Wednesday, November 24, 2010

The Real Meaning of Thanksgiving: The Triumph of Capitalism over Collectivism by Richard M. Ebeling

This time of the year, whether in good economic times or bad, is when Americans gather with their families and friends and enjoy a Thanksgiving meal together. It marks a remembrance of those early Pilgrim Fathers who crossed the uncharted ocean from Europe to make a new start in Plymouth, Massachusetts. What is less appreciated is that Thanksgiving also is a celebration of the birth of free enterprise in America.

The English Puritans, who left Great Britain and sailed across the Atlantic on the Mayflower in 1620, were not only escaping from religious persecution in their homeland. They also wanted to turn their back on what they viewed as the materialistic and greedy corruption of the Old World.

In the New World, they wanted to erect a New Jerusalem that would not only be religiously devout, but be built on a new foundation of communal sharing and social altruism. Their goal was the communism of Plato’s Republic, in which all would work and share in common, knowing neither private property nor self-interested acquisitiveness.

What resulted is recorded in the diary of Governor William Bradford, the head of the colony. The colonists collectively cleared and worked land, but they brought forth neither the bountiful harvest they hoped for, nor did it create a spirit of shared and cheerful brotherhood.

The less industrious members of the colony came late to their work in the fields, and were slow and easy in their labors. Knowing that they and their families were to receive an equal share of whatever the group produced, they saw little reason to be more diligent in their efforts. The harder working among the colonists became resentful that their efforts would be redistributed to the more malingering members of the colony. Soon they, too, were coming late to work and were less energetic in the fields.

As Governor Bradford explained in his old English (though with the spelling modernized):

For the young men that were able and fit for labor and service did repine that they should spend their time and strength to work for other men’s wives and children, without recompense. The strong, or men of parts, had no more division of food, clothes, etc. then he that was weak and not able to do a quarter the other could; this was thought injustice. The aged and graver men to be ranked and equalized in labor, and food, clothes, etc. with the meaner and younger sort, thought it some indignant and disrespect unto them. And for men’s wives to be commanded to do service for other men, as dressing their meat, washing their clothes, etc. they deemed it a kind of slavery, neither could husbands brook it.

Because of the disincentives and resentments that spread among the population, crops were sparse and the rationed equal shares from the collective harvest were not enough to ward off starvation and death. Two years of communism in practice had left alive only a fraction of the original number of the Plymouth colonists.

Realizing that another season like those that had just passed would mean the extinction of the entire community, the elders of the colony decided to try something radically different: the introduction of private property rights and the right of the individual families to keep the fruits of their own labor.

As Governor Bradford put it:

And so assigned to every family a parcel of land, according to the proportion of their number for that end . . . This had a very good success; for it made all hands very industrious, so as much more corn was planted then otherwise would have been by any means the Governor or any other could use, and saved him a great deal of trouble, and gave far better content. The women now went willingly into the field, and took their little-ones with them to set corn, which before would a ledge weakness, and inability; whom to have compelled would have been thought great tyranny and oppression.

The Plymouth Colony experienced a great bounty of food. Private ownership meant that there was now a close link between work and reward. Industry became the order of the day as the men and women in each family went to the fields on their separate private farms. When the harvest time came, not only did many families produce enough for their own needs, but they had surpluses that they could freely exchange with their neighbors for mutual benefit and improvement.

In Governor Bradford’s words:

By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many, for which they blessed God. And the effect of their planting was well seen, for all had, one way or other, pretty well to bring the year about, and some of the abler sort and more industrious had to spare, and sell to others, so as any general want or famine hath not been amongst them since to this day.

Hard experience had taught the Plymouth colonists the fallacy and error in the ideas that since the time of the ancient Greeks had promised paradise through collectivism rather than individualism. As Governor Bradford expressed it:

The experience that was had in this common course and condition, tried sundry years, and that amongst the Godly and sober men, may well convince of the vanity and conceit of Plato’s and other ancients; -- that the taking away of property, and bringing into a common wealth, would make them happy and flourishing; as if they were wiser than God. For this community (so far as it was) was found to breed confusion and discontent, and retard much employment that would have been to their benefit and comfort.

Was this realization that communism was incompatible with human nature and the prosperity of humanity to be despaired or be a cause for guilt? Not in Governor Bradford’s eyes. It was simply a matter of accepting that altruism and collectivism were inconsistent with the nature of man, and that human institutions should reflect the reality of man’s nature if he is to prosper. Said Governor Bradford:

"Let none object this is man’s corruption, and nothing to the curse itself. I answer, seeing all men have this corruption in them, God in his wisdom saw another course fitter for them."

The desire to “spread the wealth” and for government to plan and regulate people’s lives is as old as the utopian fantasy in Plato’s Republic. The Pilgrim Fathers tried and soon realized its bankruptcy and failure as a way for men to live together in society.

They, instead, accepted man as he is: hardworking, productive, and innovative when allowed the liberty to follow his own interests in improving his own circumstances and that of his family. And even more, out of his industry result the quantities of useful goods that enable men to trade to their mutual benefit.

In the wilderness of the New World, the Plymouth Pilgrims had progressed from the false dream of communism to the sound realism of capitalism. At a time of economic uncertainty, it is worthwhile recalling this beginning of the American experiment and experience with freedom.

This is the lesson of the First Thanksgiving. This year, when we, Americans sit around our dining table with family and friends, we should also remember that what we are really celebrating is the birth of free men and free enterprise in that New World of America.

The true meaning of Thanksgiving, in other words, is the triumph of Capitalism over the failure of Collectivism in all its forms.

