Is the Libertarian Movement Moving Anymore?

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It’s been a long time since there was a new libertarian book I wanted to read. Or a libertarian argument I itched to join.

Libertarian thought isn’t what it used to be. Nor libertarian influence. I think it peaked in the ’90s.

Think back on that time. In 1994 the Republicans rallied against Hillary Clinton’s health insurance plan and took back the House of Representatives for the first time in 40 years, and with a staying power they hadn’t had in 70 years. Bill Clinton tacked to the right, famously saying in 1995, “The era of big government is over.” Whether or not Bill meant it, it meant something that he said it.

Politicians get their proposals from ideas current at the time. If the New Deal was socialistic, it was because in the first half of the last century, socialism was in the air. Similarly, Bill Clinton did some pro-market things in the ’90s that Democrats wouldn’t have done 70 years before.

Libertarian thought isn’t what it used to be. Nor libertarian influence.

The reigning ideas had changed. When Richard Nixon got rid of the draft, the idea came from the free-market economists, principally Martin Anderson and Milton Friedman. Starting under Jimmy Carter and continuing under Ronald Reagan, the federal government followed the advice of the economists and ripped away price and entry controls over airlines, trucking, and natural gas. It opened up the telephone industry to competition and removed interest-rate controls on banks. The New York Stock Exchange freed itself of controls on commissions. The Supreme Court freed professionals of controls on advertising. When unions failed to seed themselves in the new tech industries, they lost their grip on most of the private economy.

Under Clinton, the government supported the extension of private property into the radio spectrum and into the North Pacific fisheries for halibut and black cod. Clinton signed the Republicans’ North American Free Trade Agreement and the Republicans’ welfare reform.

In the last half of the ’90s came the dotcom boom. Bill Gates, Steve Jobs, Jeff Bezos and others became cultural figures in a way businessmen hadn’t since the 1920s. The Democrats were happy with the dotcom boom. Al Gore even claimed parenthood of the Internet.

When Richard Nixon got rid of the draft, the idea came from free-market economists.

All this was totally unlike the reigning Democratic thought of the 1930s, 1940s, 1950s, or 1960s.

And in the ’90s there came peace. For the first time since Adolf Hitler, America had no enemy. That was a new thing, and a wonderful thing.

None of this is hardcore libertarianism, but think of what libertarianism really is. The essence of it is that your life belongs to you, not the community. We celebrate the private life. Well, the biggest threat to private life is war. From 1940 through 1973, the military could pluck a young man out of private life against his will, put a gun in his hands and make him bellow, “Yes, Sir!” But even with the draft gone, war still skews thought and feeling. It limits what a society can afford, what it can allow, or even what it can discuss. Remember the time after Sept. 11, 2001.

Libertarians like to say their philosophy is about freedom, but it is a particular brand of freedom. The Left offers a brand of freedom: “Just let us control your work and property, and you can be free of worry about food, shelter, schooling, public transit, sickness, and old age.” The Left dismisses the libertarian’s freedom as “the freedom to starve” — which, among other things, it is. The freedom to venture out includes the freedom to fall on your face. And if enough individuals crash and burn, people may decide the system that allows it is not worth it. The libertarian’s freedom requires a large dose of self-reliance — and in the ’90s, self-reliance was pushing forward with welfare reform and the most entrepreneurial economy since the 1920s.

The essence of libertarianism is that your life belongs to you, not the community. We celebrate the private life.

Regarding self-reliance, the frontier political struggle was for private accounts within Social Security. Here was a proposal to phase down payments out of a common pot under government control and phase in individual accounts under private control. Libertarian purists were prissy about it, because the individual’s control was going to be limited and the contributions would still be compulsory, but these are not realistic people, and nothing was ever going to satisfy them. The limited Social Security “privatization” would have been a big change, a culture-shifting change. The Left sensed how big it was, and denounced it in an emotional fury as a Wall Street plot to make financiers rich. And it wasn’t. I knew who the proponents were. I had interviewed some of them and written about them. I had read their books. They weren’t trying to make money; they were trying to make the world better. The most credible ones, the ones from the commercial world, made an economic case that had to do with individual wealth, not Wall Street’s profits. (For example, see The Real Deal: The History and Future of Social Security, bySylvester Schieber and John Shoven, published by Yale University Press in 1999.)

We forget that in the private sector, individual accounts did push aside “common-pot” pension plans. They’re called 401(k) plans. They increase the individual’s chance to gain and also his risk of loss — a net gain for self-reliance. They were put in by employers, not by employees. But with Social Security, the Democrats appealed to employees’ fear of loss, and the “privatizers” were defeated — decisively. Given a choice, Americans stuck with the system designed in the 1930s. And those who keep predicting that Social Security will fail are wrong. It won’t. Congress will fix it by raising taxes, probably by eliminating the cap on taxable income. If they have to, they’ll cut benefits in some gentle and technocratic way.

The freedom to venture out includes the freedom to fall on your face.

It has been years since Republicans talked about private accounts in Social Security. It’s a dead body they don’t want to be reminded of. Donald Trump vowed never to go near it, and he won’t.

The ’90s were the time of greatest libertarian momentum. By my reckoning, they ended with several events.

The first event was the protest against the World Trade Organization in my hometown, Seattle, on November 30, 1999. The Left came out — tens of thousands of them — against trade. I had imagined that the Left had withered away like the Marxian state, but I was wrong. They were here. They would come again in the Occupy Wall Street demos, and in the Bernie Sanders campaign, loud and obnoxious.

The second event was the end of the dotcom boom in early 2000. You can extend the rules of capitalism when there is a surplus of happiness. Not otherwise.

Given a choice, Americans stuck with the system designed in the 1930s.

The third event was the attacks of September 11, 2001. George W. Bush wasn’t going to be a free-market president. He was going to be a war president, if he had to start one himself.

