In Defense of Capitalism & Human Progress

Open Societies and Spontaneous Orders by Richard M. Ebeling

2011-12-14T09:24:00.000-08:00

[The following is a review of Popper, Hayek and the Open Society by Calvin Hayes (London/New York: Routledge, 2009) 284 pp. $150. It originally appeared in Freedom Daily (January 2012) published by The Future of Freedom Foundation in Fairfax, Virginia.]

Friedrich A. Hayek and Karl Popper were two of the most influential and internationally recognized critics of totalitarian collectivism in the twentieth century. Hayek's The Road to Serfdom (1944) and Popper's The Open Society and Its Enemies (1945) helped change the intellectual climate at a time when it was presumed that various forms of socialism soon would completely triumph over limited government, free markets, and individual freedom.

Both Hayek and Popper were Austrians by birth, almost the same age, and graduated with doctoral degrees from the University of Vienna in the 1920s. But they never knew each other, even in the relatively small and interconnected intellectual circles of interwar Vienna.

Hayek left Austria in 1931 for a teaching position at the London School of Economics, and only heard about Popper when his fellow Austrian economist, Gottfried Haberler, suggested in 1935 that he read Popper’s recently published book, The Logic of Scientific Discovery. With the darkening clouds of Nazism over Central Europe, Popper left Austria in 1937 for a teaching position in New Zealand. After corresponding during the Second World War, Hayek helped arrange a teaching position for Popper at the London School of Economics, as well.

In The Road to Serfdom, Hayek tried to show how the rise of socialist ideas in late nineteenth and early twentieth centuries Germany had prepared the political and economic foundations for the Nazi rise to power in the 1930s; and how similar socialist trends in Great Britain and the United States might, likewise, threaten those countries with political and economic tyranny.

Popper’s Open Society and Its Enemies traced the origins of collectivist despotism to its ancient philosophical roots in the writings of Plato, who Popper considered to be the intellectual father of both communism and fascism. He also argued that Marx’s materialistic determinism closed the door to any political system of freedom.

Calvin Hayes’ recent book, Popper, Hayek and the Open Society analyzes what he sees as the strengths and weaknesses of their respective defenses of human freedom. Popper and Hayek, each in his own way, made a case for liberty on the basis of the limits of man’s knowledge.

Karl Popper and the Fallibility of Human Knowledge

In the immediate aftermath of the First World War, Hayes explains, Popper became disillusioned with his earlier attraction to Marxism. What bothered him was the fact that no matter what happened, the cleaver Marxist theoretician always seemed to be able to show that it “confirmed” and “proved” Marx ‘s predictions of the coming collapse of capitalism to be correct.

He also was bothered by some of the, then, current trends in the philosophy of science that argued that the truth of a hypothesis was corroborated by the method of verification. That is, the more times a hypothesis passes the rigor of scientific testing, the more we can be confident that it is correct.

In The Logic of Scientific Discovery (1934) and Conjectures and Refutations (1963) Popper reasoned that no matter how many white swans one may search for and see, this in itself does not prove the hypothesis that all swans are white. The discovery of one black swan would prove the hypothesis to be wrong. Hence, the proper scientific method should be based on the construction of conjectures that are open to refutation and falsification.This, he said, should be considered the benchmark of intellectual integrity and honesty.

Such a view, by necessity, must result in us accepting the fact that all of our knowledge and beliefs are tentative and, in principle, open to being proven wrong or less than fully correct at some point in the future. Indeed, in his essays on The Poverty of Historicism, Popper had argued that predicting the future was logically impossible.

If we make one reasonable assumption, that human knowledge grows over time, then there is no way for any human being to successfully predict the future, since that would require him to know "today" that which he will only learn, discover, and know "tomorrow." You cannot already have "tomorrow's" knowledge "today," (otherwise it would already be part of "today's" knowledge). Hence, you cannot fully know what you or others may do that ends up shaping the future, because that will partly depend upon knowledge that is only acquired over the process of time.

The “open society,” Popper reasoned, must be one that allows for error, reconsideration, and a multitude of minds at work in the pursuit of always potentially fallible knowledge. The collectivist social engineers, Popper insisted, suffered from an arrogance of presuming to know the truth required to reconstruct society “according to plan,” with little thought that their conceptions of a “good,” or “just,” or “perfect” society might be flawed or incorrect.

Friedrich Hayek and the Decentralized Knowledge of Society

Hayek’s focus in essays collected in Individualism and Economic Order (1948) and The Counter-Counter Revolution of Science (1955), and in his two master political works, The Constitution of Liberty (1960) and Law, Legislation, and Liberty, 3 vols. (1976-1979), was the fact that matching society’s division of labor is an inescapable division of knowledge. Hayes summarizes Hayek’s argument that human knowledge is multi-layered, often difficult to measure or fully articulate, and dispersed among the members of humanity in a way that cannot be collected, integrated or coordinated even by “the best and the brightest” of human minds.

Hayek concluded the only successful manner in which all this knowledge can be brought to bear so all in society might benefit and take advantage of all that other human beings know and can effectively apply in productive ways is to coordinate their actions through the competitive price system of an open, and functioning market economy. This, Hayek insisted, is why socialist central planning is inherently unworkable.

The Role of Tradition in Science and Society

Hayes also emphasizes that both Popper and Hayek considered that it is impossible to understand or analyze either natural or social phenomena without taking some aspects of the existing order as “given.” These serve as the starting points for studying nature or society. Thus, both of them argued that science and the study of society could not do without some sense of intellectual and cultural “tradition.” In the study of nature, this is the “taken-for-granted” theories and hypotheses of science that form the starting points for critical investigations, including any new conjectures and attempted refutations challenging parts of the existing body of scientific knowledge.

Societal traditions Hayek argued, represent the cumulative experience and wisdom of countless generations, out of which have evolved the “rules” and patterns of human association. They incorporate more knowledge than any one man or one generation could ever know or understand. They form the basis of the foundational elements of the “spontaneous order” of society, in the context of which each new generation lives, acts, thinks and innovatively changes things in incremental ways that transform those human institutions, but often in a manner that only will be appreciated or fully understood long after those changes have been at work.

The Limits of Human Knowledge and the Case for Freedom

A central element to Calvin Hayes’ analysis of Popper and Hayek is to ask how a “positive” case can be made for limits on government control, intervention, or redistribution on what are primarily “negative” arguments about the limits of human knowledge, in the way that both Popper and Hayek basically presented their defenses of freedom.

Hayes suggests that if it can be shown that these limits on human knowledge and knowing are inescapable to the human condition, then it might be justifiable to reason from an “is” to an “ought.” If, as Popper insisted, it is a fact that man cannot be certain of what he may learn tomorrow that might falsify what he believes today, then it would be wrong to replace an “open society” with a “closed” one that imposed a single totalitarian plan on society, under the presumption that some can know enough today to centrally direct everyone’s lives into the future.

And if, as Hayek strongly argued, society is a “spontaneous order” that no one with their inescapably limited, individual knowledge, can ever fully understand or successfully redesign without leaving out much of the knowledge possessed by others that the planner can never hope to know or appreciate, then it would wrong to impose economic central plans or try to redistribute wealth according to some presumed God-like wisdom and knowledge of what would be “fair” in terms of some standard of each receiving their “just rewards” from a paternalistic government.

Thus, Hayes concludes, “negative” insights into the inherent limits of man and his mind, may provide a “positive” case for political and constitutional restrictions on the powers, duties and responsibilities of governments. And it may show, even more strongly, how insightful and important Popper and Hayek have been in the modern battle of ideas over freedom versus force in society.

Game Theory and the Dark Side of Envy by Richard M. Ebeling

2011-12-07T18:26:00.000-08:00

[The following is a review of Robert Leonard, Von Neumann, Morgenstern and the Creation of Game Theory (New York: Cambridge University Press, 2010) 469 pp. $55. It originally appeared in Freedom Daily (October 2011), published by The Future of Freedom Foundation in Fairfax, Virginia.]

Economist Oskar Morgenstern is best known as the co-developer, with mathematician John von Neumann, of game theory. Game theory emerged out of curiosities about the logic and strategies of games such as chess, where each player must take into consideration the plans and possible moves of an opponent if he is to have any success in winning the game. It culminated in the 1944 publication of Morgenstern and von Neumann’s book, The Theory of Games and Economic Behavior.

It has been applied to the planning of military strategy, as well as for attempting to design or anticipate competitive moves by rivals in the marketplace. Its most famous construction is what is called “the prisoner’s dilemma,” in which two suspected criminals are offered, separately, a lower sentence if one of them confesses and “rats out” the other first. Neither could be convicted if both of them kept their mouth shut, but since neither one can be sure that the other won’t take the deal, they both end up confessing.

It has also been used to explain the logic of cooperative behavior in the marketplace of exchange. In his 1984 book, The Evolution of Cooperation, for example, Robert Axelrod, explained that when people participate in or anticipate multiple trading opportunities with others, there emerge incentives to neither cheat nor deceive. Game theory experiments showed that most people implicitly operate in terms of a psychology of “tit-for tat.” That is, each trader will be honest and reliable in his dealings as long as his trading partner acts the same way. If “Sam” cheats or is in any way dishonest, then “Bob” will “retaliate” in kind. But if “Sam” learns his lesson and starts acting honestly again, then “Bob” will reciprocate, and mutually beneficial and honest trade will be restored.

The logic is that when individuals realize that there are long-run gains from “repeat business” with the same trading partners, it becomes costly to try to obtain short-run gains by acting dishonestly against them. Thus, in the long run, market interactions reinforce and teach the value of honest behavior and good manners.

Robert Leonard’s book, Von Neumann, Morgenstern and the Creation of Game Theory, is an outstanding example of scholarship, matched by an easy flowing writing style that explains often difficult and complex mathematical and logical problems that led up to the development of game theory. It is told in terms of the separate biographies of Von Neumann and Morgenstern who, in fact, had virtually no contact with each other until they were both at Princeton University starting in the late 1930s.

But what I would like to focus on in the remainder of this review is the evolution of Oskar Morgenstern’s ideas in this process, because what is less well known is that Morgenstern was a prominent member of the Austrian School of Economics before the Second World War.

His first book was on Economic Forecasting (1928), which unfortunately has never been translated into English. He presented a biting and insightful analysis as to why quantitative models would never be able to successfully predict the economic future. His three fundamental arguments were (1) that historical events are too unique and interdependently complex to be reducible to statistical probability analysis; (2) any public forecast easily will result in people taking the forecast into consideration, and therefore acting in ways different than what the forecast presumed; and (3) how individuals act is dependent on their expectations of how they expect others to act, and understanding and interpreting people’s subjective meanings and intentions is not readily reducible to strictly quantitative categories and classifications for statistical study.

Leonard traces out the development of Morgenstern’s thinking in the 1920s and 1930a under the influence of Austrian Economists such as Ludwig von Mises and Hans Mayer, and his friendship with Karl Menger, Jr., the son of the founder of the Austrian School.

But what he also brings out is how Morgenstern increasingly turned against his “Austrian” roots, ridiculing in print Mises’s views on economic theory and policy, and telling his various economist friends that he considered F. A. Hayek’s work on money and business cycles to be “worthless” – some of the very contributions that resulted in Hayek being awarded the Nobel Prize in Economics in 1974!

Even worse, after 1934, with Hayek now a professor at the London School of Economics, and Mises teaching in Geneva, Switzerland, Morgenstern attempted to portray himself as the “leader” of the Austrian School in an Austria that was now a fascist-type authoritarian dictatorship. He worked as a senior advisor to the Austrian government, often offering policy advice far removed from a free market perspective. And in his 1934 book, The Limits of Economic Policy, he expressed impatience with democratic government compared to an authoritarian system. (When the book appeared in English in 1937, he deleted its anti-democratic passages.)

In addition, Leonard points out that Morgenstern’s diary from this period is sprinkled with often heavily anti-Semitic sentiments, in spite of the fact that many of the members of the Austrian School at this time were Jewish (including Mises), and who had been among those encouraging and supportive of his own work and professional advancement.

Finally, while during his life-time Morgenstern was hailed as the co-developer of game theory, Leonard makes it clear that in fact virtually all of its theoretical formulations and strategy constructs in their 1944 book was the work of von Neumann (also of Jewish ancestry). Morgenstern’s contribution was mostly a couple of chapters showing the possible applications of game theory to economics. Leonard quotes Morgenstern’s diary that he often could barely keep up with von Neumann’s mathematical expositions.

I had the privilege of having Oskar Morgenstern as a professor at New York University just before his death in 1977. He was an excellent lecturer, and very generous with his time to share his ideas and memories of the “old Vienna days,” with someone interested in the history of the Austrian School.

This is what made Leonard’s book so much of a shock. It shows an unflattering, dark side of a fascinating man. A man who, at least during that earlier period between the two World Wars, too frequently demonstrated envy, arrogance, and prejudice against some of the very people who helped make his own professional success possible.

Government Controlled Money or Choice in Currency? by Richard M. Ebeling

2011-09-28T04:24:00.000-07:00

(This talk was delivered at the Utah Monetary Summit on the campus of the University of Utah in Salt Lake City on September 26, 2011, which was organized by the American Principles Project headquartered in Washington, D.C. The summit was devoted to discussing the significance of the Utah Legal Tender Act of March 2011, giving citizens of the state the legal right to use U.S. gold and silver coins in market transactions in place of Federal Reserve Notes.)

For more than two hundred years, practically all of even the most free market advocates have assumed that money and banking were different from other types of goods and markets. From Adam Smith to Milton Friedman, the presumption has been competitive markets and free consumer choice are far better than government control and planning – except in the realm of money and financial intermediation.

This belief has been taken to the extreme over the last one hundred years, during which governments have claimed virtually absolute and unlimited authority over national monetary systems through the institution of paper money.

At least before the First World War the general consensus among economists, many political leaders, and the vast majority of the citizenry was that governments could not be completely trusted with management of the monetary system. Abuse of the monetary printing press would always be too tempting for demagogues, special interest groups, and shortsighted politicians looking for easy ways to fund their way to power, privilege, and political advantage.

The Gold Standard and the Monetary “Rules of the Game”

Thus, before 1914 the national currencies of practically all the major countries of what used to be called the “civilized world” were anchored to market-based commodities, either gold or silver. This was meant to place money outside the immediate and arbitrary manipulation of governments. Any increase in gold or silver money required private individuals to find it profitable to prospect for it in various parts of the world; mine it out of the ground and transport it to where it might be refined into usable forms; and then mint part of any new supplies into coins and bullion, with the rest made into various commercial and industrial products demanded on the market.

The paper currencies controlled by governments and their central banks were supposed to be issued only as claims to – as money substitutes for – quantities of the real gold or silver money deposited by members of the society in banks for safekeeping and the convenience of everyday business in the marketplace.

Government central banks were meant to see that the society’s medium of exchange was properly assayed and minted, and to monitor and police private banks and itself to make sure that the “rules” of the gold (or silver) standard were properly followed.

Bank notes were to be issued or deposit accounts increased in the banking system as a whole only when there had been net additions to the quantity of the commodity money within the economy. Any withdrawals of the commodity money from the banking system was to be matched by a decrease in the total quantity of bank notes in circulation and in deposit accounts payable in money.

Did government’s always play by these “rules”? Unfortunately, the answer is, “No.” But, by and large, in the half-century or so before the beginning of the First World War, governments and their central banks managed their national currencies with surprising restraint.

If we look for a reason for this restraint, a leading one was that for a good part of this earlier era the predominant set of ideas was that of political and economic liberalism. But we need to remember that at that time “liberalism” meant an advocacy and defense of individual liberty, secure private property rights, free markets, free trade, and limited government constitutional under impartial rule of law.

But, nonetheless, these national currencies were government-managed paper monies linked to gold or silver by history and tradition, and more or less left fairly free of direct and abusive political manipulation, due to the prevailing political philosophy of the time that considered governments as protectors of individuals’ rights to their lives, liberty and honestly acquired property.

Political Paternalism and Monetary Central Planning

However, in the decades leading up to the First World War the political trends began to change. New ideals and ideologies started to appear and gained increasing hold over people’s minds. The core conception was a growing belief in the necessity for and the good that could come from political paternalism. Government’s were not simply to be impartial “umpires” who enforced the rule of law and protected people and their property from violence and fraud. No, government was to intervene into the social and economic affairs of men, to regulate markets, redistribute wealth, and pursue visions of national greatness and collective welfare.

This meant a change in the political philosophy behind the government’s control of the monetary system, as well. In the decades after the First World War, in the 1920s, 1930s, and 1940s, the government monetary managers increasingly became monetary central planners. The central bankers were to manipulate the supply of money and credit in the economy to achieve various goals: stabilize the price level; maintain full employment; peg or change foreign exchange rates; lower or raise interest rates to influence the amount and the types of investments undertaken by private borrowers and investors; and, whenever and however necessary, increase the quantity of money to fund government deficits needed by politicians and interest groups to feed their insatiable appetite for power, privilege and political plunder.

The triumph of Keynesian Economics in the post-World War II period resulted in a near monopoly of academic and public policy advocates who argued that private enterprise was inherently unstable and frequently unfair, and could only be allowed to exist and function in a wider environment of dominating government control. The consequence was a government constantly increasing in size, scope, and pervasive supervision and intrusion into every corner of personal, social, and economic life.

Big Government, Big Spending and the Monetary Printing Press

But big governments cost big sums of money. About a hundred years ago in America, in 1913, all levels of government combined – Federal, state, and local – absorbed only around seven percent of the nation’s income and output. Today, all level of government seize nearly fifty percent of all that is earned and produced in the United States. That cost of government is even more if we add the financial burdens imposed on private enterprise to comply with the strangling spider’s web of regulations and controls imposed on businessmen going about their business.

Just in the last two and half years under the Obama Administration, the Federal government has accumulated nearly three trillion dollars in additional debt. About at the same time, during the last three years, the Federal Reserve – America’s central bank – had created at least two trillion dollars of new money. In other words, the Federal Reserve has, in fact, already produced out of thin air a sum of new money equal to two out of every three dollars the Federal government has borrowed during this period.

The economics textbooks usually sanitize this type of process with a sterile terminology that calls it, “monetizing the debt.” An earlier generation of economists and critics of political paternalism used to call this process paper money inflation and debauchery of the currency: the diluting of the value of the money in people’s pockets through monetary depreciation and currency devaluation.

Political Demagogy, Fiscal Burdens and the Danger of Inflation

As a result of the growth of the modern welfare state, America and the other major Western countries of the world have become, in the words of Nobel Prize-winning economist, James Buchanan, perpetual democracies in deficit, funded in total or in good part by, now, trillions of dollars created by government monetary monopolies – the central banks.

Today, we are reaping the whirlwind of decades of political paternalism and monetary central planning. Nations like Greece are at the edge of financial bankruptcy and debt default. And countries like the United States, which are woven tightly with networks of special interest groups living off the redistributed plunder of other more productive members of society, seem to lurch from one fiscal crisis to another, apparently on a monthly basis now. The current politics of redistributive paternalism seems to offer little way to stop the worsening avalanche of massive annual deficits and mounting national debt.

The demagogues and political tricksters harangue about “soaking the rich” to fund the unfunded “entitlements” of social security and Medicare through the rest of the 21^st century. They demand that “big business” pay for the government “jobs to nowhere” that is promised to end the unemployment that earlier and current misguided economic policies have created and prolong.

