- My letter to the NY Times re: My advice to the ECB and the Fed
- Strict defense of private property solves the economic fact of resource scarcity
- Three questions for Andrew Haldane, chief economist at the Bank of England
- My letter to the Philadelphia Inquirer Re: the crude oil export ban
- My letter to the NY Times re: New icebreakers to the arctic for what purpose?
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Mr. Binyamin Appelbaum’s report of the Fed’s conference in Boston over the weekend perfectly illustrates our central bankers’ incompetence. They wring their hands over what they do not know and beg the public to forgive them when the next financial crisis strikes, which surely it must. If the Fed wishes to prevent financial crises, it only needs to stop initiating them. The Fed’s hubris that it can fathom the proper interest rate for our vast and complex economy must rank among the greatest fallacies of all time. The Fed sees the world through the completely discredited Keynesian lens which posits that aggregate demand–what the rest of us know simply as spending–is the path to prosperity. Anyone who believes this nonsense need ask himself why he has not liquidated his own savings on frivolous consumption and why the citizens of countries like Zimbabwe, Venezuela, and others are not as rich as Midas. Please allow me to answer Mr. Luc Laeven’s question, posed to the conference attendees, to wit, “Do we have other policies?” Yes, Mr. Laeven, I do. Liquidate your central bank (the European Central Bank) and recommend similar action by the Fed. Scrap legal tender laws that prevent the market from choosing the best medium of indirect exchange. Outlaw fractional reserve banking as the fraud that it is. Subject banks to the same commercial code as all other businesses. There–problem solved! Now send everyone at the conference home to look for a real job.
Scarcity of resources exists in many forms and is THE problem in economics. If resources were not scarce, there would be no need to economize. The existence of scarcity is true of all resources (time, human energy, natural resources, etc.) It is not intuitive that allowing scarce resources to be owned privately is the solution to this problem. Socialists would like to ignore this reality of scarcity and have all resources owned collectively for the common good. By contrast, we Austrians know that private property solves the economic fact and economic problem of scarcity, as I will now discuss.
A society which spurns private property and throws all resources open to those who wish to take them will quickly learn the terrible lesson of the tragedy of the commons; i.e., that commonly held resources will be plundered to extinction.
If society spurns allowing private ownership of resources, it must find some other means to prevent the tragedy of the commons, and historically the means chosen is the use of force. Throughout history most of mankind has been divided into a hierarchical system of masters and slaves with some graduations between the two extremes, such as priestly or aristocratic classes. The masters (pharaohs, emperors, kings, sultans, warlords, etc.) devised complex rules-based systems for resource distribution that ultimately depended upon pure terror for enforcement.
But this so-called solution to the problem of scarcity–restricting the people’s liberty through the use of force–does not work. The gradual understanding of modern economics eventually ended thousands of years of subsistence existence for the masses in the West. Modern economics explained that without private ownership of resources, a man could not hold an ordinal preference. The term ordinal , of course, means that something is prioritize from highest to lowest. Without ordinal preferences, there is no rational means to economize for the betterment of society. In other words, the masters never really knew what to order the slaves to produce, what technical means to use, what alternative materials to use, the quality desired, or how much to produce. Thus, the Commissars of the Soviet Union ordered the production of inefficiently produced, shoddy goods. The Soviet empire collapsed, despite the fact that Russia is blessed with vast resources and an industrious population .
A second fatal problem with common ownership of all resources is that few such readily available, consumable resources actually exist. There are no resources on the planet that do not require at least a minimum of effort to transform into a consumable product. Even edible berries growing in the wild must be harvested, meaning that someone must transport himself to the berries’ location and pull them from the bush at just the proper time. The cost of doing so is the value one places on forfeiting his leisure. Of course, other natural resources require much more effort to convert to consumable products, passing through uncountable stages of production. For example, timber and minerals must be extracted, harvested, etc. and then molded into something that can be consumed. Consider a hiker lost in the wild. It matters not at all to him that great stands of timber lie within easy reach or that valuable minerals lie under foot. These natural resources require great effort over very long time periods to be converted into something consumable, such as a shelter or gasoline. A lost hiker does not have the knowledge, time, or previously produced means to convert these basic resources into consumable products to ensure his survival. All this is far beyond anyone’s autarkic abilities.
Now let us assume that someone did harvest trees by felling them, transporting them to a lumber mill, milling them, storing them in a ventilated and dry place for many months before kiln-drying them (all processes that are required to turn trees into useable lumber), advertising their availability to contractors, keeping sales records, sending out bills, collecting the bills, etc. only to have a socialist call him a plunderer and confiscate his lumber for free distribution to whomever the masters deemed to be politically advantageous to their continued privileged position. No one would ever harvest another tree. In other words, production of usable lumber would cease despite the fact that trees were readily available.