After the war came another recession, worse than the one before it. Bankers and capitalists were seen to be bad, and Alan Greenspan was ejected from the people’s hall of heroes.

And then came Barack Obama, and now Donald Trump.

Can anyone argue that we’re progressing?

Has there been a libertarian moment to compare with the ’90s? There were the campaigns of Ron Paul — which amounted to what? What did they achieve? Paul has not changed his party, as Barry Goldwater famously did. Donald Trump has changed the Republican Party, and into an anti-immigrant, anti-trade, resentful mess. Ron Paul’s son is still in the Senate, but one man does not a movement make. Note the exit of Sen. Jeff Flake, Republican of Arizona — not a good omen.

George W. Bush wasn’t going to be a free-market president. He was going to be a war president, if he had to start one himself.

So where are we, now? Here in Seattle, with my city council putting a (since-retracted) head tax on Amazon in order to succor the squatters on public land — and passing out tax-funded vouchers to donate to dingbat political candidates — it feels like a socialist moment. I also read in the press that Democrats across the country have turned left, and are toying with such Bernie-style ideas as free college for everyone, Medicare for everyone, and a guaranteed job for everyone. There is even babbling out there for UBI — universal basic income.

For everyone.

Those are all hobgoblin ideas until you think of the typical American Democratic politician we all know trying to define them, sell them, and get the average American to love them and pay for them. I imagine that, and I feel better. I think the socialists are selling something Americans won’t want to buy.

Anyway, I hope so.




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Leland Yeager, R.I.P.

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Leland B. Yeager, a distinguished economist and proponent of liberty, died on April 23, in Auburn, Alabama. He was 93 years old.

In public accounts of his life you will see it noted that he was Professor Emeritus at Auburn University and the University of Virginia and that he was a monetarist economist who believed that government should keep its hands off the money supply, except by defining a “unit of account.” He was the author of many books, including International Monetary Relations: Theory, History and Policy (1976), Experiences with Stopping Inflation (1981), The Fluttering Veil: Essays on Monetary Disequilibrium (1997), and Ethics As Social Science: The Moral Philosophy of Social Cooperation (2001).

When you read his work, you will find that his interests were as wide as the world.

Many of Leland Yeager’s shorter publications, as well as his fascinating collection of essays, Is the Market a Test of Truth and Beauty? (2011), can be found on the website of the Ludwig von Mises Institute. When you read his work, you will find that his interests were as wide as the world. Unlike other polymaths and original thinkers, however, he was always careful to stipulate where his own knowledge stopped. He believed in limited government; he believed also in responsible self-limitation. As a result, he was never a pedant, and he was never a bore.

But now I’ve started to talk about Leland Yeager the person, and as I do, I feel a sense of overwhelming loss. For three decades, Leland honored Liberty with his contributions, and I had the privilege of working with him as editor on most of them. He was a fine writer and a gracious fellow citizen of the republic of letters. His friendship inspired me. He cannot be replaced in my esteem.

Leland had many intellectual involvements, and in his last years his health was failing, so I knew I was doubly fortunate to maintain a literary relationship with him. Not that he ever indicated, as academics are wont to do, that he was tired of all the demands on his time. Oh no. There was no falsity about Leland Yeager. He did what he could, and he was interested in doing what he could.

He was a fine writer and a gracious fellow citizen of the republic of letters. His friendship inspired me. He cannot be replaced in my esteem.

If I could have published his essays, reviews, and comments every month, or every week, I would have. But I tried to be respectful of his time. Every few months I asked him whether he might be thinking about something that would be good for Liberty. Usually he’d mention some interests; I’d say that I shared them, and I was sure our readers would also; and soon his crisp, clear copy would appear in my inbox. I’d make a few editorial suggestions, of which he accepted maybe half; but whether he did or he didn’t, he would discuss the logic behind his final choice of words or syntax. I always looked forward to that.

Many authors aren’t interested in discussing words. They’re more interested in what they have to say than in how they actually say it. But Leland was in love with the way language works and with the reasoning behind our syntax, diction, and even punctuation. To an editor, he was the ideal author, a person with whom one could freely discuss the craft of writing and editing, a person from whom one could learn, even when one disagreed with him.

Leland sometimes joshed me about my “flattering” him into writing his next article for Liberty, but there was no flattery involved. I told him exactly how good he was. I looked forward to discovering what his next subject would be. Economics? Government? History? Words themselves? Leland was better at explaining economics than anyone else I ever encountered, with the possible exception of Murray Rothbard (and that’s saying something); but the same enthusiasm and authorial integrity he showed in discussing economics appeared in his treatment of ethics, linguistics, history, and every other subject. A careless word, a willful exaggeration, an improbable “fact,” a cheap piece of abuse — those were things he would never permit himself. Leland never thought that good intentions could excuse bad writing.

Leland was in love with the way language works and with the reasoning behind our syntax, diction, and even punctuation. To an editor, he was the ideal author.

Rereading Leland’s works for Liberty, I found everything as fresh as the day he wrote it — and how much journal writing can you say that about? I’ll mention a few examples:

  • Leland’s essay on alternative histories, the histories of things that never happened (Liberty, September 2009);
  • his essay on free will and determinism (February 2017);
  • his introduction to the “auxiliary language” Interlingua (February 2008);
  • his essay on national and occupational cultures (April 2011);
  • his review of “Reaganomics,” with an exposition of the reasons for separating economy and state (January 1989); and
  • his magisterial consideration of government debt (December 2000).

In 2007 I persuaded him to debate the existence of God with me. He took the unbeliever’s side, but his essay remains a favorite of mine: “Is There a God? And Does It Matter?” (October 2007).

Leland’s last contribution to Liberty was an incisive analysis of Bitcoin. The essay, which I assume to be the final publication in a long career of authorship, appeared on April 4 of this year.

