You Can't Create More Savings by Printing More Money

February 12, 2015 Frank Shostak

Savings has nothing to do with money. For instance, if a baker produces ten loaves of bread and consumes one loaf, his savings is nine loaves of bread. In other words, the “savings” in this case is the baker’s real income (his production of bread) minus the amount of bread that the baker consumed. The baker’s savings now permits him to secure other goods and services.

For instance, the baker can now exchange his saved bread for a pair of shoes with a shoemaker. Observe that the baker’s savings is his real means of payments — he pays for the shoes with the saved bread. Likewise, the shoemaker pays for the nine loaves of bread with the shoes that are his real savings.

What Is Savings?

The introduction of money doesn’t alter what we have so far said. When a baker sells his bread for money to a shoemaker, he has supplied the shoemaker with his saved, unconsumed bread. The supplied bread sustains the shoemaker and allows him to continue making shoes. Note that the money received by the baker is fully backed by his unconsumed production of bread.

Yet without the medium of exchange, i.e., money, no market economy, and hence, the division of labor, could take place. Money enables the goods of one specialist to be exchanged for the goods of another specialist. In short, by means of money, people can channel real savings, which in turn permits the widening of the process of real wealth generation.

Also, in a world without money it would be impossible to save various final goods like perishable goods for a long period of time. So the introduction of money solves this problem. Instead of storing his bread, the baker can now exchange his bread for money.

In other words, his unconsumed production of bread is now “stored,” so to speak, in money. There is, however, one proviso in all of this: that the flow of the production of goods and services continues unabated. This means that whenever a holder of money decides to exchange some money for goods, these goods are there for him.

Having Money Is Not the Same as Having Savings

Money can be seen as a receipt, as it were, given to producers of final goods and services that are ready for human consumption. Thus when a baker exchanges his money for apples, the baker has already paid for them with the bread produced and saved prior to this exchange. Money therefore is the baker’s claim on real savings. It is not, however, savings.

Now what about the case where money is used to buy unprocessed material — is the unprocessed material real savings? The answer is no. The raw material must be processed and then converted into a piece of equipment, which in turn can be employed in the production of final goods and services that are ready for human consumption. In this sense, the buyer of unprocessed material transfers his claims on real savings to the seller of material in return for the prospect that the transformed material, some time in the future, will generate benefits far in excess of the cost incurred.

Furthermore, the buyer of the material also buys time (i.e., by having the material readily available, he can proceed immediately with the stages of making the final tool). If the material weren’t available he would have to extract it himself, which of course would delay the making of the final tool.

Once real savings are exchanged for money, the recipient of the money can exercise his demand for money in a variety of ways. This, however, will not have any effect on the existent pool of real savings.

An individual can exercise his demand for money either by holding it in his pocket, or in his house, or by placing it in the custody of a bank in a demand deposit, or even in a safe deposit box.

Also, whether he uses it immediately in exchange for other goods, or lends it out, or puts it under the mattress, it does not alter the given pool of real savings. Thus by putting the money under the mattress, an individual doesn’t engage in the act of saving. He is just exercising a demand for money. What individuals do with money cannot alter the fact that real savings are already funding a particular activity. Whether individuals decide to hold onto the money, or lend it out alters their demand for money, but this has nothing to do with savings.

Whenever an individual lends some of his money he in fact transfers his claims on real goods to a borrower. By lending money, the individual has in fact lowered the demand for it. Note that the act of lending money (i.e., the transferring of the claim) doesn’t alter the existent pool of real savings. Likewise, if the owner of money decides to buy a financial asset like a bond or a stock he simply transfers his claims on real savings to the seller of financial assets. No present real savings are affected as a result of these transactions.

How Does Money-Supply Expansion Affect Savings?


Now let us examine the effect of monetary expansion on the pool of real savings. Since the expanded money supply was never earned, goods and services therefore do not back it up, so to speak. When such money is exchanged for goods it, in fact, amounts to consumption that is not supported by production. Consequently a holder of honest money (i.e., an individual who has produced real wealth), that wants to exercise his claim over goods discovers that he cannot get back all the goods he previously produced and exchanged for money.

In short, he discovers that the purchasing power of his money has fallen — he has in fact been robbed by means of loose monetary policy. The printing of money therefore cannot result in more savings as suggested by mainstream economists, but rather to its redistribution. 

This, in the process, undermines wealth generators, thereby weakening over time the pool of real savings. So any so-called economic growth, in the framework of a loose monetary policy, can only be on account of a private sector that manages to grow the pool of real savings despite the negative effects of the loose money policy.

