Sunday, November 30, 2008

Obama's Idea of Change: Four More Years of Government Stupidity

Ignorance of Money and the Rejection of Austrian Economics

by William L. Anderson
by William L. Anderson

As the traditional Thanksgiving Day shopping weekend is upon us, we hear the usual canards of hope – hope that consumers will "stimulate" the economy, or we read from people like Karl Rove that President-elect Barack Obama’s "economic team" is "first-rate," and will have the "answers" for the economy. Paul Krugman, who already had advocated trillion-dollar deficits as a way to bring the economy into recovery, says that this new government can "fix the financial system" by even more regulation, thus avoiding the next recession (if we ever recover from this one).

The spate of bad advice and outright ignorance of what actually is happening will continue into the Obama presidency, which has promised "green jobs" as a means of bringing the economy back into balance. (What Obama means is that his administration plans to destroy the relatively-healthy energy industries and replace them with unreliable substitutes like wind power and corn-based ethanol, thus destroying millions of jobs in order to create a few thousand "new" ones.) Moreover, the vaunted "economic team" so lavishly praised by the former Bush political officer Rove so far has offered nothing but more Keynesian "solutions" of massive debt and inflation.

Instead of simply attacking the newest Keynesian nonsense, however, I will note that the eternal default position on economic crises – the Keynesian one – arises because academic economists foolishly have rejected Austrian Economics and the wise counsel it provides. This hardly is an accident or a problem that can be "solved" by being more aggressive in promoting the Austrian position. Instead, the failure of economists to embrace Austrianism comes both from ignorance about the economy in general and the fact that Austrian "solutions" do not provide a central role for economists to be seen as heroes or "fixers" of the economy.

Robert Murphy, in a recent "open letter" to the famed Nobel-winning economist Gary Becker, writes the following:

Mainstream economists often have a hard time grasping the Austrian theory of the business cycle because it relies on a theory of the complex capital structure in a modern economy. Most mainstream economists, in contrast, usually think of the "capital stock" encapsulated by a single value, K. Relying on the framework of the Solow growth model, mainstream economists usually interpret the Austrian theory as one of "overinvestment" during the boom.

As Murphy continues, it is clear that modern neoclassical economists are clueless in general about capital:

In order to even comprehend the Austrian claim, the mainstream economist needs to discard the simplistic homogeneous notion of the capital stock, and seek a richer framework that reflects the time structure of production. In a modern economy, if we picked a random consumer good off the store shelf, it would probably have a "life history" going back many years, and involving thousands of workers handling resources originating in dozens of countries. (Leonard Read's wonderful essay "I, Pencil" is apposite.)

Indeed, if one were to ask a typical economist how an economy grows, he or she might reply: "Aggregate demand has been increased." (The so-called Supply-Siders might say that "aggregate supply has increased," but neither statement really makes any sense. There really is no such thing as "aggregate demand" or "aggregate supply"; they are figments of economists’ imaginations.) For now, it seems that economists, no matter if they are of the "free market" variety or if they are disciples of Keynes and Krugman, all are calling for the government to become involved in schemes to "jump start" the economy. The blind are leading the blind.

Furthermore, as Murphy points out in his "open letter," even accomplished economic thinkers like Becker seem incapable of understanding the basic Austrian notion of "malinvestment," instead mistakenly calling it "overinvestment." (Krugman refers to it as the "Hangover Theory," but presents a caricature not only of the theory itself, but also in his portrayal of Austrian economists as people who revel in the economic misery of others.)

Murphy and others of the Austrian School are correct in pointing out that typical academic economists really don’t understand capital very well, and their few attempts at formulating a theory of capital have been failures. Yet, I believe that the mainstream failure of capital theory is due to the greater failure of economists to understand that simple good: money.

About 30 years ago, I read The Biggest Con by Irwin Schiff, and I have not forgotten his opening statement that money in the United States had "disappeared." I was taken aback when first reading those words, but as I read his book and then read the Austrian economists, I realized that Schiff was right: money has disappeared in this country, and has been gone for a long time. In fact, almost all modern economists have grown up in a time when fiat "money" has been the norm. Few economists (and I include myself) ever have seen real money in circulation. The closest thing that most of us have seen was the silver (or part-silver) coinage that existed in the United States until 1965, but was replaced by government tokens.

Thus, few, if any, of us have experience in dealing with what historically has been termed "money," and that situation only adds to the overall ignorance that economists have of this subject. Furthermore, because of the artificial division of economics into "microeconomics" and "macroeconomics," economists who choose the more-popular "micro" fields have almost no contact at all with monetary theory, save a class or two from graduate school in which a near-pure quantity theory prevails.

Economists can speak of "money supply" or "price levels," but very few understand the very nature of the money economy and what happens when governments predictably abuse their monopolies of "money creation." Even the "free market" economists often stumble over the issue of money, even when they "specialize" in it, as did Milton Friedman.

This state of affairs was made clear to me in an exchange of articles by Joseph Salerno and Richard Timberlake in The Freeman nearly a decade ago. Salerno argued the Austrian position while Timberlake followed the Monetarist view. Timberlake, for example, could not understand Salerno’s contention that the 1920s was an era of Federal Reserve-induced inflation in this country because the consumer price index fell slightly during that decade. Timberlake’s reasoning was that if the government index was falling, then the 1920s had to be a time of deflation, not inflation.

Yet, Salerno and Timberlake were arguing past each other because each man was defining money in very different terms. Salerno was defining money as a good used for exchange that had all the properties of any individual good, and if the amount of money in circulation increases, the marginal utility of money falls, with inflation being the decrease of the value of money relative to the goods it is used to purchase.

Timberlake, on the other hand, defined money in the more typical neoclassical fashion of being a quantity variable monopolized by government and manipulated by the central bank as a means of influencing economic activity. The difference between the two points is crucial not only in understanding the current economic crisis, but also in understanding Austrian Capital Theory and the Austrian Theory of the Business Cycle. If one cannot understand money and capital, then one cannot understand the whole issue of malinvestments and what causes the boom and bust cycle.

The consequences of this ignorance are not esoteric. This is not a parlor discussion among economists on how many spirits of George Stigler can dance on the head of a pin. Instead, it is about understanding how this current crisis came to being, what to do about it, and, just as important, what not to do.