The politicians of plunder have also taken recourse to that last refuge of every political scoundrel: a call to “patriotism.” It is your duty as a “good citizen” to pay an increasingly higher and higher “fair share” in taxes; to cooperatively be subservient and obedient to the demands and needs of government; and to sacrifice your freedom and the fruits of your own hard-earned honest labor for “the national interest” and “the common good.”

It is worth remembering that those in the political arena who claim to know what is in “the national interest” and for “the common good” are the same ones who also assert the right to compel you to conform to their vision of a “just” and “fair” America, regardless of much you may honestly disagree or desire to peacefully go your own way.

A central tool for governments to maintain their authority in society and their control over people’s lives is the ability to make the citizenry accept and use their monopoly medium of exchange. This is a lynchpin in the government’s ability to transfer the people’s wealth and privately produced output to satisfy the “needs” of government spending.

It makes each and every citizen an existing and potential victim of government abuse of the monetary printing press, since paper currencies are no longer in anyway linked to or limited by a market-based supply of a real commodity such as gold or silver. We should not presume that runaway hyperinflations and the accompanying destruction of a society’s medium of exchange only occur in places like 1920s Germany or contemporary African nations like Zimbabwe. That, “it can’t happen here.” It can happen anywhere.

The Bankruptcy of the Welfare State and Redistributive Dependency

The fact is, the modern welfare state is bankrupt. It is bankrupt ideologically; no one really any longer believes that the Interventionist- Redistributive State will bring mankind material happiness or social harmony. Everyone knows that it is nothing more than a vast and corrupt political machine through which, as Frederic Bastiat said long ago, everyone tries to live at everyone else’s expense.

In the process, the productive capacity of the society slowly grinds to a halt, as more and more people turn from productive self-responsibility to redistributive dependency. It also generates a mental attitude and a political presumption of legitimacy to that redistributive dependence that pervades each and every income group and social category throughout the nation.

Most opinion polls show that a fairly sizable majority of the American people think that government is too big, spends too much, and taxes far too excessively. But once the questions turn to “specifics” of cutting particular government programs, it is soon seen how the tentacles of the welfare state reach into virtually everyone’s pocket.

It is not only that government taxes people in varying amounts to feed the redistributive process. It is also the case that there are few people in the land who do not have some type of money, program, or benefit put into their pockets by government. Most people cannot imagine living without their government redistributive “fix.” And, admittedly, breaking people’s addiction to their government benefits, subsidies, protections, and special favors would and will involve serious withdrawal pains.

This also means that the welfare state is rapidly reaching financial bankruptcy, as well. Neither taxation nor borrowing of private savings can or will be able to cover all the costs of current and future government spending under existing interventionist and redistributive legislation and regulation.

The government may very well, therefore, use its most important financial resource to keep moving the wheels of political spending. Those in political power may more and more turn the handle of the monetary printing press, and they may turn it faster and faster.

Hyperinflations and Opting Out of Government Monopoly Money

Time after time, history has demonstrated that when serious price inflations move into disastrous hyperinflations, people first discount and then abandon the government’s monopoly money. They shift into alternative currencies of choice that they consider more stable, more predictable, and more wealth and income preserving that the increasingly worthless pieces of paper money that their own government spews out in increasing quantities.

Now such a monetary disaster is not preordained. It is not written in some “big book” in the sky. Governments and societies have in the past pulled back and stopped short of following a path leading to social and economic ruin. America, too, may yet slow down or bring to a halt the political course it is currently traveling. The future is unpredictable and trends have changed many times in the past.

But . . . forewarned is forearmed. So how might any of us be able to shelter ourselves from the possible coming fiscal and monetary storm? Central to such precautionary actions is to hedge against the possible radical depreciation and or even destruction of the government’s currency.

To the extent that one sees such a danger and has the financial wherewithal to “plan ahead,” individuals should be legally allowed to opt-out of the government’s monopoly money. In other words, every American should be free from the government’s power to compel its citizens to use and accept in trade and in settlement of debts its own monopoly money.

Utah’s Lead on the Road to Choice in Currency

Everyone should be free to choose the currency or commodity they wish to hold and use as a medium of exchange without legal restriction, penalty, or political prejudice. This is what makes the Utah Legal Tender Act of March 2011 so profoundly important. By making the use of gold and silver coins issued by the United States government lawful money in market transactions and the settling of debt, the State of Utah has begun a process the logical conclusion of which should be monetary freedom for the people of the United States.

Why should only gold or silver coins issued by the U.S. government be considered as lawful money? Why not currencies and gold and silver coins issues by other governments that Americans chose to hold and use. And why not currencies and gold and silver coins issued by private banks and financial institutions that individuals choose to accept, hold, and use?

Monetary freedom would not only give every citizen a legal right to protect and secure his income, wealth and market transactions from abusive mismanagement of the government’s monopoly monetary printing press. It could also serve as a check on the degree of such government abuse.

More than thirty-five years ago, in September 1975, Austrian economist and Nobel Laureate, Friedrich A. Hayek, delivered a lecture on, Choice in Currency: A Way to Stop Inflation, in Lausanne, Switzerland, and said:

“There could be no more effective check against the abuse of money by the government than if people were free to refuse any money they distrusted and to prefer money in which they had confidence. Nor could there be a stronger inducement to governments to ensure the stability of their money than the knowledge that, so long as they kept the supply below the demand for it, that demand would tend to grow. Therefore, let us deprive governments (or their monetary authorities) of all power to protect their money against competition: if they can no longer conceal that their money is becoming bad, they will have to restrict the issue.

“Make it merely legal and people will be very quick indeed to refuse to use the national currency once it depreciates noticeably, and they will make their dealings in a currency they trust.

“The upshot would probably be that the currencies of those countries trusted to pursue a responsible monetary policy would tend to displace gradually those of a less reliable character. The reputation of financial righteousness would become a jealously guarded asset of all issuers of money, since they would know that even the slightest deviation from the path of honesty would reduce the demand for their product.”

Taking away from the government its power of compelling the citizenry to accept money that it monopolistically controls and abuses may serve as an important legal and economic change to force the government and those who live at its spending trough to face the reality of the welfare state’s ideological and fiscal bankruptcy before it is too late to avert a complete collapse of the society.

Choice in currency may be a valuable avenue for helping to restore the American tradition and practice of individual rights, free markets, and limited government under the rule of law. And it can be an important legacy for us to leave to our children and grandchildren, so they may, hopefully, live out their lives in liberty for the remainder of the twenty-first century.

When Soviet Power Crumbled: The Failed Hard-Line Coup Attempt of August 1991 by Richard M. Ebeling

2011-08-18T06:03:00.000-07:00

Twenty years ago, on August 22, 1991, I stood amid a vast cheering crowd of tens of thousands of people outside the Russian parliament building in Moscow, the capital of the Soviet Union. They were celebrating the failure by diehard Soviet leaders to undertake a political and military coup d’état meant to maintain dictatorial communist rule in the Union of Soviet Socialist Republics.

Four days earlier, on August 19^th, a band of hard-line Soviet political and military leaders had initiated the coup attempt against the leadership of Mikhail Gorbachev, the General Secretary of the Communist Party of the U.S.S.R, and Boris Yeltsin, president of the Russian Soviet Federated Socialist Republic, the largest of the constituent republics of the Soviet Union.

Fearful that the political and economic reforms that had been introduced by Gorbachev shortly after his ascendency to the top leadership position in the Soviet Communist Party in 1986 was now threatening to bring about the disintegration of the Soviet Union, the hard-line conspirators were determined to preserve intact what remained of Soviet power in their own country.

Gorbachev's Attempt to Save Socialism

Gorbachev believed that the Soviet Union had taken several serious wrong turns in the past. But he was not an opponent of socialism or its Marxist-Leninist foundations. He wanted a new “socialism-with-a-human-face.” His goal was a “kinder and gentler” communist ideology, so to speak. He truly believed that the Soviet Union could be saved, and with it a more humane collectivist alternative to Western capitalism.

To achieve this end, Gorbachev had introduced to two reform agendas: First, perestroika, a series of economic changes meant to admit the mistakes of heavy handed central planning. State enterprise managers were to be more accountable, small private businesses would be permitted and fostered, and Soviet companies would be allowed to form joint ventures with selected Western corporations. Flexibility and adaptability would create a new and better socialist economy.

Second, glasnost, political “openness” under which the political follies of the past would be admitted and the formerly “blank pages” of Soviet history – especially about the “crimes of Stalin” – would be filled in. Greater historical and political honesty, it was said, would revive the moribund Soviet ideology and renew the Soviet people’s enthusiastic support for the redesigned bright socialist future.

The more hard-line and “conservative” members of the Soviet leadership considered all such reforms as opening a Pandora’s Box of uncontrollable forces that would undermine the Soviet system. They had already seen this happen in the outer ring of the Soviet Empire in Eastern Europe.

The Beginning of the End in Eastern Europe

In 1989 Gorbachev had stood by as the Berlin Wall, the symbol of Soviet imperial power in the heart of Europe, had come tumbling down, and the Soviet “captive nations” of Eastern Europe – East Germany, Poland, Czechoslovakia, Hungary, Romania and Bulgaria – that Stalin had claimed as conquered booty at the end of the Second World War, began to free themselves from communist control and Soviet domination.

The Soviet hard-liners were now convinced that a new political treaty that Gorbachev was planning to sign with Russian president Yeltsin and Nursultan Nazarbayev, president of the Soviet republic of Kazakhstan, would mean the end of the Soviet Union, itself.

Already, the small Baltic republics of Estonia, Latvia, and Lithuania were reasserting the national independence they had lost in 1939-1940, as a result of Stalin’s and Hitler’s division of Eastern Europe. Violent, and murderous Soviet military crackdowns in Lithuania and in Latvia in January 1991 had failed to crush the budding democratic movements in those countries. Military methods had also been employed, to no avail, to keep in line the Soviet republics of Georgia and Azerbaijan.

Communist Conspirators for Soviet Power

On August 18^th, the hard-line conspirators tried to persuade Gorbachev to reverse his planned political arrangements with the Russian Federation and Soviet Kazakhstan. When he refused he was held by force in a summer home he was vacationing at in the Crimea on the Black Sea.

Early on the morning of August 19^th, the conspirators issued a declaration announcing their takeover of the Soviet government. A plan to capture and possibly kill Boris Yeltsin failed. Yeltsin eluded the kidnappers and made his way to the Russian parliament building from his home outside Moscow. Military units loyal to the conspirators ringed the city with tanks on every bridge leading into the city and along every main thoroughfare in the center of Moscow. Tank units had surrounded the Russian parliament, as well.

But Yeltsin soon was rallying the people of Moscow and the Russian population in general to defend Russia’s own emerging democracy. People all around the world saw Yeltsin stand atop an army tank outside the parliament building asking Muscovites to resist this attempt to return to the dark days of communist rule.

The Western media made much at the time of the apparent poor planning during the seventy-two hour coup attempt during August 19^th to the 21^st. The world press focused on and mocked the nervousness and confusion shown by some of the coup leaders during a press conference. The conspirators were ridiculed for their Keystone cop-like behavior in missing their chance to kidnap Yeltsin or delaying their seizure of the Russian parliament building; or leaving international telephone lines open and not even jamming foreign news broadcasts that were reporting the events as they happened to the entire Soviet Union.

The Dangers If the Hard-liners had Won

Regardless of the poor planning on the part of the coup leaders, however, the fact remains that if they had succeeded the consequences might have been catastrophic. I have a photocopy of the arrest warrant form that had been prepared for the Moscow region and signed by the Moscow military commander, Marshal Kalinin.

It gave the military and the KGB, the Soviet secret police, the authority to arrest anyone. It had a “fill-in-the-blank,” where the victim’s name would be written in. Almost 500,000 of these arrest warrant forms had been prepared. In other words, upwards of a half-million people might have been imprisoned in Moscow, alone. The day before the coup began, the KGB had received a consignment of 250,000 pairs of handcuffs. And the Russian press later reported that some of the prison camps in Siberia had been clandestinely reopened. If the coup had succeeded possibly as many as three to four million people in the Soviet Union would have been sent to the GULAG, the notorious Soviet labor camp system.

Another document published in the Russian press after the coup failed had the instructions for the military authorities in various regions around the country. They were to begin tighter surveillance of the people in the areas under their jurisdiction. They were to keep watch on the words and actions of everyone. Foreigners were to be even more carefully followed and watched. And their reports to the coup leaders in Moscow were to be filed every four hours. Indeed, when the coup was in progress, the KGB began to close down commercial joint ventures with Western companies in Moscow, accusing them of being “nests of spies,” and arrested some of the Russian participants in these enterprises.

Fear Underneath the Surrealism of Calm

During the coup attempt Moscow had a surrealistic quality. On the streets around the city it seemed as if nothing were happening – except for the clusters of Soviet tank units strategically positioned at central intersections and at the bridges crossing the Moscow River. Taxi cabs patrolled the avenues looking for passengers; the population seemed to go about its business walking to and from work, or waiting in long lines for the meager supplies of everyday essentials at the government retail stores; and motorists were as usual also lined up at the government owned gasoline stations. Even with the clearly marked foreign license plates on my rented car, I was never stopped as I drove around the center of Moscow.

The only signs that these were extraordinary days were the grimmer than usual looks on the faces of many; and that in the food stores many people would silently huddle around radios after completing their purchases. However, the appearance of near normality could not hide the fact that the future of the country was hanging in the balance.

Russians Run the Risk for Freedom

During the three days of that fateful week, Russians of various walks of life had to ask themselves what price they put on freedom. And thousands concluded that risking their lives to prevent a return to communist despotism was price they were willing to pay. Those thousands appeared at the Russian parliament in response to Boris Yeltsin’s appeal to the people. They built makeshift barricades, and prepared to offer themselves as unarmed human shields against Soviet tanks and troops, if they had attacked. My future wife, Anna, and I were among those friends of freedom who stood vigil during most of those three days facing the barrels of Soviet tanks.

Among those thousands, three groups were most noticeable in having chosen to fight for freedom: First, young people in their teens and twenties who had been living in a freer environment during the previous six years since Gorbachev had come to power, and who did not want to live under the terror and tyranny their parents had known in the past. Second, new Russian businessmen, who realized that without a free political order their emerging economic liberties would be crushed. And, third, veterans of the Soviet war in Afghanistan, who had been conscripted into the service of Soviet imperialism and were now determined to prevent its return.

The bankruptcy of the Soviet system was demonstrated not only by the courage of those thousands defending the Russian parliament, but also by the unwillingness of the Soviet military to obey the orders of the coup leaders. It is true that only a handful of military units actually went over immediately to Yeltsin’s side in Moscow. But hundreds of Russian babushkas – grandmothers – went up to the young soldiers and officers manning the Soviet tanks, and asked them, “Are you going to shoot their mother, your father, your grandmother? We are your own people.” The final act of the coup came when these military units refused to obey orders and seize the Russian parliament building, at the possible cost of hundreds or thousands of lives.

Freedom! Freedom! Freedom!

On that clear, warm Thursday of August 22th, that huge mass of humanity that had assembled in a large plaza behind the Russian parliament stood and listened as Boris Yeltsin told them that that area would now be known as the Square of Russian Freedom. The multitude replied in unison: Svaboda! Svaboda! Svaboda! – “Freedom! Freedom, Freedom!”

A huge flag of pre-communist Russia, with its colors of white, blue and red, draped the entire length of the parliament building. The crowd looked up and watched as the Soviet red flag, with its yellow hammer and sickle in the upper left corner, was lowered from the flagpole atop the parliament, and the Russian colors were raised for the first time in its place. And again the people chanted: “Freedom! Freedom! Freedom!”

Not too far away from the parliament building in Moscow, that same day, a large crowd had formed at Lubyanka Square at the headquarters of the KGB. With the help of a crane, these Muscovites pulled down a large statue of Felix Dzerzhinsky, the founder of the Soviet secret police that stood near the entrance to the KGB building. In a small park across from the KGB headquarters, in a corner of which rests a small monument to the victims of the Soviet prison and labor camps, an anti-communist rally was held. A young man in an old Czarist Russian military uniform burned a Soviet flag, while the crowd cheered him on.

The seventy-five-year nightmare of communist tyranny and terror was coming to an end. The people of Russia were hoping for freedom, and they were basking in the imagined joy of it.

Freedom’s Hope and Post-Communist Reality

The demise of the Communist Party and the Soviet system was one of the momentous events in modern history. That it came about with a relatively small amount of bloodshed during those seventy-two hours of the hard-line coup attempt was nothing short of miraculous – only a handful of people lost their lives.

The last twenty years have not turned out how many of the friends of freedom in Russia had hoped. Indeed, post-communist Russia saw a contradictory, poorly organized, and corrupted privatization of Soviet industry, plus a high and damaging inflation in 1992-1994; a severe financial crisis in 1998; a return to authoritarian political rule following Vladimir Putin’s rise to power in 1999; two bloody and destructive wars in the attempted breakaway region of Chechnya; wide spread and pervasive corruption at all levels of government; state controlled and manipulated markets, investment, and commerce; assassinations and imprisonments of political opponents of the regime; and significant nostalgia among too many in the country for “great power” status and the “firm hand” of the infamous Stalinist era.

Nonetheless, for those of us who were fortunate enough to be in Moscow in August 1991, it remains in our minds as an unforgettable historical moment when the first and longest-lived of the 20^th century’s totalitarian states was brought to the doorstep of its end.

Debt Reduction Delusions and the Menace of Big Government by Richard M. Ebeling

2011-08-02T18:43:00.000-07:00

In spite of the rhetoric in the media about a national debt crisis having been averted through a rise in the government’s debt limit on Tuesday, August 2^nd, the fact is the United States remains very much in the midst of a fiscal disaster.

The Congress has approved and the president has signed a bill raising the debt limit by an additional $2.4 trillion over the next year and a half. In other words, at the end of 2012, the government’s debt will have reached a total of over $ 16.5 trillion from its current $14.3 trillion.

When a Spending Reduction Still Equals More Government Debt

The debt ceiling deal requires a matching $2.4 trillion to be cut from projected government spending over the next ten years. In other words, this is not an absolute cut in government spending, as if government would be spending less in the next year compared to the current year. Instead, the deficit reductions represent a decrease from the amount of increasing government spending that would have occurred if no reduction had been agreed to.

So instead of the government’s projected total debt over the next decade increasing by around $10 trillion, it will only go up by about $7 trillion. Ten years from now the U.S. government’s debt will reach a level, therefore, of nearly $22 trillion dollars, or almost 55 percent higher than it is today.

Understanding this more clearly has been confused by the emphasis given to the fact that the $2.4 trillion debt ceiling increase has been “matched” by that $2.4 trillion decrease in projected government spending. The impression has been easily created in people’s mind that these two amounts are in some way cancelling each other out.

The U.S. Treasury is being given the authority to borrow and spend an additional $2.4 trillion dollars over the next 18 months. But the $2.4 trillion spending reduction over ten years represents, on average, a “savings” of $240 billion a year. Another way of thinking about this is that the government now has the authority to spend, on average, an additional $133 billion per month of borrowed money over the next year and a half. “Matching” this, the government is supposed to spend $20 billion less every month over the next ten years.

So, assuming what has been agreed to by the Congress and the president is actually adhered to, it will take ten years of that mere decrease in the rate of increase in government spending to just equal the increase in the government’s debt between now and the end of 2012.

Clearly this entire process has been one of smoke and mirrors by both political parties. New Congressional fiscal committees to deal with the government’s debt; supposed “trigger mechanisms” to impose “automatic” across-the-board cuts in government spending if deficit reduction goals are not agreed to; and appeals for Washington’s swarm of spending frenzied politicians to act like responsible adults instead of immature children do not grapple with the fundamental problem facing America.