We can thus conclude that savings is not about money as such, but about final goods and services that support various individuals that are engaged in various stages of production. It is not money that funds economic activity but the flow of final consumer goods and services. The existence of money only facilitates the flow of the real stuff.


via mises.org

Bad Paper: How To Outsmart the Debt Collectors - Indebted or not, good info

by Felix Salmon @felixsalmon

​from fusion.net​

Updated 08/15/2014, 11:03AM

Are you being hounded by debt collectors? You're not alone. Once you go into debt -- even if it's something as benign as paying for something with a credit card, or borrowing to go to college -- then you owe someone else money, and sometimes you're not able to pay back everything you borrowed. And when that happens, the debt starts to get traded: the initial lender will write off the debt, and sell it to a collector. For example, if you borrowed money from a bank, but now the bank has written the loan off, then you no longer owe the bank but a debt collection agency. And the people who work for collection agencies can be very aggressive.

Jake Halpern's great new book, Bad Paper, an adaptation of which is published in The New York Times Magazine, follows a number of these collectors -- many with multiple felony convictions to their name -- around Buffalo, New York, the center of debt collections in the US. According to the Urban Institute, roughly 77 million Americans, or 35% of adults with a credit file, have a report of debt in collections. In some places, that number is significantly higher: In Las Vegas, for instance, it's 50%¹. Of that 35%, most do the wrong thing when approached by debt collection agencies. Their first instinct is to hang up the phone, to run away, to try to ignore the problem, which almost never works. What does work: Taking action like writing a letter to the company in question, instructing its representatives not to contact you. This generally does the trick -- until the collection agency sells your debt to yet another collection agency.

As Halpern's book explains, the unluckiest of debtors end up being taken to court by one of these agencies, in which case they have to show up -- or risk a default judgment being taken out against them, and their creditors given the opportunity to seize their bank accounts, their salaries, and just about anything else they own. 

When a debtor shows up to court, there's a wrong thing and a right thing to do. The wrong thing is for the debtor to settle the case; the right thing is for the debtor to contest it, and ask the creditors to prove that they have title to the debt in question. Almost nobody does this -- but if the debtor does it, he will walk out of that courthouse without owing a penny. The reason? When lenders pass debt onto a collection agency, they don't formally transfer title to the debt. That would be too expensive, given how little they are selling the debt for. So instead they just pass over a simple spreadsheet, with a debtor's name and the amount of money he owes. And that spreadsheet will never stand up in court.

In general, it's a good idea for people to pay their debts. But there's an exception to that rule, and that's when those debts have already been defaulted on. At that point, a person's credit score is completely shot, the people who lent the money have already written it off, and even if the debtor pays the collectors back in full, the original lenders won't see any of the cash. So if a debt collector armed with nothing more than a spreadsheet and a phone number starts pestering you for money, treat him the way you would any other cold-caller looking for your cash: Tell him not to contact you any more -- and then, in the unlikely event that you receive a summons, tell him he has no title to your debt and that you're not going to pay him a penny.

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¹ The number of Americans with debt in collections is not an easy figure to define, let alone measure: there's no central database of such things. Bad debts never really go away, they just get older and harder to collect on. Which means that while it's pretty easy to get added to the list of Americans with debt in collections, it's very hard to drop off the list. Other statistics, showing 30 million or 35 million Americans with debt in collections, generally look only at debt which has been active in the past 3 months or 12 months. But Americans get pestered every day over debt which is many years old.

The Economics of Tipping - Kenneth A. Zahringer

Mises Daily: Wednesday, November 12, 2014 by Kenneth A. Zahringer
 
My dinner companion sounded indignant. “It’s a shame we have to tip the waitress,” she said. “The restaurant owner ought to pay the staff enough to live on.”

I imagine that is a common attitude among those steeped in our current cultural climate of envy and dislike of economic success — the anti-capitalist mentality, as Mises put it. It’s easy to fall into the trap of thinking that we tip waiters out of sympathy, due to their misfortune of having to work in an industry full of greedy restaurant owners who won’t pay a “living wage.” In fact, tipping is an elegant market solution to a particular set of circumstances, often present in service jobs, that makes determining an appropriate wage extremely problematic. The practice of tipping used to be more common, applying to many more service positions than at present, when it is largely restricted to waitstaff and skycaps. Part of the reason for its partial demise is just the wandering course of economic change, but many jobs that used to be paid primarily by tips came to be covered by minimum wage legislation and simply disappeared.

So why do we tip? At first glance it seems rather odd that a waiter should be paid by two different people — employer and customer — for the same job. But in fact we, as tipping customers, are paying for a very different aspect of the waiter’s job than is the employer. The restaurant owner needs a way to get the customer’s order to the kitchen and the food out to the customer. Most anyone who can walk a straight line and operate a pencil can perform that task. 

But the restaurant owner also wants happy customers, and customers are happy when they have a waiter who can solve problems, handle special requests, and generally make their meal a pleasant experience, and that is a special skill set indeed. Coordinating these two different, and not closely connected, aspects of the job is what tipping is all about.
 
