphasized that the meaning of inflation, contrary to the mainstream’s application of it, is more appropriately defined an increase in the money supply, not “rising prices.” The reason why the Fed and proponents of central banking prefer the “rising prices” definition is because it obscures the chief source of our present economic condition. It rips the blame away from the Fed and toward all kinds of other “market forces” and therefore encourages the central bank to swoop in to the rescue rather than be the object of severe suspicion. Indeed, as Mises observed (page 420 of Human Action):

What many people today call inflation or deflation is no longer the great increase or decrease in the supply of money, but its inexorable consequences, the general tendency toward a rise or a fall in commodity prices and wage rates. This innovation is by no means harmless. It plays an important role in fomenting the popular tendencies toward inflationism.

First of all there is no longer any term available to signify what inflation used to signify. It is impossible to fight a policy which you cannot name. …

The second mischief is that those engaged in futile and hopeless attempts to fight the inevitable consequences of inflation — the rise in prices — are disguising their endeavors as a fight against inflation. While merely fighting symptoms, they pretend to fight the root causes of the evil. Because they do not comprehend the causal relation between the increase in the quantity of money on the one hand and the rise in prices on the other, they practicalIy make things worse.

Rising prices can be a result of inflation, but it is not itself inflation. So then, inflation was actually very high in the last decade due to the Fed’s QE and other monetary policy schemes. Second, it should never be ignored that “rising prices” can easily be found in the capital markets themselves. It doesn’t take an investment guru to observe the staggering levels to which the various market indexes have reached. Digging only a little bit farther into the surface reveals the absurd prices for the so-called highest valued stock such as Facebook, Amazon, Apple, and so on.

Where All That Money Went

More importantly, however, is the fact that much of the newly created money has not even come close to creating “widespread [consumer price] inflation” due to the actual structure of the current, post-crises banking regime. In fact, Jeffrey Snider, among others, have argued that it is literally impossible for “price inflation” to take place as a direct result of QE due to the way that money currently enters the system as reserves. “Price inflation” would need to come from the actions of individual banks themselves who are at present cautious about their consumer lending practices. Therefore the Fed is not creating “price inflation,” but something far worse: capital misallocation.

The point here is simply that those who want the interest rates to be continually suppressed so that economic activity will be encouraged, don’t even realize that this is literally the cause of bubble creations, not productive economic activity.

It used to be, under the pre-crises fractional-reserve model, that there would be loads of malinvestment as a result of banks creating new loans (new economic activity would take place, and then collapse back down). But now, money is created, not by commercial banks, but mostly by the Fed itself. Which means that, in the phraseology of David Stockman, the new money is simply sloshing around the canyons of Wall Street and pushing up equity and bond prices, rather than reaching the “real economy.”

The Bubble Only Prolongs the Problem

Thus, contrary to those blaming the Fed for causing stocks to fall by “raising rates” (which Joe Salerno reflects on here) we want to stress the fact that, in raising rates, the most that the Fed could do is unravel previously made mistakes. In other words, there is nothing praiseworthy in the first place about artificially propped up stock market levels. We have no interest in lauding the longevity of the bubble, because the bubble is the enemy of the healthy economy. The collapsing equity markets reveal where bubbles were formed and that our alleged prosperity is an illusion. And this is precisely what former Dallas Fed Chairman Richard Fisher stated in a conversation on CNBC last week when he confessed: “We frontloaded a tremendous market rally to create a wealth effect.”

And thus, the money expansion must inevitably cycle back down. Fisher himself admits: “… and an uncomfortable digestive period is likely now.” What was inflated up to the top, must deflate down to the floor. That is the only way for an economy to recover: bad credit needs to be liquidated. Unfortunately, it is painful indeed.

That is the true cause of the recent calamity. The dollar is “strengthening” by virtue of our credit system cracking at the seams. In other words, the so-called “strong dollar,” is merely one side of the pendulum swing of a volatile collapsing banking system. It shouldn’t be assumed that the dollar is becoming more sound; it is not. But if we might ever again have a sound currency, we first have to face the music.