Taming the Fiscal Leviathan to Save America

The United States government is a fiscal leviathan with an insatiable appetite for the wealth and income of those working in the productive private sector. But the government is not a disembodied monster with a will of its own.

Government is made up of the individual politicians desiring election and reelection to political office; the bureaucrats manning the departments, bureaus and agencies wanting larger budgets to justify more promotions, higher salaries, and greater authority over other people’s lives; and special interest groups wanting to use the taxing, spending, and regulating powers of government to redistribute wealth in their direction, acquire more revenues and higher profits on the basis of political connections than they could earn in the competitive marketplace, and impose their ideological desires and dreams on others who would prefer to live their own lives.

It is this “iron triangle” of politicians, bureaucrats, and special interest groups, as free market economist, Milton Friedman, call them, that make up what government does and for whose benefit, and at a cost to those remaining in society who make up the net taxpayers and burden-bearers of the modern interventionist-welfare state.

The problem we face is that those who benefit from some form of government largess make up a slight majority of the citizenry, according to the latest estimates. It now seems to be the case that the costs of government are born by a minority of the taxpayers of the country. A minority of the working population labors to support and pay for government-supplied incomes, transfers or related benefits enjoyed by a privileged majority.

And what Washington’s “iron triangle” wants to spend that it cannot collect in taxes it has been paying for with borrowed dollars that will push the government's debt to $16.5 trillion by the end of next year – thanks to the Congressional and presidential “solution” to the debt ceiling crisis of August 2011.

The only real solution to our government’s debt dilemma is to challenge the rationales and justifications for the size and scope of Washington’s reach over the lives and the peaceful and productive market activities of the American people. We must work to persuade our fellow Americans not only that we can no longer afford the taxing, spending, and regulatory burdens of government without threatening the society’s productive capabilities, but also that it is inconsistent and opposite to the principles of liberty upon which the country was founded.

If we don’t succeed in this endeavor we run the risk of destroying the very political and economic foundations upon which America’s freedom and prosperity have been based.

The Debt Crisis and the Fiscal Leviathan State by Richard M. Ebeling

2011-07-25T06:35:00.000-07:00

The current fiscal crisis that fills the pages of the newspapers and the news shows on television has all been revolving around the issue of raising the government debt limit.

In fact, the present Congressional-approved debt limit of around $14.3 trillion dollars was passed through in June of this year. The U.S. Treasury Department has been merely juggling the books to shift funds and keep spending money. The government has been using tax revenues that it is legally obligated to set aside for federal employee retirement accounts – and which it is supposed to be “put back” at some point when the government formally has the authority to borrow more and get further into debt. It is the type of thing that if done by a private employer to cover his current business expenses would be labeled misappropriation of funds.

Huge numbers are bandied about in the media and among the politicians concerning how much will be cut from future spending as part of a deal to raise the debt limit. Trillions of dollars are to be eliminated from the government’s budgets in the years to come. Of course, most of those spending reductions are to occur later rather than sooner, with little or no specification of exactly what programs would be cut or precisely when.

Furthermore, when both the Democrats and the Republicans propose anywhere from $1.5 trillion to $9 trillion in less spending in future years and decades they never specify what “baseline” is being used to estimate the spending reductions. What really is being proposed in virtually all these alternative plans is a projected decrease in the rate of increase in total government spending. That is, hardly anyone is suggesting that the “slice” of the national economic pie consumed by government through taxing, spending and borrowing actually should be reduced.

“Entitlements” Mean Plunder

Both Democrats and Republicans take it from granted that “Big Government” is here to stay. Even most of those Republicans who emphasize the need for “reforms” in the “entitlement” programs such as Social Security or Medicare do not challenge the idea that these programs are permanently part of the American political landscape. They merely wish to make them more “financially sound,” or “cost efficient,” or managed in ways that would give those eligible for these programs some “choice” in managing their Social Security accounts or in selecting among doctors and medical treatment.

This is, perhaps, most easily appreciated by the fact that scarcely anyone in the Washington political arena challenges the idea and the use of the word “entitlement.” The Merriam-Webster dictionary defines entitlement as “the state or condition of being entitled.” A “right to benefits specified by law or contract” as in “a government program providing benefits to members of a specified group.” It is based upon the idea, the dictionary tells us, of “a belief that one is deserving of or entitled to certain privileges.”

According to the Merriam-Webster dictionary definition, therefore, in the political arena an “entitlement” is a program of benefits that the government provides to a privileged group, a group that comes to believe that it deserves those benefits, and even comes to consider such benefits as their “right.”

The government, however, cannot provide benefits to any privileged group in the society that does not reciprocally obligate others to supply the required resources, goods, or financial means to cover what has been promised. Since government has no supply of resources, goods or sums of money that it does not first tax or borrow from others, any such entitlement compels some other people in society to provide the means necessary for the government to meet its promises to the privileged groups.

That is, one group’s privilege entails a compulsory obligation on others that is imposed and enforced through the government’s police power to tax and garnish the income and wealth of any and all members of society. Thus, society becomes divided into two groups: taxpayers and tax receivers; the unprivileged and the privileged; those who are forced to give up a portion of the production, income and wealth they have honestly earned in the peaceful transactions of the market place and those who have that production, income and wealth transferred to them through the power of the state.

This is, of course, what the famous 19^th century French free market economist, Frederic Bastiat, referred to as legalized plunder. The government, instead of acting as a protector and guardian of each individual’s right to his life, liberty and honestly acquired property, becomes the most powerful and intrusive violator of people’s liberty.

The government’s concentrated, monopoly power over the use of physical force is far greater and far more dangerous than even the worst of any private individual or private group that attempts to plunder and abuse innocent individuals in society. But equally important, government is the only user of force in society that widely succeeds in indoctrinating and persuading the large majority of the people under its jurisdictional control that it is “just” and “right” that it plunder one part of the population for the privileged benefit of another portion of society.

Political Rule vs. Individual Self-Rule

In earlier times, governments acquired legitimacy and acquiesce of its subjects by insisting on the divine right of kings. It took many centuries to overthrow the belief that monarchs ruled, regulated, and taxed because of an ordination from God. With the end or weakening of monarchy in the 18^th and 19^th centuries, a new ruler was ordained with a nearly equally divine political authority to demand obedience from the citizenry – the divine right of “the people.”

Democracy replaced monarchy as the legitimized basis of political power. If “the people” ruled by their own democratic vote, how could they ever tyrannize and plunder themselves? How can a man abuse himself, when his actions are dictated by his own will?

In the United States, the idea of “self rule” originally had a different meaning. It did not primarily or exclusively mean political self-rule through a voting process. It meant the right of each individual to have the freedom to rule over himself. When the American Declaration of Independence spoke of “unalienable rights” possessed by the individual to his life, liberty and pursuit of happiness, the Founding Fathers were saying that each man owns himself, and had the right to live his life as he chooses, as long as he peacefully goes about his chosen business, and respects the equal rights of others to do the same.

The role of government in this uniquely American conception of individual rights and personal self-rule was that of protector and securer of each person’s liberty. The political authority was to be a servant of each sovereign individual, who chooses his own goals and purposes in life and who pursues them with his own mental and physical energies. When he needs the assistance and association of others to attain some of his purposes the method is freedom of choice and voluntary exchange.

Socialism and the Anti-Capitalist Mentality

How, then, did America move away from the idea of sovereign and self-ruling individuals with government limited to a small though essential number of rights-protecting functions, to the notion of the government as itself the sovereign in the name of “the people,” with the individual reduced to the servant who is required and expected to pay any tax and bear any regulation in the name of a “common good” or “national interest,” or “general welfare”?

In a word, the answer is socialism. This year marks the 20^th anniversary of the end of the Soviet Union. After the reality of almost 75 years of socialism-in-practice in the Soviet Union and elsewhere around the world, very few people any longer believe in and yearn for dictatorial rule by a Communist Party claiming to know the “inescapable” laws of history; few want to live under a system of comprehensive and all-encompassing socialist central planning. Experience has persuaded enough people around the world that such a system leads to nothing but brutal tyranny, along with economic stagnation and poverty.

While the ideal of Soviet-style socialism and central planning has been rejected and has few explicit adherents nowadays, what does continue to endure and influence general attitudes about political power, economic policy and the role of government in society, both in the United States and around the world, is the socialist critique of capitalism and the free market society.

The rationale for the vast network of government welfare programs as well as regulation and control over private enterprise is based on the socialist analysis of the market economy. When private enterprise is left free, the socialists claimed, the selfish profit motive guides businessmen to act in ways that harm the common good or general welfare. Workers searching for employment will be exploited and abused by greedy employers unless government protects them with workplace rules and regulations, including the establishment of a “fair” wage.

The state must take on the role of paternalistic provider of health care, old age pensions, unemployment insurance, public housing, education, and a wide variety of other social services. Why? First, under unrestrained capitalism workers will not earn enough to provide these necessities for themselves. Second, private enterprises driven by mere self-interest will inevitably fail to supply these goods and services in sufficient quantity and quality.

Individuals, in other words, cannot be trusted to rule over their own lives, to make their own choices, and to interact freely with their fellow men in a society of liberty. Collective control, under the cover of the democratic process, needs to restrain and restrict the individual’s sovereignty in the arena of his own affairs.

In the name of protecting people from such unrestrained capitalism, governments everywhere, including n the United States, have created ever-expanding bureaucracies that regulate nearly every aspect of our lives. As a consequence, our world today is in the grip of a continuing ideology of anti-capitalism. State bureaucracies ruling through anti-market policies have grown into ideological and political elites who arrogantly presume to know and dictate how we should all live and work. Those holding political power may be compared to the nobility of old, before whom the commoners had to grovel so they might live and prosper.

Capitalism as the Liberator of Man

Are these accusations against capitalism and the free society justified? Absolutely not. Indeed, never has an historical record been more twisted and distorted that this socialist critique of the free market society.

Beginning in the 18th century and throughout the 19th century, capitalism and the political philosophy of classical liberalism that accompanied it insisted on the freedom and dignity of the individual. The classical liberals campaigned against and brought about an end to human slavery, first in Europe and then around the rest of the world. These free market liberals called for ending the rule of kings and princes or at least restraining their powers through constitutional government and peaceful elections. It called for impartial rule of law, and the end to torture and other cruel punishments.

The classical liberal and free market agenda included the abolition of all privileges, favors, and subsidies that benefited the aristocracy, as well as the end to all monopolies created by government regulation and protection. It called for free enterprise, freedom of trade and occupation, and freedom of movement. In other words, classical liberalism and capitalism have been an ideology for the liberation of man from political oppression and economic poverty. It has been the foundation for human freedom and material prosperity in the modern world. It has served as the foundation of the American Republic.

Capitalism in the 19th century did not doom the worker to a life of perpetual poverty. Instead, the expanding market economy kept creating new and better-paying employments as the decades went by. It produced the wealth and rising income that resulted in the emergence of a phenomenon completely new to human history: a self-supporting and educated middle class that grew more and more as the lower classes bettered their economic well-being.

Through private investment, capitalism kept raising the productivity of labor to new heights. Parents were able to earn enough so their offspring did not have to join the work force at an early age. This produced something unique in history: childhood, a time when the young could experience the innocence of play and the opportunity of schooling before entering the world of work.

Classical liberalism and the market order fostered the private associations and charitable organizations that enabled the working poor to provide medical care, pensions, and education for their families. Famines disappeared; poverty was dramatically and continuously reduced; and hard and long hours of work were slowly but surely eased and shortened to a degree never before experienced. Capitalism has been the liberator of mankind. The great history and glorious achievements of that earlier free market capitalist epoch must be relearned once again in a society that knows little of the system that has provided the comfort and standard of living that too many of our fellow countrymen take for granted.

The Dangerous Growth of Government

For more than a hundred years, now, the anti-capitalist mentality has undermined the original American political philosophy of individual rights and economic liberty. In its place has grown a politics of paternalism and dependency. This has easily played into the hands of those who have desired political power under the umbrella of democracy, and by those who have desired and now believe that they have an entitlement – a “right” – to redistributive largess because they cannot imagine life without those government “safety nets” and who believe that a free market, limited government world would be cruel, uncaring, and inhumane to them and others.

In 1902, government spending in the United States as a percentage of Gross Domestic Product (GDP) was only slightly more than 7 percent. In 1930, before the massive growth in the size and reach of government during the Great Depression and Franklin Roosevelt’s New Deal, government spending as a percentage of GDP was only a bit more than 10 percent. In other words, just 75 years ago, 90 percent of the valued production of the U.S. economy was used and spent in the private sector.

Today, government in America spends over 40 percent of the country’s GDP, the private sector uses and consumes only 60 percent of the economy’s valued output. The government’s share over this 75-year period has increased four-fold, and the private sector’s use of its own produced and valued output has decreased by 30 percent over this period.

Federal government spending in 2010 was $3.4 trillion. In 1930, the Federal government spent $156.7 billion (in 2010 dollars). Thus, government spending today is 22 times more than it was 75 years ago. In 2010, Federal government tax revenues were $2.16 trillion. In 1930, the Federal government collected $176 billion in taxes (in 2010 dollars). Government taxes collected is 12 times larger today than in 1930.

What explains the difference in the growth in government spending versus the growth in taxes collected by the U.S. government: the Federal government’s deficit spending. In 1980, the accumulated Federal debt (in 2010 dollars) was around $3 trillion. In 2001, it had increased to around $7 trillion (in 2010 dollars). Today, Uncle Sam’s debt is over $14.4 trillion, more than double what it was ten years ago. In 1980, the government’s debt amounted to less than 30 percent of GDP; today, it is rapidly approaching 100 percent of U.S. gross domestic product.

America’s Unwritten Fiscal Constitution

Through most of the first 150 years of U.S. history, the federal government abided by what Nobel Economist, James Buchanan, called America’s “unwritten fiscal constitution.” There is nothing in the U.S. Constitution that requires the government to balance its budget. But during that first century and half the fiscal rule was that the government should limit its spending to the narrow functions spelled out in the Constitution, and should not burden current and future generations with a debt due to deficit expenditures in the past. If an emergency, such as war, were to make it necessary for the government to borrow to cover unexpected and immediate higher spending, that government should run budget surpluses when the emergency had passed to pay off that debt. It should then return to the balanced budget rule.

The free market economists of the 19^th century understood that when any government expenditure must have a matching tax attached to it, the citizenry knows directly and in full what any proposed government program will and must cost. Any extravagant proposals for more and bigger government spending, carries with it, under a balanced budget, clear and explicit information for the citizens and the voters about what and whose taxes will have to be raised and by how much.

Voters may still support such an increase in government spending, but there is no way to hide from them what the cost will be in terms of less money and wealth in their pockets because taxes will have to be raised to cover the expenses of the expanded government largess. The unwritten fiscal constitution of a balanced budget rule served as an imperfect, but nonetheless effective constraint on growth in government for a good part of American history.

Keynesian Economics and Deficit Spending

The balanced budget rule was thrown to the wind beginning in the 1930s. A major influence in bringing this about was the Keynesian Revolution in economic theory and policy. Named after John Maynard Keynes who first formulated this new theory in his 1936 book, The General Theory of Employment, Interest, and Money, it was argued that a market economy is inherently unstable and susceptible to wide and prolonged fluctuations in employment and production. The remedy was for government to run budget deficits during times of recession or depression to boost spending and recovery in the economy, and run budget surpluses during boom times to dampen inflationary tendencies and pay off or reduce any accumulated debt.

Rather than balance the budget annually, the Keynesians said the budget should be balanced over the business cycle, with wise and far-sighted government policy makers using their theories to manage and manipulate government spending, taxing and borrowing to maintain full employment, economic stability, and long-term economic growth. There was a high degree of arrogance and pretense among these Keynesian economists that they had discovered and could successfully implement a “holy grail” of economic salvation against the uncertainties and vicissitudes of much of everyday economic life.

But while the Keynesians dreamed dreams of mastering and manipulating the market economy through the miracles of “activist” monetary and fiscal policy, ordinary politicians looking for ways to get elected and reelected, found in the Keynesian Revolution their own miracle.

Here was a way to offer their constituents something for nothing. In the name of “creating jobs,” fostering economic growth, and supporting a business cycle-free economy, they could offer seemingly unending spending with no need to attach a tax bill for what was being promised to voters.

More welfare redistribution; more public housing; bigger spending on public education; increased funds for the arts or scientific research for the lucky recipients of government grants; larger subsidies for selected groups of producers in the political candidate’s electoral district; expanded government bureaucracies to regulate and control various aspects of commercial and business life to benefit various special interest groups trying to manipulate the market more to their own advantage through government power.

The possibilities seemed endless, and all with a taxpayer price tag far smaller than the actual cost for all the wondrous spending that was offered to growing segments of the society. Indeed, those politicians could not have done it, if the constraint had not been lifted on government’s ability to borrow and spend.

Government deficit spending has opened a Pandora’s box of political pandering and plundering. Those who are promised government expenditures, programs, and various other benefits receive them in the present and over a period of time leading up to the next election that the politicians who have supplied these political goodies are hoping to win.

The Costs of Borrowed Money

The full cost of funding them only emerges over many years or decades, as the annual deficits add to the accumulating debt, with the resulting interest and periodic principle payments coming due. Currently, the United States government is borrowing around 40 cents of every dollar that it is spending. Taxpayers do not feel the direct and immediate impact of the deficits, since they are not being taxed enough to cover that 40 percent of those government’s expenditures.

It should be pointed out and not forgotten, however, that the citizenry does pay a price in the present for the deficits that the government is running. The government may not tax the full amount needed to cover its total outlays but to have the funds to cover the remainder of its expenditures it must borrow the difference. That deficit-funding gap recently has equaled a trillion dollars or more a year.

Every dollar borrowed by government, and the real resources that sum of money represents in buying power in the marketplace, are part of the society’s scarce means of production not available for private sector use. There is one dollar less of real resources available for private sector investment and capital formation, private sector technological research and development, or private sector expansion of output and job creation.

The costs of funding the deficits and the accumulated debt are costs not only on future taxpayers. They are costs on the current population who are that much poorer and who leave that much less wealth and productive capability to the next generation, because it has been taken out of the hands of private enterprise to instead cover the government’s present-day giveaways.

From Limited to Big Government

What enabled America’s earlier unwritten fiscal constitution to work in the 19^th and early 20^th centuries clearly was not because it was written in stone – because it was not. It was followed because it was generally considered to be the “right thing to do.” And it was considered the right thing to do, because it was part of a set of political and economic ideas based on the belief that governments were not supposed to give various special interest groups financial and regulatory favors and privileges at the expense of other members of society.

The practice of limited government meant limited government spending. There was no need to try to hide what government was costing, when what the government spent money on was, for the most part, the few enumerated functions assigned to the Federal government under the Constitution.

When the World Almanac was first published in 1869, all of the offices and activities of the Federal government literally fit on one page; and half of that single page was filled with the names of U.S. ambassadors to foreign countries. Today, if you pick up a copy of the World Almanac, you will find that the offices, bureaus, departments, and agencies of the Federal government take up several pages with hundreds of entries in very small print.

Big Government has brought with it a big and growing debt because the entitlement society, the redistributive society, the political plundering society has no limit once government is viewed as paternalistic provider rather than an essential but more modest protector of each individual’s life, liberty and property.