Information Asymmetry

The employer wants happy customers, but he has a twofold information problem. As a practical matter it is difficult for him to observe interactions between waitstaff and customers. In addition, the customers’ expectations regarding the quality of service are impossible to observe. This is further complicated by the fact that staff members are heterogeneous; they are different in terms of skill levels, personalities, and other characteristics that affect the customer’s experience of quality service. Thus the employer doesn’t have the information he needs to arrive at an appropriate wage for each member of his staff. The customer, however, is a participant in these interactions and as such has as complete information as is humanly possible. If the customer pays the server directly for that aspect of the job, the decision of the appropriate pay is made by the person with the most information about job performance.

Incentive Alignment

Employers generally want their employees to give their best, and presumably are willing to pay for that. However, the aforementioned information problem inhibits his ability to do so. Ideally, tips make the server’s compensation directly proportional and immediately responsive to the quality of service provided. This aligns the employee’s incentives with the employer’s; both now want to provide high-quality service to the customer, each for their own benefit.

Risk Sharing

Hiring a new employee entails risk. For the new employee, there is the risk that the job may not turn out as he had hoped. It could turn out to be a dead end with no future, or unsatisfactory in innumerable other ways. The employer, however, has a financial risk. The new employee’s skill set is unknown to the employer to at least some degree, regardless of how thorough the interview process might be. There is even more uncertainty with an inexperienced new hire; there is no history for the employer to work from. The employer has to pay the agreed upon wage, and if the new employee doesn’t perform as hoped he is losing money. If the new employee accepts a lower guaranteed wage and makes part of his compensation contingent on performance — the tip — this relieves risk in two ways. First, the employer is more willing to take a chance on a young, inexperienced worker. If the wage is lower, the minimum performance level needed to make the employee worth the wage is also lower. 

Second, since the employee can increase his earnings directly and immediately by improving his performance the job is not so much of a dead end. The low paying job becomes a valuable stepping stone, allowing the young, inexperienced employee to learn job skills, establish a performance record, and move on to something better. (It should be obvious that minimum wage legislation short-circuits this entire arrangement, making the employer much less willing to hire someone unless he is certain they are worth the higher wage. This is how lower-skilled individuals get shut out of the job market. But that’s the subject of another essay.)

That is the magic of the market. Even mundane habits like leaving a tip for a waiter play an important role in social cooperation and coordination. It is an elegant solution to a knowledge problem, developed spontaneously through the actions of a myriad of market participants. When left alone, people are pretty darn resourceful.

via Mises.org

If You're Disgusted with Both Parties then You're a Jeffersonian, but don't know it

If you've been disenchanted with either political party for some time like lower echelon Americans, and have defaulted voting for the "lesser of two evils", then change. Retaining liberty is not a once every two year voting event. But, you know that.

True, you can't change anything by yourself, but you can tell others about the meaning and origin of our country's true historical endowment of freedom. You will feel better about yourself knowing that you're shaping new lumber to make a difference. 

There are good people out there who want to hear your message. They will be your fellow carpenters, masons, plumbers and electricians. Credit yourself for the groundswell of restored freedoms that is sure to come. Welcome home, you'll be a Jeffersonian.

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Jeffersonian or Hamiltonian?

Mises Daily: Friday, July 31, 2009 by Murray N. Rothbard

Every college student, indeed every literate person, is expected to choose up sides and pin a label on himself in the Great Debate. Most people today consider themselves as Jeffersonians. Groups as diverse as the States' Rights (or Dixiecrat) movement and the Communists consider themselves heirs to the Jeffersonian mantle. At one and the same time, conservative southerners refer to themselves as "Jeffersonian Democrats," while the leading revolutionary Marxist school in the country is called the "Jefferson School of Social Science." Amidst this welter of confusion, to find the true picture of Jefferson the man and political philosopher is an extraordinarily difficult task.

A Bewildering Mosaic

Analysis of Jefferson is made far more difficult by the complex nature of Jefferson's personality and career. A man of brilliant intellect; keenly interested in the whole range of human thought, from economics to architecture to scientific farming; active, dynamic, and spirited in an amazing multitude of enterprises, and moreover a political leader the greater part of his life, necessarily presents to posterity a bewildering mosaic. Politics itself is a day-to-day affair, imposing by its very nature on the politician a series of shifts and compromises. Thus, Jefferson combined within himself the qualities of a soaring intellectual spirit, searching for political principle, busy man of affairs, and political boss. When it is further remembered that Jefferson dominated the stage during the most vital years of the Republic (Revolution, Independence, Constitution, Growth, War, etc.), it becomes more understandable that so many contrasting groups can pick out of his immense record of writings and actions support for their own ideologies.

A Mere Scribbler?

But to an unbiased observer who explores Thomas Jefferson, his principles stand out indelible and crystal clear. His political philosophy has been imbedded deep into the very soul of America, and has imprinted itself on the minds of innumerable Americans of later generations. His achievement has been sneered at by Hamiltonians of our day as well as his. 

