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- My letter to the NY Times re: Exaggerated Monetary Consensus
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My letter to the NY Times re: Another True Believer
After World War Two blue-collar philosopher Eric Hoffer tried to make sense of the mass movements that had led to the deaths of hundreds of millions of people. In The True Believer he identified the “misfit”, (Hoffer’s own word), who seeks to submerse himself in some movement that he considers greater than himself and to which he can pledge complete allegiance and cease all critical thinking. We have a new true believer in James Traub, who seeks to pledge his allegiance to the cause of radical environmentalism. Pardon me if I continue to express my skeptism that giving government the power to tell me how many times I may fly and how many real hamburgers I may consume will fix or delay anything that may or may not be happening. But I am certain that such a policy will open the floodgates to true totalitarian government. Furthermore, it seems to me that Mr. Traub has set the bar rather low in picking an all-knowing leader in teenager Greta Thunberg. Ms. Thunberg may not be anyone’s idea of a threat to our liberties, but the jackbooted boys surely are waiting in the wings to carry out her juvenile flights of fancy.
One more thing…Mr. Traub dismisses John Stuart Mill’s “no harm” principle, because the great philosopher/economist lived in an era without socialized medicine. I have no doubt that Mill would never have supported socialized medicine or any other form of socialism. Unlike Mr. Traub, Mill understood the dangerous power of Moral Hazard and The Tragedy of the Commons.
My letter to the NY Times re: Review of Dark Tower (a book about Deutsche Bank)
Re: What Broke Deutsche Bank, by David Enrich, reviewed by Roger Lowenstein
Roger Lowenstein’s review of David Enrich’s book about Deutsche Bank’s descent from a pillar of sound banking to one of the most reckless banks on the planet fails to mention the most important event in German post war banking history; i.e., that Germany gave up its own currency, the Deutsche Mark, for the euro on January 1, 1999. The Deutsche Mark was the soundest currency in the entire world, with the possible exception of the Swiss Franc. The euro has proven to be one of the least sound currencies. The fact that Deutsche Bank embarked on a path of reckless, but apparently perfectly legal, lending and trading after the conversion cannot be passed off as a mere coincidence. Both Mr. Enrich and Mr. Lowenstein need to dig deeper than recounting the personal character flaws of Deutsche Bank’s leadership to understand the real forces at work.
Why I Want China to Stop Manipulating Its Economy
Why I Want China to Stop Manipulating Its Economy
(Psst…It’s probably not what you might think)
by Patrick Barron
In his State of the Union Address–February 4, 2020–President Trump outlined his reasons for punishing nations like China that manipulate their economies in order to achieve some internal policy goal. The president claimed that such manipulation was unfair and harmful to its trading partners. The president’s main concern is that by manipulating its economy China “steals” jobs. It does this in several ways.
- By keeping the yuan at a lower exchange rate with other currencies–meaning that the People’s Bank of China gives more yuan for each dollar than would occur in a free currency market–Chinese goods are cheaper in terms of foreign currency than they would be otherwise.
- By subsidizing its industries, Chinese goods can be offered at a lower price.
- By erecting tariffs against some imported goods, China prevents foreign companies from producing more and employing more people than they would otherwise.
The president claimed that his policies were working…that manufacturing jobs were returning to the US and have created a “Blue Collar Boom” with unemployment statistics at very low levels for many politically sensitive segments of the labor market.
I agree with the president in his desire that China cease manipulating its economy, but my reasons are not the same as his. More importantly, I would not recommend reciprocal interventions to punish China. Instead I would follow the Barron maxim of “minding our own business and setting a good example”. I would point out the following consequences of Chinese economic interventions.
- China itself pays for the interventions, not its trading partners. In fact, Chinese economic interventions constitute a transfer of wealth from China to its customers overseas. Goods that previously cost X in the US market now cost less than X. Americans pocket the difference which increases our wealth. The Chinese people pay high taxes or higher prices. China’s subsidies to business distort the Chinese economy away from producing other more desirable products. (If this were not the case, there would be no need for subsidies.) Its tariffs on imported goods reduce supply within China, leading to higher prices and/or shortages within China. In other words, Americans and the rest of the world benefit at the expense of the Chinese people.