No deals in Washington, D.C. among the political culprits, whose interactions with special interest groups have created and maintain the Fiscal Leviathan State, will solve America’s debt and deficits problem. What we need is a change in the ideas and beliefs among many of our fellow citizens. As long as too many of our fellow Americans believe they are “entitled” to the income, wealth and productions of others, and as long as so many of our fellow Americans accept either through ignorance or guilt that they have an obligation to be taxed, regulated and plundered to fulfill those entitlements little change can or will happen to radically shift the direction we are moving in.

Making the Moral Case for Liberty

Another way of saying this is that we must reawaken the moral case for liberty. The starting point for such a moral reawakening is the rejection of the collectivist conception of man and society. Collectivists of all types—socialists, communists, fascists, interventionists, and welfare statists—presume that the group, the tribe, the “nation,” or the social “class” takes precedence over the individual. He is to serve and if necessary sacrificed for the “common good” or “general welfare,” since the individual has neither existence nor “rights” separate from the collective to which he belongs.

Compare this with the unique and starkly different philosophy of man and society captured in the American Declaration of Independence: “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are Life, Liberty, and the Pursuit of Happiness. That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.”

Rights precede government, and are not something given to man by any political authority. Each of us possesses rights that may not be taken away or undermined by those in political power. We all possess an inalienable right to our life, liberty, and property. We own ourselves, and by extension we have a property right to what our creative minds and efforts have peacefully produced. We may not be enslaved, sacrificed, or plundered by others, whether they are private individuals or organized governments.

The individual, not some mythical collective, is the center and starting point of society. The free market is the arena in which people form relationships for mutual benefit on the basis of voluntary exchange. The free man finds his own meaning for life, guided by the philosophy or faith of his choice. He refuses to coercively impose his will on others, just as others may not use force against him. He persuades others to live and act differently through reason and example, and not with the bullet or the bayonet. And no political authority can make claims against his life, liberty, and honestly acquired property, because the function of a limited government is to secure his freedom from predators and plunder.

This is the philosophy of individualism and capitalism that must be reawakened in our fellow men if we are to free our society from the stranglehold of Big Government and its ocean of debt. It requires a confident belief that we are right, that both reason and history have demonstrated the value and benevolent results of what Adam Smith once called “the system of natural liberty.”

The Importance of the Battle of Ideas

Such an appeal to a battle of political and economic ideas may seem unrealistic or irrelevant given the urgency of our political and fiscal problems. But the social political and economic crises of our time are the outcome of an earlier battle of ideas that the enemies of freedom and capitalism succeeded in winning to a great extent. They indicted the society of liberty; they distorted the reality of capitalism and its brilliant triumphs in freeing man from poverty; and they imbedded in the minds of many the conception of political entitlements that serve the power ends of political paternalists and which requires the plundering of the peaceful and productive members of society.

There is fiscal crisis – the Western world in reaching the limits of how far it can live on borrowed money, and based on unrealistic promises and immoral premises. Our society is living under a paternalistic and plundering political system that threatens to bring its productive potentials to a halt. And in the extreme, it could lead to a situation of capital consumption, under which the government’s taxing, spending, and borrowing policies take so much away from the private sector that it becomes impossible for private enterprises to maintain the productive capacity upon which our standard of living is dependent. Civilizations have regressed in the past. And it can happen again.

Whether the final phase of the fiscal crisis of the government’s redistributive and entitlement system is reached next year, or in two years, or in five years, the question then will be, what will follow the failure and collapse of the Fiscal Leviathan State? Our society will stand at a crossroads. And when that time comes it is essential that there are enough people who understand, can explain, and are willing to defend the ideas and ideals of individual rights, economic liberty, and the free market system. If not, the future may see a tragic return to a less civilized and much poorer past.

America's Fiscal Folly and Squandering of the "Reserve Fund" by Richard M. Ebeling

2011-07-19T11:03:00.000-07:00

The economic crisis through which the United States and much of the rest of the world are now passing is not another supposed instance of the “failure” of unrestrained capitalism. It is the failure of the government’s own policies. In other words, it is a crisis of the Interventionist State.

The recession has been the inevitable outcome of the prior artificial investment boom and housing bubble, which were caused by the misguided and highly expansionary monetary policy of the Federal Reserve between 2003 and 2008. The money supply was increased by nearly 50 percent during this five-year period, and key interest rates, when adjusted for inflation, were at or below zero. Investment and housing decisions were radically out of balance with available real savings to sustain such long-term financial commitments. Consumers and homeowners were induced by low interest rates and easy mortgage policies to get in way over their heads.

The duration and slowness of the recovery, and especially the sluggish delay in anything approaching “full employment,” is also the consequence of the government’s policies. The Federal Reserve went on another massive monetary expansionist binge that has increased the money supply in the form of additional bank reserves by well over $2 trillion in just a less than three years. Interest rates have, again, been kept at or even below zero when adjusted for inflation, with the affect of continued highly distorted investment and housing sectors.

Fiscal Folly and Burdensome Government

All of this has been exacerbated by the U.S. government’s radically loose fiscal policies. But all that the massive trillion-dollar-a-year government deficits for the last three years have done is to accelerate a disastrous trend in government budget financing that had been growing worse for nearly a decade. When George W. Bush entered the White House in 2001, total accumulated government debt stood at $5 trillion. When Bush left office in January 2009, the government’s debt had more than doubled to over $10 trillion.

Now in the less than the three years of the Obama administration, Uncle Sam’s debt stands at over $14.5 trillion – and growing. This debt practically is equal to the estimated total market value of the country’s Gross Domestic Product (GDP), a level not seen since the cost of fighting the Second World War. The government, right now, is borrowing approximately 40 percent of all the money it is spending. Under current spending projections government debt will total well over $20 trillion by 2016.

For decades, the United States government has been gobbling up more and more of the wealth and resources of American society. If we take a long-term perspective, in 1902, all levels of government in the U.S. only absorbed slightly more than 7 percent of GDP. By 1998, nearly a century later, all government expenditures as a percentage of GDP had grown to 28.1 percent; ten years later, by 2008, government spending had increased to 38.3 percent of GDP. And in 2010, it has approached 43 percent of GDP. Last year, in other words, 43 cents out of every dollar was spent either by local, state or federal governments.

To at least partly fund these growing expenditures, taxation had eaten into more and more of the American taxpayers’ income and wealth. Again, looking back to over a century ago, in 1902 Federal, state and local taxes combined took only 6.7 percent of GDP. Almost a century later in 1998, tax-cost of all levels of government in the U.S. had increased to 29.2 percent of GDP. This has fallen closer to 25 percent of GDP in the last few years due to the recession, with a decline in taxable incomes and corporate profits. But as we saw, this has not stopped the government’s growth in spending by borrowing, instead, all that it has needed.

Government spending on defense, entitlements (Social Security and Medicare), and illusionary and counter-productive “stimulus” programs has been and is pushing the United States into the fiscal crisis that threatens America’s economic future.

In spite of the rhetoric from a wide variety of politicians and media outlets, the problem is not that taxes are too low or that “the rich” are not paying their “fair share.” According to data from the Organization for Economic Cooperation and Development (OECD), among twelve prominent members of the organization (Australia, Canada, France, Germany, Ireland, Italy, Japan, Mexico, Netherlands, Sweden Switzerland, and United States), the U.S. had the third lowest personal income tax rate in 1990 (with only Switzerland and Sweden’s rates being less). By 2010, the U.S. was among the higher personal income tax rate nations, along with France, Italy and the Netherlands. Even Mexico’s personal income tax rate was noticeably less than America’s

Among the same group of OECD members the U.S. corporate income tax rate was far below Germany, Sweden, Japan, Italy, and Ireland in 1990. By 2010, the U.S. corporate income tax rate was exceeded only by Japan’s, with Canadian, French, Irish, Italian, Mexican, Dutch, Swedish, and Swiss corporate income tax rates being anywhere between 10 to 50 percent less than America’s.

“Soaking the Rich” – Still Not Enough

Nor are “the rich” not paying some hypothetical “fair share.” In 1990, those in the top five percent of income earners in the United States earned about 28 percent of total gross personal income in the country. In that same year, those in this income category paid around 42 percent of all personal income taxes collected by the government.

In 2008, that top five percent of income earners earned around 32 percent of total gross personal income in America. But their personal income tax burden had increased to nearly 60 percent of all personal income taxes collected by the government.

Thus, while the “share” of personal income earned in the U.S. in the hands of this top five percent had increased by 14 percent between 1990 and 2008, their tax burden rose during this time period by nearly 43 percent.

Indeed, the top ten percent of all personal income earners paid 70 percent of all personal income taxes collected by the government in 2008, compared to 55 percent in 1990. The top 50 percent of all those earning personal income in 2008 paid 97 percent of all personal income taxes collected that year. And the latest data suggests that since 2009, at least 51 percent of all American households now pay no personal income tax. A minority of income earners now provides all the income taxes paid to partly defray the cost of government in the United States.

U.S. Spending and Debt: More than the Economy Can Bear

Government spending and the accumulated debt is fast approaching more than the American economy can bear. What is collected in both personal and corporate taxes is not enough to cover all that the government spends because government’s promises to an ever-expanding spider’s web of special interest groups vastly exceeds what the country can afford to pay out of currently earned income. If the government attempted to raise that additional 40 cents out of every dollar it presently spends through borrowing by raising taxes it would bring the economy to a screeching halt.

It would soon be discovered that “soaking the rich” even more would barely provide a handful of drops to cover the spending in excess of taxes collected. It would have to be admitted that the only source of additional government revenue to fill the deficit gap would be significantly higher taxes on the broad middle class of income earners, as well as adding to the tax rolls many of those currently paying no taxes.

Income earners would save even less than now; incentives and resource availability for private sector investment in new or existing businesses in the U.S. would be crushed – along with any market- based job creation. The capital for research and technological development would dry up even more in America, and capital that could get away would flee to more business-friendly countries.

Nor can the borrowing binge continue for very much longer. Net interest payments on U.S. government debt presently equals about 1.3 percent of GDP. Under current borrowing projections, with no change in planned government spending, by 2020 interest payments on the government debt would nearly double to 3.2 percent of GDP. Between 2011 and 2020, this would mean that the United States government would have to pay a total of $4.8 trillion in interest payments.

And this ignores the costs of Uncle Sam’s unfunded liabilities for Social Security and Medicare, which, under current law and eligibility rules, is estimated to equal more than $65 trillion over the next seven decades.

For most of the post-World War II period, the U.S. national “economic pie” was able to grow fast enough due to private sector capital investment, technological innovations, and improvements in the skills and education of the American work force that it could offer a rising standard and improved quality of living for virtually everyone in the country.

It was able to do this in spite of the fact that the government’s “slice” of the national economic pie and its cost on the private sector kept growing. Growing government costs in the form of rising taxes; increased expenditures and welfare transfers; nearly annual deficit spending; growing regulations and restrictions on competitive private enterprise; along with bouts of serious price inflation and Federal Reserve-induced business cycles.

Exhausting the “Reserve Fund” of the Market Economy

We seem now to be reaching the end of what Austrian economist, Ludwig von Mises, referred to as the “reserve fund” of the market economy. The rate of growth in government taxing, spending and borrowing, and the intrusiveness of government regulations, controls, and prohibitions on the innovative competitiveness of market enterprises is resulting in a situation in which that government slice of the national economic pie is growing so much that it is seriously slowing down the ability of the economic pie to expand.

The “reserve fund” to which Mises referred is that surplus of productive output that a competitive market is able to annually generate in excess of maintaining existing capital intact and preserving present levels and standards of living. That “reserve fund” provides the resources and financial means to invest in new, more and better capital equipment; to invest in training and improving the skills of the work force, so wages over time can rise due to gains in more valuable “human capital”; it generates the greater output of desired consumer goods and services in terms of quality and variety, as well as quantity. It is the economic “fountain” from which flow the advancements in the material and cultural potentials of our civilization.

However, this “reserve fund” does not just exist “out there” to be taxed and squandered away through the fiscal spigot of government largess. It only exists through the intentional choices and deliberative decisions of members of society to save rather than consume; to invest and bear the risks of an uncertain future with the hope of profits if wise business decisions are made; to make long-run plans and develop new and innovative technologies and ways of organizing enterprises to supply those more and better consumer goods over many tomorrows.

The sluggish growth and stagnant labor market are possible indications that government taxing, spending, borrowing, and regulation are absorbing and weakening so much of the society’s productive resources and wealth that the private sector is not able to expand fast enough to counteract the “drag” of that burdensome government slice of the national economic pie.

Austria’s Past in America’s Future?

Where can this all lead? In 1930, just as the Great Depression was beginning, Ludwig von Mises authored a study of the taxing, spending, and regulatory policies that the governments of his native Austria had been following in the 1920s. He was able to show, based on the historical evidence, that fiscal and regulatory burdens on businessmen, entrepreneurs, and investors – “the rich” – had been so great during that period that not only had capital formation and net investment stopped. The fiscal and regulatory drag had actually resulted in capital consumption. The capital stock could not be maintained because of insufficient reinvestment and the productive capacity of the Austrian economy declined; standards of living decreased for many in society as the burden of government, in fact, resulted in the Austrian economy going into “reverse.” Fiscal mismanagement in interwar Austria, Mises explained, had resulted in the country's governments consuming a portion of the "seed corn," without which the existing standard and quality of life in a society cannot long be maintained.

In 1935, a summary of Mises’ findings was published in English by a former student of his, Fritz Machlup, in an article on, “The Consumption of Capital in Austria” (Review of Economic Statistics, January 15, 1935). Machlup concluded by saying:

Austria was successful in pushing through policies that are popular all over the world. Austria has the most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits [monetary expansion], she increased consumption. After all these achievements she was on the verge of ruin.

It is easy enough to say and want to believe, “It can’t happen here.” But like causes do tend to bring about like effects. And unless the current fiscal folly is brought to an end, America’s “reserve fund” of productive potential may also be squandered away through government taxing, spending and borrowing, leaving us with poorer tomorrows than our more prosperous past and present.

Monetary Policy, the Federal Reserve, and the National Debt Problem by Richard M. Ebeling

2011-05-11T11:17:00.000-07:00

(The following testimony was delivered before the House of Representatives Subcommittee on Domestic Monetary Policy and Technology, chaired by Congressman Ron Paul (R-Texas), on “Monetary Policy and the Debt Ceiling: Examining the Relationship between the Federal Reserve and Government Debt,” in Washington, D.C. on May 11, 2011)

“I place economy among the first and most important virtues, and public debt as the greatest of dangers to be feared . . . To preserve our independence, we must not let our rulers load us with public debt . . . we must make our choice between economy and liberty or confusion and servitude . . . If we run into such debts, we must be taxed in our meat and drink, in our necessities and comforts, in our labor and in our amusements . . . If we can prevent the government from wasting the labor of the people, under the pretense of caring for them, they will be happy.”

Thomas Jefferson

Government Debt and Deficits

The current economic crisis through which the United States is passing has given a heightened awareness to the country’s national debt. After a declining trend in the 1990s, the national debt has dramatically increased from $5.7 trillion in January 2001 to $10.7 trillion at the end of 2008, to over $14.3 trillion through April of 2011. The debt has reached 98 percent of 2010 U.S. Gross Domestic Product.

The approximately $3.6 trillion that has been added to the national debt since the end of 2008 is more than double the market value of all private sector manufacturing in 2009 ($1.56 trillion), more than three times the market value of spending on professional, scientific, and technical services in 2009 ($1.07 trillion), and nearly five times the amount spent on non-durable goods in 2009 ($722 billion). Just the interest paid on the government’s debt over the first six months of the current fiscal (October 2010-April 2011), nearly $245 billion, is equal to more than 40 percent of the total market value of all private sector construction spending in 2009 ($578 billion)[1]

This highlights the social cost of deficit spending, and the resulting addition to the national debt. Every dollar borrowed by the United States government, and the real resources that dollar represents in the market place, is a dollar of real resources not available for use in private sector investment, capital formation, consumer spending, and therefore increases and improvements in the quality and standard of living of the American people.

In this sense, the government’s deficit spending that cumulatively has been increasing the national debt has made the United States that much poorer than it otherwise could have and would have been, if the dollar value of these real resources had not been siphoned off and out of use in the productive private sectors of the American economy.

What has made this less visible and less obvious to the American citizenry is precisely because it has been financed through government borrowing rather than government taxation. Deficit spending easily creates the illusion that something can be had for nothing. The government borrows “today” and can provide “benefits” to various groups in the society in the present with the appearance of no immediate “cost” or “burden” upon the citizenry.

Yet, whether acquired by taxing or borrowing, the resulting total government expenditures represent the real resources and the private sector consumption or investment spending those resources could have financed that must be foregone. There are no “free lunches,” as it has often been pointed out, and that applies to both what government borrows as much as what it more directly taxes to cover its outlays.

What makes deficit spending an attractive “path of least resistance” in the political process is precisely the fact that it enables deferring the decision of telling voter constituents by how much taxes would otherwise have to be increased, and upon whom they would fall, in the “here and now” to generate the additional revenue to pay for the spending that is financed through borrowing.[2]

But as the recent fiscal problems in a number of member nations of the European Union have highlighted, eventually there are limits to how far a government can try to hide or defer the real costs of all that it is providing or promising through its total expenditures to various voter constituent groups. Standard & Poor’s recent decision to downgrade the U.S. government’s prospective credit rating to “negative” shows clearly that what is happening in parts of Europe can happen here.

And given current projections by the Congressional Budget Office, the deficits are projected to continue indefinitely into future years and decade, with the cumulative national debt nearly doubling from its present level.[3] In addition, whether covered by taxes or deficit financing, these debt estimates do not include the federal government’s unfunded liabilities for Social Security and Medicare through most of the 21^st century. In 2009, the Social Security and Medicare trust funds were estimated to have legal commitments under existing law for expenditures equal to at least $43 trillion over the next seventy-five years.[4] Others have projected this unfunded liability of the United States government to be much higher – possibly over $100 trillion.[5]

The Federal Reserve and the Economic Crisis

The responsibility for a good part of the current economic crisis must be put at the doorstep of America’s central bank, the Federal Reserve. By some measures of the money supply, the monetary aggregates (MZM or M-2) grew by fifty percent or more between 2003 and 2007. This massive flooding of the financial markets with huge amounts of liquidity provided the funds that fed the mortgage, investment, and consumer debt bubbles in the first decade of this century. Interest rates were pushed far below any historical levels.

For a good part of those five years, according to the St. Louis Federal Reserve Bank, the federal funds rate (the rate of interest at which banks lend to each other), when adjusted for inflation – the “real rate” – was either negative or well below two percent. In other words, the Federal Reserve supplied so much money to the banking sector that banks were lending money to each other for free for a good part of this time. It is no wonder that related market interest rates were also pushed way down during this period.[6]

Market interest rates are supposed to tell the truth. Like any other price on the market, interest rates are suppose to balance the decision of income earners to save a portion of their income with the desire of others to borrow that savings for various investment and other purposes. In addition, the rates of interest, through the present value factor, are meant to limit investment time horizons undertaken within the available savings to successfully bring the investments to completion and sustainability in the longer-term.