Hamilton, they claim, was a constructive and practical man of action. He funded the national debt, reformed the administration of government, established a national bank, etc. Jefferson was a mere phrase-maker and scribbler. These "practical men" fail to grasp that the forces which generate the actions of men, and therefore human history, are, for good or bad, the ideas of men. It is ideas, political, economic, ethical, esthetic, religious, that have prime significance for human action in the present and over the centuries. It is ludicrous to claim that Hamilton's financial measures were of comparable importance to the Declaration of Independence or the Kentucky Resolutions.
 
The battle between Jefferson and Hamilton, however, is of very great significance, and precisely because it represented a clash between two fundamentally contrasting systems of political principle. Jefferson's political philosophy is summed up in the phrase: ''That government is best which governs least." It received its finest expression in our own Declaration of Independence: man is endowed by God with certain natural rights; "to secure these rights, governments are instituted among men, deriving their just powers from the consent of the governed," and when government becomes destructive of that end, the people have the right to change the form of government accordingly. Thus Jefferson, as John Locke had done a century before, drastically shifted the moral emphasis from the State to the individual. In the absolutist and feudal era from which the world was beginning to emerge, divine right settled only on the kings, the nobility; in short, the State and its rulers. To Jefferson, the divine rights were conferred on each and every individual, not on rulers of government.

The Great Jeffersonian Lesson

What were these natural rights? The fundamental right, from which all others are deduced, is the right to life. Each individual has the moral right to live without coercive interference by others. To live, he must be free to work and acquire property, to "pursue happiness." In political terms, the one important natural right is self-defense; defense of one's life, liberty, and property from invasive attack. Government's function, then, is to use its power of force to prevent and combat attempts to use force in the society. If the Government extends its powers beyond this "cop-on-the-corner" function, it in itself becomes the greatest tyrant and plunderer of them all. 

Since the Government has virtual monopoly of force, its potentialities for evil are far greater than that of any other institution. The people must constantly keep their Government small and local, and even then must watch it with great vigilance lest it run amok. That is the great Jeffersonian lesson, and it is one that all Americans must begin to learn again.
 
From this basic cornerstone, the rest of the Jeffersonian edifice is easily deduced. It explains his passionate, lifelong adherence to States' Rights, his determined opposition to John Marshall in the latter's successful campaign to make the Constitution more elastic so as to permit wider extension of federal power, his very distrust of the Constitution itself and insistence upon incorporating a Bill of Rights.
 
Jefferson's position on foreign policy stemmed from the same source. He did not believe that our government, or any government, is equipped to remake the world by force to our own liking. He was frankly a whole-hearted patriot, whose natural love of the soil and his country was reinforced by the fact that America constituted the Great Experiment in Liberty. 

His foreign policy was expressed in this classic phrase: "Peace, commerce, and honest friendship with all nations — entangling alliances with none." Particularly marked was his perceptive distrust of the wily imperialism of Great Britain.

The Fundamental Cleavage

finish reading

Defense and the State

We're not yet up to transitioning to this sort of less government. Perhaps if it were of a more gentle style with polite gradualism the argument would be more palpable. Quite difficult to think of myself without a HK91 and PPK/S to sling around. Afterall, we all know what "anarchy" is, don't we. As for me I've always considered anarchy the last step taken to achieve a communist state. To be able to live free without a Rule of Law is beyond my comprehension.

Finally, without an American electorate informed of either form of government (no govt, or less govt), especially our present form, it's not too difficult to envision a totalitarian state to be America's destiny.

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July 13th, 2014   Submitted by Anthony Caprio

One of the most common objections to a stateless society is "Who will provide the defense?" Doesn't any nation with a weak military or no military suffer the same fate as Poland in WWII, subjection to a larger force bent on looting wealth, and enslaving the native population? It turns out the answer is "no." There are a number of examples of states (just to be clear I am talking about sovereign nations) with no military. These are places that exist today in the 21st century, and many have been around for quite a while. They happily go about their lives with no standing army.

Now, to be sure, none of these states are perfect Rothbardian Anarcho-Capitalist societies, but they do exist, and prosper without any military. That is something that conventional wisdom, and state sponsored education would have us believe is impossible. They show that states can and do exist without a standing Army, Navy, or Air Force, which then begs the question, "If we don't need the state to provide national defense, then what is the purpose of the state?" Can people exist and interact peacefully based on voluntary co-operation?

Those states fall into two categories. Some of these nations have no standing military and no protection agreements with larger nations. For example, Lichtenstein has been without a standing army since 1868, yet it has one of the highest per capita incomes in the world, has survived two world wars, and guarantees the right of succession in their constitution by a simple majority vote. Lichtenstein shared a border with Nazi Germany, the strongest most aggressive government in world history, and survived without a military. They even had a Jewish princess from 1929-1938, and harbored Jewish refugees during the war, but had no military.