(The article originally appeared on "In Defense of Capitalism & Human Progress" in November 2009)

Wednesday, November 10, 2010

Austrian Economics versus the Mainstream: An Interview with Richard M. Ebeling

(The following interview will appear in Spanish in a volume entitled, Economistas Austríacos. Historias Personales e Ideas [The Austrian Economists: Personal Histories and Ideas] (Madrid: Unión Editorial, 2011), edited by Adrian Ravier, professor of economics at Universidad Francisco Marroquin in Guatemala. )

Dr. Richard Ebeling is professor of economics at Northwood University in Midland, Michigan. He was a senior fellow at the American Institute for Economic Research in Great Barrington, Massachusetts, and a visiting professor at Trinity College in Hartford, Connecticut (2008-2009). He also served as the president of the Foundation for Economic Education (FEE) in Irvington, NY (2003-2008), and has been the Ludwig von Mises Professor Economics at Hillsdale College, in Hillsdale, Michigan (1988-2003). He was vice-president of academic affairs of the Future of Freedom Foundation in Fairfax, Virginia (1990-2003). He is the author of Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (Routledge, 2010) and Austrian Economics and the Political Economy of Freedom (Elgar, 2003). He is the co-editor of The Dangers of Socialized Medicine (1994), The Case for Free Trade and Open Immigration (1995), The Failure of America’s Foreign Wars (1996) The Tyranny of Gun Control (1997), and Liberty, Security and the War on Terrorism (2003), all published by the Future of Freedom Foundation. He is also the editor of the three-volume work, the Selected Writings of Ludwig von Mises (Liberty Fund), based on the "lost papers" of Ludwig von Mises, which he recovered from a formerly secret KGB archive in Moscow, Russia. He is also the editor of, Money, Method and the Market Process: Essays by Ludwig von Mises (Mises Institute, 1990). In the early 1990s, he consulted on market reform and privatization with the emerging new democratic government in Lithuania when it was still part of the Soviet Union, and witnessed the violent, attempted Soviet crackdown on the Lithuanian freedom movement in January 1991. He also was with Russian defenders of freedom in Moscow during the failed hard-line coup in August 1991. Dr. Ebeling earned his PhD in economics from Middlesex University in London, England.

What was your first contact with Austrian Economics?

Dr. Ebeling: Well, in fact, it began with Ayn Rand. When I was about 16 years old, I was already very interested in public policy issues, history, and current events. But I was rather confused about the different views I would find among American liberals and conservatives.

The liberals always seemed to have the "moral high ground,” with their emphasis on "justice" and "fairness." The conservatives, on the other hand, constantly would bring things down to earth with the "bottom line" questions: Will this government policy really work? What will it cost and is it worth it? And what happens to private opportunities in the market if the government takes over this activity or heavily regulates it?

Completely by chance I happened to meet two individuals who introduced me to the writings of Ayn Rand. I first read her non-fiction books: The Virtue of Selfishness and Capitalism: the Unknown Ideal. They gave me a radically different view of man, society, and the State, which presented a philosophical and moral understanding and defence of the individual and his rights to life, liberty, and property. Here was a conception of man that was grounded in reality and ethical at the same time.

I soon read her novels, The Fountainhead and Atlas Shrugged, where her entire philosophy of man and life is presented. I was living in Hollywood, California at this time. I found out that there was a taped lecture program offered about Rand’s philosophy of Objectivism not far from my home, which I started to regularly attend.

The organizers of the taped lectures sold copies of books by authors that were recommended by Ayn Rand, works there were considered to be consistent with or complementary to the ideas in her own writings. Among them were Ludwig von Mises, Henry Hazlett, Frederic Bastiat, William Graham Sumner, Herbert Spencer, and Isabel Patterson.

The books by Mises and Hazlitt were especially fascinating to me. The logic of the market place, as they explained it, suddenly made a lot of things seem intelligible when thinking about public policy and the role of government in society. From there I discovered the writings of Friedrich A. Hayek, Murray N. Rothbard, and Israel M. Kirzner. I was soon reading “backwards” to the writings of the founders of the Austrian School: Carl Menger, Eugen von Böhm-Bawerk and Friedrich von Wieser.

When I began by undergraduate studies at California University, Sacramento, I had already made up my mind to major in economics. I had a bit of a shock when I found out that most of my professors had never heard of the “Austrian School,” and what they knew about Mises or Hayek they strongly disagreed with.

In fact, virtually all my undergraduate economics professors were either Keynesians or Marxists – and Stalinist Marxists, at that. Right after Mises passed away in October of 1973, I wrote an obituary article about him for the university student newspaper. After one of my professors read the piece, he came up to me and said, “Mises? Mises? I thought he died in the 19th century!”

But the following year I had the good fortune to be invited by the Institute for Humane Studies to attend the first Austrian Economics conference held in South Royalton, Vermont in June 1974. There I had the opportunity to meet three of the leading figures of the Austrian School: Israel M. Kirzner, Ludwig M. Lachmann, and Murray N. Rothbard, whose writings have greatly influenced my thinking on both economic theory and policy, as well as the wider issues of human liberty in the free society.

During the summers of 1975 and 1977 I was a summer fellow at the Institute for Humane Studies when they were headquartered in Menlo Park, California. For most of those two summers, Friedrich A. Hayek, was also in residence at IHS. Being in Hayek’s company some part of almost every day for weeks at a time was one the most memorable events in my life, and has left a permanent imprint in my mind. He truly was one of the greatest social philosophers and political economists of the twentieth century. His patience and generosity in giving of his time and knowledge to a young and insistent student, who constantly bombarded him with questions about economic theory, classical liberalism, and the old Vienna days, will forever remain with me.

Why did you feel attracted to this approach versus the mainstream?

Dr. Ebeling: The more I read mainstream, or Neo-Classical, economics as I pursued my economics studies as a student, the more I came to realize how little this approach had to offer in terms of really understanding the nature and workings of market and social processes.

The Austrians always seemed so much more relevant, with their focus on individual human decision-making and action under conditions of imperfect knowledge, uncertainty about the future, and in an environment that is always subject to change.