But I mean the final publication during his life. Last November 20, Leland wrote me a message in his characteristic manner. He noted that he was “93 and in poor health.” “Still,” he said, “I can’t and don’t complain.” Then he filled me in on his current literary project:

For years I have been working on a book on capital and interest. It is substantially complete, although still in rough form. Now, I think, I have a coauthor, an eminent economist, who will finish the book after my death and try to get it published.

I am looking for news on this project, and as I get it, I will report it here. Meanwhile, his published work remains — large and rich and thoughtful, and ready at all times to encourage people who delight in true works of the mind.




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Bitcoin Blues

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Enthusiasts expect bitcoin to become a new privatized money, perhaps even replacing government money. The system will keep track of cash balances and transactions in such a way as to prevent fraudulent double-spending of the same units. Operating without any centralized recordkeeping (as by a bank or government), it will enhance financial privacy. It will employ an advanced technology called blockchain. As the Federal Reserve Bank of St. Louis Review (first quarter 2018) said, to really understand bitcoin and its many imitators requires combined knowledge of cryptography, computer science, and economics.

I lack this knowledge. Some points, though, are clear enough. A workable monetary system requires a unit of account and a medium of exchange. Prices, values, debts, claims, and cash balances are expressed, and accounting is conducted in the unit. The medium is something routinely used for receiving and making payments; in the United States it is currency and bank accounts denominated in dollars. Each transactor needs to hold some of the medium of exchange because receipts and expenditures are uncertain in exact timing and amount and are not closely synchronized.

The bitcoin unit goes undefined by anything and lacks redeemablity.

A suitable unit of account has an at least roughly stable value, which may be achieved in either of two ways. First, the unit may be defined by a quantity of some good or basket of goods, with the definition kept operational by two-way convertibility between money and the defining good or basket. Under the gold standard the US dollar was defined as the value of 1.5046 grams of pure gold. Under such a system the money supply adjusts almost automatically to the defined value. Alternatively, the value of the unit may be managed by central control of the money supply. The price level then adjusts to rough proportionality with the money supply, as explained by the quantity theory of money.

The bitcoin unit goes undefined by anything and lacks redeemablity. Its quantity grows in a strange way called “mining.” As a reward for taking part in the system’s decentralized record-keeping and especially for solving increasingly difficult mathematical problems, miners obtain new bitcoins. Their final amount is limited to 21 million. Who knows what happens then? Meanwhile, bitcoin-mining destroys real wealth by consuming vast amounts of electricity to operate huge computers.

Wild fluctuations in bitcoin’s undefined value rule out its use as unit of account and so, almost completely, as medium of exchange. Who wants to hold amounts of such an unstable asset for receiving and making payments? The occasional business firm “accepting” bitcoin promptly sells it for standard money rather than adding it to its transactions cash balance. A video by a Wall Street Journal reporter shows the great effort and extra costs of buying a pizza with bitcoin in New York City.

The final amount of bitcoins is limited to 21 million. Who knows what happens then?

Why, then, does anyone hold bitcoin? Some libertarians hold it to express disgust with government money and a hope for some kind of private and privacy-preserving alternative. (But other and academically respectable proposals for privatized money are available.) Some enthusiasts buy it as an investment or speculation. (Saying so in no way denies that speculation generally serves sound economic functions and that the distinction between it and investment is fuzzy.)

Prudence recommends that anyone considering an investment should ask how the desired gain might come as a share of real wealth — desired goods and services — created by his own and others’ investment. Even a gambling casino creates wealth in the perhaps questionable form of hopes, excitement, and entertainment. Gain on an investment or speculation with no prospect of creating wealth must come as a transfer from losers.

Meanwhile, bitcoin-mining destroys real wealth by consuming vast amounts of electricity to operate huge computers.

How, then, might promoting bitcoin create wealth? The advantages of a sound nongovernmental monetary system could count as wealth, but as a “public good” in the technical sense of something whose benefits cannot be withheld from people not paying for it — such as national defense or policing. Furthermore, competition from bitcoin’s surviving imitators would dilute any profits. More optimistically, experience with bitcoin might spur profitable improvements in its blockchain technology, which is already being extended beyond monetary uses.

Bitcoin might even evolve, after all, into a workable privatized money, quite in contrast with our current system. But how? Ayn Rand would dismissively reply: “Somehow.”

A final comment may be unfair, but I cannot resist making it. Excitement over bitcoin reminds me of the dotcom boom of the 1990s and even more so of the British South Seas bubble of 1720. For little more reason than that stocks kept going up, speculators drove prices still higher — until the crash came. Meanwhile, stock in dubious new enterprises sold readily. Charles Mackay (Extraordinary Popular Delusions and the Madness of Crowds, 1848) writes of one promoter who disappeared with the proceeds of successfully issuing stock in something described as “A company for carrying on an undertaking of great advantage, but nobody to know what it is.”




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Profound and Destructive

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President Trump’s destructiveness requires few words here. Consider how world stock and currency markets have been shaken by the resignation on March 6 of Gary Cohn, regarded until then as Trump’s chief economic adviser. Although not a trained economist, Cohn apparently had some sound instincts derived from years of financial experience. His departure apparently and ominously leaves more influence, or echo, to Peter Navarro — look him up with Google.

This latest example of destructiveness follows the one touched off by Trump’s March 2 tweet bewailing America’s loss of “many billions of dollars on trade with virtually every country it does business with” and heralding trade wars as “good, and easy to win.”

Trump views international trade as a game, a zero-sum game in which one player’s gain is another’s loss.

I’ll spend more words on how profound Trump’s ignorance is. He considers a country’s excess of imports over exports a measure of loss. This measure applies even to trade with each foreign country separately. He counts China and Mexico among the worst offenders, deserving punishment. He does not understand the multilateral aspect of beneficial trade.

