Four Theories about the Great Depression

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More than most people, libertarians have beliefs about the Great Depression. Having spent several years studying the matter, I have some conclusions about four such beliefs: first, that what caused the depression was the Federal Reserve allowing a drop in the money supply; second, that what made it terrible was the passage of the Smoot-Hawley Tariff, which collapsed America’s foreign trade; third, that the New Deal really began under Herbert Hoover; and fourth, that what lengthened the Depression was fear of what the New Deal government would do.

In addressing these questions, I am relying heavily on my hometown newspapers — the Seattle Times, Seattle Post-Intelligencer and Seattle Star — because newspapers are “the raw material of history.” They are not the only sources available, and they have their mistakes, omissions, and biases. But they are broader than politicians’ collected personal papers and broader, in a different sense, than the economists’ statistical tables. As sources for general research about a period, I like newspapers best. I know newspapers. I spent 37 years working for newspapers and magazines, about half that time on the business and financial pages.

The first of the four beliefs, associated with Milton Friedman and the Chicago School, is that the Federal Reserve was responsible for turning a recession into a depression — the deepest and longest in American history — by shrinking the money supply. It’s true that there was less money in people’s pockets, and that was a bad effect. But when economists talk about the Fed shrinking the money supply, they mean shrinking the money available to the banks — and during most of the Depression banks were loaded to the gunwales with money. With few willing and qualified borrowers, they simply parked depositors’ money in US Treasury bonds and local bonds and warrants (thereby helping to finance their local governments and the New Deal). Bankers talked about this on the business pages, and showed it in the year-end bank balance sheets presented in newspaper display ads. For those reasons I find it difficult to indict the Fed for starving the banking system of money.

Newspapers have their mistakes, omissions, and biases. But they are broader than politicians’ collected personal papers and broader, in a different sense, than the economists’ statistical tables.

A variant of this argument is that the Fed mistakenly turned a recession into a depression by raising interest rates.

Overall the Fed lowered interest rates in the depression. In the two years following the Crash of 1929, the Fed cut its rate on short-term loans to banks, going down from 6% to 1.5%. But to stop the outflow of the Treasury’s gold during the currency crisis of September 1931, the Fed temporarily raised the rate to 3.5%. This 2% bump is the “mistake” that the economists holler about. At the time the Fed did this, critics said it would retard recovery, and when recovery didn’t come, the critics pronounced themselves right. But at the time, the financial editor of the Seattle Times noted that the Fed’s supposedly stimulative 1.5% interest rate hadn’t done anything to stimulate recovery. (The Keynesians would later say the Fed was “pushing on a string.”) Investors weren’t holding back because of two percentage points. They were holding back because they were afraid to borrow at all.

I’m not a historian of the Fed, and am not claiming the Fed made no mistakes. But pinning the depression on the stinginess of the Fed to the banks doesn’t seem right. If it were true, the interest rates would have been higher. Also, there would have been furious complaints in the newspapers, even in Seattle. And I didn’t see it.

During most of the Depression banks were loaded to the gunwales with cash. With few willing and qualified borrowers, they simply parked depositors’ money.

The second belief is that the Smoot-Hawley Tariff caused the Depression by posting the highest taxes on imports in the 20th century. The figure usually cited is that the average tariff rate under Smoot-Hawley was 59% — a horrible rate. This, however, was the rate on dutiable goods, and excludes the many goods on the free list. The average rate on all goods was 19.8% — still bad, but something less than torture.

Free traders always reach for the Smoot-Hawley argument. I have heard it not only from libertarians but from supporters of the WTO, TPP, NAFTA, and the promoters of trade in my hometown. And politically, I am on free traders’ side. I agree that the Smoot-Hawley Tariff, signed in June 1930 by Herbert Hoover, was bad medicine. And in this case, there was protest in the newspapers, with voices saying it was a terrible, self-defeating law, and predicting that other countries would retaliate. The newspapers ran stories when the other countries did retaliate.

Smoot-Hawley was also a contributing cause of the collapse in the international bond market in 1931, because it made it more difficult for America’s debtors — Britain, France, Germany, Brazil, Bolivia, Peru, and others — to earn the dollars to repay their debts. But this one bad law cannot bear all the blame for the subsequent implosion of America’s imports and exports.

I can think of four reasons why. First, the Depression was already on, so that by June 1930 imports and exports were already headed downward. Second, if you want to blame tariffs, put two-thirds of the blame on the tariffs in place before Smoot-Hawley was signed, which were an average of 13.5% on all goods. Third, in 1930 exports made up only about 5% of US output (versus 12.5% today), so that the shrinkage in trade, though dramatic in itself, was only two or three percentage points of the overall economy.

This one bad law cannot bear all the blame for the subsequent implosion of America’s imports and exports.