Now let us consider what would happen if the commissars did order slaves to harvest the trees. Great forests would be denuded in short order, because there would be no social mechanism to prevent what would amount to a tragedy of the commons by order of the state.
Proper harvesting of timber requires that its value be capitalized
Capitalization of timber requires that it be privately owned in order that its worth can take its proper place in the ordinal hierarchy of preferences. The consequences of ignoring this fact of economic science is most evident today in China’s ghost cities, where resources, both natural and human, have been expended for no observable benefit except to advance the careers of politicians who can claim to have met the requirements of the latest Five Year Plan.
The opposite case of resource waste comes from special interest groups who capture the political (police) apparatus of the state and prohibit exploitation of resources by private individuals. In the name of protecting Mother Gaia from being plundered, modern environmentalists have convinced the political class that most progress is unsustainable, dangerous to our health, or any number of other specious claims. Society is prevented from benefiting from their conversion to consumable products. Private ownership insures that resources will never be plundered to extinction, because their value will have been capitalized. The process of determining a resource’s capitalized value is impossible absent free market capitalism with strict defenses of property rights.
Despite both the theoretical and empirical evidence to the contrary, socialists tell us the opposite; i.e., that state ownership of all resources will prevent their plunder and ensure prosperity for all. As Ludwig von Mises explained, socialism is not an alternative economic system of production. It is a system of consumption only, and a system of economic ignorance and economic plunder.
1. What exactly is wrong with price deflation?
2. In a world of increasing productivity, are not lower prices inevitable?
3. Are not lower prices beneficial, in that all society enjoys an increasing standard of living on the same money income?
The answer to your headline question on the front of Sunday’s business section is self-evident. The crude oil export ban cannot be justified on any economic or moral basis. It is an economic myth that there can be rational economic calculation under socialism and that private property may be violated to achieve a more important common good. First the economic calculation myth. Over one hundred years ago in Economic Calculation in the Socialist Commonwealth, Ludwig von Mises proved that private property is required for rational economic decision-making. Only owners of private property can hold rational preferences of how best to manage resources. One hardly needs to point out that appointed bureaucrats and elected officials are NOT owners of the property that they presumptuously deign to control for some more altruist purpose. Without true preferences derived from ownership, the titular managers of resources would not know what to produce, how much to produce, what quality to produce, or what factors to use in the production process. As for the moral basis, in section 27 of his Second Treatise of Civil Government, John Locke explained that property accrues legally to “he who hath mixed his labor with, and joined to it something that is his own, and therefore makes it his property.” Austrian economists have labelled this the homesteading principle. Thereafter homesteaded property may be transferred only via social cooperation under the free market. All else is theft.
The owners, workers, and paid lobbyists of those American refineries who wish to maintain the crude oil export ban seek to employ the police power of the state to prevent consumers from improving their standard of living by purchasing similar goods from foreigners at lower prices. The weakness and vapidity of their argument is evident in their admission that American oil can be transported to foreign refineries, repatriated in the form of refined products, and still sold at lower prices on the US market. Why must Americans be held hostage to inefficient, high cost domestic producers?
President Obama’s call for Congress to fund new icebreakers for the Arctic is troubling. Whereas, most nations of the world see the receding icecap as an opportunity to gain cheaper access to previously inaccessible natural resources and/or a shorter path to markets, President Obama worries about endangering the environment. In other words, most of nations want to build a better world for mankind, whereas President Obama wants to prevent anyone from doing so. A true statesman would see that the real threat to the Arctic comes from the lack of an international agreement over who may claim what resources. The Austrian economists have long had the answer. Property rights attach to those who “mix their labor” with the previously unused resource. It does not matter to the people of the world whether an American, a Russian, or an international consortium obtains title to resources that they secure as long as these resources are brought to market.
Below is my response to a reader of my blog, who asked about the implications of China reducing its holdings of US treasury debt.
I think that in the simplest terms, China is exiting the market for US Treasuries, which means that the US government must offer a larger yield in order to entice buyers who are still in the market to make up for the loss of Chinese demand. That means that US interest rates would have to rise, because the T Bill is the base upon which all other rates are set. Why would someone buy a corporate bond at a lower yield when he can buy a T Bill, which has less risk, for the same or even higher yield? Alternatively, the Fed could monetize the debt, which would cause US prices to rise (eventually) due to the increase in the money supply.