- In the short run this is good for Americans, so why should we complain? Remember that I pointed out in number one above that Chinese economic interventions are good for Americans in the short run. What about the long run? By intervening in its economy China weakens its productive capital base. It is this capital base that will pump out the many things desired by Americans in the future. Anything that weakens a trading partner’s capacity to generate wealth means that its trading partners will be less wealthy too. Therefore, even loyal Americans should advise China to eschew economic manipulations that benefit them in the short run. No one ever explained this phenomenon better than Frederic Bastiat in his classic essay That Which Is Seen, and That Which Is Not Seen. Henry Hazlitt brought Bastiat’s insights up to date in Economics in One Lesson. There actually are two lessons. The first is that one must consider the consequences of an economic act not only upon those who will benefit but also those who will be harmed. Of course, it is usually easy to point out those who will benefit. It is difficult if not impossible to quantify those who are harmed, especially if the harm constitutes benefits that never occurred but would have absent the intervention. Hazlitt’s second lesson is that one must look not only to the short term benefit of an economic act but also to the long term costs. For example, steel import restrictions may result in a boom for the US steel industry with no apparent short term consequences. But if US steel were already competitive in terms of price, quality, and service, there would be no need for import restrictions. Therefore, we can conclude through economic logic that steel prices, quality, and/or service will deteriorate, harming Americans in the long run.
The president measures economic progress by an increase in employment and/or a decrease in unemployment rather than an increase in wealth. Laboring more is not necessarily a sign of economic progress. Communist countries, such as the former Soviet Union, had zero unemployment! The state chose a job for everyone. But no one would claim that decades of full employment made the unfortunate citizens of the Soviet Union wealthier. The opposite occurred. In a free market economy without the burden of onerous labor laws, high taxes, and other interventions, there is no barrier to full employment for the simple reason that there is no limit to economic satisfaction. Even a frugal person who desired no additional economic goods certainly would be pleased that he need labor less to achieve and maintain his current level of economic satisfaction.
The greater China’s capital base, the greater the potential for a further expansion of the division of labor to employ this additional capital more productively. We Americans should wish that the entire world were free market capitalist economies, so we would have access to cheaper, better, and more varied products and services. China’s integration into the world economy has benefited Americans tremendously. So, Mr. President, I also want China to end its economic interventions, but I do not want to punish China through tariffs and other means for doing so. Our response should be to declare unilateral free trade. Let’s lead the world by setting a good example and look forward to a world of peace and prosperity.
My letter to the NY Times: Why the Predictions of Luddites Never Happen
Re: A World Without Work by Daniel Susskind, reviewed by Alana Semuels
In the closing paragraph of her review of Daniel Susskind’s A World Without Work, Alana Semuels writes…
“The dire predictions of workers losing their jobs to machines have not come true in the past. That doesn’t mean they never will.”
If economics were an empirical science, Ms. Semuels would have a point. But economics is a deductive/a priori science. As such we can know without a doubt that increased productivity is a result of savings to accumulate capital in order to invest in processes to reduce the human effort and cost per unit of production of an economic good. Economic science is as true for labor as for any other scarce resource; i.e., man aims to economize its use. Unemployment, especially chronic unemployment, has other causes, mostly the result of policies recommended by Mr. Susskind, such as redistributing wealth through higher taxes. The most laughable of Mr. Susskind’s concerns is that government must “create leisure policies to help people occupy themselves in a world without work.” Is Mr. Susskind REALLY a fellow in economics at Oxford? I find that hard to believe.
Central Banks: Enemies of Freedom
Central banks are enemies of a free and prosperous society. Let me count the ways.
- Like the military, central banks are creatures of the state. Suggestions of them being independent are pure fantasy.
- There is a symbiotic relationship between central banks and the state. Central banks are created by legislatures with the full understanding that they will finance the state’s spending, primarily war and welfare.
- Since the main threat to freedom comes not from foreigners but from the state itself, central banks are willing accomplices in the state’s attack on freedom.
- Central banks are the source of fiat money expansion in society. In other words, central banks create money out of thin air. We commoners call this counterfeiting. Well, so does the state if done by anyone except the central bank.
- As the source of money expansion in society, central banks are responsible for the boom-bust credit cycle. Main stream media falsely calls a central bank induced credit cycle as a business cycle, implying that it is business or free market capitalism that is to blame. Alasdair Macleod has explained in many essays why central banks and only central banks are to blame.