Finally, in September 1931, the British Commonwealth went off the gold standard. The British, Australian, and Canadian currencies were immediately devalued by 15 to 20%. Austria, Germany, Japan, and Sweden also went off gold, effectively devaluing their own currencies. The products of these fiat-money countries immediately dropped in price relative to the products of the United States. One example: Swedish wood pulp pushed US pulp out of world markets, so that almost all the pulp mills in Washington state shut down.

When Franklin Roosevelt came into office in March 1933, he ended the convertibility of the dollar into gold at the old rate of $20.67 an ounce. The reason for doing this was not a shortage of gold; the Treasury had stacks of it. The reason was to match the foreign devaluations and make American goods competitive again. And it did. Trade, the stock market, and the real economy jumped immediately when the dollar went off gold. From April to July 1933 there was a kind of boom, even though Smoot-Hawley was still in effect. (The boom ended because of the National Industrial Recovery Act and some other things, but that is another story.)

If you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more.

The third belief, that Herbert Hoover was an interventionist and implemented a kind of proto-New Deal, is a thesis of Murray Rothbard in America’s Great Depression. Rothbard recounts that after the Crash of 1929, Hoover called leaders of industry to the White House and made them promise not to cut wages. The theory at the time was that this would maintain “purchasing power” and thereby prevent a depression. That was a precedent for the New Deal. It was noted at the time by business columnist Merryle Rukeyser (father of Louis Rukeyser, host of PBS-TV’s “Wall Street Week” from 1970 to 2002). Merryle Rukeyser wrote in December 1929 of the Hoover meetings, “The old-fashioned idea of leaving such matters to the individualism of business leaders — known as the doctrine of laissez faire among economists — has been formally laid to rest and buried.”

So Rothbard had a point: in principle, Hoover was an interventionist. But if you focus on principles, which libertarians like to do, you can lose sight of magnitudes and proportions that matter more. The larger fact is that the Hoover and Roosevelt regimes were hugely different in what the federal government undertook to do, what constitutional precedents they set, how many people they employed, how much money they spent, and how much they affected the world we still live in.

The fourth belief, that the New Deal prolonged the depression by frightening investors, is the thesis of libertarian historian Robert Higgs in his essay, “Regime Uncertainty: Why the Great Depression Lasted So Long and Why Prosperity Resumed After the War.” (Reprinted in Depression, War and Cold War, Independent Institute, 2006.) Higgs argues that the Depression lasted for more than ten years because of “a pervasive uncertainty among investors about the security of their property rights in their capital and its prospective returns” during the later New Deal of 1935–1940.

I can’t comment on much past the beginning of 1935, because that’s where I am in my reading. But I can verify that “regime uncertainty” was real, and that I saw evidence of it beginning in mid-1933, when the initial Roosevelt boom faltered.

At first Forbes advised his business readers to swallow it and said he was loyally swallowing it himself.

In the newspapers I read, the best barometer of this is B.C. Forbes’ business-page column. Forbes — the founder of the eponymous magazine — was very much a pro-capitalist guy. (The magazine calls itself a “capitalist tool.”) Forbes once wrote that his job as a newspaper columnist was to explain the economy to ordinary readers by interviewing industrialists and bankers. Much of the time Forbes was a transmission belt of their doings, thoughts, and feelings along with his own.

It was predictable that Forbes would not like the New Deal. At first he advised his business readers to swallow it and said he was loyally swallowing it himself. But he quickly began choking on the two principal “recovery” programs, the Agricultural Adjustment Act (AAA) and the National Recovery Administration (NRA). The NRA’s boss, Gen. Hugh Johnson, was a loud, imperious man who had been President Wilson’s boss of military conscription during World War I. During the early New Deal, Johnson helped to popularize two expressions: to chisel, meaning to lower one’s price below the government minimum, and to crack down, meaning to punish. In July 1933, Johnson went right to work, cracking down on the chiselers in American industry.

General Johnson was the closest that peacetime American business ever had to a military dictator. In August 1933, Forbes called him “a Vesuvius, in epochal, thundering eruption . . . Not even Teddy Roosevelt in his most explosive days matched General Johnson’s Titanic energy and action — or his wielding of the big stick.”

And: “Mussolini has nothing on him in readiness to undertake multitudinous tasks and to swing the Big Stick.” (This was when Italy’s dictator, Benito Mussolini, was popular with many Americans.)

General Johnson was the closest that peacetime American business ever had to a military dictator.

In the fall of 1934, when Gen. Johnson was replaced by labor attorney Donald Richberg, Forbes wrote: “Reason is expected to replace ranting swashbucklerism.” Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.

In March 1934, Forbes quoted an anonymous industrialist (probably Charles Schwab of Bethlehem Steel, whom he named elsewhere in the column): “No, don’t quote me as saying anything that would sound like criticism of the administration or any branch of it. It’s too dangerous. I don’t want to be cracked down on at this time when Washington has unlimited power to do what it likes.”

Later in the same month Forbes wrote, “The fear today is not of the law but of bureaucrats. Few employers regard themselves as in a position to stand up against dictation as Henry Ford has done.” (Ford had refused to accept the NRA’s “voluntary” price and production controls, and was not allowed to display the Blue Eagle and its motto “We Do Our Part.”)