Nor does he understand how we gain in buying goods cheap from abroad. What difference does it make if steel and aluminum are cheap because of low foreign prices or because they grow cheaply on bushes at home? Money cost is a measure of opportunity cost, which means the loss of other goods when resources go instead to make the particular good in question. Opportunity cost reflects scarcity. Scarcity applies even to prosperous America, where we could enjoy still higher standards of living if food, clothing, shelter, entertainment, and other goods and services came costlessly and miraculously from heaven. Scarcity and how gains from domestic and foreign trade alleviate it are fundamentals of economics. The principle of comparative advantage goes far in explaining how.

The profundity of Trump’s ignorance goes beyond economics, extending even to the behavior of a decent human being.

Without understanding the academic presentation of the “absorption approach to the balance of payments,” everyone should be able to grasp its central idea, which is sheer arithmetic. If we as a country use more output for consumption and real investment than we produce, then the difference must come from somewhere — from abroad in the form of more imports than exports. A big item in this excess absorption, alias national undersaving, is government deficits. Yet Trump and Congress are complacent about increasing the deficit and debt by taxing less and spending more.

All too many politicians say that they are in favor of free trade if it is “fair trade” played on a “level playing field.” These slogans express Trump’s view of international trade as a game, a zero-sum game in which one player’s gain is another’s loss.

Trump does not understand how the price system coordinates economic activity, making most government planning about jobs and industries unnecessary and harmful.

The profundity of Trump’s ignorance goes beyond economics. It extends to diplomacy in domestic and foreign relations and even to the behavior of a decent human being. Yet his destructive economic ignorance remains prominent.




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OPEC Death Watch

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A number of recent articles suggest that OPEC — that kleptocratic cartel that has artificially jacked up oil prices for so many decades — is in its death throes.

The cause is something upon which I have long commented in these pages: the roaring renaissance of the American oil and natural gas industry, a renaissance produced by entrepreneurial capitalism — as opposed to interventionist statism. While the Department of Energy funded wind and solar power, along with biomass and ethanol production, all of which together have accounted for only a tiny sliver of American energy production, and that only with massive subsidies and draconian mandates — private enterprise backed the winners: oil and natural gas.

But the recent dramatic increase in production and exportation was occasioned by Speaker Paul Ryan’s success in enacting into law the right of American energy companies to export those resources. This allows frackers (and ordinary drillers) to increase production, because they now have an unlimited world market within which to sell their products.

There's a roaring renaissance in the American oil and natural gas industry, a renaissance produced by entrepreneurial capitalism — as opposed to interventionist statism.

And this is already happening, as several noteworthy articles report. One is a Bloomberg report that of all countries, no less than the United Arab Emirates (UAE) — the fourth largest oil exporter in OPEC — is buying oil from shale wells in Texas. It turns out that the Texas crude is much “sweeter” (lighter and of superior quality) and more useful to the UAE’s refining than the local brand. The 700,000 barrels of oil that it is buying are their first purchase from us.

Bloomberg notes that while American exports to the UAE are not projected to continue, the explosion of American oil exports will. Shipments from America rose from a mere 100,000 barrels per day (BPD) five years ago to 1.53 million BPD in November of last year.

Besides increasing American exports of oil, the fracking revolution has reduced non-American imports to below 3 million BPD, the lowest level since data were first gathered 45 years ago. Our current net imports are only one-fourth of what they were in 2006, and we are likely to become a net exporter in about a decade — sooner, if ANWR is finally tapped, and new offshore areas are opened up for drilling.

The 700,000 barrels of oil that the UAE is buying are their first purchase from the US.

A second story reports the rapid growth in exports of domestically produced natural gas. It reveals that China has signed a long-term contract with Cheniere Energy — a major exporter of liquefied natural gas (LNG) — under which Cheniere will ship LNG from the Gulf Coast to China. Under this contract, Cheniere will provide 1.2 million tons of LNG annually to China, starting in five years, and lasting for 20 years after that.

And there is a third story, which notes that besides a rapid rise in American LNG shipments to China, we are seeing an explosion of exports of American crude oil shipments to that country. These exports have mushroomed from zero, before two years ago, to 400,000 barrels per day during the past two months. And again, if we bust open ANWR and the coastal waters of Alaska, such exports will increase even more quickly.

One nice side effect of this is that the more oil China buys from us, the lower our balance-of-trade deficit is with China. Two months ago our trade deficit with China was $25.55 billion. Last month it dropped to $21.895 billion.

Our current net imports are only one-fourth of what they were in 2006, and we are likely to become a net exporter in about a decade.

For the foreseeable future, of course, China will continue to buy most of its oil from Russia and the OPEC countries. But our share of the Chinese market will grow, for two reasons. First, at $60 per barrel, American crude is more than $4 cheaper than the benchmark (Brent) price. Second, while there are certain infrastructure bottlenecks that have to be overcome, they are being addressed. For example, while we don’t yet have ports capable of handling the biggest oil tankers (“Very Large Crude Carriers”), we have already started expanding one of the largest ports on the Louisiana coast.

All of this has added to the stress on OPEC that may result in its collapse as a cartel: the members of the cartel may go their own ways. The recent uptick in oil prices above the $60 per barrel range has helped OPEC find some relief. The recovery of the old price from its lows in the $40–50 range has two causes.

One is the meltdown of socialism in Venezuela, which has cut its oil production dramatically. Venezuela, a founding member of OPEC, is allocated by the Cartel to produce 1.97 million BPD. But the near civil war in Venezuela has dropped actual production to only 1.64 Million BPD. In fact, Venezuela’s production dropped by a whopping 30% last year alone. This is a steeper decline than that experienced by Russia when the Soviet Union broke up, and that experienced by Iraq following the 2003 invasion!