This was especially the case in Hayek's work on the nature of decentralized knowledge, and the role of prices for coordinating the actions and interactions of multitudes who do not know each other but depend upon each other's specializations and abilities to improve their individual circumstances.

Mises and Hayek convinced me why socialism and interventionism were not viable economic systems in the long run, and that only a functioning, competitive market order could bring people both freedom and prosperity.

I was also deeply impressed with their monetary and business cycle analysis. It seemed so superior to the Keynesian-style aggregated, macroeconomics that I learned in my undergraduate and graduate courses in economics. The Austrians offered a truly "micro" foundational basis to understanding economy-wide fluctuations in employment, output and prices. And one that showed how these processes worked out through time.

As Joseph Schumpeter (who though trained by the Austrians in old Vienna did not consider himself an "Austrian") said, by focusing on these microeconomic process aspects for understanding macroeconomic events, the Austrian approach may be less simple than the Keynesian alternative, but it is far richer in results.

As the same time, I found fascinating how the Austrians took up Adam Smith's idea of the "invisible hand" and applied it to demonstrate the origin and evolution of social and market institutions that are often the unintended consequences of human action. This reinforced the argument against those who arrogantly wished to socially engineer human society. There is far more knowledge and experience at work in social processes, over years and over generations of people, than any planners could ever master and successfully manipulate to any good end.

How do the Austrian Economists see the Chicago School of Economics? Are they friends or foes?

Dr. Ebeling: The primary difference between the Austrian and Chicago Schools of Economic Thought concern questions of methodology, that is, how does one do economics as a science?

The modern Chicago School's methodology is a variation on positivism, that is, the idea that to be a "real" science, economics needs to construct hypotheses that are open to experimental falsification along the model of physics. This requires that the subject matter of economics be reducible to purely measurable and quantifiable data.

The problem is that economics, while certainly including elements that have a measurable dimension – prices, output, quantities bought and sold – is the study of human action and its intended and unintended consequences. This means that economics at its most fundamental level must begin with an appreciation of and an insight into the meaning of purposeful conduct. All that happens in the social arena begins with the meanings and intentions of individuals, with those meanings and intentions providing the context and interpretive basis for understanding why men act, the logic of their conduct, and then analyzing what happens when those individuals act and interact in the market.

In other words, the following questions cannot be answered unless you begin with the actor's subjective point-of-view: What is a consumption good and what is an investment or capital good? What is a "means" and what is an "end"? What is the "cost" of an action, and what might be its "benefit"? What is a "substitute" good, and what is a "complementary" good? What is "supply" and what is "demand"? What is a "market" and of what type? What is a "scarce" good and what is a "free" good?

These cannot be understood, defined, or analyzed independent of understanding how actors in particular circumstances, with particular purposes in mind, define and assign meanings to these ideas and relate these concepts to each other.

Economists often speak of unintended versus intended consequences that may arise from individual actions, or from the interactions of several individuals. But how do we even know what to understand as an "intended" outcome from an "unintended" outcome, separate from the purposes, goals and intentions of the actors' themselves?

None of these exist "objectively," that is, they do not exist in the physical world independently of their existence in the minds of men.

This, in my view, is one of the most fundamental differences in approach and analysis that separates the Austrians from the members of the Chicago School, in general. Your method of analysis influences much of what you look for in economics, what you see, and how you go about the seeing.

Now, the other aspect of your question concerns the political or policy orientation of Austrian vs. Chicago economists. In general, Chicago and Austrians traditionally have been pro-free market. And there are many Austrian and Chicago economists who have been strongly classical liberal or even libertarian.

But it is true that Austrians have tended to be more radically classical liberal or libertarian in many of their views of society, government, and public policy. Obviously, to fully answer this you would have to look at the biography of each individual to understand how they came to their views on political philosophy, public policy, and the role of government in society.

However, having said that, I believe that part of the reason is that the Austrian approach often reinforces an appreciation for how the market process has the capacity to integrate and coordinate far more knowledge and activities among the multitude of market participants than government would ever have the ability to do. Thus, Austrians tend to be far more suspicious that government can "fix" any supposed "social problem." They have far more confidence that leaving these problems to sort themselves out through the market and other related voluntary associations will be far more effective than a coercive “one-size-fits-all” approach of government involvement.

James M. Buchanan has explained in an interview that he did for the Mises Institute that he would consider himself an Austrian, and that Mises and Hayek, would accept that. Do you consider Buchanan an Austrian thinker? Is the Public Choice totally consistent with the Austrian tradition?

Dr. Ebeling: James Buchanan studied with Frank Knight at the University of Chicago. It is well known that Knight was a leading critic of "Austrian" capital theory, that he did not agree with Mises or Hayek about the impossibility of economic calculation under socialism, and that he was very far from being an advocate of laissez-faire.

But Knight, at the same time, was a strong and sometimes eloquent opponent of Positivism and Bahaviorism. Many of his methodological essays from the 1920s, 1930s, and 1940s, present arguments against Positivism that are very similar to those made by Mises and Hayek. Knight believed that economics could not be moulded along the lines of the natural sciences, and therefore could not limit itself to the methods of, say, physics. And he believed there are limits to the application of mathematics in economics.

He emphasized the importance of introspection as a source of knowledge in the study of human action and choice. He argued that one could not ignore the "subjectivist" elements to social and economic processes. Like Mises, Knight had been very influenced by the German sociologist and historian, Max Weber, in focusing on human action as "intentional conduct" to which the actor assigns subjective meanings.

Unlike Milton Friedman or George Stigler (who also studied or interacted with Frank Knight at the University of Chicago), James Buchanan absorbed many of Knight's views and ideas on methodological subjectivism. This is seen most clearly in Buchanan’s short, but excellent, book, Cost and Choice. Here he presents a conception of the meaning and logic of cost that runs parallel to much of the Austrian analysis.