One of Forbes’ October 1934 columns was an open letter to Franklin Roosevelt, titled in the Seattle Post-Intelligencer “Mr. President, All Employers Aren’t Crooks.”

Forbes loved to publicize good omens, but during these years he was repeatedly disappointed.

Forbes is not the only wellspring of business angst. Here is Merryle Rukeyser, a man more sympathetic to the New Deal than Forbes, in September 1934: “Business men are in a timid mood because of lack of assurance as to their tax liability and as to the attitude of the powers that be toward business profits.”

A doubter might argue that a handful of newspaper columns aren’t enough to prove Higgs’ thesis. I suppose so; but how would you prove it? It is about a state of mind — “confidence” — and how do you demonstrate that except by considering what people say and do? In fact, investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment. And in fact, there were statements by Roosevelt and by Hugh Johnson, Harold Ickes, Henry Wallace, Rexford Tugwell, and other New Dealers that might very well cause investors to lack confidence. And it was not only the New Dealers, but also their opponents on the left: Dr. Francis Townsend, who wanted every American over 60 to have $200 a month of government money (about $3000 in today’s terms); Upton Sinclair, the Democratic nominee for governor who wanted to set up a socialist economy in California; Father Coughlin, a radio priest who ranted against the rich; and Sen. Huey Long, the “Kingfish” of Louisiana who called his program “Share the Wealth,” and who was stopped only by an assassin’s bullet. This was a different time — and newspapers give you a flavor of it.

Of the four beliefs about the Depression I mentioned at the beginning, I think Robert Higgs’ “regime uncertainty” is most clearly verified. (Read his essay!) The crucial fact about the Depression of the 1930s is not that America got out of it; it always gets out. It’s that the getting out took more than ten years, which was longer any other depression in US history, and that Canada, Britain, Germany, and most other countries got out sooner, and that it took a worldwide war and the eclipse of the New Dealers for America to get all the way out.

Investors talked and acted as if they lacked confidence; statistics show a shortage of long-term investment.

But I don’t think the depression of the 1930s — the onset of it, the depth of it, the duration of it — was caused by any single thing. The commercial world is more complicated than that. I think the Austrian theory of overinvestment, or “mal-investment,” explains much of the setup of the crash, because in the late 1920s and into 1930 there were a lot of bad investments in real estate, commercial buildings, holding companies, and junky stocks. The Crash in 1929 shrank people’s assets and, more important, their confidence — for years. The Dow Jones Industrials went down almost 90%. The reparations owed by Germany to Britain and France, the sovereign debts owed to the United States by Germany, Britain, and France, as well as by Brazil and other South American republics, all had something to do with it, because in 1931 this grand edifice of debt went down in a heap. The bond market was so thoroughly wrecked that counties, cities, school districts, and corporations were locked out of long-term borrowing for several years. Smoot-Hawley and the whole movement toward economic nationalism had a bad effect. The gold standard deepened the Depression because it imposed a discipline on government finances — heavy spending cuts — at a time when they were painful, and when some countries freed themselves of that discipline it shifted the pain to the other ones. Finally, the anti-capitalist political currents and the ad hoc, experimental, extralegal character of the New Deal frightened investors, whose long-term commitments were needed for economic recovery.

That’s the best I can do. I’m still reading old newspapers.




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Maybe We’re Not Paranoid Enough

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Andrew McCabe, former deputy director of the FBI and former interim director of the FBI, has produced a book about his bitter experiences with Donald Trump and is now puffing that book in interviews. In an interview with CBS he recalled his (hysterical) reaction to the firing of the egregious James Comey, director of the FBI, whose career of government-enabled arrogance Trump finally ended.

McCabe said that he, McCabe, immediately decided to instigate a high-profile probe of the president’s alleged obstruction of justice in firing Comey and of Trump’s alleged collusion with Russia. He decided, in addition, to institutionalize these probes so firmly that they could never be stopped without additional charges of obstructing justice.

McCabe also said that he discussed with his boss, deputy attorney general Rod Rosenstein, the latter’s plan to enlist cabinet members to consider taking Trump out by means of the 25th Amendment, and that this project was seriously considered.

From McCabe’s point of view, Trump’s offenses, besides firing the FBI director, included daring to criticize the FBI’s activities (imagine that!):

The president had been speaking in a derogatory way about our investigative efforts for weeks, describing it as a witch hunt, publicly undermining the effort of the investigation.

Intolerable, is it not, that Trump should have spoken in such a way about investigations of himself?

McCabe himself was subsequently fired for lying and leaking, and his accounts of other people’s actions have been denied by some of them. He has tried to soften the impact of a few of his statements. That having been said, we can assume that his first account of his own doings, which he delivered with self-righteous braggadocio, can be given credence. He bragged about trying to stage a coup d’etat — exactly the kind of thing that supposedly paranoid libertarians have always suspected that “intelligence” agencies are able and willing to do. This is something even worse than the soft coups that such agencies have chronically staged, leaking or merely letting it be known that they possessed damaging information against public figures whom they distrust. A good example is J. Edgar Hoover’s stranglehold on Presidents Kennedy and Johnson, and his threats against Martin Luther King.