Due to the Fed’s policy, interest rates were not allowed to do their “job” in the market place. Indeed, Fed policy made interest rates tell “lies.” The Federal Reserve’s “easy money” policy made it appear, in terms of the cost of borrowing, that there was more than enough real resources in the economy for spending and borrowing to meet everyone’s consumer, investment and government deficit needs far in excess of the economy’s actual productive capacity.[7]

The housing bubble was indicative of this. To attract people to take out loans, banks not only lowered interest rates (and therefore the cost of borrowing), they also lowered their standards for credit worthiness. To get the money, somehow, out the door, financial institutions found “creative” ways to bundle together mortgage loans into tradable packages that they could then pass on to other investors. It seemed to minimize the risk from issuing all those sub-prime home loans, which we now see were really the housing market’s version of high-risk junk bonds. The fears were soothed by the fact that housing prices kept climbing as home buyers pushed them higher and higher with all of that newly created Federal Reserve money.

At the same time, government-created home-insurance agencies like Fannie Mae and Freddie Mac were guaranteeing a growing number of these wobbly mortgages, with the assurance that the “full faith and credit” of Uncle Same stood behind them. By the time the Federal government formally had to take over complete control of Fannie and Freddie in 2008, they were holding the guarantees for half of the $10 trillion American housing market.[8]

Low interest rates and reduced credit standards were also feeding a huge consumer-spending boom that resulted in a 25 percent increase in consumer debt between 2003 and 2008, from $2 trillion to over $2.5 trillion. With interest rates so low, there was little incentive to save for tomorrow and big incentives to borrow and consume today. But, according to the U.S. Census Bureau, during this five-year period average real income only increased by at the most 2 percent. Peoples’ debt burdens, therefore, rose dramatically.[9]

The easy money and government-guaranteed house of cards all started to come tumbling down in the second half of 2008. The Federal Reserve’s response was to open wide the monetary spigots even more than before the bubbles burst.

The Federal Reserve has dramatically increased its balance sheet by expanding its holding of U.S. government securities and private-sector mortgage-back securities to the tune of around $2.3 trillion. Traditional Open Market Operations plus its aggressive “quantitative easing” policy have increased bank reserves from $94.1 billion in 2007 to $1.3 trillion by April 2011, for a near fourteen-fold increase, and the monetary basis in general has expanded from $850.5 billion in 2007 to $2,242.9 trillion in April of 2011, for a 260 percent increase. The monetary aggregates, MZM and M-2, respectively, have grown by 28 percent and 21.6 percent over this same period.[10]

In the name of supposedly preventing a possible price deflation in the aftermath of the economic boom, Fed policy has delayed and retarded the economy from effectively readjusting and re-coordinating the sectoral imbalances and distortions that had been generated during the bubble years.[11] Once again interest rates have been kept artificially low. In real terms, the federal funds rate and the 1-year Treasury yield have been in the negative range since the last quarter of 2009, and at the current time is estimated to be below minus two percent.

This has prevented interest rates from informing market transactors what the real savings conditions are in the economy. So, once again, the availability of savings and the real cost of borrowing is difficult to discern so as to make reasonable and rational investment decisions, and not to foster a new wave of misdirected and unsustainable private sector investment and financial decisions.

The housing market has not been allowed to fully adjust, either. With so much of the mortgage-backed securities being held off the market in the portfolio of the Federal Reserve, there is little way to determine any real market-based pricing to determine their worth or their total availability so the housing market can finally bottom out with clearer information of supply and demand conditions for a sustainable recovery.

This misguided Fed policy has been, in my view, a primary factor behind the slow and sluggish recovery of the United States economy out of the current recession.

Federal Reserve Policy and Monetizing the Debt

Many times in history, governments have used their power over the monetary printing press to create the funds needed to cover their expenses in excess of taxes collected. Sometimes this has lead to social and economic catastrophes.[12]

Monetizing the debt refers to the creation of new money to finance all or a portion of the government’s borrowing. Since the early 2008 to the present, Federal Reserve holdings of U.S. Treasuries have increased by about 240 percent, from $591 billion in March 2008 to $1.4 trillion in early May 2011, or a nearly $1 trillion increase. In the face of an additional $3.6 trillion in accumulated debt during the last three fiscal years, it might seem that Fed policy has “monetized” less than one-third of government borrowing during this period.

However, the Fed’s purchase of mortgage-backed securities, no less than its purchase of U.S. Treasuries, potentially increases the amount of reserves in the banking system available for lending. And since 2008, the Federal Reserve had bought an amount of mortgaged-backed securities that it prices on its balance sheet as being equal about $928 billion.

The $1.4 trillion increase in the monetary base since the end of 2007, from $850.5 billion to $2.2 trillion, has increased MZM measurement of the money supply by $2,161.1, or an additional $769 billion dollars in the economy above the increase in the monetary base. This is an amount that is 83 percent of the dollar value of the $927 billions in mortgage-backed securities.

Due to the “money multiplier” effect – that under fractional reserves, total new bank loans are potentially a multiple of the additional reserves injected into the banking system – it is not necessary for the Fed to purchase, dollar-for-dollar, every additional dollar of government borrowing to generate a total increase in the money supply that may be equal to the government’s deficit.

Thus, it can be argued that Fed monetary policy has succeeded, in fact, in generating an increase in the amount of money in the banking system that is equal to two-thirds of the government’s $3.6 trillion of new accumulated debt.

That the money multiplier effect has not been as great as it might have been, so far, is because the Federal Reserve has been paying interest to member banks to not lend their excess reserves. This sluggishness in potential lending has also been affected by the general “regime uncertainty” that continues to pervade the economy. This uncertainty concerns the future direction of government monetary and fiscal policy. In an economic climate in which it difficult to anticipate the future tax structure, the likely magnitude of future government borrowing, and the impact of new government programs, hesitancy exists on the part of both borrowers and lenders to take on new commitments.

But the monetary expansion has most certainly has been the factor behind the worsening problem of rising prices in the U.S. economy and the significant fall in the value of the dollar on the foreign exchange markets.

The National Debt and Monetary Policy

It is hard for Americans to think of their own country experiencing the same type of fiscal crisis that has periodically occurred in “third world” countries. That type of government financial mismanagement is supposed to only happen in what used to be called “banana republics.”

But the fact is, the U.S. is following a course of fiscal irresponsibility that may lead to highly undesirable consequences. The bottom line truth is that over the decades the government – under both Republican and Democratic leadership – has promised the American people, through a wide range of redistributive and transfer programs and other on-going budgetary commitments, more than the U.S. economy can successfully deliver without seriously damaging the country’s capacity to produce and grow through the rest of this century.

To try to continue to borrow our way out of this dilemma would be just more of the same on the road to ruin. The real resources to pay for all the governmental largess that has been promised would have to come out of either significantly higher taxes or crowding out more and more private sector access to investment funds to cover continuing budget deficits. Whether from domestic or foreign lenders, the cost of borrowing will eventually and inescapably rise. There is only so much savings in the world to fund private investment and government borrowing, particularly in a world in which developing countries are intensely trying to catch up with the industrialized nations.

Interest rates on government borrowing will rise, both because of the scarcity of the savings to go around and lenders’ concerns about America’s ability to tax enough in the future to pay back what has been borrowed. Default risk premiums need not only apply to countries like Greece.

Reliance on the Federal Reserve to “print our way” out of the dilemma through more monetary expansion is not and cannot be an answer, either. Printing paper money or creating it on computer screens at the Federal Reserve does not produce real resources. It does not increase the supply of labor or capital – the machines, tools, and equipment – out of which desired goods and services can be manufactured and provided. That only comes from work, savings and investment. Not from more green pieces of paper with presidents’ faces on them.

However, what inflation can do is:

· Accelerate the devaluation of the dollar on the foreign exchange markets, and thereby disrupting trading patterns and investment flows between the U.S. and the rest of the world;

· Reduce the value, or purchasing power, of every dollar in people’s pockets throughout the economy as prices start to rise higher and higher;

· Undermine the effectiveness of the price system to assist people as consumers and producers in making rational market decisions, due to the uneven manner in which inflation impacts of some prices first and effects others only later;

· Potentially slow down capital formation or even generate capital consumption, as inflation’s uneven effects on prices makes it difficult to calculate profit from loss;

· Distort interest rates in financial markets, creating an imbalance between savings and investment that sets in motion the boom and bust of the business cycle;

· Create incentives for people to waste their time and resources trying to find ways to hedge against inflation, rather than devote their efforts in more productive ways that improve standards of living over time;

· Bring about social tensions as people look for scapegoats to blame for the disruptive and damaging effects of inflation, rather than see its source in Federal Reserve monetary policy;

· Run the risk of political pressures to introduce distorting price and wage controls or foreign exchange regulations to fight the symptom of rising prices, rather than the source of the problem – monetary expansion.

What is To Be Done?

The bottom line is, government is too big. It spends too much, taxes too heavily, and borrows too much. For a long time, the country has been trending more and more in the direction of increasing political paternalism. Some people argue, when it is proposed to reduce the size and scope of government in our society, that this is breaking some supposed “social contract” between government and “the people.”

The only workable “social contract” for a free society is the one outlined by the American Founding Fathers in the Declaration of Independence and formalized in the Constitution of the United States. This is a social contract that recognizes that all men are created equal, with governmental privileges and favors for none, and which expects government to respect and secure each individual’s right to his life, liberty, and honestly acquired property.

The reform agenda for deficit and debt reduction, therefore, must start from that premise and have as its target a radical “downsizing” of government. That policy should plan to reduce government spending across the board in every line item of the federal budget by 10 to 15 percent each year until government has been reduced in size and scope to a level and a degree that resembles, once again, the Founding Father’s conception of a free and limited government.[13]

A first step in this fiscal reform is to not increase the national debt limit. The government should begin, now, living within its means – that is, the taxes currently collected by the Treasury. In spite of some of the rhetoric in the media, the U.S. need not run the risk of defaulting or losing its international financial credit rating. Any and all interest payments or maturing debt can be paid for out of tax receipts. What will have to be reduced are other expenditures of the government.

But the required reductions and cuts in various existing programs should be considered as the necessary “wake-up call” for everyone in America that we have been living far beyond our means. And as we begin living within those means, priorities will have to be made and trade-offs will have to be accepted as part of the transition to a smaller and more constitutionally limited government.

In addition, the power of monetary discretion must be taken out of the hands of the Federal Reserve. The fact is, central banking is a form of monetary central planning under which it is left in the hands of the members of the Board of Governors of the Federal Reserve to “plan” the quantity of money in the economy, influence the value or purchasing power of the monetary unit, and manipulate interest rates in the loan markets.

The monetary central planners who run the Federal Reserve have no more or greater knowledge, wisdom or ability that those central planners in the old Soviet Union. The periodic recurrence of the boom and bust of the business cycle demonstrates that there is no way for them to get it right – in spite of them saying, again and again, that “next time” they will get it right.

It is what the Nobel Prize-winning, Austrian economist, Friedrich A. Hayek, once called a highly misplaced “pretense of knowledge.” That is why in a wide agenda for reform, the goal should be to move towards a market-based monetary system, the first step in such an institutional change being a commodity-backed monetary order such as a gold standard.[14]

And in the longer-run serious consideration must be given the possibilities of a monetary system completely privatized and competitive, without government control, management, or supervision.[15]

The budgetary and fiscal crisis right now has made many political issues far clearer in people’s minds. The debt dilemma is a challenge and an opportunity to set America on a freer and potentially more prosperous track, if the reality of the situation is looked at foursquare in the eye.

Otherwise, dangerous, destabilizing, and damaging monetary and fiscal times may be ahead.

End Notes

[1] The 2011 Statistical Abstract: The National Data Book (Washington, D.C., U.S. Census Bureau, 2011), Table 669.

http://www.census.gov.compendia/statab/2011/tables/11s0669.pdf.

[2] Richard M. Ebeling, Why Government Grow: The Modern Democratic Dilemma,” AIER Research Reports, Vol. LXXV, No. 14 (Great Barrington, MA: American Institute for Economic Research, August 4-18, 2008); James M. Buchanan and Richard E. Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes (New York: Academic Press, 1977); and earlier, Henry Fawcett and Millicent Garrett Fawcett, Essays and Lectures on Social and Political Subjects (Honolulu, Hawaii: University Press of the Pacific, [1872] 2004), Ch. 6: “National Debts and National Prosperity,” pp. 125-153.

[3] The Budget and Economic Outlook: Fiscal Years 2011 to 2021 (Washington, D.C.: Congressional Budget Office, January 27, 2011)

[4] Richard M. Ebeling, “Brother, Can You Spare $43 Trillion? America’s Unfunded Liabilities,” AIER Research Reports, Vol. LXXVI, No. 3 (Great Barrington, MA: American Institute for Economic Research, March 2, 2009), pp. 1-3.

[5] Michael D. Tanner, "The Coming Entitlement Tsunami." April 6, 2010. http://www.cato.org/pub_display.php?pub_id=11666 (accessed May 5, 2011).

[6] For more details, see, Richard M. Ebeling, “The Financial Bubble was Created by Central Bank Policy,” American Institute for Economic Research, November 5, 2008, http://www.aier.org/research/briefs/667-the-financial-bubble-was-created-by-central-bank-policy (accessed on May 5, 2011).

[7] See, Richard M. Ebeling, “Market Interest Rates Need to Tell the Truth, or Why Federal Reserve Policy Tells Lies,” in Richard M. Ebeling, Timothy G. Nash, and Keith A. Pretty, eds., In Defense of Capitalism (Midland, MI: Northwood University Press, 2010) pp. 57-60; http://defenseofcapitalism.blogspot.com/2009/12/market-interest-rates-need-to-tell.html

[8] Thomas Sowell, The Housing Boom and Bust (New York: Basic Books, 2010); Johan Norberg, Financial Fiasco (Washington, D.C.: Cato Institute, 2009).

[9] Richard M. Ebeling, “Is Consumer Credit the Next Bomb in the Economic Crisis?” American Institute for Economic Research, October 22, 2008, http://www.aier.org/research/briefs/599-consumer-credit-the-next-qbombq-in-the-economic-crisis (accessed May 5, 2011).

[10] Monetary Trends (St. Louis, MO: St. Louis Federal Reserve, May 2011)

[11] See, Richard M. Ebeling, “The Hubris of Central Bankers and the Ghosts of Deflation Past” July 5, 2010, http://defenseofcapitalism.blogspot.com/2010/07/hubris-of-central-bankers-and-ghosts-of.html (accessed May 5, 2011)

[12] See, Richard M. Ebeling, “The Lasting Legacies of World War I: Big Government, Paper Money, and Inflation,” Economic Education Bulletin, Vol. XLVIII, No. 11 (Great Barrington, MA: American Institute for Economic Research, November 2008), for a detailed example of the German and Austrian instances of monetary-financed inflationary destruction following the First World War.

[13] See, Richard M. Ebeling, “The Cost of the Federal Government in a Freer America,” The Freeman: Ideas on Liberty (March 2007), pp. 2-3; http://www.thefreemanonline.org/from-the-president/the-cost-of-the-federal-government-in-a-freer-america/ (accessed May 5, 2011).

[14] See, Richard M. Ebeling, “The Gold Standard and Monetary Freedom,” March 30, 2011, http://defenseofcapitalism.blogspot.com/2011/03/gold-standard-and-monetary-freedom-by.html

[15] See, Richard M. Ebeling, “Real Banking Reform? End the Federal Reserve,” January 22, 2010, http://defenseofcapitalism.blogspot.com/2010/01/real-banking-reform-end-federal-reserve.html

The Gold Standard and Monetary Freedom by Richard M. Ebeling

2011-03-30T13:38:00.000-07:00

(This talk was delivered at a debate on whether “American Should Adopt the Gold Standard,” sponsored by the Atlas Economic Research Foundation and the Forum for Citizenship and Enterprise, held at Northwood University on March 29, 2011)

The severity of the current economic crisis has been serving as a catalyst for reconsideration of some fundamental questions about economic policy. This has included the size and role of government in society, the national debt burden and the unsustainability of various entitlement programs, and the relevancy of fiscal “stimulus” for economic recovery.

It has also thrown up into sharp relief some crucial flaws in the nature and workings of the prevailing monetary system. The central question, I would argue, is whether or not we should continue to leave monetary and banking policy in the discretionary hands of central banks and the monetary central planners who manage them.

Central Banking as Monetary Central Planning

And make no mistake about it. Central banking is monetary central planning. The United States and, indeed, virtually the entire world operate under a regime of monetary socialism. Historically, socialism has meant an economic system in which the government owned, managed, and planned the use of the factors of production.

Modern central banking is a system in which the government, either directly or through some appointed agency such as the Federal Reserve in the United States, has monopoly ownership and control of the medium of exchange. Through this control the government and its agency has predominant influence over the value, or purchasing power, of the monetary unit, and can significantly influence a variety of market relationships. These include the rates of interest as which borrowing and lending goes on in the banking and financial sectors of the economy, and therefore the patterns of savings and investment in the market.

If there is one lesson to be learned from the history of the last one hundred years – during which the world and the United States moved off the gold standard and onto a government-managed fiat, or paper, money system – is the fundamental disaster of placing control of the money supply in the hands of governments.

Government Abuse of Money and the Benefits of the Gold Standard

If is worth recalling that money did not originate in the laws or decrees of kings and princes. Money, as the most widely used and generally accepted medium of exchange emerged out of the market transactions of a growing number of buyers and sellers in an expanding arena of trade. Commodities such as gold and silver were selected over generations of market participants as the monies of free choice, due to their useful characteristics to better facilitate the exchange of goods in the market place.

And for almost all of recorded history, governments have attempted to gain control of the production and manipulation of money to serve their seemingly insatiable appetite to extract more and more of the wealth produced by the ordinary members of society. Ancient rulers would clip and debase the gold and silver coins of their subjects. More modern rulers – whether despotically self-appointed through force or democratically elected by voting majorities – have taken advantage of the monetary printing press to churn out paper money to fund their expenditures and redistributive largess in excess of the taxes they impose on the citizenry. Today the process has become even easier through the mere click of a “mouse” on a computer screen, which in the blink of an eye can create tens of billions of dollars out of thin air.

Thus, monetary debasement and the price inflation that normally accompanies it have served as a method for imposing a “hidden taxation” on the wealth of the citizenry. As John Maynard Keynes insightfully observed in 1919:

By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.

It is the corrosive, distortive, and destructive effects from monetary manipulation by governments that led virtually all of the leading economists of the nineteenth century to endorse the “anchoring” of the monetary system in a commodity such as gold, to prevent governments from using their powers over the creation of paper monies to cover their budgetary extravagance. John Stuart Mill’s words from the middle of the nineteenth century are worth recalling:

No doctrine in political economy rests on more obvious grounds than the mischief of a paper currency not maintained at the same value with a metallic, either by convertibility, or by some principle of limitation equivalent to it . . . All variations in the value of the circulating medium are mischievous; they disturb existing contracts and expectations, and the liability to such changes renders every pecuniary engagement of long date entirely precarious . . .

Great as this evil would be if it [the supply of money] depended on [the] accident [of gold production], it is still greater when placed at the arbitrary disposal of an individual or a body of individuals; who may have any kind or degree of interest to be served by an artificial fluctuation in fortunes; and who have at any rate a strong interest in issuing as much [inconvertible paper money] as possible, each issue being itself a source of profit. Not to add, that the issuers have, and in the case of government paper, always have, a direct interest in lowering the value of the currency because it is the medium in which their own debts are computed . . . Such power, in whomsoever vested, is an intolerable evil.

Under a gold standard, it is gold that is the actual money. Paper currency and various forms of checking and other deposit accounts that may be used in market transactions in exchange for goods and services are money substitutes, representing a fixed quantity of the gold-money on deposit with a banking or other financial institution that are redeemable on demand.