As for Public Choice, many of the useful insights of the application of economic thinking to the political process were understood by some of the Classical Economists of the 19th century, and by some of the early "Marginalist" economists of the late 19th and early 20th century. For example, the analysis of the bias towards government intervention in the political process due to the concentration of government-bestowed benefits for special interest groups and the diffusion of the costs or burdens of these interventions among the vast majority of the taxpaying and consumer public, was understood in a fairly clear way by Jean-Baptiste Say and Nassau Senior.

The logic behind this aspect of State interventionism was developed very clearly by the famous Italian economist, Vilfredo Pareto, in the 1890s. And the reasons for this bias toward particular producer interests at the expense of general consumer interests, is explained by Philip Wicksteed in his Common Sense of Political Economy (1910). Wicksteed, of course, was greatly influenced by the early Austrians (Menger, Boehm-Bawerk, Wieser) and, in turn, he was one of the influences on the post-World War I generation of Austrians in Vienna.

Finally, the logic of the concentration of special-interest benefits and the diffusion of their burden on the rest of the society was analyzed by the Austrian economist, Oskar Morgenstern, in his 1937 book, The Limits of Economics. The relevant chapter has been reprinted in, Richard M. Ebeling, editor, Austrian Economics: A Reader (Hillsdale College Press, 1990). Morgenstern extends the analysis with an "Austrian" twist by developing the theory in the context of a time-sequential process.

Unfortunately, much of contemporary Public Choice theory has been moulded by the dominant mainstream, Neo-classical mathematical approach. Even Buchanan has several times critically commented on the fact that due to this much of Public Choice theory has moved in a wrong and unrealistic direction, that it has lost its grounding in a common sense, market process framework.

The Austrians, since the time of Carl Menger, have insisted that the complex phenomena of the market can only be successfully understood and analyzed by first reducing it to its elemental components, i.e., the individual acting men, and explaining the logic of human choice and activity under the inescapable conditions of scarcity, uncertainly, and the passage of time. Only then can the analyst proceed to explain the emergence of the complex social and economic order that arises out of the interactions of those acting and choose individuals. This also includes the analysis of those unintended social and market institutional forms and relationships that are the results of human action, but not of human design.

Buchanan has argued that it is sufficient to start the analysis on the basis of interpersonal exchange and the processes that emerge out of these mutual gains from trade. Thus, he has tended to place less importance on grounding economic theory on a prior and methodical study of individual man, as the Austrians have insisted upon.

Thus, much of Buchanan's writings are consistent with certain parts of the body of Austrian theory. For the most part his ideas run parallel in certain ways to Austrian Economics, but they are not the same. Nonetheless, Austrians have much to learn from and appreciate in James Buchanan's contributions to economics. Indeed, I would say that Buchanan's contributions are among the most important in economics since the Second World War. Especially insightful has been his emphasis on what he has called, "Constitutional Political Economy." That is, the study and analysis of the alternative social and political institutional orders in which human beings may interact, for understanding which of these orders are likely to be most conducive to fostering freedom, prosperity, and peaceful harmony for mankind in the long run. This focus, I might add, is most certainly a valuable complement to the type of analysis that Ludwig von Mises and Friedrich A. Hayek developed in their institutional comparisons of market economies vs. socialist planning systems vs. interventionist-welfare states.

Let´s talk about John Maynard Keynes. Do we have to rescue any insight in his philosophy? I have in mind Axel Leijonhufvud book, “On Keynesian Economics and the Economics of Keynes."

Dr. Ebeling: Interpreting the “real” message in and meaning of Keynes’ 1936 book, The General Theory of Employment, Interest, and Money, has become an entire “research industry” in the economics profession. In other words, “Will the real John Maynard Keynes please stand up?”

Leijonhufvud’s 1968 book, which you mention, was one of the significant attempts to try to make sense of Keynes’ macroeconomics by attempting to explain it in terms of microeconomic foundations. His work and that of his colleague, Robert Clower, were insightful and creative attempts to do so. And there are still many valuable things to learn from their works, separate from their efforts to “save” Keynes.

But having said that, my reading of The General Theory several times, as well as many of the interpretive analyses over the years, still leaves me persuaded that Keynes’ work remains confused and contradictory to our essential understanding of human decision-making and the workings of markets.

The fundamental flaw in Keynes’ approach remains the one that F. A. Hayek pointed out when he reviewed Keynes’ earlier work, A Treatise on Money in the early 1930s. That flaw is Keynes’ attempt to construct a theory of the “economy as a whole” on the basis of aggregates and averages.

Such an approach hides from view all the microeconomic relationships and interconnections between the structures of relative prices and wages, and the different sectors of the market that are the setting in which the market process occurs and is played out. First of all, and contrary to most Keynesian reasoning, there is no such thing as “aggregate demand,” and therefore there is no such thing as a “failure” of aggregate demand.

There is the demand for shoes, and hats, and bananas, and houses, and . . .

But there is no such thing as a demand for "output as a whole." After all, there is no such "demander" in the market place Thus, we must ask why there can arise mismatches, imbalances, disequilibrium between a variety of individual market demands and supplies, which, it is true, can feed on each other, with microeconomic distortions interacting on each other and bringing about a cumulative decline in employments, productions, and outputs.

The "Austrians" see the cause of the depression or recession as usually arising from monetary mismanagement that has distorted essential market price signals -- in this case, market rates of interest -- that generate over time imbalances between savings and investment, and a misallocation of labor, capital and other resources among the sectors of the economy.

It is these imbalances in the demands and supplies, and resulting distortions in the structure of relative prices and wages, that eventually set the stage at some point for a necessary correction in the market.