Whatever libertarians think of President Trump — and there is a wide range of opinion — they should receive McCabe’s revelations as a sign that their paranoia was fully justified, and as a warning about what will happen if libertarians ever do predominate, or look as if they may soon predominate, in government.

Picture it. Murray Rothbard Jones, senator from Idaho, is thought to be the likely nominee of the Republican Party. Jones is an antagonist of government surveillance and of what he calls “our institutionalized system of prying, snitching, and intimidation.” He has attacked and ridiculed the “process violations” that the FBI uses to send people it dislikes — such as Martha Stewart(!) — to jail. He has vowed that if he becomes president, one of his first objectives will be a “full house cleaning at the FBI.”

What do you think will happen to Murray Rothbard Jones?

Here’s what. As soon as Jones shows any chance of winning, the FBI will covertly investigate him for collusion with corporations that seek the repeal of antitrust and other trade-restrictive legislation. Is he not in favor of such repeal? And has he not taken contributions from corporate executives? So investigate; you’re likely to find something — on anybody. And of course you can leak it.

Meanwhile, the CIA will covertly investigate Jones for collusion with foreign countries. Is he not in favor of reducing tariffs? And has he not traveled to foreign countries and conferred with their leaders?

Information will be stockpiled, doctored, invented, and divulged. The FBI and CIA will collaborate in sponsoring stories about Jones’s nights in a Beijing luxury hotel, where he paid prostitutes to piss on him in a bed where Huma Abedin once slept. This purported information will be assiduously leaked by the same people who will proceed to vouch for its value. Investigation will follow investigation, paralyzing the Jones regime — as mobs roam the country, denouncing all Jones supporters as racists and sexists (after all, doesn’t Jones want to end racial and gender preferences?).

Well, this is more or less what happened to Trump. Now comes the part about the 25th Amendment.

What more proof do you want that Jones is unfit to discharge the duties of his office than his insane ideas about reducing military expenditures, ending American interference in foreign countries, and (gasp!) stopping the government’s subsidies to schools? The one thing lacking might be skepticism about the usefulness of the FBI and CIA, but now we know he’s crazy in that way too. If Jones survives, it will be a miracle. If he accomplishes any part of his program, it will be an apocalypse.

So, speaking of apocalyptic thought: libertarians should not imagine that their only enemies are demagogic pols, social scientists with incomplete educations, and the people standing behind the counter at the DMV. They’re just some of the hosts arrayed against us. The others are the guys in expensive suits whom St. Paul pictured as “powers” in “high places,” and “the rulers of the darkness of this world.”




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Rothbard’s Mistake

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Being interested in the history of the 1930s, I recently picked up a copy of America’s Great Depression by the influential libertarian Murray Rothbard (1926–1995). I choked on the introduction, where Rothbard lays out his theory about theory, which makes no sense to me.

“This book rests squarely on the Misesian interpretation of the business cycle,” he writes, referring to the theories of the older libertarian economist, Ludwig von Mises (1881–1973). “Note that I make no pretense of using the historical facts to ‘test’ the truth of the theory. On the contrary, I contend that economic theories cannot be ‘tested’ by historical or statistical fact. These historical facts are complex and cannot, like the controlled and isolable physical facts of the scientific laboratory, be used to test theory . . . The only test of a theory is the correctness of the premises and of the logical chain of reasoning.”

You have to keep in mind that the map sometimes lies, or maybe tells you a truth different from the one you need to know.

Philosophers make a distinction between statements that are valid and statements that are true. Validity is like math. It’s about logic. If P then Q. It’s theory. Truth is about what’s real, which is not the same thing. Logic is useful, but ultimately what we care about is what’s real.

I am reminded of the accounting classes I took many years ago. I gave up on accounting, but one thing has stuck in my mind: the professor described accounting as a map of the “territory” of a firm, and warned us not to confuse the map with the territory. The “map” might say the company is making money, but the truth might be that it runs out of cash before the owners are paid. (As a business journalist I wrote about some companies like that.) The map is useful; to steer the company you need the map. But you have to keep in mind that it sometimes lies, or maybe tells you a truth different from the one you need to know.

Back to Rothbard. He says that an economic theory is “a priori to all other historical facts.” It can be used to explain the historical record, but it cannot be tested. Here is his argument:

Suppose a theory asserts that a certain policy will cure a depression. The government, obedient to the theory, puts the policy into effect. The depression is not cured. The critics and advocates of the theory now leap to the fore with interpretations. The critics say that failure proves the theory incorrect. The advocates say that the government erred in not pursuing the theory boldly enough, and that what is needed is stronger measures in the same direction. Now the point is that empirically there is no possible way of deciding between them. Where is the empirical “test” to resolve the debate? How can the government rationally decide upon its next step? Clearly, the only possible way of resolving the issue is in the realm of pure theory — by examining the conflicting premises and chains of reasoning.