I have contended for some time that this event would lead to a crisis. When the world market eschews T Bills, the government is left with difficult choices. It can raise taxes to pay off the debt that it can’t roll over. It can cut spending to decrease the amount of debt that is required to fund all the government’s programs. It can increase interest rates to suck more money out of the private economy and into government bonds. Or it can monetize the whole thing. Of course, it could do a combination of all these things. My least favorite option is that the government monetizes the debt; i. e., prints more money. My favorite option is for government to drastically reduce its expenditures, but this is probably the most politically difficult option.
I was appalled at your supposed “case” for eliminating cash, which you yourselves describe as the peoples’ “go-to safe asset”. And what IS your case?
One, “cash…limits the central banks’ ability to stimulate a depressed economy.” Really? Although I am not in favor of debasing money as a path to prosperity, I see no limit to the central banks’ ability to hit the “enter” key on their computer screens in order to manufacture out of thin air as much money as they dare. Two, banks cannot impose a negative interest rate–what we common folk call stealing–on the cash in one’s pocket. Your preposterous goobledygook that a negative interest rate is required by central banks in order to have sufficient “ammunition” when tightening from a “lower band” is as vacuous a statement, although often heard, that one can imagine. Three, that unlike electronic money, cash cannot be tracked…to which I answer “so what?” and “thank God for that!” Four, that former chief economist of the International Monetary Fund, Kenneth Rogoff, thinks eliminating cash is a wonderful idea. Let’s set the record straight. The IMF gets its money from sovereign states, who tax their people against their will in order to give the money to the IMF to squander and give bad advice around the world. Any self-respecting economist would try to hide the fact that he had anything to do with such an institution; therefore, I find little comfort in Mr. Rogoff’s endorsement of the cash-confiscation scheme. Four, the state can more easily levy a Value added tax in order to make tax collection easy. Oh, how nice! Here…let me put my cash in the bank in order to make it easier for government to tax it away. Ah, but then you conclude your support of the cashless society with the caveat that we minions might, just might, be allowed to carry some cash…but at a cost. Our cash could carry an expiration date, for example. As you state: “The benefits of cash are significant–but they need not be offered for free.” A more Orwellian statement would be hard to find.
I will not take the time required to refute point-by-point Mr. Ed Conway’s latest attack upon a gold-backed currency. It is obvious that he is completely ignorant of monetary theory and history. Rather, I will ask Mr. Conway why governments must erect legal tenders laws around their fiat currencies, using the police power of the state to force citizens to use their currencies? The answer is obvious: were it not for legal tender laws, sounder private monies would drive governments’ fiat monies out of the market. I do not advocate a gold-backed, government currency, because I know that all governments will suspend specie redemption for any myriad of reasons, all of which can be placed into two general categories: fund wars or buy votes with welfare payments. Only private monies can be trusted, because they would be subject to the rule of law. Money issuers who did not surrender specie upon demand would be declared bankrupt and thrown in jail. When governments do the same thing, they are lionized as patriots and philanthropists of the public purse. I repeat–if Mr. Conway believes in the superiority of government issued fiat money, then abolishing legal tender laws would have no effect upon the pubic’s demand to use government money. I dare Mr. Conway to recommend such a policy.
China’s money dictators have decided to put all Chinese exports on sale, allowing people in foreign countries to buy more Chinese goods for the same amount of local currency or invest in any manner of other financial transactions that will increase their quality of life including (dare I say the name?) saving! Oh, the horror of it all.American politicians are fretting that prices actually may fall, benefiting everyone from the unemployed to the rich. This, my friends, is a situation that cannot be tolerated, for the politicians’ supporters in industry do not wish to allow their fellow Americans to enjoy a higher standard of living. Oh, no. We Americans must pay higher prices for fewer American goods of lower quality. This is the path to prosperity. If you cannot understand this logic, then it is obviously that you do not have a degree in economics from a large American university.
Your definition of “good news” for the U.S. economy is defined as an increase in “real, or inflation-adjusted, personal-consumption expenditure”, which was driven by a “savings rate, which slipped to 4.8% from 5.2%.” An economy can expand only from savings; i.e., deferring consumption in order to invest capital resources in productive assets that will provide more goods in the future. Your definition assumes the opposite. Surely, you would not recommend such a policy for individuals: i.e., that one should spend one’s savings in order to be more financially secure in the future. And, please, do not resort to the fallacious argument of the “paradox of savings” and/or the “savings glut”, which assumes that what is bad for the individual somehow is good for the economy as a whole.