But when the "boom" has ended there is no escaping the necessary realignments in the structure of relative prices and wages; reallocations of capital and labor to reflect the post-boom patterns of supplies and demands, and the writing down or writing off of various investment projects begun during the boom period, and found now to be unprofitable in the post-boom correction period.

If there are superimposed on this correction process inflexible or "rigid" prices and wages that resist or significantly lag behind the necessary realignment in the price-wage structure and supply-demand adjustments, then there will be additional unemployment and reduced production in various sectors. And these will then put greater downward pressure on other individual demands and supplies, no doubt.

But what is crucial is not that there is that some imagined "aggregate demand" deficiency. Rather, the problems are on the supply-side, in the failure or resistance or delays in the appropriate price and wage and resource allocation adjustments.

This would be understood more easily and clearly, it seems to me, if presumed "macro"-economic problems were looked at more often and consistently through a microeconomic chain of logic. It would make the policy issues and answers seem different, as well. They would point more in the direction suggested by Friedrich Hayek in the 1930s and the decades that followed.

It also means that whatever other criticism may be raised against deficit spending and growing debt burdens, this more "Austrian"-type micro analysis enables us to see that government stimulus or stimulated "aggregate demand" spending is not spending on "output as a whole," because as I suggested, there is no such demand.

The government's spending or the spending induced by government fiscal "activism" are always, by micro necessity, demands for particular goods or services in particular sectors or corners of the market. And their sustainability is limited to how long government continues to spend or stimulate spending in particular ways and in a particular direction.

If or when that "stimulus" spending is slowed down or ended, the patterns of demands and the structure of prices dependent on it, and the resource and labor employments derived from it, must decline. And a new layer of necessary adjustments and realignments are now required in the economy.

That is, such "demand management" activity runs the risk of setting the stage for a future downturn as a result of the ways the government had earlier tried to move the economy out of the recession.

Thus, the Austrian argument is not an argument of resignation or despair or insensitivity to the hardships of those unemployed in the downturn. Rather, it is a positive conception of what is needed to be allowed to work within the market, itself, so that rebalance and re-coordination can come about for real and sustainable recovery without making a future downturn inevitable.

This book is publishing an interview you did with Fritz Machlup in 1980, where you asked “how did the Austrians distinguish their own economics from others in the 1920s”. Machlup gave you his own list. One, methodological individualism. Two, methodological subjectivism. Three, marginalism. Four, individual tastes and preferences. Five, opportunity costs. Six, the time structure of consumption and production.” Has this list changed today?

In many ways, the same list applies to day as when I did that interview with Fritz Machlup back in 1980. But I would suggest that it might be slightly modified in terms of ideas and emphasis.

Let’s go over some on this list. Methodological individualism refers to the idea that all social and market analysis should start with the actions and interactions of individuals. The Austrians (and other social theorists) emphasize that all language and references to such things as the “people,” the “nation,” the “group,” the “society,” the “market,” or the “community,” are merely short-hands for the interactive associations of individuals. The “people” never act; the “nation” never decides; the “society” never chooses. These do not exist independently of the individuals making up such groups. To assign existence to them is to commit the fallacy of conceptual realism; that is, to presume or assign autonomous existence to a concept or construct of the mind. Hence, all tastes and preferences are individual and personal, as well. There are no “community” or “social” preferences, or utility or welfare functions.

Methodological subjectivism emphasizes that in the social world, we can only understand and interpret people’s actions in terms of the meanings they assign to their own activities in relations to others and the objects of the world. The physical world is filled with objectively existing objects. But what they are in the arena of human activity, how they are used and for what purpose can only be understood in the context of the intentions and meanings of the human actors. This, alone, makes the nature of the social sciences, including economics, uniquely distinct from the subject matter of the natural sciences.

Marginalism has a distinct meaning in the Austrian framework. Traditionally, in mainstream, or Neo-Classical, economics, marginalism has been viewed as a mathematical function, that is, the rate of change in the amount of utility received from the consumption of a good. Beginning with Pareto there has been an attempt in Neo-Classical microeconomics to do away with the presumption of “utility” as being a measurable quantity, and to speak of more, or less, or equally “preferred.” But this is all a sleight-of-hand, since the construction and differentiation of the functions reflecting total or marginal “preferredness,” as in the indifference curve approach, merely changes the names while continuing the same quantitative calculations of comparison.

The Austrians, from the time of Menger, have viewed the weighing of choices and the making of trade-offs in terms of ordinal rankings of discrete alternatives. The focus has been on “margins of use” and not amounts or degrees of satisfaction or utility.

Opportunity Cost refers to the next best alternative foregone in an act of choice. From the Austrian perspective, only individuals make choices and, hence, cost is always personal and “subjective.” Since choices only relate to possibilities that the individual still views as open to him in the future (whether that future is a moment from now or a month from now), the opportunities are those the individual imagines in his mind, as he sees and evaluates them.

Thus, there are no and cannot be any such thing as “social costs.” Costs can only be known and born by the individual making choices. The actions of others can only modify the social environment in which any particular individual now has to decide what he views as the options open to him and the relative significance they have for him.

We would not say, for instance, that nature has imposed a “cost” on a person because during a storm a tree fell across a road, which that individual will have to take the time and effort to move out of the way if he wishes to travel on that road. A natural event will have changed the environment in which that individual has to, now, decide what is the best course of action for him to follow.

If someone had cut down the tree that has now fallen across the road, he may or may not have cut it down with the purpose of making that other individual’s travel plans more difficult. But it remains the fact that he has changed the setting in which that other individual now has to act. But the “cost” remains an evaluative judgement in that other individual’s mind; it is not something objectively imposed on him by the woodchopper. This is a subtle point. But it is one that is important not to lose sight of.

Machlup’s emphasis on the time structure of consumption and production remains as relevant as a distinct element in Austrian theory today as when he suggested this list. And as my earlier comment on the shortcomings of Keynesian economics brought out, these relationships between the time patterns of consumption, savings and investment are crucial for understanding the interconnections in such things as the business cycle.