This strikes me as piffle. There are several ways of deciding between the two claimants. You can compare what happened at times when the policy was imposed with what happened at times when it wasn’t. You might compare the depression of the 1930s with the depressions of 1920–21 or 1893–97 or 1873–79, etc., and see that the one in the 1930s featured the slowest recovery in US history. That is evidence (not proof) that whatever policies were tried didn’t work too well. You can dig deeper. How did investors, entrepreneurs, company managers, workers, and other people in the 1930s respond to the National Recovery Administration? To mass unionization? To the retained-earnings tax? To the abandonment of gold? What did supporters and opponents predict the players would do, and what did they do?

Robert Higgs asks these kinds of questions in Depression, War and Cold War. You can reject what he does — none of his arguments amount to a drop-dead test such as you find in a chemistry lab — but they are ingenious. They are instructive. They make a case.

The social life of humans is more complicated than a test tube.

Rothbard argues, in essence, that such questions are too messy to answer. A theory cannot be “tested” in the way a question in chemistry can be “tested” by heating compounds in a test tube. He’s right in thinking that you can’t test that way with economic policies, but it doesn’t mean that “empirically there is no possible way of deciding between them.” You can look at what lawyers call “the preponderance of the evidence.” “Test” is a high-hurdle word, the wrong word. You can evaluate. You won’t get to 100% certainty, but it’s unlikely that you’ll be stuck at 50-50, either. You can decide, but you have to look at the territory as well as your map — and you may find yourself correcting your map to make it fit the territory better.

Essentially Rothbard denies this.

“Clearly,” he asserts, “the only possible way of resolving the issue [of choosing the best economic policy] is in the realm of pure theory — by examining the conflicting premises and chains of reasoning.” In other words, the only way to decide what to do “in the territory” is to pick the best-looking map without looking at the territory.

No, no, no! Because the social life of humans is more complicated than a test tube, and because cause and effect are mixed up and piled on each other, you have to check your “map” against the territory all the time. Because your theory is only an approximation. A simplification. It is not life.

Praxeology is not primary. Supply and demand curves are not reality.

To quote the philosopher Robert Heinlein: “What are the facts? Again and again — what are the facts?”

If you say, “I don’t care about what facts you have. What experiences, or what statistics, or anything. I have my theory, I’m sure it’s right, and I don’t need to ‘test’ it,” you become irrelevant. You become ignorable. You become the frog at the bottom of the well.




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Libertarian Patent Reform

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Liberty has recently been a forum for discussing copyrights; this brief essay on patents is intended to contribute to the intellectual property conversation. First, I will suggest several legal reforms that could narrow patents — in my opinion, a good thing. Second, I will explain why patents should exist, although in a form more limited than the present one.

Much has been made in the media about “patent trolls,” companies that file or collect patents, not with the intention of ever selling a product, but simply with the desire to litigate against others for patent infringement. Their special target is small businesses that lack the legal resources to fight back. They extort money from these businesses by threatening to sue them. Patent trolls should be repulsive to all libertarians. Even libertarians who devoutly believe in patent law should consider this a blatant example of people gaming the legal system to steal money from innocent, productive businesses.

Twenty years enables a virtual monopoly that may encompass the bulk of a person’s working life, and that’s too long.

What can be done about such trolls? I have some recommendations for changes in the patent laws. I am confident that these changes would satisfy a broad swath of libertarians because, while hurting the trolls, they would provide a healthy limitation to the laws themselves, laws that, according to some libertarians, are too powerful and tend to help patent owners at the expense of the public.

1. Shorten the term of patent protection to ten years. A patent currently lasts for 20 years from its grant date. But the purpose of the patent laws, as spelled out in the United States constitution, is to encourage innovation — “to promote the progress of science and useful arts.” An adequate incentive to invention would be ten years. Twenty years enables a virtual monopoly that may encompass the bulk of a person’s working life, and that’s too long. Ten years of protection rewards and encourages invention but allows a patent to pass into the public domain early enough so that the public can freely make use of inventions while they are still technologically relevant. This is the public’s reward for granting the patent to the inventor. In other words, the public and the inventor enter into a bargain wherein the inventor gets a temporary monopoly and the public gets the useful knowledge embodied in the invention after the monopoly ends. If the technology is out of date by the time the patent ends — and after 20 years most tech is outdated — then the public is not getting its end of the bargain.

2. Require “intent to use.” Currently a person may file and own a patent merely for having invented it, and may assign it to whomever he likes. Trademark law contains a concept called “intent to use,” but this doctrine has not migrated to patent law. If a legal requirement were imposed that to file or own a patent a person must possess a legitimate intent to develop the invention commercially and sell it, then patent trolls would cease to exist. This would not hurt penurious inventors, because the only requirement would be a good faith intent to use the patent at some point, and there would be no requirement of actually being commercially successful, nor of having the financial resources to start manufacturing in the near future.