Any net increases in the quantity of currency and checking and related deposits are dependent upon increases in the quantity of gold that depositors with banking and financial institutions add to their individual accounts. And any withdrawal of gold from their accounts through redemption requires that the quantity of currency notes and checking and related accounts in circulation be reduced by the same amount. Under a gold standard, a central bank is relieved of all authority and power to arbitrarily “manage” the monetary order.

Many critics of the gold standard consider this a rigid and inflexible “rule” about how the monetary system and the quantity of money in the society is to be determined and constrained. Yet, the advocates of the gold standard have long argued that this relative inflexibility is essential to discipline governments within the confines of a “hard budget.”

Without the “escape hatch” of the monetary printing press, governments either must tax the citizenry or borrow a part of the savings of the private sector to cover its expenditures. Those proposing government spending must either justify it by explaining where the tax dollars will come from and upon whom the taxes will fall; or make the case for borrowing a part of the savings of the society to cover those expenditures – but at market rates of interest that tell the truth about what it will cost to attract lenders to lend that sum to the government rather than to private sector borrowers, and therefore, at the social cost of private sector investment and future growth that will have to be foregone.

In other words, it prevents the government from “monetizing the debt” to cover all or part of its budget deficits. The borrowed sums cannot be created out of thin air through central bank monetary expansion. The government, under a gold standard, can no longer create the illusion that something can be had for nothing.

As Austrian economist, Ludwig von Mises, expressed it:

Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money’s purchasing power independent of the ambitions and machinations of governments, of dictators, and political parties, and pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called “sound money.”

Milton Friedman’s “Second Thoughts” About the Benefits of Paper Money

It must be admitted that even some advocates of economic freedom and limited government have been advocates of paper money. The most notable one in the second half of the twentieth century was Milton Friedman. Over most of his professional career he argued that maintaining a gold standard was a waste of society’s resources. Why squander the men, material and machinery digging gold out of the ground to then simply store it away in the vaults of banks? It is better to use those scarce resources to produce more of the ordinary goods and services that can enhance the standard and quality of people’s lives. Control the potential arbitrary recklessness of central banks, Friedman proposed, by setting up a monetary “rule” that says: Increase the paper money supply by some small annual percent, with no discretion left in the hands of the monetary managers.

But it less well known is that in the years after Friedman won the Nobel Prize in Economics in 1976, he had second thoughts about this monetary prescription. In a 1986 article on, “The Resource Costs of Irredeemable Paper Money,” he argued that when looking over the monetary mismanagement and mischief caused by governments and central banks during the twentieth century, it was “crystal clear” that the costs of mining, minting and storing gold as the basis of a monetary system would have been far less than the disruptive and destabilizing costs imposed on society due to paper money inflations and the booms and busts of the business cycle brought about by central bank manipulations of money and interest rates.

In his 1985 presidential address before the Western Economic Association on “Economists and Public Policy,” he said that Public Choice theory had persuaded him that it would never be in the long-run self-interest of governments or central bankers to manage the monetary system according to some hypothetical “public interest.” Those in government or holding the levers of the monetary printing press will always be susceptible to the temptations and pressures of short-run political gains that monetary expansion can fund. He admitted that it had been a “waste of time” on his part to try to get governments and central banks to follow his idea for a monetary rule.

And in another article in 1986 (co-authored with Anna Schwartz) on, “Has Government Any Role in Money?” Friedman said that while he was not ready at that time to advocate a return to the gold standard, he did conclude that “that leaving monetary and banking arrangements to the market would have produced a more satisfactory outcome than was actually achieved through government involvement."

Monetary Mismanagement versus Markets and Gold

But it is not only the political dangers arising from government mismanagement of paper money that justifies the establishment of a gold standard. It is also and equally the fact that monetary central planning is unworkable as a means to maintain economy-wide stability, full employment, and growth.

Especially since the 1930s, many economists and policy makers influenced by Keynes and the Keynesian Revolution have believed markets are potentially unstable and susceptible to wide and prolonged fluctuations in employment and output that only can be prevented or reduced in severity through “activist” monetary and fiscal policy.

But in reality, the causation runs the in the opposite direction. It is central bank manipulations of money, credit and interest rates that have generated the instability and periodic swings in economy-wide production and employment.

The fact is financial institutions and interest rates have important work to do in the market economy. Banks and other financial intermediaries are supposed to serve as the “middlemen” who bring together those who wish to save portions of their earned income with others who desire to borrow and invest that savings in profit-oriented productive ways that generate capital formation, technological improvements, and cost-efficient production of new, better and more goods and services to satisfy consumer demands in the future.

Market-determined interest rates are meant to bring those savings and investment plans into coordination with each other, so the amount of invested capital and the time-shape of the investment horizons undertaken are consistent with the available real savings to support them to maintainable completion.

Monetary expansion by central banks creates the illusion that there is more actual investable savings in the economy than really exists. And the false interest rate signals generated in the banking system by the monetary expansion not only misinforms potential investment borrowers about the amount of real savings available for capital projects, but creates an incorrect basis for determining the present value calculations that influence the time horizons for the investments undertaken.

It is these false monetary and interest rate signals that induces the misdirection of resources, the mal-investment of capital, and the incorrect allocation of labor among employments in the economy that sets the stage for an inevitable and inescapable “correction” and readjustment that represents the recession stage of the business cycle that follows the collapse of the artificial boom.

The monetary central planners can never be more successful in determining a “optimal” quantity of money or the “right” interest rates to assure savings-investment coordination than all other socialist planners were when they tried to centrally plan agricultural production or investment output for an entire society. All such attempts at monetary planning and management by central bankers are instances of what Friedrich A. Hayek called in his Nobel Lecture a, “pretense of knowledge,” that they can know better and do better than the outcomes generated by competitive interactions of the market participants, themselves. And as Adam Smith warned, nowhere is such regulatory power “so dangerous as in the hands of a man who had the folly and presumption enough to fancy himself fit to exercise it.”

There is no way of knowing the optimal amount of money in the economy other than allowing market participants in the competitive exchange process to decide what they want to use as money – which has historically been a commodity such as gold or silver. And there is no way of knowing what interest rates should be other than allowing the market forces of supply and demand for lending and borrowing to determine those interest rates through the process of private sector financial intermediation, without government or central bank interference or manipulation.

The Return to the Gold Standard as a Monetary Constitution

Finally, how do we return to a functioning and workable gold standard? Under the current government and central bank-controlled monetary system the simplest method might be for the monetary authority to stop creating and printing money and credit. Over a short period of time a fairly reasonable estimate could be made about the actual quantity of a nation’s currency and checking and related deposits that are in existence and in circulation. A new legal redemption ratio could be established by dividing the estimated total quantity of all forms of these money-substitutes into the quantity of gold possessed by the government and the central bank.

A country following this procedure would then, once again, be on the gold standard. Its long-run maintainability, of course, would require the government and the central bank to follow those “rules of the game” that no increase in the quantity of money-substitutes may be created and brought into circulation unless there have been net deposits of gold in people’s accounts with banking and other financial institutions.

Can we trust governments and central banks to abide by these rules of the game? The temptations to violate them will still remain strong in a political environment dominated by ideologies of wealth redistribution, special interest favoritism, and numerous “entitlement” demands.

It is why the real long-run goal of monetary reform should be the denationalization of money. That is, the separation of money from the state by ending of central banking, altogether. In its place would emerge private, competitive free banking – a truly market-based money and banking system.

But nevertheless, in the meantime, a gold standard can serve as a form of a “monetary constitution” setting formal limits and imposing restraints on those in government who would want to abuse the monetary printing press, similar to the way political constitutions, however imperfectly, are meant to limit the abuses of power-lusting monarchs and the plundering majorities in functioning democracies.

If it fails, it should not be for want of trying. And a gold standard can be one of the positive institutional reforms in the attempt and on the way to a fully free market monetary system.

Practicing the Principles of Non-Intervention -- At Home and Abroad by Richard M. Ebeling

2011-03-14T18:25:00.000-07:00

Events in other parts of the world, such as the civil war in Libya, and the revolutions and mass public demonstrations against various tyrannical and autocratic governments in several countries in the Middle East, have aroused a deep sympathy among the American people.

Ordinary people, long politically oppressed by despotic rulers who have denied them individual freedom and plundered their often-meager incomes and wealth, have risen up against their cruel governments. Many Americans wonder what should or could the United States do? Some of our fellow citizens even call for political and military intervention to assist those who seem to be yearning to breathe free in their own lands.

What should the freedom of freedom, therefore, view as the best course of action in these circumstances?

Personal Freedom and the Principle of Non-Intervention at Home

As an advocate of individual liberty, I consider all forms of government interference in people's lives, other than those minimally essential for the protection of life, liberty, and property, to be morally wrong, politically harmful, and economically counterproductive. As part of that political philosophy, I believe that the government of the United States should no more intervene into the internal affairs of other countries than in the personal, peaceful, and voluntary affairs of its own citizens at home.

Many of my fellow countrymen follow courses of action in their own lives that I consider stupid, immoral, and harmful. But I also feel strongly that it would be morally wrong and pragmatically counterproductive to force my fellow countrymen to follow the courses of action I consider to be wiser and better for them.

Either every man must be respected and protected as a free agent in his own affairs, or we run the risk of degenerating into a society of coercing meddlers, each with his own banner of "right living," each trying to use the political power of the state to make our fellow citizens bend to our vision of the good, proper, and virtuous life. Society becomes a war of all-against-all, as individuals sharing similar conceptions of that "right living" form coalitions for strength in the struggle for votes, influence, and control of the state's authority to use force.

Personal Choice, Not Political Coercion, Makes for Moral People and a Good Society

But men being what they are, even when they begin as pure-at-heart "true believers," only wishing to use the state for the good of others (as they conceive that good), soon are taken over by the "dark side of the force." The welding of power over others becomes an aphrodisiac, a "high" stronger than any narcotic; and, besides, having political power also has its use for material gain, both for oneself and for those with whom one is in coalitions for power. Few have been able to resist these temptations over the ages. Even when the first generation of coercing meddlers coming to power remained fairly uncorrupted by the opportunities for personal gain, their heirs in acquiring the reins of political authority have tended to have fewer inhibitions for resisting these temptations.

Furthermore, coercion can never, ultimately, be a means for making men good or virtuous. Force can control men's behavior — it can prohibit them from doing certain things and command them to do others — under the threat and use of various physical or psychological punishments. But this does not make those actions moral or virtuous. An act is moral or virtuous only by virtue of it being the free choice of a human being who, in principle, could have done the opposite. Morality and virtue are in the minds and hearts of men, not in the control of their external conduct.

Imposed conformity does not result in moral conduct; it is the denial of morality. By narrowing or abrogating the field in which a man in his actions must make up his own mind as to what is "the right thing to do," the state removes the necessity to more conscientiously think and decide about what he should do as a self-responsible human being.

By denying him the freedom to choose in various corners of his life, the state frees the individual from being more fully responsible for his actions. When men are freed from responsibility for their actions, the conditions are created for the growth of a climate of amorality: "It's not my responsibility, I paid my taxes" or "I'm not accountable, I just obeyed orders."

In the free society, the only appropriate means for trying to change other people's conduct is through reason, persuasion, and example. The coerced man often harbors resentment and anger in his heart, both against the coercer and at himself because he had not the courage to resist being made to do what he did not want. The free man, when he changes the things he does due to the persuasion or example of others, feels gratitude and joy for having been shown a better purpose in life or how to more successfully pursue his ends.

When other men freely choose to change their behavior due to our arguments or example, it is more likely, therefore, to represent an actual change of heart or of mind. And that is how the world is, ultimately, really changed — one person at a time, for good or evil.

The Dangers and Unintended Consequences from Foreign Intervention

Men and governments in other countries have done and are doing many evil things. They have killed, brutalized, tortured, and destroyed; and especially in the century that has recently ended, it was done on a scale that goes beyond our mind's ability to fully comprehend. They have shocked our conscience and made us doubt the existence of any humanity in the human being. In a world of such conduct by others in other lands, it has been natural that many in America have wanted to "do something" — to come to the aid of those victimized by evil and to stop evil from doing it anymore.

But similar to the pattern too often at home, people disturbed by the immoral acts of others abroad have turned to the state to right the wrongs occurring in foreign lands. They have wanted their government to intervene in the affairs of people in other countries, to oppose bad governments and evil men and, in their place, foster good government and support better men.

Rarely has this been successful in achieving the end desired; and even when the result in the short-run has seemed better than what had been before, the intervention has often had longer-run, usually unintended, consequences that have made new outcomes often similar to, and sometimes worse than, the ones the intervention was meant to cure.

Even when people oppressed by a tyrant have been liberated from their torment, the people freed frequently turn against their liberators. It begins to play on their pride that they were not able to free themselves. Also, the liberating government is often not satisfied with merely eliminating the evil government; to justify the sacrifice made by its own people, in lives and money, to free those who had been living under foreign oppression, the liberating government tries to establish a "new order" of good government and honest politics in that foreign land.

But, alas, good government and honest politics often have different meanings for the people in that foreign country. Customs, traditions, and other societal practices call for political structures and methods of authority frequently quite different from what the liberating government's "advisors" view as the good or the better. Irritated and angry at the appearance of being told by the liberators how to live their lives and run their affairs in their own country, the people in that foreign land soon start wishing that the meddling Yankee (or the Limey Brit, or the French Frog, or the Russian Bear) would go home.

And too often, the emotional reaction of being dictated to by the foreign power (who only yesterday was hailed as the great liberator), plays into the hands of the demagogue and would-be new tyrant hoping to ride to power on the wave of anti-foreign sentiment. The military forces and civilian advisers of the liberating government soon find themselves the new targeted enemy of the very people whom they wanted to free from the evils and injustices of the past.

At home, the interventionist government often finds itself — sooner or later — governing a "house divided" over the justification for the intervention and its continuance. Sometimes there is no consensus from the start that the foreign intervention is justified. People in the society, to the extent they take any interest in international events, take different sides concerning who is in the right and who has been wronged in that foreign country — who is the oppressor and who needs to be freed. If the foreign intervention is undertaken, then from the start, there will be many in the country who oppose and resent their wealth being taxed and the lives of their loved ones in the military being put in harm's way to fight for "the wrong side." If the foreign intervention has broad support among many in the society, then dissent is muted at first.

But if the intervention is not short and clearly successful, then second thoughts begin to emerge among a growing number of people: Was the intervention the right thing to do from the start? Are we becoming the enemy of the very people we wished to befriend? Are we making the situation in that country worse than it was before? Is it worth the sacrifice in men and money — ours and theirs — to continue the intervention?

Even if the foreign intervention seems to have been successful — with the goals appearing to have been achieved quickly, with minimal sacrifice in lives and money, and with "our boys" already having come home — the intervening government often leaves behind a situation in that foreign country that soon becomes not much different from what existed before.

Why? Because merely overthrowing the existing political order and imposing a new political order does not change the ideas, beliefs, customs, and traditions of the people. Such impositions may temporarily affect the external behavior of those people, but it does not transform what guides their sense of right and wrong, good and bad, just or unjust; these are matters of their hearts and minds, and these cannot be coerced into change. The only alternative is for the intervening government to stay on in that foreign country as a permanent, coercing meddler, and that usually only leads to more problems, not solutions.

Practicing the Principle of Freedom Abroad: Private Solutions to Foreign Problems

What, then, is to be done in the face of evil in other lands? For the advocate of freedom, the answer is the de-politicization, the privatization of foreign intervention. In our private life, we have many friends, neighbors, and family members whom we care about and desire to help; we desire to help them in getting through times of trouble and hardship, and we want to help them in trying to find better principles to guide their lives, so many of the problems that have been caused by their past choices do not happen again.

Sometimes these tasks are more than we, ourselves, can try to solve, so we form voluntary associations, organizations, and clubs to pool our efforts with those who share the same desire to help and see value in the same peaceful methods for attaining the end. Others "go it alone" in their endeavors to assist their fellow men, and still others form different associations because, though they believe in the same end, they think there are better means to achieve it than the ones we decide to try. And others in the society choose not to participate at all in these types of tasks, because they place a higher value on other things, in terms of an expenditure of their time, money, and efforts.

No one is compelled to care or to help, nor is any one forced to accept one way of doing things as the only correct method. Such voluntary associations and institutions are among the essential foundation stones of civil society. They are also the free society's private solutions to what are called "social problems."

The de-politicization or privatization of foreign intervention means an approach analogous to the private institutions of voluntary association for the handling of domestic "social problems." Those who see distress and hardship among peoples in other lands, and who desire to assist them, should not be restricted in forming associations and charities to pool their resources to supply such help. But neither should others who do not share that same concern, or who consider there to be other answers to solve those foreign problems, be compelled to provide assistance if they choose not to.

If oppression reigns in a foreign land or if a peaceful people in another country are threatened or aggressed against by another state, any citizen in a free society should have the liberty to volunteer his help. This help can include financial contributions or personal service. He can offer to fight alongside the "freedom fighters" resisting their own government's tyranny, or he can offer his services in the military of that foreign country to help repel the aggressor nation. He can choose to do so for free or for pay. He can form associations and societies to pool his own resources with those of others to buy military equipment, medical supplies, or emergency food and clothing. He can try to persuade others in his own country to see the rightness in the cause and join him in fighting the good fight to win freedom for others in those other lands.

The Importance of Principle, and Not Expediency – Even for Seemingly “Good Causes”

But what would be inconsistent with any person's crusade in the cause of freedom in other lands would be to abrogate the freedom of his own fellow citizens in the pursuit of that cause. It is easy to say that all that is asked for is a small violation of the liberty of his fellow citizens in the good cause of the freedom of so many others. But is this any different from the appeal often heard, that it is only small violations of people's liberty that is being asked for to feed the hungry, to house the homeless, to assist the poor, to support the handicapped, to. . .?

Once the principle of liberty is breached, no matter how deserving the cause may sound, all other such abridgments soon become matters of pragmatic judgment. Well, if it seemed reasonable or meritorious to abridge some people's liberties for this cause, then surely to extend that abridgment just a little longer, or a little more, for this other good cause cannot be objected to, can it? If we sacrificed some people's liberty to intervene in country X for a good cause, then surely to do it again or more forcefully for the noble endeavor of helping these other unfortunate people in country Y cannot be objected to, can it? Where does it stop? And whose judgment shall prevail in making this decision?

The fundamental duty of the state is the protection of the life, liberty and property of the citizenry within its own territorial jurisdiction. If the state goes beyond this, it can only do so by taking the wealth, income, and resources of some to improve the circumstances of others, i.e., by means of coercive meddling. Either we have the protection of equal individual rights for all before the law or we have unequal privileges for some at the expense of others. This is the choice concerning the role of the state, whether in domestic or foreign affairs. There is no third alternative.

(An earlier version of this article originally appeared in Freedom Daily in December 1995, published by The Future of Freedom Foundation in Fairfax, Virginia)

Adventures in Economics: An Interview with Richard M. Ebeling

2011-03-13T06:28:00.000-07:00

(This interview appeared in the February 2011 issue of the "Lara-Murphy Report," published by the United Services & Trust Corp., Nashville, Tennessee, www.usatrustonline.com)

Austrian Economics – “Then” and “Now”

Lara-Murphy Report: You have spent your whole career promoting and teaching Austrian economics—in fact, one of us is a former Ebeling student! From your perspective, what has happened with the Austrian movement as a whole? What would you say to today’s young libertarians and Austrians, who take it for granted that the average person on Wall Street has probably at least heard of Austrian business cycle theory?