As noted by the Wall Street Journal article that I am referencing, the drop in Venezuelan petroleum output will likely continue, if not accelerate, because the nation is trapped in a vicious socialized spiral. As it exports less, it receives less foreign currency, which cuts its ability to buy food and other necessities that its own dysfunctional economy cannot produce, which in turn increases its hyperinflation and thus the political and economic failure. Moreover, Venezuela’s declining shipments of crude are deducted to paying creditors (such as Russia) and are in constant danger of being seized by creditors.

All of this has added to the stress on OPEC that may result in its collapse as a cartel: the members of the cartel may go their own ways.

In short, the ill winds that have so badly buffeted the hapless Venezuelan people have blown great good to the rest of OPEC. I suspect this is the real reason why Russia — no longer itself socialist — so strongly supports the Venezuelan socialist regime: it keeps a formidable competitor on the ground. The Russians want nothing so much as fair competition — the history of their Olympic teams shows that!

Speaking of Russia, the second major reason that OPEC has been able to keep the price of oil as high as it has recently (i.e., in the $60–70 per barrel range) is that so far Russia has stuck to its agreement with OPEC to hold down production. In early 2017, OPEC and Russia — which, while not a member of OPEC, is certainly an ally of it — agreed to cut back Russia’s production. This agreement has held up for thirteen months, now, and the Russians have signaled that they are inclined to keep to the bargain through the rest of this year and even into the first half of next year. However, the Russian oil oligarchs are expressing doubts about the deal — since Russia needs to maximize its income in order to arm itself maximally.

Vadim Yakovlev, deputy CEO of Gazprom Neft, the giant Russian oil company, has said that the company views the OPEC agreement as only temporary, and it irks the company to be forced to hold back production. Gazprom’s CEO Alexander Dyukov has said, “Following the OPEC agreement, instead of growing at eight to nine percent, we [Gazprom] have increased by just 4.5 to five percent. Which is, without a doubt, a negative factor for us.”

At this point, American production is a regulator of world prices: whenever the price rises much above $60, the industry jacks up production, and the result brings the price right back down.

It is clear that OPEC’s day of rule is coming to an end. America — already the greatest producer of oil and natural gas combined — is on track to become the world’s biggest oil producer this year. Energy research firm Rystad Energy estimates the US production will rise by 10%, hitting 11 million BPD. America hasn’t been the global leader since — 1975!

The report from which I have drawn that last piece of information notes that in 2015 the Saudis drove oil prices down to $26 a barrel. This lowered American production by 11%. But the American oil industry, not destroyed, became stronger — and more efficient, able to turn a profit with prices as low as $30 a barrel. While some experts are not so sanguine about the US becoming number one, it is clear that our production will continue to grow. At this point, American production is a regulator of world prices: whenever the price rises much above $60, the industry jacks up production, and the result brings the price right back down. A recent article spells this out — oil prices have been driven down by American production’s rise to a new high of 10.25 million BPD.

In sum, the days of OPEC — an evil cartel of evil states, from socialist Venezuela to religious-fascist Iran to duplicitous Saudi Arabia to revanchist neofascist Russia — are numbered. The free market will at last prevail.




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Why Do Economists Disagree?

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The influence of economics suffers from the idea that economists disagree to the point of uselessness. George Bernard Shaw supposedly complained that “if all the economists were laid end to end, they'd never reach a conclusion.” A similar old adage says that if you ask the advice of five economists, you will get five different answers, or, if Keynes is one of the five, six answers.

Such talk may be fun, but it is unfair. "The first lesson of economics,” said Thomas Sowell, “is scarcity: there is never enough of anything to fully satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics." Why? With characteristic exaggeration, H.L. Mencken observed that “no educated man, stating plainly the elementary notions that every educated man holds about the matters that principally concern government, could be elected to office in a democratic state, save perhaps by a miracle . . . by a combination of miracles that must tax the resourcefulness even of God” (Notes on Democracy, 1926, pp. 103, 106). A politician who understands economics and tries to apply it loses votes. One who understands it but conceals that fact is dishonest. Honest ignorance is an electoral advantage.

Externalities, monopoly, inflation, recessions, mistakes, inadequate foresight — all do occur. Economists are tempted to damn reality for being real.

Economists agree on the basics of their subject; disagreement on policy has other sources. The following list merely names the main points of agreement. Explaining them would go beyond this note, although, toward the end, it does expand on the most fundamental of them.

  1. Scarcity and the need for choice; opportunity cost.
  2. The division of labor, gains from trade, and comparative advantage.
  3. Marginalism and diminishing marginal returns.
  4. The role of the price system in exploiting the fragmented knowledge and coordinating the productive efforts of millions and billions of people in the nationwide and worldwide economy. The task includes allocating resources between the present and the future. The midget economy of the Swiss Family Robinson on its desert island contrasts instructively with the vast capitalist world of diverse resources, abilities, and preferences.
  5. “Economic calculation,” which is more than the mere dovetailing of such activities as automobile production and tire production, suitably proportioned. It refers, further, to producing the chosen amount of each good and service at minimum sacrifice of other desired things. Efforts at such calculation without genuine markets and prices, whether in theory or in the real world, have failed.
  6. Money as an institution that vastly promotes specialization and gains from multilateral trade. Money prices express opportunity costs, convey information and incentives, and ration scarce resources and goods.
  7. Private property, innovation, and entrepreneurship as essential to a thriving economy.
  8. Refutation of fallacies that have contaminated policy for centuries, especially ones relating to international trade and to a supposed self-regulation of money — the “real-bills doctrine” that the money supply will be correct if based on short-term bank loans to finance the production or marketing of real goods.

Shared understanding does not end there. Economists agree that reality has “imperfections” in comparison with an imaginary perfectly working price system. Externalities, monopoly, inflation, recessions, mistakes, inadequate foresight — all do occur. Economists are tempted to damn reality for being real, and they agree on many such matters. Price inflation traces above all to creating too much money.