The second category is states with no standing military that do have protection agreements with larger nations. One example of this would be the tiny nation state of Monaco, which has a protection agreement with France. However, this agreement did little to protect Monaco from being invaded by the Nazis and Italians during WWII. I think the lesson here is don't enter protection agreements with France, but I digress. Other examples are Nauru, which has an agreement with the Australian Government, and Samoa which has an agreement with the New Zealand government.

These categories address two separate but related arguments against Anarcho-Capitalism.

The first argument goes that no civilization can exist without a state funded defense force. Countries with no protection agreements prove this is not true. The second argument goes that the state must solve the free rider problem. The free rider argument goes something like this, "No one will pay for defense services if they think someone else will cover the bill. Therefore no one will pay for defense services, and their territory will be overtaken." Existing protection agreements show that is not the case among nation states in the 21st century.

Smaller nations are essentially free riders when they have protection agreements with larger nations. Defense services are provided for them by the larger state because it's in the larger state's best interest to protect both territories. So, if nation states already exist as free riders it fails as an objection that individuals or businesses might do the same in an Anarcho-Capitalist society.

There are real life examples of nations that exist without a standing military, and no protection agreement with a larger state. Lichtenstein is probably the best example of a nation that kept its sovereignty intact despite sharing the border with the most aggressive state in modern history. Costa Rica has also had no standing army since 1949 despite being located in Central America, an area known for violent dictators and revolutions. Panama abolished its army in 1990 after the United States backed dictator who ruled the country got uppity and the United States invaded and deposed the dictator. Since abolishing the army Panama has seen an unprecedented level of prosperity.

So if countries can, and do prosper without a standing military, if private arbitration is already solving disputes, and families by the millions are choosing private education and home schooling over public education, and millions more are using non-state issued currencies for their transactions, then the question must be asked, why do we need the state?

​via dailyanarchist​

When Steelers Steal - Christopher Westley

Thursday, July 03, 2014 by Christopher Westley

In Alabama last week, an estimated 900 union reps, politicians, local business owners, and their families rallied to raise awareness of supposed steel import dumping and how it threatens their way of life. They have a point. 

When a competitor enters a market selling a homogeneous product and can undercut the price of the established producers, those producers' livelihoods are threatened.


Thank goodness this is the case. In a free market economy, the threatened firms often respond by searching for ways to increase efficiencies, attempting to access lower cost inputs, and improving on economies of scale and scope. In the long run, those firms that continually adjust to serve the consumer better than others survive for another day, while those that don't tend to fail and are soon forgotten.


When this process is played out across the entire economy, more goods and services are produced than would have otherwise, prices fall (resulting in a corresponding increase in purchasing power), and we become richer. That this process was relatively unhampered in the United States in the nineteenth century explains why the Industrial Revolution occurred here and why, over time, Americans grew in prosperity and their economy became the envy of the world.


Although one can go back to the Washington administration of 1789 for examples of government intervening in the market order, it was not until the Progressive Era that these interventions became institutionalized as official functions of government, and soon cartels and crony firms began to characterize and (increasingly) define the US economy. In the steel industry in particular, this has proved to be quite nefarious. Let's count some of the ways.


First, there are the unions. Steel was one of the first industries to be unionized. This in itself is not necessarily pernicious, but it became so once extra-market power, yielded by the coercive state, was used to anoint union workers over others. These workers became more resistant to change and less productive as it became increasingly difficult if not impossible to fire them. A primary reason why steel producing states became known as the Rust Belt is because while union productivity relatively declined and union wages relatively rose, capital and labor found itself more productive in other states. Both escaped the Rust Belt for better opportunities elsewhere.


Although opulent labor unions have spent tens of millions of dollars to force unionization on right-to-work states, ostensibly out of concern for working conditions there, the actual purpose is to remove relative differences in the cost of capital and labor so as to remove the advantages these states enjoy. Their solution, when faced with the consequences that result when workers' wages exceed their productivity, is to try to force the same wage-productivity outcome on potential competitors elsewhere.


Second, there are international trade effects. Although the American steel industry's glory days occurred in the first few decades following World War II, it was not to last as steel production, often employing superior technology, took root overseas. Managers of less-protected industries would have had strong incentives to respond with similar investments out of concern for shrinking market share, but such incentives are diminished when managers can depend on the government to impose protective trade legislation. Why renovate factories to match South Korean steel efficiencies when lower priced Korean steel can be countered with tariffs and quotas?


Such is the moral hazard of protectionism. It removes healthy incentives for favored industries to improve over time.


Finally, there's the role of prices. By forcing domestic steel prices higher than they otherwise would be, increased competition becomes inevitable as competitors react to heightened price signals the domestics themselves created. This "short-sightedness effect" plays out with short-run benefits to domestics but with long-run problems that often result in demands for new rounds of protection. It's a costly cycle that harms consumers the longer it is allowed to exist.