And thus oil too, after years of being elevated up toward the heavens via the Fed’s monetary shenanigans, is experiencing its own inevitable bust. The illusion is being exposed.

Unfortunately, the Fed is a wild card, so we stay tuned to whether it will let the markets recover, or continue the perpetual cycle of money creation. My own advice for the Fed is neither to “raise rates” nor to lower them. But rather, to let go and let the market correct itself. For we have a lot of correction ahead of us.

The Week in Review: January 23, 2016

22 January, 2016 - 07:00

Fear is in the air. Central bankers are warning of crisis, stock markets are falling, and even the media is realizing  that the economy may not be as stable as our central planners would have us believe. Of course, while mainstream economists fear the falling prices that are on the horizon in our post-boom world, Austrians know that deflation and recessions are both inevitable and necessary when the economy is based on debt and fiat money.

Dr. Mark Thornton joined Jeff Deist on Mises Weekends to dive deeper on the current economic headlines. Why don’t central bankers understand deflation? A they really Keynesians or some variant thereof? What might a “crack-up boom” look like? And what does the Skyscraper Index tell us about the future of the global economy?

This is an episode you won’t want to miss.

And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:

Un-PC Lego Making Toys Girls Like by Ryan McMakenIn a Post-Boom World, Auto Prices Will Fall by Patrick BarronWhy We Need a Recession by Ronald-Peter StöferleThree Centuries of Boom-Bust in Spain by Daniel Fernández-Renau Atienza and David HowdenMises in Four Easy Pieces by Dan SanchezBorderland Homicides Show Mexico's Gun Control Has Failed by Ryan McMakenRon Paul's Pillars of Prosperity in ChineseTexas Adopts New York Values on Fantasy Football by Tho BishopPennies And Nickels: More Expensive To Mint Than To Use by Paul-Martin Foss"Stocks Are Not Overvalued": Supply Siders Drop the (Crystal) Ball Again by Joseph SalernoMedia Catches Up to Economic Reality by Tho BishopBarron's Is Talking Skyscraper Curse by Mark Thornton1916 and the Health of the State by T. Hunt TooleyPer Bylund on the Sharing Economy in EntrepreneurThree Reasons Oil Prices Can Still Go Lower by Troy VincentCentral Banker Warns of Coming Financial Collapse by Joseph SalernoBernie Sanders Says We Should be Spending Less on Health Care by Ryan McMakenRepent and Believe in the Data! by Jonathan Newman

Mises in Four Easy Pieces

21 January, 2016 - 07:00

One day in 1959, hundreds of students, educators, and grandees filled the enormous lecture hall of the University of Buenos Aires to capacity, overflowing into two neighboring rooms. Argentina was still reeling from the reign of populist president, Juan Perón, who had been ousted four years before. Perón’s economic policies were supposed to empower and uplift the people, but only created poverty and chaos. Perhaps the men and women in that auditorium were ready for a different message. They certainly got one.

A dignified old man stepped before them, and delivered a bold, bracing message: what truly empowers and uplifts the people is capitalism, the much-maligned economic system that emerges from private ownership of the means of production.

This man, Ludwig von Mises, had been the world’s leading champion of capitalism for half a century, so his message was finely honed. Not only a creative genius, but a superb educator, he boiled down capitalism to the essential features that he believed every citizen needed to know. As his wife Margit recollected, the effect on the crowd was invigorating. Having spent years in an intellectual atmosphere of stale, stagnant ideas: “The audience reacted as if a window had been opened and fresh air allowed to breeze through the rooms.”

This lecture was the first in a series, the transcriptions of which are collected in the book Economic Policy: Thoughts for Today and Tomorrow, edited by Margit.

Life (and Death) Before Capitalism

To demonstrate in his lecture how revolutionary the advent of capitalism was in world history, Mises contrasted it with what he called the feudalistic principles of production during Europe’s earlier ages.