3. Give teeth to the “obviousness” requirement. The two legal requirements for a patent to issue are, in the words of patent law, “novelty” and “non-obviousness.” Novelty means that no one has done it before. This is strictly enforced by the courts. But as to the invention being non-obvious, the test is enforced very loosely. The best example is the Amazon “one click” patent. Amazon filed a patent that was, really, for nothing more than the process of buying something on a website by means of a single click of a button on the site, where that one click does everything necessary to complete the sale. Apparently it was novel, and the patent issued. But, in my opinion, one click is patently obvious (pun intended). Clicking a button to buy something seems so obvious that a monkey could think of it. Yet this patent still exists, although it was somewhat narrowed by later litigation.

One click is not an isolated exception. For another example, Yahoo! has a patent, which Google licenses, a patent for including ads in search engine results. An idiot could have invented that patent. But patent law deems it “non-obvious.” I advocate, in all seriousness, the creation of a “monkey-or-idiot” test: if a monkey could have designed something or an idiot could have invented it, then it is obvious, and no patent may issue for it. The test used by the courts for “obviousness” right now is merely whether prior art anticipated it, which improperly collapses the obviousness test into the novelty test, and in practice creates one hurdle to clear when the laws explicitly require that a patent must clear two hurdles.

4. Make patents non-assignable. Right now, there is a handful of big corporations that dominate an area of technology and collect patents in order to prevent smaller startup companies from competing against them. For example, in the software realm, Microsoft, IBM, Apple, and Amazon collect patents aggressively and use their patents to stifle competition. This is rightly characterized as the rich exploiting the laws to hurt the poor and the middle class, because the big corporations are owned by the rich while the small startups tend to be ambitious hard-working poor or middle-class entrepreneurs.

If a monkey could have designed something or an idiot could have invented it, then it is obvious, and no patent should be issued for it.

The solution to this problem is to make patents non-assignable: only the inventor of a patent can own it. This will diversify patent ownership so that the rich cannot use patents to suppress the middle class. One of the purposes of a patent is to reward the inventor for his creative contribution to society, and this reform would force corporations to pay inventors what they are due.

5. Make independent creation a defense to the charge of infringement. In the realm of copyrights, independent creation is already a defense to infringement. If Singer A writes a song, and Singer B writes the same song by himself and does not copy A, then B cannot be sued for infringement by A, even if A owns the copyright in the song. This makes sense, because intellectual property infringement is basically a claim for theft, and B did not steal or copy A, despite the two songs being identical. I advocate a similar defense of independent creation to patent infringement. If an inventor creates an invention by himself, and does not copy or steal from the patent’s owner, then he will be free to use it. (We can discuss whether, in addition to freedom of use, he should also have the right to file a patent for it, when a patent already exists.) This makes sense, because the inventor should reap the rewards of his work, and nothing that the patent owner has done makes it just or right to block an inventor from using the invention that he himself created.

Some libertarians suggest that “loser pays” should apply in patent litigation. Recent legislation to apply “loser pays” to patent cases, in an effort to curtail patent trolls, massively failed to elicit voter support and died in Congress. And the trillion dollar technology industry, and its lobbyists, will never allow patents to be eliminated. However, by intelligently advocating selective, sensible, wise reforms, we can nudge patent law in a direction that makes it more responsive to the needs of the public.

Of course, some libertarians will be outraged that I am advocating patent reforms instead of the wholesale abolition of patents. To enable a discussion of this topic, allow me to review the three libertarian arguments for patents. I call these the Randian argument, the Rothbardian argument, and the Nozickian argument.

1. The Randian (Ayn Rand-derived) argument is simply this: assume that John Galt designs a motor that can convert static electricity to usable electric power. This motor will solve the world energy crisis and create clean, cheap, limitless electricity. Should Galt own a patent in the motor? The Randian answer is yes, because Galt created it by using his hard work, intelligence, and genius, and a person deserves to own the results of his labor, as a matter of justice: you should be allowed to reap what you have sown. If you oppose patents, just imagine James Taggart, a principal villain of Rand’s Atlas Shrugged, taking Galt’s motor and using it without his consent in order to make money for Taggart, who gives nothing to Galt. To a libertarian, this should feel shocking and ghastly. In fact, it should feel like the parasites exploiting the geniuses, opposition to which is the whole point of Rand’s philosophy.

2. Many libertarians oppose patents, not because of analysis or thought, but because libertarian theorist Murray Rothbard told them to. Many libertarians obey the Rothbardian party line and do what Rothbard says without any critical inquiry. But a little critical thinking shows why, even if we concede Rothbard's basic economic theory, we can still justify patents.