Richard Ebeling: When I first became interested in Austrian Economics as a teenager back in the 1960s, there was virtually no Austrian School – most certainly it was not mentioned in the classroom. Keynesian Economics was riding high, with its argument that only Big Government could keep the economy on an even keel through manipulative monetary and fiscal policy. And socialist central planning was considered the ideal for “third world” countries to rise out of poverty; it was also said to be a good thing if more government control, regulation, and income redistribution could be introduced here at home in America, as well.

This was the message that I was getting from all my undergraduate professors while I was studying economics. To speak up in my classes and suggest the relevancy and importance of the ideas of the Austrian Economists was to invite ridicule, sarcasm, and verbal attack from both professors and fellow students. The attitude was that the Austrian argument for a free and competitive market process was out-of-date and as dead as the Dodo bird.

I had to learn all my real economics understanding by reading on my own. That is how I found out about and came to appreciate the ideas of those earlier, leading members of the Austrian School – Carl Menger, Eugen von Böhm-Bawerk, Ludwig von Mises, and Friedrich A. Hayek.

I had the luck to be invited to a unique Austrian Economics conference sponsored by the Institute for Humane Studies in June 1974, where I had the wonderful opportunity to meet Murray Rothbard, Israel Kirzner, Ludwig Lachmann, and Henry Hazlitt, and a handful of other young people who, like myself, had discovered the Austrian tradition on their own (many of whom are prominent members of the Austrian School today).

More than thirty-five years later the world is a very different place. There are colleges and universities where a student can take courses in Austrian Economics, and even study Austrian Economics as a specialized field in an economics graduate program, such as at George Mason University in Virginia.

Every year I teach a course on Austrian Economic Theory at Northwood University in Midland, Michigan, as well as incorporating Austrian ideas into all my other classes, as part of an economics department that is free market and Austrian “friendly.”

There are Austrian-oriented institutions and think tanks, such as the Ludwig von Mises Institute in Auburn, Alabama, for instance, that offers a vast print and online library of all the great works of the Austrian Economists, and where an interested student can attend conferences on Austrian ideas. Excellent online courses are regularly offered (including by Bob Murphy) and online articles are published virtually everyday applying Austrian ideas to contemporary economic policy issues for an increasingly worldwide audience.

And there are vibrant and challenging Austrian blogs such as “Coordination Problem” and “ThinkMarkets.”

Most certainly, the current economic crisis has served as a powerful catalyst for economists and business analysts to find in the Austrian theory of money and the business cycle a clear, coherent, and empirically relevant explanation of how government manipulation of interest rates and monetary expansion create the distortions and imbalances throughout the economy that set the stage for an inescapable recession following a false boom. It has provided a far better explanation for understanding how we got in to the present mess, and why only allowing the economy to self-correct can put America back on the path of a well-coordinated and sustainable market system of freedom and prosperity.

These are wonderful times to be an Austrian Economist. The insights and contributions of great Austrian thinkers, like Mises and Hayek, are helping to clear away the intellectual rubble and misguided policies created by Keynesian and collectivist ideas.

Trends Can Change – They Have in the Past and They Will in the Future

LMR: Ironically, just when it seems everything is finally clicking for those who are interested in spreading the ideas of liberty, the U.S. government at least seems to be accelerating its slide into a form of corporatism, if not outright socialism. You have studied the history of liberty quite extensively. Is our pessimism accurate, or does every generation of liberty-lovers think they face the worst threat ever?

RE: Ludwig von Mises always emphasized that “trends can change.” He pointed out that they have changed in the past and will most likely do so again in the future. One of the most frustrating, yet promising things in life is that the future always has an element of unpredictability.

I lived a good part of my life, like many of us, in the shadow of the Cold War. As an economist I understood why socialism could not and did not work as an economic system, and why a socialist economic system always resulted in political tyranny and loss of personal freedom.

But who among us, who lived through that time, really expected to see the end of the Soviet Union in our lifetime – unless it came about either through a terrible and bloody civil war within Soviet Russia or through a catastrophic global nuclear war? And, yet, in the late 1980s and early 1990s, the contradictions and corruptions of the Soviet system began to unravel. And within a few, short years the Soviet system imploded, and only with the loss of a relatively small number lives of brave souls during those last years.

I was in the Soviet Union working as a consultant on market reform and privatization 1990-1991, and I saw with my own eyes heroic Lithuanians in Vilnius and Russians in Moscow who died fighting for freedom against Soviet tyranny. But on the whole, Soviet socialism went out with a whimper, and not a huge bloody bang. Who, honestly, predicted that this great change would happen this way, at that time?

In Human Action, Ludwig von Mises refers to the “reserve fund” of wealth and capital in a prosperous society that a plundering government can draw upon for a long time, to feed its gluttonous drive for power and to provide the favors and privileges for special interest groups that keep the political elite in control.

But the reserve fund of private sector wealth for the government to eat from finally and inevitably must reach its end, Mises argued. That is, very possibility, what we are witnessing here in the United States and some other parts of the world today. America and countries in Europe are facing major fiscal crises caused by blood sucking taxes, crushing government debt burdens and huge unfunded liabilities adding up to tens of trillions of dollars (such as social security and government healthcare programs), strangling regulations that hinder competition and innovation, and inflationary misdirection capital and labor that throw market supplies and demands out of balance.

If we are at such a turning point – such a change in trends – what will be crucial in determining the direction it all takes will be the power and influence of the ideas that explain to our fellow citizens how the crisis has come about, why government is no longer – and never was -- the answer; and why a reborn system of individual liberty and free market capitalism is essential in the decades to come.

The responsibility of making that case falls upon all of us who care about liberty.

Austrian Economics Helps Explain How the Real World Works

LMR: In the previous question, we said it was “ironic” that the growing popularity of the Austrian and libertarian movements is occurring precisely as the federal government and Federal Reserve amass more powers. But is this actually to be expected? In other words, does the public not bother to worry about “abstract” things such as economic freedom and civil liberties, when the nation is at peace and the unemployment rate is 3%? Are Americans only now looking to the Austrians because they might be able to avert the brewing disaster?

RE: Perhaps it is a part of human nature to often take the psychological attitude that, “if it ain’t broken, it don’t need fixing.” And for decades, in spite of the occasional inflationary boom and bust cycle, it seemed to many that the American interventionist-welfare state was both desirable and sustainable. The current fiscal crisis that is hitting both the Federal government and the majority of state governments across America is forcing people, as voters and taxpayers, to rethink not only what government can afford to do, but also what it is government should do.

An essential part of this rethinking about the role of government in society is understanding why politicians and bureaucrats have neither the wisdom nor the ability to manage a complex and ever-changing market order in which multitudes of millions of people interact and coordinate their diverse wants as consumers with their abilities and talents as producers.

The Austrians, more than most other economists, have demonstrated beyond any doubt that only a functioning and free market economy can provide the means for achieving this coordination through a price system that tells the truth about the changing conditions of supply and demand, and leaves people at liberty to competitively discover and take advantage of mutual gains from trade that results in rising standards and qualities of living for all in the long run.

Whether the growing number of Austrian Economists can succeed in helping to stop this massive monetary and fiscal madness before it becomes the disaster to which it must otherwise lead, only the future will tell. But either way, there is only one path back to freedom and prosperity: radically reducing the size and intrusion of government into our personal lives and market activities; drastically cutting state and federal taxing and spending and eliminating the interventionist-welfare state; and ending our system of monetary central planning by abolishing the Federal Reserve, and returning to a commodity-backed monetary system such as the gold standard, along with the total privatization of banking and the financial system.

The Austrians offer the clearest and most persuasive arguments, in my view, as to why and how this needs to be done.

The “Lost Papers” of Ludwig von Mises, and Their Significance

LMR: For our final question, could you give the highlights of your famous acquisition of Ludwig von Mises’ “lost papers”? Many of our readers might not realize that you are a real-life Indiana Jones.

RE: Actually, I’m a big fan of those Indiana Jones movies, so thank you for that comparison and complement!

Ludwig von Mises, as many of your readers may know, was one of the most influential Austrian Economists of the twentieth century. He explained why socialist central planning could not work; why government intervention leads to insoluble distortions that prevent markets from effectively functioning; and why government monetary manipulation is the source of the booms and busts of the business cycle.

He lived and worked in Austria through much of the 1920s and 1930s, and was viewed as a forceful enemy of both Soviet socialism and German Nazism. By the time Hitler invaded Austria in March 1938, Mises was teaching in Geneva, Switzerland, but he had kept part of what had been his old apartment in Vienna. The Nazis came looking for him at that apartment. He was safe in Geneva, but they boxed up and took away all his papers, correspondence, manuscripts, and family and professional documents. For the remainder of his life, he believed the Nazis had destroyed all of these materials.

In fact, they ended up in a small town in Bohemia, where the Nazis stored all the vast collections of papers, documents and archival materials that they plundered from all the countries they occupied during the war. This huge cache of material was captured by the Soviet Army at the close of the war, and ended up being housed in a special KGB archive in Moscow that Stalin ordered to be built in the late 1940s. And there they remained, closed to every one except the Soviet secret police and the Soviet foreign ministry until the 1990s.

My wife, Anna, and I found out in 1996, that Mises’ papers had survived the war and were in this archive. Anna is originally from Moscow and, using her friends and contacts in the post-Soviet government, arranged for us to gain access to Mises’ papers in this archive. We spent nearly two weeks in October of 1996 going through Mises’ papers, which turned out to be around 10,000 pages of materials, and returned to the U.S. with photocopies of virtually the entire collection.

Liberty Fund of Indianapolis contacted me shortly after our return, and offered to publish a selection of these papers. I have served as the editor of this project, overseeing the translation process and editing the papers for publication in a three-volume set under the title of the Selected Writings of Ludwig von Mises. Two of the three volumes have already been published, and the third volume should be out by late 2011 or early 2012.

It gives a unique insight into Mises, not as the grand theorist of the free market and critic of socialism, interventionism, and inflationism. But, instead, we see Mises as the detailed economic policy analyst during the years before and after the First World War when he made his living as a senior staff member as the Vienna Chamber of Commerce. For those who sometimes wonder, “Well, how do you apply Austrian Economics to the real world of economic policy and practice?” Here is it, by the leading voice of Austrian Economics during the last one hundred years.

Preparing these papers for publication has been one of the most thrilling and rewarding experiences of my long years as an economist.

Lyndon Johnson's "Great Society": A Free Market Critique by Richard M. Ebeling

2011-03-09T15:16:00.000-08:00

(The following talk was delivered at John Jay College of Criminal Justice in New York City on March 7, 2011, as a lecture in a series on “The 1960s: the Struggle for Justice Intensifies.”)

Fifty years separate us, now, from the 1960s. For many who are college-age students, today, it all must seem like ancient history. And even for those of us who are old enough to have lived a part of our young lives in that decade, it seems a long time ago, also – and yet, at the same time, it seems like only yesterday.

Our memories fill up most frequently, I suppose, with two recollections of that time: the Civil Rights Movement and the Vietnam War. The first involved the abolition of the last remnants of that “peculiar” institution that had, at first, kept enslaved a portion of the population of the United States; and, then, even when slavery had ended, still used legal barriers, restrictions, and sometimes-brutal force to prevent a distinguishable minority of that population from having impartially secured equal rights before the law.

The second stands out as a searing memory of a military conflict ten thousand miles away from the United States, which went on for more than a decade, and at the cost of 55,000 American lives and at least one million causalities among the Vietnamese people. It was a war that tore the United States apart unlike any other armed conflict in American history since the Civil War of the 1860s, a century earlier. Tens of thousands of young men, not fortunate enough to have a college deferment, were conscripted into the U.S. armed forces, and sent off to fight a war that at least half of the American people either did not support or did not understood. And which finally ended with one of the most humiliating defeats in American military history.

Vietnam: The Hubris of War Planning and Conflict Fine-Tuning

A part of the Vietnam War tragedy was due to the fact that it was managed by “the best and the brightest,” as David Halberstam called them in his well-known book with that title. These were the people within the Kennedy and Johnson Administrations who orchestrated and escalated the war as the conflict progressed through the 1960s.

Halberstam referred to these war managers as the “whiz kids.” They believed that they had the theoretical and quantitative knowledge and ability to fine-tune a military conflict. By incremental “escalation,” they could bring to bear just enough pressure at vital points considered crucial to the enemy in North Vietnam. This would compel the appropriate response from the communist regime in Hanoi, to assure that the conflict ended with an “acceptable” outcome.

The disaster and the destruction that befell both the American and the Vietnamese people resulted from their arrogant pretense of possessing all the necessary and relevant knowledge for them to design and direct a war on the other side of the world, and, seemingly, all according to a central plan constructed in Washington, D.C.

What they learned (or should have learned) were the inescapable limits to man’s ability to try to consciously direct the future course of human events, and the ever-present occurrence of “unintended consequences.” It was a costly lesson in the need for humility and caution in believing that it is in our power to socially engineer global affairs to our own liking.

Lyndon Johnson – Master of Events and Manipulator of Men

The same, I would like to suggest, was also the case in the domestic policies of the Lyndon Johnson Administration, which became known as the Great Society agenda. Johnson was the consummate politician. Born in west Texas, he won a seat in the House of Representatives in 1937, and was a loyal supporter of Franklin Roosevelt and his New Deal programs. He won a seat in the U.S. Senate in the 1948 election, and later became the Democratic Party leader in the Senate, until his run for the vice-presidency of the United States as John F. Kennedy’s running mate in 1960. He became president in November 1963, following the assassination of JFK.

Johnson considered himself to have an uncanny power to read situations, manipulate and intimidate men, and control the flow of political events. In his leadership role as majority leader, Johnson supposedly knew every detail of the public and private lives of all the other members of the U.S. Senate. He, seemingly, knew just the right “buttons” to push to make the votes and often the policies go the way he wanted.

In one of the ironies of history, in 1954 he used his Senatorial influence to stop, then-President Eisenhower, from militarily intervening into what was at that time France’s colonial war in Vietnam against Ho Chi Minh’s communist guerrilla forces. The French defeat left a divided Vietnam that became the catalyst for the next phase of this conflict, which pulled America into the vortex of war and finally brought about the downfall of LBJ.

While the Vietnam War became inseparably intertwined with Johnson’s name and was a defining mark of his presidency, he really viewed his Great Society agenda as the legacy for which he wanted to be remembered. In his mind, he was attempting to fulfill and complete the New Deal programs initiated by his mentor, FDR.

The Great Society: Designing a “War” on America’s Ills

What guided the Great Society agenda was not just Johnson’s political savvy. It was also the equally arrogant pretense of knowledge on the part of many in the economics profession of that time. As a student in my first undergraduate economics classes in the late 1960s, I soon learned that there was only one economics: Keynesian Economics, named after the famous British economist, John Maynard Keynes, who had published a book called The General Theory of Employment, Interest, and Money, in 1936.

Most economists, especially in macroeconomics, were convinced that the market economy was inherently flawed and susceptible to periodic and wide fluctuations in employment and production. They believed they had discovered the necessary monetary and fiscal policy tools to “steer” the economy and simultaneously maintain “full employment,” stable prices, and stimulate long-run growth in the economy as a whole.

At the same time, there was a general attitude among many economists and a large number of self-proclaimed social critics that most of the “evils” of the world – poverty, illiteracy, lack of decent housing or medical care, and environmental degradation – were all due to a lack of will-power and well intentioned and implemented policy. The guiding premise was that the private sector had failed in meeting these problems, and indeed, may have contributed to them due to a disregard for “national needs,” while pursuing private purposes.

In a speech in May of 1964, President Johnson proposed a series of “activist” government policies that would create a “Great Society” for America. He told his audience that he was determined “to assemble the best thought and broadest knowledge from all over the world to find [the] answers” to these social ills. In 1965, following Johnson’s reelection to the presidency, he initiated a wide variety of pieces of legislation to fight his declared “wars” on these social ills. Government programs and spending were either introduced or expanded in almost every domestic direction.

Among the leading Great Society programs were:

· Medicare and Medicaid (as amendments to the Social Security Act)

· Economic Opportunity Act

· Office of Economic Opportunity

· Community Action Agencies

· Elementary and Secondary Education Act

· Higher Education Act

· Model Cities Program

· Housing and Urban Development Act

· Urban Mass Transit Act

· Supplemental Nutrition Assistance Program (Food Stamps)

· National Endowments for the Arts

· National Endowments for the Humanities

· Wilderness, Endangered Species, and Federal Water Pollution Control Acts

In the time available, it would, obviously, be impossible to offer a detailed, critical examination of each of these programs and pieces of legislation, and their impacts on various parts of society over the decades. Instead, I would like to approach it from a skeptical view of the underlying political, economic and social premises upon which the Great Society agenda was proposed and implemented. And, then, draw some conclusions about their longer-term effect on American society today, including the fiscal crisis in which the country finds itself.

Political Paternalism and the Reduction of Freedom

The fundamental premise upon which the Great Society vision for America was conceived is the idea of political paternalism. Good men, with enough political power, authority, and financial resources can successfully solve the problems of society. The dilemma, however, is that for government to do anything for us, it must at the same time have the police power do things to us.

If government is to plan our retirement, provide our education, oversee and guarantee our health care, supply our housing, and give us various amounts of cash and other in-kind benefits, then that same government must, invariably, determine and dictate the form, quality, quantity, and conditions under which we can be and will remain eligible for such welfare redistributive benefits.

Thus, many of the welfare programs specified, for example, the make-up and membership of a household to receive government housing, child allowances, and cash payments. Federal money to education invariably ended up coming with standards, requirements, and restrictions on the content of what was taught and the benchmarks for measuring student success for continued funding. Government financing of health care necessarily incorporated regulations, controls, and rules about the pricing of health care services, the types of treatments and coverage permitted or restricted, and access to what care in terms of age and gender.

Increasingly, the individual’s options and choices were narrowed by, and confined to, what the government directly supplied, or mandated through its rules and regulations. This, obviously, hit those in the lower income categories the most. Once such individuals and groups were completely or heavily dependent upon these government programs, escape from them was difficult due to the significant loss of benefits if such a recipient wished to find private-sector employment at a wage that would greatly reduce or terminate their eligibility for these programs. Thus, an underclass of more or less permanent wards of the state was created with inter-generational dependency on government transfers growing in frequency.

This political paternalism, obviously, also implied that those in the government establishing these standards and rules for welfare eligibility presumed to know what all those receiving such benefits and services “really” needed. That is, what kind of housing, what type of medical care, what content of education, what kind of nutritional requirements the recipients of these programs should receive.

Political Hubris and Unintended Consequences

This, too, was no less an arrogance or hubris on the part of the government welfare providers that the poor and unfortunate recipients of the government largess clearly did not have the knowledge, experience, or forethought to make such decisions for themselves. Since the State was providing these benefits, the State clearly knew best what “these” people really needed for them to have some minimum form of a “decent life.” The “poor” were classified and homogenized into one or a small handful of sizes that were to “fit all,” with little regard or sensitivity to the diversity between individuals and their personal and family needs and values.

This implicitly condescending attitude toward those receiving Great Society transfers resulted in some free market critics, such as Milton Friedman, to argue that if government was going to redistribute wealth it would show much more respect and confidence in such recipients if, instead of in-kind benefits in the form of such things as government housing, food stamps, health care services, etc., the government merely gave them cash equivalents. This way, each individual, in his own circumstances, and in terms of his own judgment about what was more or less important to her and her family could make the market-based trade-offs that would most fit with what they needed or valued.