The upshot is that economists are creating crude models of imaginary "aggregate demand and aggregate supply," throwing in government spending and expansion of fiat currency, and calling it a "solution." However, one applies these "solutions" the same way that one pours gasoline on a house fire to extinguish the flames. The Keynesian "solution" is a disaster which is made worse because most academically-trained economists are ignorant of the causes of the problem and, thus, are not intellectually equipped to recommend the needed steps to put the economy back into balance.

Austrian economists and the intellectual tools they bring to the table are needed more than ever, yet the response of the economics profession has been to be even more aggressive in denouncing Austrians as "quacks" and "charlatans" and making sure that they are excluded from any academic and political discussions about this crisis. However, if one wishes to see just how superior the Austrian position has been, the best proof is to watch clips of Peter Schiff (Irwin’s son), who is a well-known investor and fund manager, debate mainstream economists and other "financial experts" by using the Austrian analysis against their viewpoints. Schiff clearly understands the nature of the crisis and how to stop the bleeding and cure the "patient"; the others blindly stumble about, citing the "expertise" of economic theories that lead to nowhere.

For years, economists from the University of Chicago and others influenced by them have claimed that Austrian Economics is rejected by the mainstream because it "fails the market test." Their logic goes like this: (a) Mainstream economists accept good theory and reject bad theory; (b) Austrian Economics is rejected by the mainstream; (c) Therefore, Austrian Economics is bad economics.

This is circular reasoning, not economic logic. The Chicago economists never deal with the actual Austrian arguments or if they attempt to do so, they usually get them wrong. In my view, the reason they get them wrong is because most economists do not have a clue as to understanding money. The consequences for this ignorance are serious. We have a financial and economic crisis that is going to turn into a major depression because the economic mainstream is intellectually incapable of understanding causes and solutions, and when the Austrians speak up, the other economists close their ears, start screaming, and continue to lead everyone else down the same path of destruction.

November 29, 2008

William L. Anderson, Ph.D. [send him mail], teaches economics at Frostburg State University in Maryland, and is an adjunct scholar of the Ludwig von Mises Institute.He also is a consultant with American Economic Services.

Copyright © 2008

William Anderson Archives

Friday, November 21, 2008

How Obama Will Continue to Ruin the Economy

Jobarama: Obama's "Investment"

Daily Article by | Posted on 11/14/2008

With all of the talk of how charismatic Barack Obama is, or of his oratory ability—and especially given his recent presidential victory—it is time to engage in a deeper economic critique of Obama's actual policies. Once we see the true effects of his policies and the incentives they create, we will see that his leadership skills and abilities make him more of a threat to freedom than if he were less articulate.

In this article we will start with a small part of Obama's program to "create" jobs, with the aim of tackling poverty. We find the following claim on Obama's website:

Barack Obama will expand access to jobs. Obama and Biden will invest $1 billion over five years in transitional jobs and career pathway programs that implement proven methods of helping low-income Americans succeed in the workforce.

First, there is the use of the word "investment"—in true government Orwellian fashion—as a euphemism for government spending. Investment signifies an accumulation of savings through lower present consumption, which will then be used to achieve (potential) profitable returns in the future. Obama does not have $1 billion of his own money (even including campaign contributions) that he will be investing. Isn't it bizarre how the more money politicians say they are "investing," the more excited people get? Do people not realize that it is their money politicians are referring to? It is as if a thief approached you and, instead of demanding half of your money, said, "Since I really do care about you and your future, give me 90% of your money." Wouldn't it be better if Obama could say, "We are going to invest $10 and creates thousands of new jobs"? Talk about a return on investment.

Second, there is no non-arbitrary way to determine whether a government program makes a profit or a loss. Indeed, government typically does not "talk" in those terms. If a private company is making losses for whatever reason, it must change and innovate in order to make a profit or it will continually make losses and go out of business. But with the government, if a program is labeled as failing, it receives more money—just think of FEMA, the current bank crisis, or, no doubt, Obama's future jobs program.

In contrast, when private companies fail it is not a proof of market failure; on the contrary, it is proof the market is working. It is eliminating failure; in sharp contrast, the government promotes failure: if you want more of something, subsidize it. Government's solution to government failure is consistent with Mises's theory of intervention: government meddling seems to require more government involvement (and more money). And there is nothing as permanent as a temporary government program.

Continuing, we read the following from Obama's program:

Obama and Biden will create a transitional jobs program to place people with extreme difficulties getting and keeping good jobs into temporary, subsidized wage-paying jobs to gain necessary job skills before applying for unsubsidized jobs in the private and public sectors.

Those who are being coerced into subsidizing these jobs should expect more and continued taxation. Obama claims these jobs will be provided by both the private and public sectors. We can assume that politicians want to ensure and, more likely, reassure their voters, that this program is working. After all, it's a $1 billion investment, right? Well, if private companies aren't hiring these workers, obviously, what will probably happen will be more government (public) jobs. As for incentives, if someone is guaranteed a "subsidized wage-paying job," albeit a government one, then they will be less likely to search for an unsubsidized, less-secure job. The obvious effect of this would be fewer private-sector, productive, wealth-creating jobs, and more public-sector, unproductive, waste-creating jobs.

Government investment through taxation means taxpayers must lower their current levels of consumption and investment. As Murray Rothbard points out,

When capital investment takes place in the free market, it deprives no one of consumption goods; for those save who voluntarily choose investment over some present consumption. No one is required to sacrifice present consumption who does not wish to do so. As a result, the standard of living of everyone rises continually and smoothly as investment increases. But a Soviet or other system of compulsory investment lowers the standard of living of almost everyone, certainly in the near future.

Standards of living will decrease as there will be a shift from private production and exchange to political demagoguery, as well as taxes levied on the more efficient to subsidize the less efficient, but privileged, group. As with most government programs, this creates a caste conflict where one man or group benefits at the expense of another man or group. Thus we see government as the true originator of conflict in a society; whereas the market creates mutual harmony, the government engages in exploitation to achieve its ends.