- Central banks are responsible for excessive state debt. In a sound money environment, state spending is limited by two factors, both of which are natural. One, the state can raise taxes to pay for new spending, but the public’s tolerance of increased taxes has a natural limit. Two, the state can borrow to pay for new spending, but it must compete for funds in the bond market to do so. Either it must outbid other borrowers and/or induce a shift in public sentiment from spending to savings. Either tactic causes the interest rate to rise. Spending falls and the cost of capital increases, causing a reduction in investment in the future prosperity of the nation. (Note that this scenario is opposite of the one touted by Keynesian economists, who view government spending as beneficial, especially when an economy goes into recession due to previous money and credit expansion by the central bank.)
- The central bank funds an almost unlimited confiscation of resources by the state. Whether to finance war or welfare, in a sound money environment the people will begin to question the options to excessive government spending. Not so when the central bank creates money out of thin air. The consequences of central bank monetization of government debt are delayed and poorly understood. When these consequences can no longer be ignored–price inflation, unemployment, never-ending war, an expanding dependent class–the state will blame others. Furthermore, it is likely to recommend even more of the same poison that caused the crisis in the first place–increase government spending to continue war beyond the public’s tolerance, to save politically connected industries like banking, or to continue to buy votes through welfare expansion.
- A corollary to number seven above is the corruption of public understanding and need for limited government. Unlimited money via the central bank makes it appear that the state can fund anything, especially in the short run. Of course, all spending programs then become short run necessities, as if the lack of government funded, free healthcare was an existential threat; whereas, healthcare is one of many economic products for which the public must make individual, rational spending choices. After all, there is no magic limit to how much is appropriate spending on healthcare. It is a subjective personal choice of each individual in society.
In conclusion, central banking is not compatible with a politically free and economically prosperous society. Through money printing the central bank empowers the state to confiscate resources beyond what the people would accept if the true state of affairs were known, as in a sound money economy. This is NOT self-government or limited government. Furthermore, central bank credit expansion causes capital decumulation. Spending becomes the goal, not savings. Individuals understand intuitively the harmful effects of excessive spending. When our personal finances are strained, we would not entertain the idea that the way to restore them would be to take long, expensive trips, buy expensive cars, etc. Of course not. We reduce our spending to well within our income. The excess of earnings over spending is savings, which is the lifeblood of any economy. So simple for the individual to understand, yet the lesson is sneered at by Keynesian economists when applied to government spending. Time for getting back to basics and away from Keynesian fantasy.
US Opposition to Nord Stream Two Is Wrong on Two Fronts
On December 20, 2019 President Trump authorized sanctions against companies and individuals who are participating in building Nord Stream Two, a pipeline under the Baltic Sea that will bring Russian natural gas to Western Europe, principally Germany. The pipeline is more than eighty percent completed. The sanctions were included in the 2020 National Defense Authorization Act, which funds America’s huge military and will be difficult to overturn. Already a pipeline laying company has suspended its operations. Germany, the main beneficiary of this huge project, has denounced the US sanctions. These sanctions are wrong on two fronts and are very likely to backfire against US long term interests.
The Economic Case for Nord Stream Two
The economic case in favor of completing Nord Stream Two is simple. In a free market capitalist society investors decide which projects are likely to return profits, not politicians. The very fact that the pipeline is being built tells us that the investors expect it to be successful in replacing existing, higher priced energy sources and/or providing a solid, lower cost energy source for future economic growth in Germany and Western Europe. In fact, no one has claimed otherwise. The German government has been supportive of the project, because natural gas is a cleaner energy source than coal and is seen, rightly or wrongly, to be safer than nuclear energy. Germany plans to shut down all except eight of its coal-fired plants by 2030 and all of its nuclear power plants by 2022. So, Germany will be left with windmills, solar panels, and little else, which may be fine with its large environmental activist sector but will not provide enough power to support the nation. Natural gas appears to be the answer and Russia has large supplies for sale. Economically, this is the end of the controversy, since capitalists are much better than politicians at foreseeing the economic viability of such a project.