The feudal system was characterized by productive rigidity. Power, law, and custom prohibited individuals from leaving their station in the economic system and from entering another. Peasant serfs were irrevocably tied to the land they tilled, which in turn was inalienably tied to their noble lords. Princes and urban guilds strictly limited entry into whole industries, and precluded the emergence of new ones. Almost every productive role in society was a caste. This productive rigidity translated into socio-economic rigidity, or “social immobility.” As Mises reminded his Argentine audience:

a man’s social status was fixed from the beginning to the end of his life; he inherited it from his ancestors, and it never changed. If he was born poor, he always remained poor, and if he was born rich  —  a lord or a duke  —  he kept his dukedom and the property that went with it for the rest of his life.

Over 90 percent of the population was consigned to food production, so as to precariously eke out sustenance for their own families and contribute to the banquets of their domineering, parasitic suzerains. They also had to make their own clothing and other consumers’ goods at home. So, production was largely autarkic and nonspecialized. As Mises highlighted, the small amount of specialized manufacturing that existed in the towns was devoted largely to the production of luxury goods for the elite.

From the High Middle Ages onward, production in Western Europe was higher, and the average person much less likely to be a chattel slave, than during antiquity and the Dark Ages. But the economic system was still fixed and moribund; the common man had no hope of progressing beyond a life teetering between bare subsistence and starvation.

And in the eighteenth century, in the Netherlands and England, said Mises, multitudes were about to go over the ledge, because the population had grown beyond the land then available to employ and sustain them.

It was then and there that capitalism entered the scene, saving the lives of millions, and vastly improving the lives of millions more.

Four key distinguishing features of capitalism can be gleaned from Mises’s lecture. What follows is an exposition of those features, which can be thought of as, to paraphrase Richard Feynman, “Mises in four easy pieces.”

It is important to note that, as Mises fully noted elsewhere, what emerged in the eighteenth century and developed subsequently was never a purely free market. So, the following characteristics have never been universal. But these features did come into play far more extensively in this period than ever before.

One: Dynamic Production

Under what Mises called “capitalistic principles of production,” feudal productive rigidity is replaced by productive flexibility and free entry. There are no legal privileges protecting anyone’s place in the system of production. Lords and guilds cannot exclude new entrants and innovations. And an upstart enterpriser’s capital, products, and proceeds are secure from the cupidity of princes and the jealousy of incumbents.

Of course free entry amounts to very little without the corresponding right of free exit. With capitalism, peasants are free to leave their fields and former masters for opportunities in the towns. And proprietors are free to sell or hire out their plots of land and other resources to the highest bidder. (Although, during the transition between feudal and capitalist production, it really should have been the peasants doing the selling and hiring out, as they were owed restitution never delivered for their past serfdom and expropriation.)

Free entry/exit is the logical corollary of liberty: inviolate self-ownership and private property. It is the freedom of an individual to put his labor and earnings to whatever productive use he finds advantageous, irrespective of the pretenses to privilege of vested interests.

Under capitalism, no longer can nobles rely on a captive labor force and “customer” base, or enjoy the impossibility of having resources bid away by more efficient producers. No longer can these robber barons turned landed barons rest on such laurels of past armed conquest.

Mises identified resentment of this fact as a prime source of anti-capitalism, which thus originated, not with the proletariat, but with the landed aristocracy. He cited the consternation of the Prussian Junkers of Germany over the Landflucht or ”flight from the countryside” of their peasant underlings. And he related a colorful story of how Otto von Bismarck, that prince of Junkers who founded the welfare state (with the express purpose of co-opting the masses), grumbled about a worker who left Bismarck’s estate for the higher wages and pleasant Biergartens of Berlin.

Under capitalism, no longer can tradesmen idle in old methods and old markets. To do so is impossible in a world in which any man with savings and gumption is a potential underseller and overbidder. Industry incumbents also loathe the competition, so their special pleading is another major source of anti-capitalist rhetoric.