While Austrian economists do not necessarily promote economic growth, it is recognized that true growth can only come through an increase in savings and investment by individuals in the free market, determined by how much they want to consume in the future compared to the present. On the other hand, government "investment" leads to either malinvestment or does not turn out to be an investment at all. An increase in government spending leads to an increase in (government) consumption and a decrease in (private) saving and investment. Thus we see Obama's jobs program will distort the market by shifting workers and resources from the private sector to the public sector, toward government ends rather than consumers'.

Jobs cannot be created by government fiat. While it is true that neither governments nor entrepreneurs have any way of perfectly forecasting the innovations that will take place in the future, there is, however, one enormous and fundamental difference: entrepreneurs are putting themselves at risk—not taxpayers. An entrepreneur can only originate funds from consumers and investors, i.e., individuals with an interest in the entrepreneur's success who anticipate a profit. Government, however, can extract funds by taxation and obtain them seemingly at whim. Therefore, the profit-and-loss test functions as a market mechanism to properly allocate funds. Without the requirement of obtaining goods through voluntary exchange, government can neither calculate nor allocate funds rationally.

Without a free price system and profit-and-loss criteria, says Rothbard,

[T]he government can only blunder along, blindly "investing" without being able to invest properly in the right fields, the right products, or the right places. A beautiful subway will be built, but no wheels will be available for the trains; a giant dam, but no copper for transmission lines, etc. These sudden surpluses and shortages, so characteristic of government planning, are the result of massive malinvestment by the government.

Obama's jobs program will lower the standard of living of nearly everyone in the near future. The solution to any of Obama's policies would be to eliminate all current and future government "investments."

Tuesday, November 11, 2008

A Recipe for the Next Great Depression

by Thomas J. DiLorenzo

Along with the ascendancy of the Democratic Party to control of the executive and legislative branches of government has come the repetition of the tired, old mantra of an alleged need for a "new New Deal." God help us. The original New Deal unequivocally made the Great Depression much worse, and much longer-lasting, than it would otherwise have been.

One of the most readable expositions of why the New Deal was an economic debacle is Jim Powell’s book, FDR’s Folly. It summarizes more than a half century of economic research on the actual effects of the New Deal and presents the results in a very readable, conversational style that is suitable to a general reading audience. And every bit of it is being studiously ignored by the powers that be in Washington. After his voluminous survey of the ill effects of New Deal interventionism Powell concludes with "lessons for today." Every one of these lessons is not only being ignored by Washington policymakers, but the policy proposals coming out of Washington are ominously structured to do exactly the opposite of what Powell suggests.

Lesson Number One is that "the basic problem with central banks is that like socialist economic planners, they can never have more than a fraction of the vast knowledge needed to make a society work, knowledge that is dispersed in the minds of millions of people. In addition, when central bankers make mistakes – as they inevitably will, since they’re human beings – these mistakes harm not just the economy in a city or a region but the entire country. The Fed’s response to the current economic crisis, which it created by creating the housing bubble, has been to declare more and more central planning powers for itself."

Lesson Number Two is that "deposit insurance must be priced to reflect the risks of the banks that buy it. Having the federal government provide deposit insurance inevitably introduced political pressures to offer deposit insurance at the same price for all banks, which meant subsidized banks engaged in risky practices and contributed to the instability of the banking system." The federal government recently expanded the coverage of federal deposit insurance, thereby guaranteeing more excessively risky lending in the future.

Lesson Number Three is, "Especially because taxes are the biggest burden millions of people face today, it’s crucial to cut taxes. Tax cuts mean expanding economic liberty . . ." President-elect Obama is promising punitive taxes on the most productive people in America – higher income families and investors and savers, combined with government handouts that he mislabels as "tax cuts" for people who don’t even pay income taxes.

Lesson Number Four is "efforts to ‘soak the rich’ will backfire, because the investments of the rich are needed to create jobs." If Obama’s campaign and, indeed, his entire political career, has been about anything it has been about soaking the rich and "redistributing" income and wealth through the tax system.

Lesson Number Five is "public works and other ‘jobs’ programs must be avoided because they increase the cost and burden of government, making it more difficult for the private sector to function." All of Washington is foaming at the mouth over the prospect of more pork-barrel spending, laughingly labeled "stimulus package."

Lesson Number Six is that "especially during a recession or depression, the government must not enact laws preventing prices from adjusting to circumstances. Prices are vital signals that help people decide what to produce and consume." The government has been doing exactly the opposite. Stopping prices from adjusting to realistic levels is the whole intent of the Fed’s policies as well as the Wall Street Plutocrat Bailout Bill.

Lesson Number Seven is that "government must not enact laws preventing wages from adjusting to circumstances . . . . Labor union monopolies have been major obstacles to adjusting wages." One of the first orders of business for the Obama administration will be to strengthen labor union monopolies by passing a law that prohibits secret ballot voting in union certification elections.

Lesson Number Eight is, "only if investors feel private property is secure will they be willing to make long-term financial commitments needed to spur recovery and boost employment." The government has been busy charging businesses that have simply gone bankrupt with crimes, promising more of the same, placing price controls on executive pay, increasing the taxation of investment with higher capital gains taxes, and generally demonizing the entire American capitalist system as a means of shifting the blame for the economic crisis that its own stupid policies have created.

In other words, everything going on in Washington today is a recipe for another Great Depression.

November 11, 2008

Thomas J. DiLorenzo [send him mail] is professor of economics at Loyola College in Maryland and the author of The Real Lincoln; Lincoln Unmasked: What You’re Not Supposed To Know about Dishonest AbeandHow Capitalism Saved America. His latest book, Hamilton’s Curse: How Jefferson’s Archenemy Betrayed the American Revolution – And What It Means for America Today, will be published on October 21.

Copyright © 2008 Ludwig von Mises Institute

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Sunday, November 9, 2008

Why Obama Will Be Worse Than Bush

by William Norman Grigg

My reaction isn’t dictated merely by the conclusion that Obama is uniquely unsuitable to the office he will acquire next January.

I'm of the view that all presidents should be simultaneously inaugurated and impeached, and that there should be a streamlined procedure to expedite their conviction and removal from office upon each president's first documented violation of his constitutional oath.