Recessions are episodes of snowballing impediments to transactions, and economists explain them in various ways. In no field do professionals totally agree. An example in macroeconomics is the opinion of central bankers worldwide, shared by many but not all economists, that 2% inflation — a halving of money’s purchasing power every 36 years — is a proper objective of policy and that lower inflation is a cause for concern. Some technically valid arguments do exist for chronic mild inflation, but they are not decisive. Economists disagree on the weights to be accorded to agreed considerations.

Disagreement on policy traces overwhelmingly to matters other than economics.

But disagreement makes news while agreement does not. Lack of total agreement parallels what also occurs in the natural sciences: total understanding and consensus never are reached; room always remains for further research. As in other disciplines, economists disagree, when they do, on details and at the “frontiers” of research but not on the basics.

Disagreement on policy traces overwhelmingly to matters other than economics. Economists are not equally bold in predicting the future. They (as well as political scientists) hold differing opinions about how well government and politics function. Scientific issues join in policy disagreement, as about how serious a problem global warming is.

Economists are not equally knowledgeable about history, as about periods of advance and stagnation, crises, recessions, and monetary systems. Historical knowledge is valuable for making judgments about prospective population growth and technical and other innovation, but agreement cannot be expected to the extent that it can be expected on the basics of economics.

Psychology is sometimes at issue. Not all economists have the same understanding of people’s psychological quirks and of whether policy “nudges” might improve their decisionmaking.

Economists sometimes yield to wishful thinking. An example is the belief that proposed tax-rate cuts will so stimulate economic activity as to increase, not reduce, tax revenues.

Sociological questions arise, such as whether and to what extent welfare programs foster a culture of dependency and undermine the traditional family. So do issues of ethics and social philosophy, as about inequality of wealth and income, concern for future generations, how progressive the tax structure should be, whether the estate tax is fair, and what claims poor people at home and abroad are entitled to make on the more fortunate. “Bleeding-heart libertarians” do exist and have a web site of that name.

Like other people, economists sometimes yield to wishful thinking. An example is the belief that proposed tax-rate cuts will so stimulate economic activity as to increase, not reduce, tax revenues. Such a belief does not mean rejection of economic principles; in rare circumstances, that happy result could occur.

Career advancement can be a factor. Some economists seek distinction in cleverly working on the “frontiers” of research, in deploying impressive mathematics, or in finding exceptions to generally agreed applications of basic principles. Alternatively, some may be paid for rationalizations about policy that selectively emphasize some valid principles while disregarding (though not denying) others.

Some economists, perhaps seeking influence and fame, make compromises by taking account of political feasibility (i.e., votes), endorsing policies other than those they truly consider best. Full honesty would require openly acknowledging what they are doing (see Clarence Philbrook’s eloquent article in the American Economic Review, December 1953).

If enough demand exists, wouldn’t private enterprise satisfy it, and in a less costly and otherwise more suitable part of town?

Not all so-called economists are real ones who have completed graduate studies in the field and try to keep up with and occasionally contribute to the professional literature. It is not enough to hold an economics-related government position or to be prominent on TV. Disagreement among such people shouldn’t be allowed to disparage the professionals.

The most basic economic principles concern scarcity and opportunity cost. The city council of Auburn, Alabama, has voted to build an outdoor ice-skating rink downtown, where it will gobble up scarce parking space, worsen traffic problems, and otherwise inconvenience nonskaters. Evidently the council has not made a full cost-benefit analysis. Might not the money be better spent for other city purposes or left to taxpayers for their own purposes? How intense, anyway, is the demand for ice-skating here in the Deep South, where, by the way, the ice would have to be artificial? If enough demand exists, wouldn’t private enterprise satisfy it, and in a less costly and otherwise more suitable part of town?

I conjecture that the city council simply agreed with someone’s idea that a rink would be a good thing. So why not build it? It is easy to forget asking how desirable it would be and how great the opportunity cost in sacrifice of other public or private use of resources.

Disregard of opportunity cost is disregard for a principle accepted by all economists.

Such blitheness about opportunity cost shows up on the big-city and national levels. If a proposed museum would be nice or another overseas military base would seem to be a wise precaution, why not vote for it? A new sports stadium might please the fans, and consultants will conceive of side benefits for nearby restaurants, so why not support it with city money? An individual legislator pays practically nothing himself and might gain some votes.

James L. Payne shows how disregard of opportunity cost supports thinking that government money is somehow “free” (The Culture of Spending, 1991). Lobbyists not only for governors and mayors but also for industries swarm Washington seeking local projects and grants of money. Understandably, witnesses calling for such favors in congressional hearings far outnumber those who dissent. A similar explanation applies to firms and industries seeking protection from competition. But disregard of opportunity cost is disregard for a principle accepted by all economists.

Nothing said here denies that economists have expertise in contributing to policy judgments and that they — and quasi-economists — often disagree. Such disagreement rarely hinges on core principles and does not excuse disregarding them. Specialists cannot and should not have the decisive vote on policy, but that judgment does not excuse neglecting the basic principles that concern everybody and on which economists emphatically do agree.




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The Reality of “Emerging Markets”

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The British Empire was the largest in history. At the end of World War II Britain had to start pulling out. A major part of the reason was, ironically, the economic prosperity that had come through industrialization, massive improvements in transportation, and the advent of telecommunications, ethnic and religious respect, freedom of speech, and other liberties offered by the empire.

After the departure of the British — as well as the French, German, Belgians, and other European colonizers — most of the newly “independent” countries suffered rapid decay in their institutions, stagnant economises, massive social strife, and a fall in standards of living. An age of anti-liberalism and tyranny descended on these ex-colonized countries. They rightly got to be known as third-world countries.

The blame — at least among those on the Right — went mostly to socialism and the rise of dictators. This is not incorrect, but it is a merely proximate cause.