Why did Rothbard oppose them? My reading of Rothbard is that, for him, property exists in order to prioritize scarce resources. He believed that ideas are not scarce, and that therefore ideas cannot be subject to ownership. My analysis is that Rothbard confused the use of ideas and the creation of ideas. Once an idea is created, it cannot be used up or depleted, and anyone can employ it without taking it away from someone else. An idea is not scarce in its use. But the creation of ideas is scarce. If the design for a motor that could create cleaner, cheaper, more plentiful electricity is not scarce, then where is this idea? If not truly scarce, it should be growing on trees and waiting to be plucked and used, like berries on a bush or air to breathe. But Galt’s motor is nowhere to be found. Indeed, the motor must be created by Galt before we can use it. And, until it is created, it is scarce.

Recent legislation to apply “loser pays” to patent cases, in an effort to curtail patent trolls, massively failed to elicit voter support and died in Congress.

The creation of ideas uses scarce resources, such as Galt’s genius, or funding for research laboratories. Therefore, even according to Rothbard’s basic idea that property exists to prioritize scarce resources, patents should issue to inventors, so that money can be paid to the creators of inventions, to prioritize the resources that go into creating inventions.

3. Robert Nozick, Harvard’s most notable libertarian, once posed a thought experiment about what would happen if people were allowed to sell themselves into slavery. He posited that everyone would buy an interest in everyone else, leading to a communal society grounded in contract law.

Nozick's argument, which comes from the second section of chapter 9 in his book Anarchy State and Utopia, is very complicated and difficult to summarize. The gist of it is that a socialist state could arise from a series of contracts if everyone were allowed to sell to others the right to make the seller's important life decisions, such as the decision of which job to work, what drugs to use, what to do with money, etc., because eventually everyone would own a decision-making interest in everyone else, so the community would then have the contractual right to make each individual's decisions. Nozick's prose is dense enough and meanders so much that it is debatable whether he thought this was an argument against the right to make such contracts, or whether he merely found it a thought experiment colorful enough to elaborate. I have no need to answer this question, because my version of Nozick's argument focuses on other contracts that, in general, most libertarians would agree that a person has the right to make.

Let us assume that in a libertarian utopia a person is free to enter into contracts with other consenting adults, without limits. And let us assume that Galt invents a great motor. Then, as a condition to telling anyone else how his motor works or showing his design to others, he requires that everyone else involved with it, such as the investors who fund it and the consumers who buy it, signs a contract. This contract between Galt and third parties would say that the other person consents not to use, buy, make, or sell a motor similar to Galt’s, without Galt’s permission or without paying Galt a licensing fee, in return for the right to do business with Galt. How would this arrangement differ from a patent?

But, also consider: what in libertarian theory would forbid such a contract? If such contracts were allowed, then de facto patents could exist, although they would be based on contract law and not on patent law. So the Nozickian argument proves that a libertarian utopia would collapse, or develop, into a society where de facto patents exist, even if patent law had been abolished.

For all three reasons, Randian, Rothbardian, and Nozickian, it is worth asking: why should (some) libertarians be so passionate in their hatred of patents? I do not ask for your blind agreement on an answer, but merely ask that you consider whether your position on patents is the result of thoughtful reflection or peer pressure from the libertarian movement to conform to the standard form of Rothbardian dogma.




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The Steel Curtain: The Pauls’ Attack on the Libertarian Party

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The rise of Ron Paul and Rand Paul has brought great attention to such libertarian ideas as auditing the Fed and the need for an antiwar foreign policy. But because Ron Paul’s 2008 and 2012 presidential bids were GOP primary attempts, their net effect was to bring libertarianism into the GOP fold. The phenomenon was confirmed by Rand Paul's Senate victory as a GOP candidate, and by the fact that many Americans now associate libertarian ideals with the Tea Party, with which the Pauls themselves are associated, and think of the Tea Party as a Republican group.

Things were simpler when the GOP was for conservatives and the Libertarian Party was for libertarians. If, now, the GOP steals a large number of libertarians away from the LP, the LP will be doomed. Worse, Ron Paul's efforts have made mainstream America think of libertarianism as a right-wing political philosophy, more extremely to the right than conservatism. This is a tendency that Murray Rothbard, for one, would certainly have deplored. Rothbard fiercely criticized Ayn Rand's idea that "the businessman is America's most persecuted minority," asserting instead that many businessmen were statist hacks who benefited from corporate welfare. Yes, Rothbard might have felt differently during his paleolibertarian phase, but liberty has always been an ideal that paralleled leftist positions on certain social issues: drugs, immigration, gay rights, limits on police authority, and others. The danger now is that this parallel will be forgotten. The GOP will simply consume the LP, and true libertarians will have no political home.

Conservatives will always control the American Right because they vastly outnumber libertarians. If, then, libertarianism is considered a rightwing movement, it will eventually dissolve into nothingness. I fear that a steel curtain is going to be built, cutting libertarians off from our socially liberal positions, and fencing libertarianism in on the side of the conservatives. The Libertarian Party's national leadership has never been particularly clever or smart. It has often been obsessed with ideological purity at the expense of practicality and the possibility of winning elections. I doubt the leadership will have what it takes to save the LP from the Pauls’ implicit attack. To paraphrase Caesar, "Et tu, Paule?"