This would be more than merely a convenient time-saving measure; it is entirely justified in light of the alacrity with which presidents become enemies of the Constitution. Nearly all newly installed presidents reveal themselves to be perjurers before the echo of their insipid inaugural addresses dies down. Indeed, in our degenerate socialist democracy it's impossible for a politician to become a "serious" presidential contender without promising, in extravagant detail, the crime wave he intends to preside over once enthroned.

But since there's no acceptable procedure for impeaching a candidate before he obtains public office, we would have to settle for a system in which presidents entered the office under the burden of impeachment and haunted by the prospect of immediate removal.

Granted, this would result in an executive turnover akin to that experienced by Argentina following its financial collapse earlier this decade, when that country went through five presidents in roughly a year. Governmental paralysis would ensue, with legislation lingering unsigned, executive appointments left unmade, and "rogue" nations left un-bombed.

Some would describe the resulting state of affairs as a crisis. I'd describe it as a miraculous improvement on the status quo.

In an interview with the redoubtable Lew Rockwell, former Federal Judge Andrew Napolitano – one of the few jurists in our history to display actual respect for the Constitution – yielded to what he called the human virtue of hope by opining that it's possible Barack Obama (we pause to observe a moment of chastened reverence) will prove to be a friend to constitutionally protected individual liberties once he assumes office.

Judge Napolitano correctly points out that Obama, whose absence during critical votes has been a consistent trait of his legislative career, made a point of being present to vote in favor of renewing the PATRIOT [sic] Act and the revised FISA law that supposedly authorized unconstitutional electronic surveillance. (Not mentioned in that interview, but relevant to this discussion, is Obama's explicit disavowal of any intention to pursue investigations or criminal prosecutions of Bush administration figures implicated in torture and other abuses once he is in office.)

However, Napolitano suggested that those votes reflected a cynical, election-year design on Obama's part to neutralize criticism that he was in some sense "soft on terrorism." So the best case to be made here is that Obama was willing to abet the assault on individual liberties in order to win election so as to be able to undo the damage he helped inflict on the Constitution. This would mean, in principle, that he is willing to impose tangible injury on innocent people in exchange for power while piously insisting on the purity of his intentions.

So we'd be seeing a familiar routine: A politician compromises his professed principles, insisting this is necessary in order to obtain the power he needs to act on those discarded principles.

Judge Napolitano did make a substantive point when he observed that the Democratic Party, unlike the GOP, has a civil liberties constituency, even if its influence is negligible. But whether or not Obama sympathizes with that element of his coalition and harbors a desire to rectify atrocities committed by the Bu'ushists in the realm of civil liberties, the hyper-activist role he prescribes for the State will inevitably mean that his reign will be even worse for individual liberty than that of his predecessor.

During the era of Bush the Lesser, conservatives who claimed to oppose big, intrusive government at home embraced unlimited government for the purpose of conducting imperial warfare abroad. As the history of previous empires demonstrates, pretending that such an arrangement is possible is an exercise in puerile self-deception: War is the definitive big government program, and – to quote James Madison yet again – "No nation can preserve its freedom in the midst of continual warfare."

The same principle applies with even greater acuity to the enhancement of government power for domestic purposes. It is impossible to mobilize government power on behalf of wealth redistribution without commissioning widespread and wholesale violation of individual rights – beginning, obviously, with the fundamental right to own and dispose of one's wealth and property.

Governments that get really serious about this sort of thing tend to kill all productive activity outright; often the only significant industry that remains is the manufacture of corpses out of once-living, breathing, productive human beings.

Barack Obama, a one-time professor of constitutional law, has famously criticized the Constitution for defining liberty in terms of "negative" liberties – meaning protections against various forms of state action. This is a hoary truism often invoked in theories of Constitutional law that were rooted in Marxism and nurtured by the federal government's post-New Deal demand for legal apologists and executors.

Obama, speaking as a state legislator in a recently discovered and inadequately publicized 2001 radio interview, observed that the civil rights revolution of the 1960s sought to overcome this "negative" concept of liberties, but was too wedded to the idea of pursuing its social revolution through the courts.

As he pointed out, "[T]he Supreme Court never ventured into the issues of redistribution of wealth, and the more basic issues of political and economic justice in this society.... [O]ne of the, I think, tragedies of the civil rights movement was, because the civil rights movement became so court-focused, I think there was a tendency to lose track of the community organizing and activities on the ground that are able to put together the actual coalitions of power through which to bring about redistributive change. And in some ways we still suffer from that." (Emphasis added.)

Here in one paragraph Obama at once reveals his core ideological commitments and answers the much-asked question, "What does a 'community organizer' actually do?" From Obama's own words (soon to be printed in double-column, red-letter text on gilt-edged, leather-bound paper, according to his more devoted followers) we learn that a community organizer is someone who assembles "coalitions of power" in the interest of "redistributive change."

This is an elaborate way of saying that a "community organizer" is what less sophisticated people would call a Communist agitator.

Obama, who reads a teleprompter with panache and knows how to pose for a photo, often finds himself foundering when asked to extemporize.

He does have a certain facile glibness of the kind often mistaken for wit, as we saw when he dismissed charges that he is a socialist by "confessing" to sharing his brownies in kindergarten.

This was actually a moment of self-aggrandizing compound dishonesty worthy of Bill Clinton: In one stroke – a carefully rehearsed "spontaneous" one-liner – Obama offered a non-denial of his intentions while at once lying about the nature of socialism and adding another line to his auto-hagiography (a work constantly in progress):

  1. And the Child Obama, seeing that the multitudes in his kindergarten were an hungered, did say:
  2. Behold, my bosom abounds in compassion for you.
  3. Therewith He did take of his brownies and – offering thanks unto the Almighty State for its wisdom in erecting tax-subsidized child care through the great bounty of its divinely plundered wealth – did break them and offer them to the others,
  4. saying: Take, and eat; And the other children did eat, and gave thanks to Obama the Blessed for his divine generosity,
  5. foreshadowing the day when He, the Embodiment of Change and Hope, would have the power to compel those heedless of the requirements of social justice to surrender their brownies for redistribution to those more worthy.
  6. And the Child Obama did wax mighty in the Spirit of Alinsky, and great wonders were wrought by his hand.