The Geopolitical Case for Nord Stream Two
The publicly stated US case against Nord Stream Two is that it will leave Germany too dependent upon a potentially hostile power to fuel its economy. I say “public stated” because the US wants to sell liquefied natural gas to Germany, but at a cost that is estimated to be double that of pipeline gas from Russia. The US is taking it upon itself to decide what is best economically and geopolitically for the world’s third largest economy. Do our policy makers really have a better understanding of these matters than Germany’s own policy makers? I highly doubt it. Germany may be foolish in shutting down its coal and nuclear energy sources, but in this regard it is hostage more to its own radical environmental lobby than it will ever be hostage to Russia. In fact, one way to look at this issue is that Russia is saving Germany from its own foolishness. I predict that this environmental lobby will never be satisfied and will simply move on to campaigning against another pillar of German industry. Furthermore, Germany has many energy options even if it does shut down its coal and nuclear plants. It can import nuclear power from France and coal-fired power from Poland. Poland is campaigning to stop the new pipeline, too. A skeptical person would wonder whether it does so for geopolitical reasons or because it sees a loss of export revenue and/or a loss of influence over a former enemy. In any event, this is Germany’s decision, not that of the US and especially not that of Poland.
The geopolitical case in favor of Nord Stream Two is as straightforward as the economic one. The German and Russian economies would become interdependent to some extent. If Germany becomes dependent upon Russian natural gas, Russia will likewise become dependent upon export revenue from Germany. This interdependency theory for peace between former enemies was at the foundation of the European Union. Our post World War Two statesmen were wiser than our present bunch. They saw that Germany’s attempt at creating an autarkic state was a key element in its policy to control nature resources from its neighbors via invasion and annexation; such as wheat from Russian and oil from the Balkans. On the Western front, France had plentiful coal supplies and Germany had state-of-the-art steel mills. By agreeing to join the European Coal and Steel Community France and Germany ended their century old and bloody competition to control the resources of the other. Such a simple thing to do and yet how many millions died and were enslaved to pursue the false god of economic autarky? Frederic Bastiat’s purported dictum was never so prescient; i.e., “When goods don’t cross borders, soldiers will.”
The great missed opportunity of our times is that Russia has not been welcomed back into the community of peaceful nations. Where does the blame lie? Some would say that Russia’s annexation of Crimea in 2014 exposed its still expansionist goals. Others would say that expanding NATO to encompass most of the former Warsaw Pact nations is to blame. Economic integration and cooperation may not be a complete panacea for stopping a new Cold War, but the demise of Nord Stream Two almost guarantee that tension will increase. The US should not assume that Germany and the other countries of Western Europe who desire to purchase Russian natural gas will acquiesce in this affront to their sovereignty. If the US persists in enforcing sanctions, one can envision the eventual breakup of NATO itself. You heard it here first.
Fiat Money and Socialism
The Hidden Link Between Fiat Money and the Increasing Appeal of Socialism Among the Young
by Patrick Barron
For some time now I have been mulling over the possible causes of what seems to be an increase in the desire for socialism among the young. For someone of my generation (an early post war baby boomer), it is inexplicable. Socialism was at the heart of two of the most despised totalitarian regimes of the twentieth century: Nazi Germany and the Soviet Union. Both regimes murdered millions and enslaved hundreds of millions. Although the young may not wear swastikas or the hammer and sickle, they seem completely enamored of the policies that underpinned these regimes; i.e., more state control of the economy and our lives in order to achieve some vaguely stated paradise on earth.
The market economy of sound money vs. the political economy of fiat money
I suppose each generation feels that it understands reality to a better extent than the following generation, and I admit to this phenomenon. My early years were enjoyable, but there was no question that the purpose of one’s youth was to prepare oneself for a life of economic challenge. In other words, my generation assumed that our primary goal was to figure out how we would integrate ourselves into the market economy. Oh, we did not espouse this goal in such terms. We simply said that we wanted to find jobs that both appealed to us and would pay our way in the world. Our success in life would depend upon finding our niche in the market economy of serving others. Our reward was a paycheck.
This visceral understanding of the way the world really works stands in stark contrast to the likes of the Extinction Rebellion movement. These young people have learned that there is an alternative means to success and one that does not involve meeting the legitimate needs of one’s fellow men in the marketplace. It is the political process, whose underpinnings are fiat money printed in whatever quantities that are desired. Members of Extinction Rebellion are convinced that they KNOW that the world will end unless capitalism is replaced by socialism. Furthermore, they are convinced that socialism definitely can work, despite its unbroken history of failure.