What I find interesting, looking over Machlup’s list of distinct aspects of the Austrian perspective, is the absence of any reference to “unintended consequences” and “spontaneous order.” Since Menger’s writings in the 1870s and 1880s, a particular “Austrian” emphasis compared to most of Neo-Classical economics, has been an analysis of institutions and their evolution and development independent of conscious social or political design.

Indeed, this is often considered one of the hallmarks of the Austrian method and approach. And, yet, it was ignored by Fritz Machlup, one of the most careful and knowledgeable members of the interwar Austrian generation, and a very close friend of Hayek’s who made the study of spontaneous order a central aspect of much of his own social theory.

There is a debate between the Austrian economists of the Mises Institute and those of George Mason University, about what we call today “Austrian Economics”. At the beginning of this year, we see a post by Peter Boettke where he explained why they decide to change the title of the blog from “Austrian economics” to “Coordination problem”. Are we seeing a division within the Austrian School?

We need to keep in mind that there never was a uniform Austrian School of Economics. While Menger’s writings were the beginning of the Austrian School, there emerged differences of emphasis and approach between him and his two leading early followers, Böhm-Bawerk and Friedrich von Wieser. This continued in the interwar period of the 1920s and 1930s. And it continues, today.

Rather than be dismayed or concerned about “divisions” within the Austrian School, it is really a sign of vibrant growth and innovation, as different individuals see possibilities and avenues for research and development within those generally shared ideas that make up the starting points of the Austrian approach.

Let’s return to your own work. Can you give us some background on your two books, Austrian Economics and the Political Economy of Freedom, and Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition?

Dr. Ebeling: Austrian Economics and the Political Economy of Freedom was published by Edward Elgar in 2003. I try to explain the core concepts of the Austrian School, how they differ from other schools of economic thought, and the nature of both socialism and the interventionist-welfare state from an Austrian Economic and classical liberal perspective.

My more recent volume was published in early 2010, entitled Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition, by Routledge. The beginning chapters discuss the ideas and contributions of Ludwig von Mises in the historical context in which he lived and wrote, especially in the first half of the 20th century.

In a lengthy chapter I explain the Austrian theory of money and the business cycle and the Austrian analysis of the causes of and the cures for the Great Depression of the 1930s; and I then offer a detailed critical study of the Keynesian alternative that was in competition with the Austrian view at that time. In two other chapters I compare Mises' theory of money and business cycles with that of Joseph Schumpeter, and then Mises and Hayek in relation to the Swedish Economists. I also present in the concluding chapter the distinctly "Austrian" theory of expectations and expectations-formation for understanding the problems of market coordination in a complex and ever-changing economy.

You've travelled a good deal. What is the status of freedom in the world these days?

Dr. Ebeling: To use the famous line with which Charles Dickens began A Tale of Two Cities, "It was the best of times, and the worst of times." On the one hand, all the totalitarian systems of the 20th century - fascism, Nazism, communism - are gone. We have seen the dismantling of the Berlin Wall and the collapse of the Soviet Union. There are very few who will, with a straight face, still publically advocate Soviet-style central planning.

Many countries around the world that suffered from poverty and lived under socialist tyranny are now experiencing economic growth and prosperity. They have abandoned the ‘socialist road" and have introduced, if not a free market, then at least freer market reforms. These changes have generated rising standards of living in parts of the world that have only known hunger and despair for all of recorded history.

But what has not been defeated is the socialist critique of capitalism. That is, many people, and most especially educators, those in the mass media and the political arena, believe the socialist claims that capitalism, as an economic system, is inherently bad. It results in exploitation of consumers and workers; it doesn't produce the goods and services that people "really" need; it is short-sighted and harms the environment; and it causes the boom and busts of the business cycle, resulting in innocent, ordinary people losing their jobs.

Thus, all current economic policies, and especially during this recession, are grounded in the idea that free markets have failed and only "big government" can save the economy and society. Now, of course, what we are actually suffering from is the failure of the interventionist state and misguided monetary policies that have gotten us into this mess. But, unfortunately, that is not how things are seen by most of those who mould public opinion and set government policy.

Give us a little background on how you discovered the lost papers of Ludwig von Mises in a formerly secret Soviet archive in Moscow.

Dr. Ebeling: In 1934, Mises had accepted a teaching post at the Graduate Institute of International Studies in Geneva, Switzerland. But he sublet a room in the Vienna apartment that he had lived in since the beginning of the 20th century. In March 1938, shortly after the Nazi Germany's annexation of Austria, the Gestapo ransacked Mises' apartment and carted off his library, personal and family papers, his professional writings, and correspondence.

For the remainder of his life, Mises believed that the Nazis had destroyed all of his looted property. In fact, they were warehoused in German-occupied Czechoslovakia along with many other collections of papers and documents that the Nazis plundered in the various parts of Europe they conquered. At the end of the war, the Soviets captured this vast cache of papers and documents, and under Stalin's orders they were hidden away in a secret archive in Moscow built for this purpose.

My wife, Anna, and I were in Vienna in 1993 doing archival research about Ludwig von Mises and other Austrian Economists. A friend of mine told us that some German diplomats had recently been in Moscow looking for information about anti-fascist Germans from the interwar period of the 1930s. While going through various records they saw a reference to Ludwig von Mises, but because he was Austrian and not German, they had not followed up on it. And that was all my friend knew.

In 1996, my wife and I went to the Holocaust Museum in Washington, D.C. and one of the researchers there showed us the index to a formerly secret KGB archive in Moscow that was now open to Russian and foreign scholars. Going through the index we came across an entry, "Ludwig Mises - Fund 623." Nothing else.