At the risk of committing heresy, I have to point out something His Holiness sought to conceal: Socialism isn't about sharing one's own brownies, but rather about the forcible collectivization of brownies by seizing them from others at gunpoint – and then the ever-escalating use of lethal violence to regiment society once the inevitable shortage of brownies (or bread, or any other good subject to distribution through political rather than economic means) develops.

All State efforts to redistribute wealth and regiment the economy are, in principle and generally in practice, warfare against the rights of the governed. Obama's most impassioned supporters, some of whom have sung arias lamenting the criminal foreign aggression carried out by the Bush Regime, are already chanting hymns of praise in anticipation of the Holy One's war against the American bourgeoisie.

Prominent among those psalmists is Norman Solomon, who wrote a splendid book indicting the corrupt entente between the Establishment media and the presidential warmaking apparatus (War Made Easy: How Presidents and Pundits Keep Spinning Us to Death). Solomon insists that Obama's victory is nothing less than a mandate for war on Americans who stubbornly insist on the sanctity of their personal wealth.

"Two days before he lost the election, John McCain summarized what had become the central message of his campaign: `Redistribute the wealth, spread the wealth around – we can't do that,'" recalls Solomon. "Oh, yes we can. The 2008 presidential campaign became something of a referendum on `spreading the wealth.'"

Solomon complained – inaccurately, alas – that the Republican presidential campaign "recycled attacks on the principles of the New Deal. Like Franklin Roosevelt when he first ran for president in 1932, Barack Obama put forward economic prescriptions that were hardly radical. Yet, in the next few years, Obama's administration could accomplish great things – reminiscent of the New Deal...."

Assuming that he's familiar with the relevant history, Solomon is actually assuming that Obama's campaign was a work of deliberate deception, as FDR's initial presidential bid certainly was. As I've noted before, the 1932 Democratic platform actually criticized Herbert Hoover from the right, condemning his profligacy, demanding a balanced budget, endorsing a sound currency backed by precious metals and the expansion of free trade. FDR's first running mate actually accused Hoover of shepherding the United States into socialism.

Once in power, of course, FDR pivoted sharply to the left, filling the executive branch with squalid Bolsheviks and building a corporate socialist state along the lines prescribed by Italian technocrat Giovanni Gentile, a key adviser to a disavowed disciple of Lenin named Benito Mussolini. FDR ran as a conservative, and governed as an aspiring totalitarian.

Obama campaigned as an unabashed European-style socialist and, if he is given the means, will rule like a post-colonial African dictator.

I say the latter not because of Obama's attenuated African ancestry, but rather because of his preferred style of mobilizing public support – the grotesque Leni Riefenstahl-meets-Tony Robbins public spectacles that portend the advent of an Americanized version of Africa's "Big Man" theory of government.

Given Obama's youth, the bottomless devotion of his followers, the depth of our impending economic disaster, the eagerness of the mass media to help the Holy One "make history," the well-earned political disintegration of the Republican Party, and the totalitarian powers of the office Obama inherits, he may very well become America's second president-for-life, following the course set by FDR before he died and went to hell.

Can Obama rule by decree? Thanks to Bush's example, his answer would be: Yes, I can!

Can he and his followers overturn the 22nd Amendment? Yes, they can!

Can they succeed in creating an egalitarian paradise through forcible redistribution of wealth from the productive to the parasitical?

No – they can't.

But that won't stop them from trying, even if they have to destroy what remains of our liberties in the process.

November 8, 2008

William Norman Grigg [send him mail] writes the Pro Libertate blog.

Copyright © 2008 William Norman Grigg

Proof of Free Market Superiority Over Government Funded Waste

The Myth of the Robber Barons

by Burton W. Folsom, Jr.

This article is adapted from a lecture Professor Folsom gave at the History and Liberty seminar at FEE in June. For readers who are interested in finding out more about these lost lessons of history we recommend Professor Folsom's popular book, The Myth of the Robber Barons, now in its fifth edition.

In the ongoing war of ideas in American history, those who advocate government action as an engine of economic development have been encouraged by a general and all-too-human tendency to avoid thinking deeply. Because we have a long history of government intervention in the economy, the assumption—both among those who design government programs and among the constituencies that support them—has usually been that government action accomplishes its objectives. Even people who have reservations about bureaucratic inefficiency reason that we wouldn't have turned to government so many times in the past if government hadn't accomplished something.

Three Assumptions About Capitalism

This shallow conclusion dovetails with another set of assumptions: First, that the free market, with its economic uncertainty, competitive stress, and constant potential for failure, needs the steadying hand of government regulation; second, that businessmen tend to be unscrupulous, reflecting the classic cliché image of the “robber baron,” eager to seize any opportunity to steal from the public; and third, that because government can mobilize a wide array of forces across the political and business landscape, government programs therefore can move the economy more effectively than can the varied and often conflicting efforts of private enterprise.

But the closer we look at public-sector economic initiatives, the more difficult it becomes to defend government as a wellspring of progress. Indeed, an honest examination of our economic history—going back long before the twentieth century—reveals that, more often than not, when government programs and individual enterprise have gone head to head, the private sector has achieved more progress at less cost with greater benefit to consumers and the economy at large.

Competition Versus Subsidy in the Steamship Industry

America's early experience with the steamship industry provides an illustrative case. By the 1840s,the technology of steam-powered water transport had reached the point where it became practical to build large ocean-going vessels, and steamships began plying the route between New York City and Liverpool, England. An enterprising fellow named Edward K. Collins approached the U.S. Congress with a plan to develop a steamship fleet that could compete with Britain's Cunard Company. Since the Cunard operation was subsidized by the British government, Collins asked Congress to provide him with a grant of $3 million to underwrite the construction of five vessels and a yearly supplement of $385,000 so he could strive to best Cunard's fare of $200 per passenger and its rates for carrying freight and mail.

Playing skillfully on congressional fears about British domination of the transatlantic trade, and promising that his ships could serve as the basis of a merchant marine fleet in the event of war, Collins got his money. He then proceeded to build four very large and luxurious ships, instead of the five smaller vessels provided for in the agreement, and he took far longer than anticipated to get his fleet into operation.