What causes such seemingly unfounded confidence in socialism? In the aftermath of the Second World War Eric Hoffer wrote The True Believer in which he suggested that certain people are psychologically insecure and seek an all-encompassing world view to which they can dedicate themselves. These misfits (Hoffer’s word) seek acceptance in a mass movement. Hoffer claimed that the nature of the mass movement did not matter as much as the fact that it offered a simple solution to all of life’s challenges without further thought. In post war interviews, Nazi propagandists said that the easiest people to convert to the Nazi creed were communists. It was simply a matter of shirking off one totalitarian belief for another.
Unlimited money engenders the myth of unlimited real resources
The world was on a watered down version of a gold standard until 1971 when the US abandoned its solemn promise–the 1944 Bretton Woods Agreement— to back the dollar with gold at $35 per ounce. Gold backing of a currency provided a solid intellectual foundation of reality that few even recognized existed within themselves; i.e., that we live in a world of scarcity and uncertainty. Furthermore, wealth has to be built. It cannot be conjured out of thin air, just as gold cannot be conjured out of thin air.
But fiat currency CAN be conjured out of thin air and in enormous amounts. The longer a fiat currency is the coin of the land, the more one is led to believe that nothing should be in short supply, since everything is bought with money and money need not be in short supply. The young, who know only unlimited fiat money, soon demand free healthcare and free higher education as a right. And why not? Unlimited money will pay for it. Into this never-never land comes demands for scrapping the fossil fuel underpinnings of our modern economy by youth who understand nothing of how an economy works. But, apparently one does not need to understand technical limitations, because there are no technical limitations. The “barbarous relic” (gold) had once limited the money supply and thusly seemed to limit the supply of vendible goods. Gold has been replaced by unlimited fiat money. Now it seems that unlimited aggregate demand can be funded by unlimited fiat money, leading to a world of plenty. Designer of the Bretton Woods Agreement Lord Keynes says so in this very insightful short video.
Fiat Money Turns the World Upside Down
The psychological impact of a lifetime within a fiat money economy cannot be underestimated. One’s world is turned upside down. For many of the young financial success becomes prima facie evidence of exploitation of the masses rather than something to be admired and to which one could aspire also. Rather than integrate oneself into the capitalist, market economy, one is better served by integrating oneself into any number of politically oriented pressure groups. Rather than helping others achieve their dreams, thereby helping oneself achieve one’s own dreams, young people are more intent on thwarting others’ dreams. The envious young attribute the success of others to crass money grubbing or outright theft. Such a view may palliate their own relative lack of success. But success of life is a relative term and riches are not guaranteed. However, with proper foresight, hard work, and plain old fashioned civility one can go a long way toward fulfilling one’s dreams. Contrast these eternal virtues with Extinction Rebellion’s tactics of tying up foot, car, and rail traffic in London recently. In a capitalist, market economy one attempts to provide benefits to others, not hindrances to everyday life.
Other state interventions contribute to the lack of civility, such as higher minimum wage laws that prevent the young from getting that first, even though low paying, job. A job…any job…teaches us so much about work place expectations other than performing the stated tasks–showing up on time, dressing properly, being pleasant to customers and fellow employees, willingness to assist in tasks, especially unpleasant ones, that may not be one’s own, etc. But little can match fiat money for undermining the very fabric of the social order. With more money seemingly available at the click of a computer button, only an Ebenezer Scrooge would deny funding the latest demand. But that is the very reason that fiat money is so subversive to the social order. In a sound money economy any new spending program can be funded only by an increase in taxes, an increase in debt, or by cutting existing funding. There is a real cost to each of these options. There is a real cost to printing money, too, but the cost is hidden. One does not see malinvestment at the time of money printing. Price increases are delayed and uneven, due to the Cantillon Effect whereby the early receivers of new money are able to purchase goods and services at existing prices. Later receivers or those who do not receive the new money at all suffer higher prices and a reduction in their standard of living. Even then most people do not link higher retail prices with a previous expansion of the money supply.
It would be hard to invent a more effective method for the destruction of modern society. As Pogo would say, “We have met the enemy and he is us.”