An armchair economist would have assumed that these ex-colonized countries, still very backward and at a very low base compared to Europe, would grow economically at a faster rate. Quite to the contrary, as time passed by, their growth rate stayed lower than that of the West.

The blame — at least among those on the Right — went mostly to socialism and the rise of dictators. This is not incorrect, but it is a merely proximate cause. Clarity might have been reached if people had contemplated the reason why Marxism and socialism grew like weeds in the formerly colonial countries.

According to conventional wisdom, the situation changed after the fall of the socialist ringleader, the USSR, in the late ’80s. Ex-colonized countries started to liberalize their economies and widely accepted democracy, leading to peace, the spread of education and equality, the establishment of liberal, independent institutions, and a massive economic growth sustained during the past three decades. The “third-world” would soon be known as the “emerging markets.”

In some ways, government regulations and repression of businesses in the “emerging markets” have actually gotten much worse.

Alas, this is a faulty narrative. Economic growth did pick up in these poor countries, and the rate of growth did markedly exceed that of the West, but the conventional narrative confuses correlation with causality. It tries to fit events to ideological preferences, which assume that we are all the same, that if Europeans could progress, so should everyone else, and that all that matters is correct incentives and appropriate institutions.

The claimed liberalization in the “emerging markets” after the collapse of the USSR did not really happen. Progress was always one step forward and two steps back. In some ways, government regulations and repression of businesses in the “emerging markets” have actually gotten much worse. Financed by increased taxes, governments have grown by leaps and bounds — not for the benefit of society but for that of the ruling class — and are now addicted to their own growth.

The ultimate underpinnings of the so-called emerging markets haven’t changed. Their rapid economic progress during the past three decades — a one-off event — happened for reasons completely different from those assumed by most economists. The question is: once the effect of the one-off event has worn off, will the so-called emerging markets revert to the stagnation, institutional degradation, and tyranny that they had leaped into soon after the European colonizers left?

In the “emerging markets” (except for China) synchronized favorable economic changes were an anomaly. They resulted in large part from the new, extremely cheap telephony that came into existence (a result of massive cabling of the planet done in the ’80s) and the subsequent advent of the new technology of the internet. The internet enabled instantaneous transfer of technology from the West and, by consequence, an unprecedented economic growth in the “emerging markets.”

Those who hold China in contempt for copying Western technology don’t understand that if copying were so easy, the rest of the world would have done the same.

Meanwhile, a real cultural, political, and economic renaissance started in China. It was an event so momentous that it changed the economic structure not just of China but of the whole world. Because China is seen as a communist dictatorship, it fails to be fully appreciated and respected by intellectuals who are obsessed with the institution of democracy. But now that the low-hanging fruit from the emergence of the internet and of China (which continues to progress) have been plucked, the “emerging markets” (except, again, for China) are regressing to the normal: decay in their institutions, stagnant economies, and social strife. They should still be called the “third world.”

There are those who hold China in contempt for copying Western technology, but they don’t understand that if copying were so easy, Africa, the Middle East, Latin America, and South Asia would have done the same. They were, after all, prepared for progress by their colonial history. European colonizers brought in the rule of law and significantly reduced the tribal warfare that had been a daily routine in many of the colonies — in the Americas, Africa, the Middle East, and Asia. Britain and other European nations set up institutional structures that allowed for accumulation of intellectual and financial capital. Western-style education and democracy were initiated. But this was helpful in a very marginal way.

For those who have not travelled and immersed themselves in formerly colonized countries, it is hard to understand that although there was piping for water and sewage in Roman days, it still does not exist for a very large segment of the world’s population. The wheel has been in existence for more than 5,000 years, but a very large number of people still carry water pots on their heads.

It is not the absence of technology or money that is stopping these people from starting to use some basic forms of technology. It is something else.

A remark often attributed to Churchill, although unverified, has more than passed the test of time: “If Independence is granted to India, power will go to the hands of rascals, rogues, freebooters; all Indian leaders will be of low calibre and men of straw. They will have sweet tongues and silly hearts. They will fight amongst themselves for power and India will be lost in political squabbles. A day would come when even air and water would be taxed in India.”

The hope that once the correct incentives are in place and institutions have been organized, the third world on a path to perpetual growth, couldn’t be more wrong.

Europeans of that time clearly knew that there was something fundamentally different between the West and the Rest, and that the colonies would not survive without the pillars and cement that European management provided. With the rise of political correctness this wisdom was erased from our common understanding, but it is something that may well return to haunt us in the near future as expectations from the third-world fail and those who immigrate to Europe, Canada, Australia, and the US fail to assimilate.

For now, the hope among those in the World Bank, the IMF, and other armchair intellectuals has been that once the correct incentives are in place and institutions have been organized, imposed structures will put the third world on a path to perpetual growth. They couldn’t be more wrong.

The cart has been put in front of the horse. It is institutions that emerge from the underlying culture, not the other way around. And a cultural change is a millennia-long process, perhaps even longer. As soon as Europeans quitted their colonies, the institutional structures they left started to crumble. Alas, it takes a Ph.D. from an Ivy League college and a quarter of a million dollar salary at the World Bank or IMF not to understand what is the key issue with development economics and institutional failures: the missing ingredient in the third world was the concept of objective, impartial reason, the basis of laws and institutions that protect individual rights. This concept took 2,500 years to develop and get infused into the culture, memes, and genes of Europeans — a difficult process that, even in Europe, has never been completed.

European institutions were at roots a product of this concept. Despite massive effort by missionaries, religious and secular, and of institutions imposed on poor countries, reason failed to get transmitted. Whatever marginal improvement was achieved over 200 to 300 years of colonization is therefore slowly and surely being undone.

Without reason, the concepts of equal law, compassion, and empathy do not operate. Such societies simply cannot have institutions of the rule of law and of fairness. The consequence is that they cannot evolve or even maintain the Western institutions that European colonizers left behind. Any imposed institutions — schools, armies, elections, national executives, banking and taxation systems — must mutate to cater to the underlying irrationalities and tribalisms of the third world.