Collins ran his ships on the same schedule as Cunard, sailing every two weeks, and he often did beat Cunard's crossing time by one day, though at considerably higher operating costs. But while he had promised Congress that his yearly subsidy could eventually be phased out, he was soon lobbying for annual increases to about $500,000, $600,000, $700,000, and then to more than $800,000 per year.

Cornelius Vanderbilt, who had made his mark as an operator of river steamboats, approached Congress with a proposal for an “Atlantic ferry,” promising to match Collins's two-week sailing schedule at half the cost of Collins's subsidy. Congress debated Vanderbilt's proposal. But it doubted his ability. Having made a commitment to Collins—and by now a considerable investment as well—Congress turned Vanderbilt down.

Vanderbilt was undeterred. He went into operation without a subsidy, using privately financed ships, set up a self-insurance arrangement by which he was able to save on payments to outside insurers, and ran his ships at slower speeds to save fuel. He also reduced the fare, and he invented a new, cheaper passenger class, by which people could travel below decks, in what was called steerage, for as little as $30. Vanderbilt's “sardine class” made it possible for many immigrants to come to America.

After a year, Vanderbilt's operation was flourishing, and Collins, in serious trouble from competition with Vanderbilt, went to Congress to ask that his subsidy be raised, yet again, to more than $850,000. Collins managed to persuade the congressmen to conclude that since they started with Collins, it would be disloyal to take his money away now.

But Collins recognized that each time he went back to Congress for more money, the vote was closer. He decided that if he couldn't beat Vanderbilt on price, he would concentrate on beating his crossing time, demonstrating that the Collins line clearly offered the most efficient way to get from Liverpool to New York City. This strategy had its dangers. Long beset with maintenance problems because their engines were too large for their hulls, Collins's ships began to feel the strain of this high-speed policy. Two of the ships—half his fleet—sank, killing almost 500 passengers, and Collins faced the humiliation of going back to Congress to beg for an emergency $1 million appropriation to construct a replacement vessel.

Again Congress funded him. But the new ship, The Adriatic, was so hastily and poorly constructed that it had to be sold at auction after its first voyage—at a $900,000 loss. When Collins went back to Congress for still more money to build yet another ship, he was finally turned down.

It is interesting to look at the reaction in Congress after being embarrassed again and again by the subsidies to Collins. Senator Judah Benjamin of Louisiana said, “I believe [the Collins line] has been our most miserably managed.” Senator Robert Hunter of Virginia went even further. “The whole system was wrong,” he said. “It ought to have been left, like any other trade, to competition.” Senator John Thompson of Kentucky insisted, “Give neither this line nor any other line a subsidy. Let the Collins line die. I want a tabula rasa . . . a new beginning.”

Collins had his subsidy stripped and had to compete head to head—unsupported—with Vanderbilt. Within a year, Collins went bankrupt, and Vanderbilt was the dominant force on the seas from the American side.

Competition Versus Subsidy in the Railroad Industry

It would be comforting to report that the United States learned its lesson about the effects of federal subsidies from the Collins/Vanderbilt experience. Unfortunately, less than a decade later, would-be railroad builders were coming to Congress begging for money to span the nation with transcontinental lines. Congress subsidized three transcontinental rail-roads: the Union Pacific, the Central Pacific, and later the Northern Pacific.

These companies, which were provided with money and land by the government, had no incentive to build their lines efficiently, along straight routes with even grades and proper materials. Eventually they went bankrupt. The Union Pacific and the Central Pacific did so only after eating up 44 million acres of free land and $61 million in cash loans. Large sections of the lines they did complete soon had to be rebuilt and sometimes even relocated due to shoddy construction.

The privately funded Great Northern, which, by contrast, operated on a shoestring budget, was a success. Unlike his competitors, James J. Hill built the Great Northern for durability and efficiency. “What we want,” he said, “is the best possible line, shortest distance, lowest grades, and least curvature that we can build.” That meant he personally supervised the surveying and construction. “I find that it pays to be where the money is being spent,” he noted. He believed that building a functional and durable product actually saved money. For example, he usually imported high-quality Bessemer rails, even though they cost more than those made in America. He was thinking about the future, and quality building cut costs in the long run. When Hill constructed the solid granite Stone Arch Bridge—2,100 feet long, 28 feet wide, and 82 feet high across the Mississippi River—it became the Minneapolis landmark for decades. Yet today Hill is regarded as just another member among the ranks of the greedy, amoral “get-rich-quick” capitalists.

After the transcontinental railroad episode, Congress increasingly began to take the position that American business success would be based on entrepreneurship, not subsidy, relying on those whom I call market entrepreneurs rather than political entrepreneurs. If you look at industries after the Civil War—particularly steel, oil, and chemicals—you find that time and again American market entrepreneurs stepped in and defeated competition from Europe, without subsidies.

Andrew Carnegie and the Steel Industry

When Andrew Carnegie founded Carnegie Steel in 1872, the biggest steel producer in the world was England and the going price of steel rails was about $56 per ton. Carnegie was an eager innovator. He adopted the revolutionary Bessemer process and introduced new accounting methods to make his operations more efficient, applied a merit-pay system to reward his workers, and implemented many employee-suggested ideas. Carnegie Steel became so efficient that by 1900 the company could produce steel rails at $11.50 per ton, and its rail output surpassed that of all the steel mills in England combined. Other U.S. firms followed Carnegie's lead, and America became the dominant steel producer of the world.

John D. Rockefeller and the Oil Industry

Our story would not be complete without recalling the success of John D. Rockefeller. By the 1890s, Standard Oil had a 60 percent market share of all the oil sold in the world. Rockefeller sold the oil at eight cents a gallon—that would be around $1.60 today. Eight cents a gallon! Nobody in the world could do it that cheaply. Kerosene was so inexpensive that people could light their homes for less than one cent an hour.

Rockefeller, the first billionaire in U.S. history, made a fraction of a cent on each gallon of oil his company sold. He had the foresight to say that his goal was to make it for six cents, sell it for eight cents, and use the two cents for research and development. Rockefeller realized that finding new uses for oil was the key to success. (Other companies would take a barrel of oil out of the ground, heat it to get the kerosene, and dump the excess as waste into rivers.) Eventually Standard Oil discovered and produced scores of byproducts, including candle wax, soap, petroleum jelly, tars, and lubricating oils.