My letter to the NY Times re: Why Not Allow School Choice Regardless of Outcomes
In his excellent review of Robert Pondiscio’s How the Other Half Learns: Equality, Excellence, and the Battle Over School Choice Dale Russakoff seems to assume that parents should be allowed to send their children to a charter school only if that school performs better than the public school. The author, Mr. Pondiscio, had immersed himself for a year in Success Academy, a charter school in New York City whose students consistently outperformed public school students in standardized tests. Mr. Pondiscio found that it was the parents who really made the difference. Success Academy vetted parents who would work with their children and ensure that homework got done, etc. This is hardly surprising. Nevertheless, the implication seems to be that we really don’t need charter schools, because the children of such responsible parents would do just as well anywhere. But why must a charter school prove that it is superior? Why can’t parents simply be allowed to choose their children’s schools, even if the children attending alternate schools perform less well on standardized tests? Despite the fact that parents may choose a school for reasons other than high student performance on test scores–proximity to home, friends of the children attending there, better nonacademic environment, better sports opportunities, etc.–no one seems to consider the freedom and choice of parents and their children. In other words, it’s really none of society’s business where or why parents send their children to the school of their choice.
Is There an Economic Justification for Tariffs?
A tariff is a tax on imports that is used to satisfy a policy goal. Before the federal income tax became law in 1913, the US federal government was funded almost entirely by tariffs and excise taxes. An excise tax is a tax on a good that is produced in the US. The best example of a current excise tax is the federal tax on gasoline. The most infamous excise tax was the tax on whiskey in the early days of the republic that resulted in the Whiskey Rebellion, centered in western Pennsylvania. The tax on whiskey was so unpopular that even George Washington couldn’t enforce it. The tax was rescinded very quickly and the federal government collected zero revenue.
As a source of federal income, tariffs are a cipher compared to the federal income tax. Today tariffs are used as policy tools. There are two competing schools of economic thought, and tariffs are justified under one of these schools of thought and not the other.
John Maynard Keynes (1883-1946)is considered the father of macroeconomics, the school of thought under which tariffs are just another government policy tool. His most influential book was The General Theory of Employment, Interest and Money, published in 1936 at the height of the Great Depression. Keynes called for massive government intervention into the economy, guided by his main conclusion that the world suffered from a “lack of aggregate demand” that would be cured only by government spending. The explosion of war production in the Second World War seemed to validate Keynes’ ideas. During the war the entire world went off the gold standard. All governments printed money, unbacked by gold, and all governments took direct control of their respective economies. The general consensus by the public was that if government can direct a vast expansion of war goods, it should be able to direct a vast expansion of consumer goods in peacetime. Unemployment could be eliminated as all manner of capital and consumer goods would flow from the nations’ factories just as had tanks, warplanes, and all other war goods. Furthermore, there was no need to fear deficit spending. In fact it was incumbent upon government to deficit spend whenever the economy seemed to be slowing down.
It is not hard to see why Keynes’ main thesis was seized upon by politicians and their like-minded economists. Over the years government direction of economic affairs has become so engrained in all major economies that we don’t even realize that there might be a legitimate and superior alternative. We’ll never know whether Keynes himself would have endorsed all that now is called macroeconomics, because he died shortly after the end of the war.
Macroeconomics has certain characteristics. It relies upon statistics to measure whether and to what extend interventions are needed and whether, once initiated, they are achieving government policy. This assumes that economists fully understand which lever to pull on the great economic machine, for macroeconomists view the economy as a machine. Macroeconomist have coined a name for their machine-like model: econometrics. When an economy appears to fall short of econometric expectations, it is merely a matter of adding a little monetary oil here or requiring that businesses comply with some new regulation there and, bingo!, the economy is humming along again! How do we know? Because the statistics that government attempts to move are going in the proper direction!
Some typical tariff policy goals are helping producers (think… steel and/or automobile companies), helping labor (think… lumberjacks), or achieving a favorable balance of payments (think…China buys as much or more from the US as the US buys from China).
But there is another school of economic thought in which tariffs have no role. This school of thought is at least several hundred years old rather than a mere three quarters of a century old as is macroeconomics. This school of thought is the antithesis of macroeconomics. Its technical name is methodological individualism, but for our purposes we’ll just call it microeconomics. This school of thought emphasizes that the goal of all economic life is satisfaction of the individual, not some large group, and especially not producers. Furthermore, unlike macroeconomics, statistics play no role, since it is impossible to quantify an individual’s satisfaction. Satisfaction is subjective, not objective.