Things were simpler when the GOP was for conservatives and the Libertarian Party was for libertarians. If, now, the GOP steals a large number of libertarians away from the LP, the LP will be doomed. Worse, Ron Paul




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Are Objectivists Also Libertarians?

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The second Atlas Shrugged movie has now come out. Should this be viewed as a cause for celebration within the libertarian movement? Well, to know that we must first answer whether Objectivists are also libertarians. Is Objectivism a part of libertarianism?

Many people who claim to be Objectivists vehemently say No, it is not. My first reaction, on hearing them say that, is to think, “This is preposterous!” But it is hard to “answer” the question, because there is so much political and intellectual baggage caught up in it. In order to say “Objectivism is a type of libertarianism” you would need to define the two terms, and definitions vary so much that most people won’t agree on any two you give. And naturally, one doesn’t want to start a fight.

But let me put on my Objectivist hat for a moment and say: “In the next part of this essay I am going to demonstrate that reason and reality say that Objectivism is, in fact, a form of libertarianism, and I will be presenting the objective, neutral honest Truth.”

Here goes.

1. If “libertarian” means “extreme and radical defender of capitalism,” and “Objectivist” means “a follower of Ayn Rand,” then because Rand was an extreme, radical defender of capitalism, all of her true followers must be this type of person also. So all Objectivists are libertarians.

2. If “libertarian” means “a believer in the idea that aggression should never be initiated and violence should be used only in self-defense,” and this thought can be seen at the heart of Rand’s politics (consider the Project X episode in Atlas Shrugged, for example), then she was a libertarian and those who accept her philosophy are libertarians.

3. If “libertarian” refers to a belief that property comes from natural rights and human nature, a belief that mirrors one of Rand’s core beliefs, then the same conclusion can be drawn: she was a libertarian and her followers are also libertarians. Rothbardian libertarianism and Objectivism are like brother and sister, and Rothbard’s anti-Rand play “Mozart Was a Red” was merely a case of brother being mean to sister.

4. If “libertarian” refers to a belief that property rights are practical, pragmatic, and utilitarian, in the tradition of Hayek and Friedman, then yes, on the surface one might say that this is different from Objectivism. But let’s look more closely. The utilitarians say that capitalism will produce wealth and make people happy. Objectivism holds that capitalism is the system for “life on this Earth.” Translation: capitalism will make people happy. Rand bases her ethics on what will work in practical reality, although she takes this practicality and dresses it in the language of strict, almost puritan “morality.” Utilitarians like to say that they will obey whatever idea works best, whether it be capitalist or socialist, but in practice Hayek and Friedman were some of the most passionately idealistic and principled of capitalism’s defenders. Libertarian utilitarians take practicality and mold it into a theoretically consistent ideology based on the idea that capitalism will make people happy. Even in this sense, Objectivism is a type of libertarianism, if interpreted correctly.

5. If “libertarian” refers not to specific ideas but to a historical political movement and that movement’s members, then how can anyone ignore the steady foot traffic from Rand’s novels to the libertarian movement, during at least the past 50 years? This is the reason why It Usually Begins with Ayn Rand was so popular among libertarians. I suspect that an accurate poll of movement libertarians would reveal that at least 25% to 30% are post-Randian Objectivists, which is probably just as many as are Rothbardians or Ron Paul fanatics.

The truth is that the “official” Objectivist movement is a subset of libertarianism that, unfortunately, seeks to exclude and cast out anyone who disagrees with it, in an effort to preserve its ideological purity, which revolves around the quasi-worship of Rand; and that the “unofficial” Objectivist movement is overtly libertarian. Another truth is that many, perhaps most, of the other subsets of the libertarian movement are also obsessed with ideological purity and seek to cast out nonconformers. Anarchists hate minarchists, and vice versa, and some followers of Rothbard and his vision of anarchy are as stubborn as any Randroid. A more detailed account is beyond the scope of this essay, but can be found in Brian Doherty’s history of libertarianism, Radicals for Capitalism.

But all these people, including the Objectivists, are libertarians, whether they like it or not. Any contrary belief is illogical, self-contradictory, and blatantly irrational — precisely the type of thinking Rand preached against, although she herself had a spotty and checkered history of applying her theory of strict rationality in her personal life.

Some Objectivists reason in this form:

  1. Rand defined Objectivism.
  2. Rand said that Objectivists are not libertarians.
  3. Therefore Objectivists are not libertarians.

This sequence of assertions has a remarkable simplicity, of the kind that often appeals to the young. But, of course, the truly Randian thought would be: what matters is not what people believe or say, even about their own ideas; what matters is what exists in objective reality. I couldn’t agree more with this essential Objectivism. And I hope I have selected an appropriate way to provide an “unanswerable” question with an objective and obvious answer.




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