Free entry/exit imposes the stimulus and discipline of competition on producers, impelling them to strive to outdo each other in satisfying potential customers. As Mises announced in Buenos Aires: “The development of capitalism consists in everyone’s having the right to serve the customer better and/or more cheaply.”

Production, formerly adrift in the standing water of feudalistic stagnation, sets sail under capitalistic dynamism, driven by the bracing winds of competition.

Two: Consumer Sovereignty

When producers vie with each other to better serve customers, they unavoidably act more and more like devoted servants of those customers. This is true of even the biggest and wealthiest producers. As Mises brilliantly expressed it:

In talking about modern captains of industry and leaders of big business … they call a man a “chocolate king” or a “cotton king” or an “automobile king.” Their use of such terminology implies that they see practically no difference between the modern heads of industry and those feudal kings, dukes or lords of earlier days. But the difference is in fact very great, for a chocolate king does not rule at all, he serves. He does not reign over conquered territory, independent of the market, independent of his customers. The chocolate king  —  or the steel king or the automobile king or any other king of modern industry  —  depends on the industry he operates and on the customers he serves. This “king” must stay in the good graces of his subjects, the consumers; he loses his “kingdom” as soon as he is no longer in a position to give his customers better service and provide it at lower cost than others with whom he must compete.

With capitalism, just as producers play the role of servant, customers play the role of master or sovereign: in a figurative sense, of course. It is their wishes that hold sway, as producers strive to grant them. And strive they must, if they want to succeed in business. For, just as a sovereign of the ancien régime was free to withhold favor from one courtier and bestow it upon another, the “sovereign” customer is free to take his business elsewhere.

This relation is even expressed in the language we use to describe commerce. Customers are patrons who patronize shops and other sellers. These sellers say, “thank you for your business” or patronage, and insist that, “the customer is always right.” The polite, respectful deference formerly given by the ancient Roman cliens (client) to his patronus (patron) is now instead given by the producer to his customer/patron, except generally in a much more self-respecting and less groveling manner.

If the customer is himself also a producer on the market, he must pay forward that same solicitousness and deference to his own customers, lest he lose their business to competitors. Thus, his desires for goods from his eagerly attentive suppliers are shaped by his own eagerness to fulfill the desires of his own customers. Therefore, the higher order producer, by striving to make his customer happy, indirectly strives to make his customer’s customers happy as well.

This series terminates with the customers who have no customers: namely, the consumers, who are therefore the “engine” of this “train” of final causation. Thus, with capitalism, it is the consumers who hold ultimate sway over all production. Mises referred to this fundamental characteristic of capitalism as, speaking figuratively, consumer sovereignty.

Again, this is constrained to the extent that state intervention hampers capitalism. “Leaders of big business” can and often do use the state to acquire powers and privileges that enable them to flout the wishes of consumers and acquire wealth through domination instead of service. In fact, one of the most clear recent instances of this involved a real life person actually nicknamed, as in Mises’s example, the “chocolate king”: a confectionary tycoon named Petro Poroshenko who parlayed his business success into a political career which recently culminated in his election as president of the US-sponsored junta now ruling Ukraine.

Three: Mass Production for the Masses

In the first lecture of his online course “Why Capitalism,” David Gordon drew from his limitless reservoir of scholarly anecdotes to relate that Maurice Dobb, a British economist and communist, replied to Mises’s point about consumer sovereignty by averring that this feature of capitalism hardly does the common man any good, since the most significant consumers are the wealthiest. Dobb’s mistake, of course, is to neglect the fact that the relative importance of single consumers is not the issue here. The combined purchasing power of the preponderance of typically wealthy consumers vastly outstrips that of the atypically wealthy.