Higher protected prices also have the effect of increasing the search for substitutes such that, today, many thousands of products have been developed to replace goods that used to incorporate steel. That's great for those producers and the consumers they serve, but one wonders about the unseen goods not produced because resources were diverted to steel substitutes. Let's just say they do not show up in GDP calculations.


Talk of such destruction was probably not a feature of last week's steel rally in Alabama, where the federal flag flew freely and workers' signs proclaimed, "Keep It Made In America" and "#SOSJobs." Pat Summerlin, an electrician attending the rally, said protecting the industry was important since, after all, his plant and its workers support the community. "If I lose my job, that means I'm not spending money at your business. We're all connected."


Not if you balance increased spending of the well-connected with harmful and often unseen effects of protecting the domestic steel industry on everyone else. When you do, there is a net loss to society — a loss that reflects a profound and even steel-like ignorance of economics.


Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.



Christopher Westley is an associated scholar at the Mises Institute. He teaches in the College of Commerce and Business Administration at Jacksonville State University. Send him mail. Twitter @DrChrisWestley

See Christopher Westley's article archives.

​via mises.org​

Libertarianism from A to Z : Walter Block

Mises Daily: Friday, June 27, 2014 by Walter Block

 

Walter Block’s new book Toward a Libertarian Society covers a wide variety of topics from the death penalty to secession, and from war to macroeconomics. Dr. Block recently spoke with the Mises Institute about just a few of these.

Mises Institute: You say in your book that it is a contradiction in terms to be both libertarian and to be for an aggressive foreign policy. Why is this?

Walter Block: The essence of libertarianism is the non-aggression principle (NAP). This means it is legitimate to use force only in defense, or retaliation, but not to initiate it. However, an aggressive foreign policy is an attempt to export democracy, or the American way of life, or to make things easier for US business, at the point of a gun or a bomb. Thus, this policy necessarily initiates violence against foreigners, but not in defense of their attack on us, nor in retaliation against such. Thus, there is a contradiction. It is as if A were to have the policy of punching B in the nose, where B did not first use violence against A. Clearly, A would be violating the NAP. This is true, however, whether it applies to an individual or a large group, such as a nation. 

But what about 9-11? Did they not attack us first? No. They were “over here” because we were first “over there.” This was blowback. Had we not stuck our stick into hornet’s nests in that part of the world, they would not have attacked us. They were retaliating against the prior use of force on the part of the US government.

MI: When it comes to the compatibility of libertarianism and labor unions, you say, “it depends.” What does it depend on?

WB: It depends upon whether organized labor violates the NAP. They need not do so in order to pursue their goals, which is an improvement in the wages and working conditions of their members. 

For they do have one legitimate weapon in their arsenal: the mass quit. 

If one person goes to the boss demanding improved pay, he is likely to be shown the door. But if he says that all 500 employees will walk out of the factory unless their demands are met, or at least negotiated, the boss is more likely to make a counteroffer. If the union limits itself to this sort of threat, it is entirely legitimate and is acting in accordance with libertarian requirements. However, unions rarely, if ever, limit themselves to a threatened mass quit. They also use violence against those who try to pass through their picket lines, such as replacement workers, or raw materials entering the firm’s property, or finished goods leaving it. It is as if a husband divorces his wife, but they surround her house with his friends who threaten to beat up any potential suitor of hers. Leaving her, a quit, is justified; using violence against competitors, is not.

MI: When it comes to building a better economy, you say that it is production that counts and not jobs. What does this mean?

WB: The goal is not jobs, but the goods and services jobs bring about. If we could have the latter without the former, that is, banish scarcity, all would be lovely. We could play (do whatever we enjoyed) the live-long day. Unfortunately we want more things than is available; that is why we have to work for them. Suppose that the “jobs” consisted of digging holes in the ground, and filling them up again, and that everyone did this and nothing else. At the end of the day, we would have had mass employment, and we would all starve to death because these “jobs” produced nothing to keep us alive.

MI: One should not be surprised at all that you oppose the drug war, but what is the most important reason to oppose the drug war?

WB: There are many reasons to oppose the drug war. It creates havoc in the lives of drug users. It promotes crime. As a result of it, we have all too many people in jail. It is a victimless crime, when limited to consenting adults. But the most important reason to be against it is that the drug war violates the NAP. It uses violence against peaceful users, and entrepreneurs who supply this good to them.

MI: How do you cure poverty? What is the best short answer to this question when a non-libertarian asks about it?