Because of this resourcefulness, Rockefeller might well be called the first environmentalist. (He also could be credited with species preservation: the whaling industry declined precipitously as kerosene displaced whale oil in lighting.)

But all this did not make him popular. Competitors did not like him, and public opposition mounted. Standard Oil had already begun to lose market share to competitors because it failed to invest in the Texas oil fields in 1900. But despite this declining market share, successful antitrust litigation resulted in the company's being split into 34 companies.

Time and again, experience has shown that while private enterprise, carried on in an environment of open competition, delivers the best products and services at the best price, government intervention stifles initiative, subsidizes inefficiency, and raises costs. But if we have difficulty learning from history, it is often because our true economic history is largely hidden from us. We would be hard pressed to find anything about Vanderbilt's success or Collins's government-backed failure in the steamship business by examining the conventional history textbooks or taking a history course at most colleges or universities. The information simply isn't included.

The Greatest Generation?

I want to end on a positive note. The success of the market entrepreneurs of the post-Civil War era depended on their ability to serve consumers. When they started their enterprises, the United States was a second-rate power; during their lifetimes they spurred American industry to world dominance. Their accomplishments in transportation, steel, oil, and chemicals led to the unparalleled economic progress of the late 1800s, contributed to American prosperity, and prepared the way for future innovation.

Along with our Founding Fathers and the World War II generation, this remarkable group of entreprenurs, has a rightful claim to being America's greatest generation.

Wednesday, November 5, 2008

"Spontaneous Order" or How A Free Society Works

The Freeman: Ideas on Liberty - July 1999


Spontaneous Order

By Nigel Ashford

Nigel Ashford is senior lecturer in politics at the University of Staffordshire in England and coauthor of A Dictionary of Conservative and Libertarian Thought (Routledge, 1991). This article is adapted from his paper “Principles for a Free Society,” a primer for former communist countries. Reprinted by permission of the Jarl Hjalmarson Foundation of Stockholm.

“Many human institutions are the result of human action, but not of human design.”
—Adam Ferguson

Order has been a central preoccupation of political thinkers and philosophers throughout the ages. It is widely understood today as a state of harmony between people, or social peace. In the premodern era, however, the concept was understood as the maintenance of a stable, hierarchical order that was pre-ordained by God or nature or both. Order can also be seen as the existence of regularity and predictability in human affairs, the absence of chaos. Although no longer associated with a rigid society ranked by privilege and power, the idea of order is still highly valued. This is because it allows people with different interests and values to live together in society without resorting to discord, conflict, or civil war. This is the modern idea of spontaneous order.

The first thinker to articulate this modern concept of spontaneous order was Bernard de Mandeville, in a book called The Fable of the Bees (1714). This work discussed the paradox that “private vices” such as individual self-interest could lead to “public benefits” from which the whole community benefited. He observed that the sum of individuals acting from separate motives produced a commercial society that was no part of any one person’s intention. This idea that the evolution of human institutions allowed individuals to serve others, even though their motive might be self-interest, was at the core of the Scottish Enlightenment that grew up around Adam Smith, David Hume, and Adam Ferguson. They sought to apply this idea to a whole range of human institutions, including commerce, law, language, human morality, and even mores and customs. Far from a narrow theory of economics, Smith’s Theory of Moral Sentiments (1759) argued that morals evolved slowly. The principles that enabled humanity to flourish and prosper were eventually accepted by the community. They stood the test of time.

Smith, Hume, and Ferguson were fascinated at how these values and institutions grew up to greatly benefit mankind despite their being the product of no single mind. Adam Ferguson’s observation that human action produced a form of social order superior to that conceived by human design was to echo in the thoughts of an Austrian thinker, F. A. Hayek, two centuries later. Hayek took on the ancient idea that institutions were divided between those that are “natural” and those that are “artificial.” A third group existed, Hayek said, and these were social institutions. As these are regular and orderly, people suppose that they have been invented by humanity and can therefore be altered or restructured at will. Hayek pointed out that this notion was mistaken because the human mind and society had evolved together. Tearing down the institutions that kept society together and building anew, as socialists advocated, would destroy the order that made society work.

Order Without Commands

Spontaneous order keeps the wheels of society turning without the need to issue commands from the center. A free society is orderly not because people are told what to do but because the evolving traditions and inherited institutions of human society allow individuals to pursue their own ends and by so doing, meet the needs of others. People’s behavior follows certain patterns because they have been accepted by society initially as they allowed the groups that adopted them to prosper. It is no accident, said Hayek, that the sharpest differences in material welfare can be seen throughout the Third World where the city meets the countryside and complex rule-guided societies meet intimate communities in which the rules are different.
The rules that allow a complex social order like a city or the global economy to function are not orders in the sense that term is usually understood. Rules that prevent individuals’ injuring others or engaging in theft or fraud or breaking promises in fact give people a great deal of latitude in their behavior. They tell people how to do things, but they do not tell them what they should do.

The moral framework for human society is not set in stone, but rather is constantly changing as new rules are discovered that allow the social order to function better. The problem is that we do not know in advance which rules will work and which will not. Our existing laws and customs show us what has worked to get us to the stage society has reached, but innovation and trial and error are required if we are to continue to discover new, effective rules of which we are currently ignorant. Social institutions that keep society orderly—customs, traditions, and values—are like tools. They contain the knowledge of generations before us about how to behave and will be modified by the rising generation and then passed on to the next. Groups that adopt these rules benefit from having done so, without necessarily knowing why. The institutions that transmit information about the rules are the product of human action, but not necessarily the result of human design.
There are three categories of social rules, according to Hayek. The first consists of those that we design ourselves, such as parliamentary legislation. The second, which has been called “tacit knowledge,” consists of things like a sense of fair play or injustice that we all understand but cannot put into words. Finally, there is a third group of rules of beneficial behavior that we can observe and write down, but our attempts at codification only approximate the principles. The Anglo-Saxon system of common law is an example of this third type of rule; it evolved through and was gradually refined over centuries by different cases and judgments, and it is open to modification in the future. We learn from these rules and contribute to them even though we often cannot fully explain them. It is the second and third categories that have the power to create a complex order that uses more knowledge than can ever be known by a single human mind.