Therefore, as Mises pointed out, the capitalist’s main route to becoming one of those few wealthy consumers of extraordinary means is through mass producing wares that cater to the masses of consumers of ordinary means. Even a small per-unit profit margin, if multiplied millions or billions of times, adds up to some serious dough. Boutique enterprises catering only to the elite, as feudal era manufacturers did, simply cannot compare. And that is why, as Mises informed the stunned Perónistas:

Big business, the target of the most fanatic attacks by the so-called leftists, produces almost exclusively to satisfy the wants of the masses. Enterprises producing luxury goods solely for the well-to-do can never attain the magnitude of big businesses.

That is why, as Mises never tired of saying, capitalism is a system of mass production for the masses. It is overwhelmingly the masses of “regular folk” who are the sovereign consumers whose wishes are the guiding stars of capitalist production.

Capitalism flipped feudalism on its head. With feudalism, it was the elite (the landed aristocracy) whose will dominated the masses (the enserfed peasants). With capitalism, it is the wishes of the masses (ordinary consumers) that hold sway over the productive activity of the entrepreneurial elite, from retail giants to dot-com millionaires.

As Mises’s address implied, the yearned-for “people power” always promised by demagogues like Perón, but which invariably turns to ashes in the mouths of the masses, as it did with the Argentines, is the natural result of capitalism, a system so often derided as “economic royalism.”

Imagine his audience’s surprise!

But the full truth that Mises was imparting was even more surprising than that. Not only does capitalism fulfill the broken promises of economic populism, but, as Gordon brilliantly remarked in his lecture, it also follows through on the more specific promise offered by syndicalists and Marxian socialists: worker control over the means of production. That is because, as Mises stressed in his lecture, the vast majority of the masses of ordinary “sovereign” consumers are also workers.

With capitalism, the working people really do hold ultimate sway over the means of production. They just don’t do it in their role as workers, but in their role as consumers. They exert their sway in checkout aisles and website shopping carts, and not in the halls of labor unions, syndicates, soviets (revolutionary councils of workers), or a “dictatorship of the proletariat” that reigns in their name while it rides on their backs.

Capitalism has the charming arrangement of empowering the working person, while still preserving economic sanity by placing means (factors of production, like labor) at the service of ends (consumer demand), instead of the insanity of doing the opposite, as the labor fetish of syndicalism does.

Four: Prosperity for the People

Capitalism not only empowers the working person, but uplifts him.

Capitalism, as its name implies, is characterized by capital investment, which was the solution to the crisis of how the marginal millions of eighteenth-century England and the Netherlands were to integrate into the economy and survive.

Labor alone cannot produce; it needs to be applied to complementary material resources. If, with given production techniques, there is not enough land in the economy to employ all hands, then those hands must be placed upon capital goods, if the connected mouths are to eat. During the Industrial Revolution, such capital goods were lifelines that the owners of new factories threw to countless economic castaways and that pulled them from the abyss and back into the division of labor that kept their lives afloat.

Knowing this truth of the matter, Mises was rightly appalled at the anti-capitalist agitators who “falsified history” (Gordon identified Thomas Carlyle and Friedrich Engels as among the worst offenders) to spread the now dominant myth that capitalism was a bane to the working poor. He set the issue right with passion:

Of course, from our viewpoint, the workers’ standard of living was extremely low; conditions under early capitalism were absolutely shocking, but not because the newly developed capitalistic industries had harmed the workers. The people hired to work in factories had already been existing at a virtually subhuman level.

The famous old story, repeated hundreds of times, that the factories employed women and children and that these women and children, before they were working in factories, had lived under satisfactory conditions, is one of the greatest falsehoods of history. The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying. And all the talk about the so-called unspeakable horror of early capitalism can be refuted by a single statistic: precisely in these years in which British capitalism developed, precisely in the age called the Industrial Revolution in England, in the years from 1760 to 1830, precisely in those years the population of England doubled, which means that hundreds or thousands of children  —  who would have died in preceding times  —  survived and grew to become men and women.