WB: A very short answer is: promote private property rights, laissez faire capitalism, and the NAP of libertarianism. A longer answer would mention the fact that in the free enterprise system, the only way to become wealthy (that is, cure poverty), is to engage in commercial interaction. But this necessarily improves the well-being of all parties to the exchange. Whenever Bill Gates sold a computer to someone for $500, that person valued it at more than this amount, otherwise he would not have purchased it; and it cost Bill Gates less than that figure to produce the computer. Otherwise, he would have gone broke. Each and every commercial transaction, buying, selling, renting, bartering, borrowing, lending, employing, etc., is mutually beneficial at least in the ex ante sense of anticipations (we engage in the market since we expect to gain thereby). Free enterprise is necessarily in this sense a wealth creating institution. How else can poverty be cured, but by creating wealth?

MI: You’ve also written extensively on environmentalism and free markets. Without government, wouldn’t we all have to drink filthy water and breathe dirty air?

WB: Private property rights, along with the NAP, are the two sides of the libertarian coin. Both are essential. But what is pollution, whether air or water borne, other than a trespass of smoke and dust particles onto the property, and into the lungs, of other people? The government unfortunately, for many years, has not allowed people to sue each other for such trespasses. If they had allowed this to occur, the challenge of filthy water and dirty air would have long ago been overcome.

Note: The views expressed in Daily Articles on Mises.org are not necessarily those of the Mises Institute.

Walter Block is the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at Loyola University, senior fellow of the Mises Institute, and regular columnist for LewRockwell.com. Send him mail. See Walter Block's article archives.

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The Rebirth of Austrian Economics

Happy birthday to Ron Paul, Distinguished Counselor of the Mises Institute and longtime supporter of Austrian economics. Here’s Dr. Paul with Henry Hazlitt, Murray Rothbard, and Lew Rockwell, from a 1987 dinner in honor of Hazlitt.

June 24, 2014

Editorial By Richard Ebeling

Forty years ago, during the week of June 15-22, 1974, the Austrian School of Economics was reborn during a conference in the small New England town of South Royalton, Vermont. Why was this important? Because the economists of the Austrian School have developed the most persuasive understanding of why only economic freedom can give mankind both liberty and prosperity.

During the Great Depression of the 1930s, many economists and political policy-makers argued that capitalism was a "failure" and only wisely guided government intervention and regulation of the market place could bring stability and fairness to society.

The Domination of Big Government Ideas

For the next thirty years following the Second World War, Keynesian Economics dominated economic policy decision-making. Government, it was said, had to have the discretionary authority to manipulate spending and taxing as well as the monetary system to assure full employment and stable economic growth.

This was matched by a rarified mathematical formalism in the higher levels of economic theory in which the everyday individual was reduced to a mere passive variable in a series of equations, with the assistance of which it was presumed government could successfully micro-manage the market. Unless regulated and guided by the superior hands of the government policy-makers, society would fall into waste and inefficiencies due to people's wrong choices and misplaced actions when left on their own.

The Beginning of Austrian Economics

Almost 145 years ago, Carl Menger founded the Austrian School of Economics. One of the pathfinders to break asunder the myth of the labor theory of value, which had dominated economics from the time of Adam Smith to that of Karl Marx, Menger developed the subjective theory of value. The value of a good, Menger explained, was not determined by the amount of labor devoted to making a product, but rather the labor was given value by the intensity felt for the product by the individual who would finally use or consume it. Since individuals valued things differently and by different scales of importance, there was no way to objectively determine the value any market-traded good might have other than relating it back to the personal ("subjective") judgments of the individual valuator.

Menger was soon followed by two disciples who refined Austrian theory to such a point that it became a major force in the world of ideas. Friedrich von Wieser formulated the concept of opportunity cost, by which is meant that nothing is free. The fact that most of the means that we use to achieve our various ends are scarce (too limited in supply to enable us to attain all the goals for which those means might be used) means we always have to make trade-offs.

The cost of anything is the alternative goal, purpose or end for which some scarce means might have been used if we had not instead valued more highly some other use for which we ended up applying those limited means. The idea that government can give people a "free lunch" is fundamentally wrong; what the government gives to someone with one hand it must take from someone else by the other hand, because the available means are not enough to fully satisfy both uses at the same time.

Eugen von Böhm-Bawerk, developed Menger's theory of subjective value and applied it to the problem of savings, investment and the creation of capital. Everything we do involves time. Whether we are boiling an egg or constructing a tunnel through a mountain, or planting a crop for food, all of our production activities take time.

This requires that individuals must save enough to free up the resources needed to build the capital goods and cover people's living expenses until the production processes are completed at some point in the future when more and better goods and services will be forthcoming as the benefit from having waited for them.

Government taxation and regulation can undermine if not destroy the ability and motive of people to do the savings and investing that is essential if we are all to benefit from rising standards of living in the future.

Ludwig von Mises and the Case for the Free Market

In the twentieth century, Ludwig von Mises extended the Austrian approach. Mises applied Menger's subjective value theory to the area of money and developed the "Austrian" theory of the business cycle. 