Why We Need Freedom

Complex social orders require freedom because the information and knowledge that make them work can never be amassed by a central authority. Attempting to use the first category of rules—legislation—to change the second and third categories will fail because the sum total of human knowledge has allowed people in society to live with one another and brought us to the levels of prosperity and population that we now enjoy. This was seen in the old socialist states of the Soviet empire, in which government attacked and undermined traditional morality, justice, and fair play while relying on the economies of the West to keep living standards from falling below subsistence levels. Freedom is critical to the process of achieving spontaneous order in society because we do not know in advance which rules will work, because liberty is essential to the trial-and-error process, and because the creative powers of man can only be expressed in a society in which power and knowledge are widely dispersed. To impose a pre-designed pattern on society would make society cease to function as a creative force. Progress cannot be commanded.

Essential to the progress of an orderly society is the distribution of power among its citizens, as opposed to the concentration of power in the hands of the state. This allows society to experiment in the rules and mores that govern people’s behavior. The process of trial and error limits the impact of mistakes to a small segment of society. Rules that work will be observed, imitated, and absorbed into the social framework. Risk-taking and rule-breaking are virtually impossible in small, intimate rural societies, yet these activities are essential to maintaining the large populations that live in the vast impersonal societies of modern life.

The Role of Incentives

Life in a free society can be hard because it forces individuals to adjust to the needs of others. The free society works because it coordinates conflicting desires by creating incentives for people to satisfy their own wants by satisfying those of others. This is the opposite of a state in which one can only achieve one’s aims at the expense of others. As if by an invisible hand, Adam Smith suggested, we are moved to serve the needs of others while pursuing our own self-interest.

This complex order that harmonizes and synchronizes the conflicting desires of people who are different from one another can be confusing at first. But it is essential to look beyond that initial confusion if we are to see how a free society works. When Alexis de Tocqueville first disembarked in New York in 1831, he heard what he described as “a confused hum.” That great chronicler of American society wrote, “No sooner do you set foot upon American ground than you are stunned by a kind of tumult; a confused clamor is heard on every side, and a thousand simultaneous voices demand the satisfaction of their social wants.” Simply trying to work out how society works by watching it and listening to it tells us little. It would be like trying to understand how a clock works by telling the time. It is how people must interact with one another that allows the clockwork of society to keep ticking.

The hum of commerce eases the path of social cooperation in a free society, in part because it offers man opportunities that are simply not available when acting alone or in a state of war of all against all. Incentives allow us to cooperate with others even though our views on political issues or our religious beliefs may radically differ. When people supply goods and services or buy them from others, they may not know with whom they deal. Protestant, Catholic, Jew, and Muslim all benefit from the commercial activity of a free society without altering their fundamental beliefs. Their security and prosperity are interdependent and in free societies far surpass those of nations where conflict marks differences of faith. These differences are resolved peaceably and profitably in a free society, because the benefits of these values have been passed down through society and have become part of the moral framework. The absence of this mechanism for transmitting moral values is one of the reasons that religious strife and social discord mark societies that have never known freedom.

The Law

One key institution that makes the coordination of a free society possible is the law. In a free society, law is not the same as the arbitrary government decrees of totalitarian and autocratic societies or the legislation of Western congresses and parliaments. It is, as we have seen, a code that has evolved not at the hands of politicians but in the decisions of judges. Tocqueville in Democracy in America (1840) described how laws keep order in a free society. He observed that “the spirit of the law which is produced in the schools and courts of justice, gradually penetrates beyond their walls into the bosom of society, where it descends to the lowest classes, so that at last the whole people contract the habits and tastes of the judicial magistrate.” The law is respected in a free society not by the use of force (although governments do reserve the right to use force to protect freedom), but because it is based on rules that have grown up and been tested in real life, and because the values and the spirit of the law are closely connected to the moral values of the civilization.
Over-government undermines that respect by imposing controls on society that do not conform to people’s inherited sense of right and wrong. Freedom creates order in society. The institutions of a free society give people an interest in keeping the peace, better than any police state or concentration camp.

©2007 Foundation for Economic Education. All Rights Reserved.

Monday, November 3, 2008

The Next President's First 5 Tasks

An article in Time magazine online listed 5 important first things that the next President (whoever he may be) must take care of . Here is the link

The Next President's First Five Things To Do

I believe this list is too vague, and mostly wrong. Here are 5 better suggestions:

  1. Return to a Gold Standard. By making sure the dollar is backed by precious metals such as gold and silver, the dollar will once again be worth something, and inflation will be completely eliminated.
  2. Change to a non-interventionist domestic policy. Get the government completely out of the economy. Instead of hurtling headlong into a completely socialist economy, let's take our current mixed economy and for the first time in our history let's have a completely free market. Resources will be most efficiently allocated, and society will prosper tremendously. This means abandoning the economic myths and fallacies of John Maynard Keyens which have all but destroyed America from the inside, and adopting an Austrian Economic philosophy.
  3. Change to a non-interventionist foreign policy. Wise were the words of our Founding Fathers, who believed that sticking our noses in everybody's business would be a bad idea, create resentment, and cause terrorism against us. Minding our own business, stopping "Foreign Aid" which only puts money in the hands of brutal dictators, returning our troops home from the over 137 countries which we occupy will stop giving the world a reason to hate America. No nation-building, no shoving democracy down everyone's throat (when we ourselves don't even have it anymore), no empire-building, no more being the world's biggest bully by pretending to be Globo-Cop.
  4. With a solid change to a foreign policy of peace, trade with all and non-interventionism, terrorism will all but cease to exist. Without any terrorist threat, we will no longer need to live in an Orwellian Surveillance and Police State.
  5. Re-establish our Constitution as the Supreme Law of the Land. Recognize it not as a living breathing document which is subject to change, but as a document of universal values chiseled into stone, never to be changed, and always protecting the citizenry from government gone wild. This will shrink the government down to what it was originally intended to be--a small government that protects private property and contracts, and one that is subject to the citizenry. In other words, We the People are the BOSS, and the government is our servant, not the other way around.