There is no single founder of methodological individualism, but Immanuel Kant (1724-1804) provided two wonderful maxims upon which microeconomics stands: the categorical imperative and the humanity formula. The former maxim states that for something to be ethically valid it must be binding always and everywhere regardless of one’s inclination. An example of a violation of the categorical imperative is the government’s claim that its central bank’s money printing powers are justified as good for the economy. If that were so, then you and I should be allowed to print money! But, alas, counterfeiting is a crime, unless committed by the government’s central bank. The humanity formula states that man is an end and can never be used as a means to an end. The most egregious violation of this maxim is slavery, where it is obvious that some men are used as means to satisfy other men’s ends. But there are many such violations all around us. For example, tariffs on foreign steel benefit some men–US steel companies and their employees–at the expense of everyone else.
The Law of Comparative Advantage
Methodological individualism exposes other macroeconomic fallacies. I’ll discuss just a few. David Ricardo (1772-1823)explained that trade is founded on the Law of Comparative Advantage; i.e., that trade expands the specialization of labor to minimize one’s opportunity costs. For example, it makes no sense for basketball star Michael Jordan to skip a few games in order to paint his living room. His opportunity cost would be very high; i.e., he would forgo the opportunity to earn vastly more money by playing basketball than by saving the cost of paying someone to paint his living room. The law of comparative advantage extends infinitely, from the individual to the family to the neighborhood, etc. to cover the entire world. Political boundaries are irrelevant.
Macroeconomics’ invention of “lack of aggregate demand” attempts to deny the validity of Say’s Law or the Law of Markets. Jean Baptiste Say (1767-1832)most clearly explained that supply must precede consumption. In other words, inherent in supply is the wherewithal for consumption. Think of an Iowa farmer who gazes over his vast corn crop. The farmer sees the wherewithal for satisfying all his many needs. He will exchange his corn crop for a widely accepted medium of indirect exchange, money, in order to purchase all the necessities of life. If his crop failed, he would face dire straits. Printing money and giving it to him, as advocated by macroeconomists, merely debases the medium of exchange and causes higher prices for the rest of society, a violation of Kant’s humanity formula.
Frederic Bastiat (1801-1850)pointed out what should be obvious to all; i.e., that state directing of resources may indeed cause certain “seen” statistic to go in the desired direction, but these same resources could have been directed to any number of more highly desired ends. These ends may be less than they would have been absent the state direction of resources. Furthermore, there may be ends that never were realized at all. In other words, if we are forced to pay more for something simply because it is “made in America”, we will have less money for satisfying other desires. Bastiat’s famous essay “That Which Is Seen, and That Which Is Not Seen” was a devastating attack upon Mercantilist direction of the French economy.
Tariffs cannot be justified by methodological individualism. They are a political policy tool within macroeconomics. The net adverse consequences of tariffs are by those economists who think of tariffs’ logical results of over longer time frames and over the entire economy rather than the short term impact on cherry-picked statistics to favor politically connected pressure groups. It is the difference between freedom and tyranny.
Wrong Approach to a No Deal Brexit
From today’s Open Europe news summary:
Chancellor: No Deal Brexit would eliminate Treasury’s fiscal reserves
The Chancellor of the Exchequer, Philip Hammond, warned yesterday, “The ‘fiscal firepower’ we have built up in case of a No Deal Brexit will only be available if we leave with an orderly transition. If not, it will all be needed to plug a hole a No Deal Brexit will make in the public finances.” This comes after both Conservative Party leadership contenders, Jeremy Hunt and Boris Johnson, promised in the last few days to use some of the £26.6bn allocated for a No Deal Brexit in the last budget for additional public spending.
Open Europe’s Henry Newman told BBC Radio London yesterday, “The Chancellor has kept a fiscal headroom… in the event of No Deal, but it will be up to the next Chancellor to decide how they balance the books. In a No Deal scenario, it will always be open to the Government to fund emergency spending through borrowing.”
It seems that governments everywhere just cannot rid themselves of the fallacy that increased government spending is the panacea to all political problems. Rather than increase spending in the case of a No Deal Brexit, the UK should slash government spending, scrap counterproductive regulations on business, and adopt unilateral free trade. In other words, GET GOVERNMENT OUT OF THE WAY. Then British business can adopt quickly to the new economic reality. The cost of living will fall, benefiting every British citizen. Such a policy would send a powerful and hopeful message to EU skeptics in the rest of Europe and hasten the EU’s demise. The EU is nothing more than a backdoor method to turn all of Europe into a socialist command economy.