Government manipulation of money and credit in the banking system throws savings and investment out of balance, resulting in misdirected investment projects that are eventually found to be unsustainable, at which point the economy has to rebalance itself through a period of a corrective recession.

The only wise policy for government is to leave money and the banking system to the competitive forces of a free market to eliminate the inflationary booms and recessionary busts of the business cycle, so markets can effectively keep people's saving and investing decisions in balance for well-coordinated economic stability and growth.

Mises also demonstrated in the early 1920s why the new experiment with socialist central planning in communist Russia would eventually fail. Rational and efficient economic decision-making requires market-generated money prices to determine and calculate the relative values of the finished goods that consumers might wish to buy in comparison with the costs of using the means of production – land, labor and capital – in one alternative production activity instead of another, on the basis of which entrepreneurs can estimate likely profits or losses from producing one product rather than some other.

Comprehensive socialism abolishes private property, bans market ownership and trading of goods and resources and places all economic decision-making in the hands of a government central planning agency.

But without private property, there is nothing to buy and sell. With nothing to buy and sell there is no bargaining to determine possible terms-of-trade. With no agreed-upon terms-of-trade, there are no market prices.

Without market prices to tell market decision-makers the value of what consumers might want and the actual value of scarce resources in competing uses for their employment, there is no rational way for the socialist planner to efficiently and effectively know what to produce and at the lowest costs to maximize total desired production. Socialist central planning creates a society of "planned chaos."

Based on his critique of the unworkability of socialist central planning Ludwig von Mises developed a theory of how the competitive market process works, and the important role of the entrepreneur for guiding production in the pursuit of profits and the avoidance of losses.

This also led Mises to a detailed critical analysis of how and why various forms of government regulation and intervention in the market economy can only distort and bring about imbalance in the market's own coordination of multitudes of supplies and demands in the service of consumer desires. The only viable economic system for freedom and prosperity, Mises concluded, is laissez-faire capitalism.

F. A. Hayek and the Use of Knowledge in Society

Further developments in Austrian theory were the product of the versatile mind of Friedrich von Hayek, who won the Nobel Prize in Economics in 1974 a few months after this Austrian Economics conference in South Royalton, Vermont.

In the 1930s, Hayek refined Mises's theory of money and the business cycle, and became the leading free-market critic of John Maynard Keynes at the time when "Keynesian Economics" was just being developed. He insisted that government deficit spending and manipulation of spending in the economy would only slow down the normal market-generated recovery from a recession, and ran the danger of creating a future inflation that would be followed by another economic downturn.

Hayek, like Mises, was a leading critic of socialism. His core argument centered on the impossibility of even the wisest and most intelligent central planners ever having the ability to master, integrate and effectively use all the needed knowledge to successfully guide an entire economy from the offices of a government planning bureau.

The division of labor in society is matched by a division of knowledge in which each of us possesses only a limited and small amount of all the knowledge of the world in our individual minds. We all must admit and accept how ignorant any one of us is about all the forms of knowledge that exist in the world, and which must somehow be successfully brought to bear if all of us are to benefit from what one or a few people may know that we do not.

Hayek's answer to this problem was to explain that market-generated prices serve as the communications device through which we can inform each other about our desires as consumers and our abilities as producers, while leaving us free to use the knowledge that each of us individually possesses as we find it most advantageous. Thus, freedom and prosperity are combined through the market system of prices and competition to find out who can do better in satisfying the wants of others in the pursuit of self-interested profit.

Austrian Voices at the South Royalton Conference

The Institute for Humane Studies (IHS) organized the South Royalton Austrian Economics conference, and brought to Vermont three of the leading Austrian economists of that time to deliver a series of unique and important lectures: Israel M. Kirzner, Ludwig M. Lachmann and Murray N. Rothbard.

Israel Kirzner had studied under Mises at New York University, and in 1973 had written Competition and Entrepreneurship, the first of many books explaining the importance of the alert and creative market-based entrepreneur who brings about the balance and coordination of supplies with our consumer demands through his pursuit of profit opportunities.

Murray Rothbard had already made an outstanding name for himself as an Austrian economist with his two-volume work, Man, Economy and State (1962), in which he developed the entire edifice of economic understanding following in the footsteps of Ludwig von Mises. His 1963 book, America's Great Depression, demonstrated that the economic depression of the 1930s had its origin in bad Federal Reserve monetary policy in the 1920s, and made far worse than it needed to be due to the wrong-headed interventionist policies of the Hoover Administration in the early 1930s.

Ludwig Lachmann had studied with F. A. Hayek at the London School of Economics in the 1930s, and went on to challenge the Keynesian misconception that the economy should be viewed and treated as one single aggregate lump of economic output. He subtly showed that the market is an intricate web of multitudes of individual supplies and demands interconnected in ways that could have no harmonious order to them other than through the free competitive actions of people, themselves, in a dynamic world of unexpected change.

Austrian Economics as Good Economics … FINISH READING