But here, in essence, was the same fundamental flaw in the Great Society agenda as was to be found in the executing of the Vietnam War: the confidence and belief on the part of the implementers of these programs that they could redesign the social order at home just like the foreign policy makers believed they could remake entire societies abroad.

And here, too, were a series of unintended consequences. These included the weakening and break-up of groups and families due to inter-generational dependency on government programs; the emergence of an “entitlement mentality” that taxpayer funded transfers from the government were as legitimate as a source of income as earning a living from a private-sector job; the entrapment of those on welfare in isolated, poorly-managed, and increasingly crime-infested public housing projects; and the deteriorating of educational standards in public schools, especially in inner city areas of the country.

For the free market critic, the entire direction of the Great Society agenda was wrong-headed. Precisely because it was desirable to see an improvement in the condition of those least and less well off in society, government’s role had to be less rather than more. As a later president was to say, “Government was the problem, not the solution.”

The Free Market Agenda for a Truly Great Society

The free market agenda for a truly great society was for people to have the liberty to make their own decisions, find and take advantage of their opportunities, and have the latitude and incentive to design their own lives, according to their own conception of the good, desirable, and worthwhile. Government controls, regulations, redistribution, and handouts were the opposite of the direction needed for America.

· Government regulations and licensing requirements had to be reduced and abolished to make it easier for the less well off to start their own businesses, or expand their existing businesses to improve their own lives and create employment opportunities for others.

· Taxes had to be lowered in all personal income and corporate brackets to leave income, wealth, and savings in the hands of the people, themselves, to generate over time the investment and capital formation that would create jobs, raise the productivity and value of those in the work force, and increase standards of living for all over time through more and better goods and services of all kinds offered on the market.

· Union power had to be reduced since, historically, it had been used to limit entry into the labor market in many “closed-shop” sectors of the economy to artificially keep up the wages and benefits of those fortunate enough to belong to a particular labor union monopoly, at the expense of others locked out of employment opportunities.

Individual freedom, personal choice and responsibility, and open, competitive markets in a setting of limited government taxing, limited government spending and limited or no government regulation was the social and institutional circumstance most conducive to really fighting a war on poverty and illiteracy, and a lack of economic opportunity, with equal justice for all before the law.

Eliminating the disincentives for private sector construction of less expensive housing would better provide more housing for lower income groups. This would include ending or reducing zoning and various building codes that limited the locations for low-income housing and raised the costs of construction; it also required reducing property and other related taxes on the residential housing market.

Shifting to market-based education in place of the government monopoly school system would introduce needed competition in the educational market to improve the quality, variety and availability of education for all, including and especially for those in the lower income categories.

And moving to a truly market-based health and medical care system would provide the market-generated competition to keep costs down, while providing the incentives to improve hospital services and treatments.

Benefiting All Through the Freedom of Each

Free market economists, like Friedrich A. Hayek, explained that there is more knowledge and wisdom dispersed and decentralized in all the minds of all the members of society than can ever be known, integrated, or mastered by even the “best and brightest” who assert their ability to manage, direct, and redesign the complex society in which we live.

That is the advantage and the benefit of the competitive market order: it brings to bear all that there is to know and can be used to improve the condition of society through the informational mechanism of the price system, and the unhindered interactions of supply and demand. Shall we rely upon, and be limited to, what the government regulators, planners, and redistributors are able to know and understand; or shall we be free to utilize and benefit from what all of us can contribute through the institutions and workings of the free market economy?

Deficits, Inflation and Keynesian Mismanagement

Another legacy of the Great Society was the false confidence of the Keynesian macroeconomic planners that they could push the fiscal buttons and turn the monetary dials in just the right calibrated amounts to maintain full employment, stable prices, and economic growth all at the same time. They were sure that they could juggle the costs of an ever-more expensive war in Vietnam and supply all the needed money for the increased spending of the domestic Great Society programs without having to significantly raise taxes to foot the expanding financial bill, so the Johnson Administration could do all it wanted to do, both at home and abroad.

The government funded much of its spending through deficit financing. The amounts seem small by today’s trillion-dollar deficit standards, but for the 1960s the spending and the deficits were large compared to what government had spent in earlier years. The Federal Reserve – America’s central bank – attempted to keep interest rates low and private sector investment high by basically printing the money that was needed to feed the costs of growing government. In other words, they “monetized” the debt, to use the jargon of the economist.

Thus, added to everything else, by the end of the 1960s and into the 1970s, the United States was starting to experience and suffer from serious price inflation. Manipulated interest rates distorted and imbalanced the relationship between savings and investment; those who saved saw the real value of their “nest-eggs” eaten away due to rising prices; inflation distorted cost-accounting by making it difficult to know what one’s wealth, capital, and investments were really worth due to the uncertainty of what prices and costs of doing business would be tomorrow compared to today.

The inflationary spiral was not “broken” until the early 1980s, by which time America was suffering from “stagflation” – rising prices and increasing unemployment – a dilemma for which standard Keynesian theory had no answer.

Thus, the Great Society dream heralded by Lyndon Johnson in 1964 and 1965 began to degenerate into a disillusioning reality in the 1970s and 1980s. The Great Society provided neither the prosperity, nor the justice, nor the freedom that Lyndon Johnson had held out as its promise.

Liberalism: True and False

And that gets us to our conclusion: What is a just, good and great society? The Great Society advocates of the 1960s argued that theirs was a liberal vision for a better America. But was it?

I would like to suggest that theirs was a false conception of liberalism, and therefore a misguided idea of a free and great society. The real, or true, liberalism, as it took form in the nineteenth century as a political and economic ideal, and an agenda for social reform, emphasized the freedom and rights of the individual to his life, liberty, and honestly acquired property. The individual human being was an end in himself, not the tool or means to the coercing will of others possessing political power.

These earlier (or, classical) liberals opposed and helped to do away with absolute monarchy and replace it with representative government. They lead the cause for, and finally triumphed in bringing about, the end to human slavery. They insisted upon civil liberties and equal justice before the law for those whom the older political order had discriminated against, including Jews, religious dissenters, various ethnic and national groups, and women.

They also considered economic liberty – the freedom to own and use private property for consumption and production purposes; to peacefully compete in any trade, profession, or occupation the individual found attractive and advantageous; and to freely enter into any voluntary association and market exchange found to be mutually agreeable, including the terms of trade found acceptable by the traders – to be inseparable from any understanding of and practical existence to human freedom.

The classical liberals considered this also to be a morally better society. Why? Because it is based on the idea of respecting the dignity of the individual not to be viewed and treated as a “pawn” (a coerced means) to be manipulated, controlled or restricted by police power, to serve someone else's preferred ends — even if that “someone else” is a large majority of his fellows in society.

The Self-Governing Individual and the Free Society

For these liberals, “self-government” did not only mean the right of the citizenry to participate in the political process to select those who will hold political office and enforce the laws of the land. It also crucially meant the “self-governing” individual. The individual was “sovereign” to freely live his life in peace, deciding what values and goals will give meaning and purpose to his own sojourn on earth. The individual had the unmolested right to the private property he had honestly produced or acquired in trade, as the means for pursuing and possibly fulfilling his dreams and conceptions of a good and happy life for himself and those others he may care about.

They considered such a truly liberal society also to be the one that provided the free market incentives and opportunity structures that would have the good affect of directing men (without force, and through the motive of self-interested improvement) to apply their knowledge, ability, and experience in ways — as if by an “invisible hand” — to reciprocally help improve the conditions of others as they advanced their own desired ends in the interplay of market competition.

They also argued that such a free society is more conducive to not only raising people out of poverty and making it possible for more people to be self-supporting, but also to foster a proper sense of benevolence and compassion towards others who may have fallen upon misfortune or “hard times” not of their own making. The history of voluntary charity and benevolence in the era of nineteenth century classical liberalism – before the advent of the modern welfare state and its undermining of some of this philanthropic spirit – attests to the magnitude of this private generosity and its success.

The Politically Governed Individual

What I have suggested to be considered the false liberalism of the Great Society turned its back on this earlier liberal tradition. Indeed, it turned liberalism on its head. Liberalism now meant bigger government, more intrusive government, more regulating and controlling government, with government’s very visible hand increasingly in every corner and aspect of American life.

Rather than self-governing, the individual in this new Great Society was to be governed. By whom? By those who arrogated to themselves the idea that they were “the best and brightest,” the social engineering “whiz kids,” who claimed to know how various segments and groups in the society should and would be made to live.

This paternalistic legacy of the Great Society era remains with us today. Indeed, it is at the center of the political and social controversies enveloping American debate and conflict about the future direction of the country. Many, if not most, of the supposedly “untouchable” entitlement programs that are at the heart of the current budgetary and debt crisis facing both the Federal government and state governments are the outgrowths of the redistributive programs either introduced by or greatly expanded during the Great Society presidency of Lyndon Johnson.

LBJ wanted to be remembered for his Great Society legacy. And he has had his wish. His paternalistic and welfare state agenda is the Albatross that has a stranglehold around the fiscal neck of the American people.

What Friends of Freedom Can Learn from the Socialists -- To Win Freedom! by Richard M. Ebeling

2011-02-27T12:30:00.000-08:00

On March 14, 1883, a German philosopher living in exile in London passed away. When he was buried three days later in a modest grave where his wife had been laid to rest two years earlier, fewer than ten people were present, half of them family members. His closest friend spoke at the grave-site and said, “Soon the world will feel the void left by the passing of this Titan.” But there was, in fact, little reason to think that the deceased man or his long, turgid, and often obscure writings would leave any lasting impression on the world of ideas or on the course of human events.

That man was Karl Marx.

Advocates of liberty often suffer bouts of despair. How can the cause of freedom ever triumph in a world so dominated by interventionist and welfare-statist ideas? Governments often give lip service to the benefits of free markets and the sanctity of personal and civil liberties. In practice, however, those same governments continue to encroach on individual freedom, restrict and regulate the world of commerce and industry, and redistribute the wealth of society to those with political power and influence. The cause of freedom seems to be a lost cause, with merely temporary rear-guard successes against the continuing growth of government.

What friends of freedom need to remember is that trends can change, that they have in the past and will again in the future. If this seems far-fetched, place yourself in the position of a socialist at the time that Marx died in 1883, and imagine that you are an honest and sincere advocate of socialism. As a socialist, you live in a world that is predominately classical liberal and free market, with governments in general only intervening in minimal ways in commercial affairs. Most people—including those in the “working class”—believe that it is not the responsibility of the state to redistribute wealth or nationalize industry and agriculture, and are suspicious of government paternalism.

How could socialism ever be victorious in such a world so fully dominated by the “capitalist” mindset? Even “the workers” don’t understand the evils of capitalism and the benefits of a socialist future! Such a sincere socialist could only hope that Marx was right and that socialism would have to come—someday—due to inescapable “laws of history.”

Yet within 30 years the socialist idea came to dominate the world. By World War I the notion of paternalistic government had captured the minds of intellectuals and was gaining increasing support among the general population. Welfare-statist interventionism was replacing the earlier relatively free-market environment.

The socialist ideal of government planning was put into effect as part of the wartime policies of the belligerent powers beginning in 1914, and also lead to the communist revolution in Russia in 1917, the rise to power of fascism in Italy in 1922, the triumph of National Socialism (Nazism) in Germany in 1933, and the implementation of FDR's New Deal policies in 1933, as well.

Socialism triumphed during that earlier period of the last decades of the 19th and early decades of the 20th centuries because while socialists advocated collectivism, they practiced a politics of individualism. They understood that “history” would not move in their direction unless they changed popular opinion. And implicitly they understood that this meant changing the minds of millions of individual people.

So they went out and spoke and debated with their friends and neighbors. They contributed to public lectures and the publishing of pamphlets and books. They founded newspapers and magazines, and distributed them to anyone who would be willing to read them. They understood that the world ultimately changes one mind at a time—in spite of their emphasis on “social classes," group interests, and national conflicts

They overcame the prevailing public opinion, defeated powerful special interests, and never lost sight of their long-term goal of the socialist society to come, which was the motivation and the compass for all their actions.

The Lessons for Freedom

What do friends of freedom have to learn from the successes of our socialist opponents? First, we must fully believe in the moral and practical superiority of freedom and the free market over all forms of collectivism. We must be neither embarrassed nor intimidated by the arguments of the collectivists, interventionists, and welfare statists. Once any compromise is made in the case for freedom, the opponents of liberty will have attained the high ground and will set the terms of the debate.

Freedom advocate, Leonard E. Read, once warned of sinking in a sea of “buts.” I believe in freedom and self-responsibility, “but” we need some minimum government social “safety net.” I believe in the free market, “but” we need some limited regulation for the “public good.” I believe in free trade, “but” we should have some form of protectionism for “essential” industries and jobs. Before you know it, Read warned, the case for freedom has been submerged in an ocean of exceptions.

Each of us, given the constraints on his time, must try to become as informed as possible about the case for freedom. Here, again, Read pointed out the importance of self-education and self-improvement. The more knowledgeable and articulate we each become in explaining the benefits of the free society and the harm from all forms of collectivism, the more we will have the ability to attract people who may want to hear what we have to say.

Another lesson to be learned from the earlier generation of socialists is not to be disheartened by the apparent continuing political climate that surrounds us. We must have confidence in the truth of what we say, to know in our minds and hearts that freedom can and will win in the battle of ideas. We must focus on that point on the horizon that represents the ideal of individual liberty and the free society, regardless of how many twists and turns everyday political currents seem to be following. National, state, and local elections merely reflect prevailing political attitudes and beliefs. Our task is to influence the future and not allow ourselves to be distracted or discouraged by who gets elected today and on what policy platform.

Let us remember that over the last hundred years virtually every form of collectivism has been tried—socialism, communism, fascism, Nazism, interventionism, welfare statism—and each has failed. There are very few today who wax with sincere enthusiasm that government is some great secular god that can solve all of mankind’s problems. Statist policies and attitudes continue to prevail because of institutional and special-interest inertia; they no longer possess the political, philosophical, and ideological fervor that brought them to power in earlier times.

There is only one “ism” left to fill this vacuum in the face of collectivism’s failures. It is classical liberalism, with its conception of the free man in the free society and the free market, grounded in the idea of peaceful association and individual rights. If we keep that before us, we can and will win liberty in our time—for ourselves and our children.

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

2010-11-24T07:53:00.000-08:00

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)

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

2010-11-10T10:14:00.000-08:00

(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

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

2010-11-08T15:53:00.000-08:00

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 20^th 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).

A Leader for Liberty in Latin America: Manuel Ayau (1925-2010) by Richard M. Ebeling

2010-08-05T12:10:00.000-07:00

One of the outstanding leaders of individual liberty and economic freedom in Latin America, Dr. Manuel Ayau, passed away on August 4, 2010 at the age of 85.

Many Americans may not be familiar with his name or his contributions to the cause of liberty, but he was most assuredly one of the “movers and shakers” in defense of capitalism in the Spanish-speaking world.

His greatest and most lasting achievement was the founding in 1972 of Francisco Marroquin University (FMU) in Guatemala. He also served as its first president until 1988. Under his stewardship, FMU has developed into one of the most academically respected institutions of higher learning in Central and South America, not only offering undergraduate degrees but graduate programs in medicine and dentistry, as well.

But the true hallmark of FMU since its establishment by Manuel Ayau is its principled and uncompromising dedication to the ideals of classical liberalism and free market economics, and especially that free market tradition known as the “Austrian School” of economics. Indeed, no student can successfully graduate from Francisco Marroquin University without taking two mandatory courses: “The Social Philosophy of Ludwig von Mises” and “The Social Philosophy of F. A. Hayek,” the two leading figures of the Austrian School in the 20th century.

His courage in establishing FMU was not only due to the obvious entrepreneurial and financial risk in founding a private institution of higher learning. It was courageous because in the 1970s Guatemala was in the midst of a violent civil war, with collectivist and socialist fractions of several types battling and committing acts of terror against “enemies of the revolution.” His life was threatened more than once because of his public voice in support of the classical liberal ideals of constitutionally limited government, rule of law, private property, and freedom of enterprise -- and his building of Francisco Marroquin University.

Born on December 27, 1925, Dr. Ayau earned a B.A. degree in Mechanical Engineering from Louisiana State University in 1950, and was awarded two honorary doctoral degrees, one in Law from Hillsdale College in 1973, and one in Literature from Northwood University in 1994.

In the world of business Manuel Ayau founded a highly profitable enterprise making ceramic tiles that enabled him to earn the wealth to support the cause of freedom that became the philosophical focus of his life. In 1959, he established the Center for Economic and Social Studies, a think tank devoted to advancing the case for free enterprise in his native Guatemala, as well as Latin American in general.

He also served on the board of trustees of the Foundation for Economic Education in New York, and was a member of the board of trustees of the Liberty Fund of Indianapolis at the time of his death. He was also a long-time member of the Mont Pelerin Society, an association of friends of freedom organized by F. A. Hayek in the years immediately after the Second World War to push back the global rising tide of collectivism.

Dr. Ayau also actively participated in Guatemalan politics, serving as a member of his country’s Congress from 1970-1974, and ran as a candidate for the presidency of Guatemala in the 1990 elections.

He wrote widely in defense of economic and individual freedom in the Guatemalan press and in American newspapers, including in the pages of The Wall Street Journal. In 2007, he published Not a Zero-Sum Game, a short, extremely readable and outstanding book, explaining the workings of a free enterprise system, based on the benefits from mutual gains from trade arising from the creative productivity of a market-based and profit-guided system of division of labor.

An excellent public speaker -- in both Spanish and English -- Manuel Ayau became one of the most eloquent voices for free market capitalism throughout Latin America. He inspired the old and the young to have a new and deeper appreciation for a society of liberty, in which creative minds were set free, and government protected life and property rather than plundered them.

I had the privilege and honor of knowing “Muso” (as his friends called him) for almost twenty years. He epitomized the old-world Latin gentleman, always gracious, hospitable, and extremely generous with his time and knowledge. He had a sharp tongue in defense of capitalism, and did not always “suffer fools gladly.” But no matter how misguided and wrong-headed he may have considered a person’s argument, his response was always given with wit and charm, and a devastating sense of humor – but always against the ideas, and never the individual.

In 2003, my wife and I were invited to FMU to deliver a series of public lectures and presentations in a variety of classrooms over nearly two weeks. The university stands as an awe-inspiring legacy to Manuel Ayau, not only because of its academic excellence and voice for liberty in Latin America, but also because of the exquisite tastefulness of the architectural design of the school. Located not far from the center of Guatemala City, it gives the impression of idyllic tranquility in a forested valley with beautiful buildings containing state-of-the-art classrooms and technology, and an excellent library.

Our stay was made even more enjoyable due to Muso’s and his wife’s hosting of a delightful weekend at their home in the Guatemalan countryside. The sharp mind of the practical businessman came through when he gave us a tour of one of his large ceramic tile factories not too far from his home, explaining every detail of the manufacturing and market methods that had made him so successful in the world of commerce.

But his love for liberty came through, as well, when he took us up to his private study on the grounds of his country home and showed us his immense library of books, monographs and publications on the ideas of individual freedom and the free market. As he shared his knowledge about many of the great thinkers of liberty and their writings, you saw how deeply and sincerely he was devoted to the freedom and dignity of man, and the need to fight in the eternal struggle against tyranny’s oppression of the individual human being.

Manuel Ayau was truly one of the champions of freedom in our time. All those who were privileged to know him will miss him, but we are all better people for having had that opportunity.