And as Mises further explained, capitalism not only saves lives, but it vastly improves them. That is because capitalism is also characterized by capital accumulation (which is why Mises embraced the term, in spite of it originating from its enemies as an epithet), which is the result of cumulative saving and perpetual reinvestment being unleashed by greater security of property from meddlesome laws as well as grasping princes and parliaments. Capital accumulation means ever growing labor productivity, which in turn means ever rising real wages for the worker.

These higher wages are the conduits through which workers acquire the purchasing power that crowns them with consumer sovereignty. And they are no petty sovereigns either. Thanks to his capital-enhanced high productivity, a modern worker’s wage-powered consumer demand guides the deployment of a globe-spanning, dizzying plethora of sophisticated machines, factories, vehicles, raw materials, and other resources, as well as the voluntary labor of the other workers who use them, all of which conspire to churn out a cornucopia of quality household staples, marvelous devices, amazing experiences, and other consumers’ goods and services for the worker to choose from for his delectation. Purchasing such goods with his higher wages is how the worker claims his portion of the greater abundance, which approximates to his own capital-enhanced contribution to it.

And higher wages are not the only way that the average working person can enrich himself through capitalism. Especially since the advent of investment funds, he can supplement, and upon retirement, even replace his wage income with interest and profit by putting his high-wage-fed savings to work and partaking in capital investment himself.

Because of these characteristics, as Mises proclaimed to those assembled: “[Capitalism] has, within a comparatively short time, transformed the whole world. It has made possible an unprecedented increase in world population.”

He returned to the subject of England for one of the more paradigmatic examples of this:

In 18th-century England, the land could support only 6 million people at a very low standard of living. Today more than 50 million people enjoy a much higher standard of living than even the rich enjoyed during the 18th-century. And today’s standard of living in England would probably be still higher, had not a great deal of the energy of the British been wasted in what were, from various points of view, avoidable political and military “adventures.”

In one of those wonderful flashes of dry wit that would illuminate his discourse from time to time, Mises urged his auditors that, should they ever meet an anti-capitalist hailing from England, they should ask him: “… how do you know that you are the one out of ten who would have lived in the absence of capitalism? The mere fact that you are living today is proof that capitalism has succeeded, whether or not you consider your own life very valuable.”

Mises furthermore cited the more general and clearly evident fact that: “There is no Western, capitalistic country in which the conditions of the masses have not improved in an unprecedented way.”

And in the decades following his speech, the conditions of the masses improved incredibly in non-Western countries (like China) who partially opened up to capitalism as well.

Mises concluded his talk by urging his Argentine fellows to seize the day and strive for the economic liberation that would unleash the wonderworks of capitalism, and not to sit and wait for an economic miracle:

But you have to remember that, in economic policies, there are no miracles. You have read in many newspapers and speeches, about the so-called German economic miracle  —  the recovery of Germany after its defeat and destruction in the Second World War. But this was no miracle. It was the application of the principles of the free market economy, of the methods of capitalism, even though they were not applied completely in all respects. Every country can experience the same “miracle” of economic recovery, although I must insist that economic recovery does not come from a miracle; it comes from the adoption of  —  and is the result of  —  sound economic policies.Conclusion

If the subsequent policies adopted in Argentina, South America, and the world are any indication, Mises’s message, as lucid and affecting as it was, did not propagate far beyond the auditorium walls that day. Perhaps in the age of camera phones, YouTube, and social media, it would have. But his brilliant encapsulation of the beneficence and beauty of capitalism did not dissipate vainly into the Argentine air. Thanks to his Margit and to his institutional namesake, his message was preserved for the ages, and is now only a mouse click away for billions.

Ludwig von Mises can still save the world by posthumously teaching its people the unknown truth about the inherently populist nature of capitalism in a way which speaks to their hopes and longings: that private property means dynamic production, which means a competitive, consumer-steered economy, which means a production system geared toward improving the lives of the masses, which first means widespread succor and ultimately ever-rising prosperity for the people of the world.