When we returned to Hillsdale, I informed George Roche, the college president, what we had found. He immediately arranged for the financing of a trip to Moscow so my wife and I could follow this lead. Anna was born and raised in Moscow, and with the assistance of some of her friends we were able to gain access to the archive and Mises' papers. We returned to the United States with over 8,000 pages of photocopied material, nearly the entire collection of papers and documents, the originals of which still are kept in that archive in Moscow.

Are they fully published now? Can you assess their impact?

Dr. Ebeling: Liberty Fund of Indianapolis has been supporting the translation and publishing of a large portion of these papers. Two of three volumes have so far appeared in print under my editorship, under the title, Selected Writings of Ludwig von Mises. The last of the three volumes will appear in early 2011.

Those who are a bit familiar with Ludwig von Mises' writings easily might think of him as the great economic theorist, focusing on the wide issues of capitalism vs. socialism vs. the interventionist state; or as a monetary theorist explaining the nature of money and the causes of the business cycle. But in the Austria of his time, especially both before the First World War and in the interwar period of the 1920s and 1930s, Mises earned his living as a nuts and bolts economic policy analyst as a senior staff member at the Vienna Chamber of Commerce.

Many of these "lost papers" show him as grappling with the reality of a hyperinflation in the immediate aftermath of the First World War; devising policy strategies to overcome the fiscal madness of massive deficit spending by left-leaning Austrian governments; and proposing policies for Austria to overcome the disastrous consequences of misguided economic policy during the Great Depression. In these papers you see how Mises combines theory with practice in dealing with a tidal wave of government interventionism and socialist planning.

We are coming to the end. Why do you think Austrian tradition is still out of the study programs of a degree in economics? Is it possible to change this tendency?

Dr. Ebeling: The Austrian School went into decline in the 1940s and 1950s due to the triumph of Keynesian Economics and the dominance of mathematical general equilibrium theory in microeconomics. The current economic crisis should be a lesson, again, that it is government monetary and fiscal policy that is the cause of market instability and economy-wide imbalances and distortions. And the failure of the recent “stimulus” policies to get out of the recession phase of the business cycle should be seen, once more, as demonstrating the fundamental errors in Keynesian thinking.

The hyper-mathematical, general equilibrium approach to market analysis that lead too many economists to presume that markets were always and everywhere perfectly in balance and fully adjusted to all “relevant data” in the economy should throw into doubt some of the foundations of mainstream Neo-Classical economics.

But it remains to be seen if any of these ideas in both macroeconomics and microeconomics, in fact, get rejected or at least rethought. So in spite of the fact that I think that Austrian Economics is a better and more insightful way to look at the market and its workings, I’m not especially optimistic that the Austrian approach will be widely accepted in the near future.

What do you think about the future of Austrian Economics?

Dr. Ebeling: While I am not confident that Austrian Economics will become the dominant approach in the economics profession any time soon, I am optimistic about work within the Austrian tradition that will keep it a vibrant and “progressive research program.”

Important work continues to be done by Austrians in analyzing monetary and banking institutions, and the business cycle. There have been and are significant advancements in the Austrian theories of entrepreneurship, the firm, and the market order, in general. Austrians are expanding their research and studies into the nature and evolutionary processes of institutions and social orders.

All this, and more, makes it certain that there will be a unique and knowledge-advancing Austrian School and approach well into the 21st century.

Thank you so much for sharing your views with us

Monday, November 8, 2010

A Return to the Gold Standard? by Richard M. Ebeling

Over the weekend of November 6-7, 2010, World Bank president, Robert Zoellick , proposed in a column written for the Financial Times that the global economy once more be linked to gold as an anchor to help maintain currency stability and reduce inflationary expectations in international markets.

A few days earlier, on November 1, Financial Times columnist, Martin Wolf, had written a piece precisely asking, “Could the World Go Back to a the Gold Standard?” Wolf pointed out, “It is not hard to understand the attractions of a gold standard. Money is a social convention. The advantage of a link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government. The aim, then, would be to ‘de-politicize’ money.”

But Wolf raised a number of objections to reestablishing a gold standard, including, (a) the fact that it would require a significant revision upwards in the official price of gold in terms of dollars, which seemed unfair to him since it would give an unearned windfall to current holders of gold; (b) it would impose additional transactions costs in international dealings since some trade imbalances would have to be settled through transfers of gold; and (c) it might inhibit necessary flexibility in the banking and financial system for the monetary authority to counteract recessionary forces that may lead to falling production and rising unemployment.

As Martin Wolf correctly observed, historically a primary advantage of a gold standard was that it removed the hand of the government from the handle of the monetary printing press. Over and over again, governments have used their power or influence over the monetary system to either debase coins or print up paper money to cover its expenditures in excess of the taxes collected from the citizenry.

But in spite of Wolf’s concerns, it can be argued the costs of a gold standard are far less that the costs that have been imposed on society from a century of gross mismanagement of the monetary system by governments around the world. Since 1914, when the Federal Reserve System came into operation as America’s central bank, and the beginning of the First World War that same year, the world has experienced severe inflations, including a number of hyperinflations, and the rollercoaster of several booms and recessions, including the Great Depression of the 1930s and the current global economic downturn.

Placing the fate of the world’s monetary system in the hands of monetary central planners, who have had all the discretion imaginable through their control of paper money instead of gold, has not secured an inflation- or recession-free economic environment.

In the mid-1980s, leading free market economist, Milton Friedman, who for decades had advocated a paper money monetary system restricted to increasing the money supply within a narrow “rule” of three percent a year, admitted that he had been all wrong in believing that such a system could ever work. He said that he, now, realized that it would never be in the interest of governments or their central banks to resist the temptation of printing money to cover government spending, serve special interest groups, and advance other short-run political purposes. He concluded that, in retrospect, the costs on society since 1914 from inflations and the boom and bust cycle caused by central bank mismanagement were far greater than the costs that would have been associated with a real, politically-free gold standard from mining, minting and storing gold, and facilitating transactions through use of the yellow metal during the 20th century.[i]

The fact is, government-caused inflations, and fears of inflation, have already delivered a windfall gain to all those astute and entrepreneurial enough to investment in gold or gold-mining companies over the years. They have protected their wealth and assets from dollar depreciation and sometimes earned handsome returns from their holding of gold. But it was government monetary mismanagement that created this “opportunity.”

If the Federal Reserve were to stop increasing the money supply, and if a new legal redemption rate between gold and dollars were to be established on the basis of the estimated total number of dollars in circulation in the world divided by the amount of gold held by the U.S. government, any financial “gains” made by the holders of gold would be all due to the avalanche of dollars that have been printed up by the Federal Reserve over the decades. Gold’s dollar appreciate in value has been due to the dollar's depreciation caused by unlimited monetary expansion.

Finally, Wolf’s concern that a real gold standard would tie the hands of governments and central banks from having the discretionary authority to manipulate the monetary system should be considered a “plus,” not a minus. Only the most doctrinaire Keynesian can deny or fail to see that past recessions and the current economic downturn were all preceded by unsustainable booms resulting from monetary expansions and interest rate manipulations that threw savings and investment out of balance, artificially stimulated misplaced construction projects, and misdirected labor into employments that became unprofitable to maintain once the inevitable financial and investment bubbles burst.[ii]

Monetary-induced booms are the “cause” that precedes the inescapable bust that follows. Eliminate or radically reduce the possibility for central banks and governments from artificially creating such booms, and the likelihood of having to go through economy-wide downturns will have been dramatically reduced or done away with.

At one point in his article, Martin Wolf mentions that some have called for an even more radical monetary reform than even a government-managed new gold standard: the abolition of central banking and a full separation of money from the state, through a monetary system based on competitive, private free banking.

Wolf sets that alternative aside as well, thinking that the world is certainly not ready for such a change, even if it was workable. But, in fact, this is the ultimate and most reasonable of all the alternatives to the existing system of monetary central planning through the government institution of central banks.

Monetary central planning has worked no better than any other form of central planning over the last one hundred years. The world’s central bankers – just like the central planners in the old Soviet Union – just do not have the knowledge, wisdom and ability to successful manage the monetary system of a market economy.

How can central bankers know what market rates of interest should be, better than the competitive interaction of borrowers and lenders for the use of scarce savings for various investment purposes? How can central bankers know what the quantity and types of money and credit should be in the market, better than those who wish to use various commodities for money purposes, and interact for various forms of lending and borrowing?

Money emerged out of market interactions, through people’s search for ways to better facilitate their transactions. Governments did not create money; but governments have been highly creative in devising ways to monopolize its control over money, and manipulate its quantity and value for political purposes.

Banking and other forms of financial intermediation do not require government creation or oversight to function effectively to bring lenders and borrowers together for mutual advantageous exchanges. But government regulations and controls imposed on financial markets can generate anti-competitive practices; can result in distorted and misdirected uses of savings and capital; and can enable the wasteful siphoning off of a part of society’s scarce resources to fund the insatiable appetite of government for spending other people’s money.

Luckily, over the last twenty years, a number of free market economists have successfully demonstrated how a private, competitive free banking system can operate, and perform far better a variety of tasks and activities for which it has been presumed a central bank was needed.[iii]

The time has come to rethink the basic premises of the existing monetary order. And this needs to begin with thinking "outside the box" of the predominant macroeconomic policy framework.

The wisdom and insights of the classical economists must be given a new hearing, in terms of their argument in support of a market-based commodity monetary system, such as a gold standard.

Even more radically, we need to rethink the rationale for central banking all together. We need, in the phrase of Austrian economist, F. A. Hayek, to consider the "denationalization of money," and a monetary order based on private, competitive free banking.

The return to a market-based money such as gold, therefore, is both possible and desirable. And it would be most effective in acting as a barrier against any further government abuses of the monetary system, if such a return to gold was introduced through the freeing of banking and financial markets from the heavy-hand of government, as well.

The next phase of our post-communist world may very well require the end to monetary socialism, which is what central banking really represents.

[i] Milton Friedman, “Economists and Economic Policy,” Economic Inquiry (Jan. 1986), pp. 1-10; “The Resource Cost of Irredeemable Paper Money,” Journal of Political Economy (June 1986), pp. 642-64-7; and, “Has Government Any Role in Money?” Journal of Monetary Economics, Vol. 17 (1986) pp. 37-62.

[ii] See, Richard M. Ebeling, “Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies,” in Richard M. Ebeling, Timothy Nash, and Keith A. Pretty, eds., In Defense of Capitalism (Midland, MI: Northwood University Press, 2010) pp. 57-60; and Richard M. Ebeling, Political Economy, Public Policy, and Monetary Economics: Ludwig von Mises and the Austrian Tradition (London/New York: Routledge, 2010), Ch. 7: “The Austrian Economists and the Keynesian Revolution: The Great Depression and the Economics of the Short-Run,” pp. 203-272.

[iii] Kevin Dowd, Private Money: The Path to Monetary Stability (London: Institute of Economic Affairs, 1988); and, The State and the Monetary System (New York: St. Martin’s Press, 1989); George Selgin, Theory of Free Banking: Money Supply Under Competitive Note Issue (Totowa, NJ: Rowman & Littlefield, 1988); and, Banking Deregulation and Monetary Order (New York: Routledge, 1993); Lawrence H. White, Free Banking in Great Britain: Theory, Experience, and Debate, 1800-1845 (Cambridge: Cambridge University Press, 1984); Competition and Currency: Essays on Free Banking and Money (New York: New York University Press, 1989); and, Theory of Monetary Institutions (New York: Wiley-Blackwell, 1999).