Alas, it takes a Ph.D. from an Ivy League college and a quarter of a million dollar salary at the World Bank or IMF not to understand what is the key issue with development economics and institutional failures.

In these “emerging markets,” education has become a dogma, not a tool; it floats unassimilated in the minds of people lacking objective reason. It has burdened their minds. Instead of leading to creativity and critical thinking, it is used for propaganda by demagogues. Without impartial reason, democracy is a mere tribal, geographical concept steeped in arrogance. All popular and “educated” rhetoric to the contrary, I can think of no country in the nonwestern world that did well after it took to “democracy.”

The spread of nationalism (which to a rational mind is about the commonality of values) has created crises by unifying people tribally. The most visible example is what is happening in the Middle East, but the basic problem is the same in every South Asian and African country. It is the same problem in most of South America. India, the geographical entity I grew up in, has rapidly been collectivized under the flag and the anthem. It might eventually become the Middle East on steroids, once Hindutava (Hindu nationalism) has become well-rooted.

In Burma, a whiff of democracy does not seem to have inhibited Buddhists’ genocide against the Muslim Rohingya. Thailand (which wasn’t colonized in a strictly political sense) has gone silent, but its crisis hasn’t. Turkey and Malaysia, among the better of these backward societies, have taken paths of rapid regression to their medieval pasts. South Africa, which not too far in the past was seen as a first-world country, got rid of apartheid, but what it now has is even worse. The same happened with Venezuela, which in the recent past was among the richer countries of the world. It is ready to implode, as may Brazil one day. Pakistan, Bangladesh, Nepal, and East Timor are acknowledged to be in a mess, and are getting worse by the day. Indonesia took a breather for a few years and is now again on the footprints of fanaticism. India is the biggest democracy, so its problems are actively ignored by the Western press, but they won’t be for long, as India continues to become a police state.

The spread of nationalism has created crises by unifying people tribally.

Botswana was seen as a country whose growth was among the fastest for the longest. What was ignored was the fact that this rather large country has a very small population, which benefited hugely from diamonds and other natural resources. The top political layer of Botswana is still a leftover from the British. The local culture continues to corrode what was left by them, and there are clear signs that Botswana is past its peak. Papua New Guinea was another country that was doing reasonably well, before the Australians left. It is now rapidly regressing to its tribal, irrational, and extremely violent norm, where for practical purposes a rape is not even a crime.

The world may recognize most of the above, but it sees these countries’ problems as isolated events that can corrected by a further imposition of Western institutions, under the guidance of the UN or some such international (and therefore “noncolonialist”) organization. Amusingly, our intellectual climate — a product of political correctness — is such that the third world is seen as the backbone of humanity’s future economic growth.

Unfortunately, so-called emerging markets are headed for a chaotic future. The likeliest prospect is that these countries will continue catering to irrational forces, particularly tribalism, and that they will consequently cease to exist, disintegrating into much smaller entities. As their tide of economic growth goes out with the final phase of plucking the free gift of internet technology, their problems will surface rapidly, exactly when the last of those who were trained in the colonial system are sent to the history books.




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Buchanan the Wicked?

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Morbid curiosity tempts me to buy and read Nancy MacLean’s new book Democracy in Chains, but I have resisted so far; for I don’t want to add to the unearned wealth that her book’s notoriety will probably bring her. I know enough from reviews, favorable and unfavorable, and from a published interview with the author herself, to understand that one main theme is the supposed wicked influence of James Buchanan.

I knew Buchanan very well from 1957, when, as Economics Department chairman, he brought me to the University of Virginia. There I was his academic colleague and friend. After he left the University of Virginia (in honorable protest against the University administration’s maltreatment of a colleague), I kept in contact with him and often saw him at professional meetings and occasionally at his homes in Blacksburg and then Fairfax.

Buchanan took economics seriously. He wouldn’t waste time on conspiracies and was no apologist for the wealthy and powerful.

Buchanan took economics seriously. He drew inspiration from his admired professor at Chicago, Frank Knight, and from the writings of the Swedish economist Knut Wicksell. He encouraged the creative thinking of his graduate students. He was a fabulously hard worker whose collected writings fill 20 large volumes and whose Nobel Prize was amply deserved. He wouldn’t waste time on conspiracies and was no apologist for the wealthy and powerful.

I understand Buchanan’s economic and political philosophy quite well, for my own is close to his. He was more of an egalitarian than I am, favoring an extreme estate tax and pondering redistributionary taxation as an arrangement whereby people insure one another against economic distress. While not completely agreeing with John Rawls, who called for social and economic arrangements designed to maximize the welfare of the least-well-off stratum of the population, he admired Rawls and his writings.

As for his thought on limits to democracy, I could expound it at length and enthusiastically. He admired the American Founders, who wisely tried to create a constitutional republic charged with protecting people’s rights even against abusive majorities and government itself. (“Democracy” is a much abused word, sabotaging clear thought by cramming various and even inconsistent good things together under a single label.)

In short, James Buchanan was an entirely different person from the one that Ms. MacLean imagines. She did not bother to know what she was writing about. But historians and journalists have a professional duty to check the truth of what they write.




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Bring On the Trillion Dollar Coin!

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Most Americans regard the federal deficit and the national debt as a single problem. In reality, they are two separate but related problems. Let’s decouple them and discover whether the widely disparaged idea of a “trillion dollar coin” would actually be an improvement over the practice of continuous borrowing to cover the federal government’s deficit.

Hard money is money backed by a tangible good, typically gold or silver. Fiat money is money backed only by the “good faith and credit” of the government issuing it. In the United States, fiat money comes in two flavors. The vast majority of US currency consists of Federal Reserve Notes and their electronic equivalents, backed by government bonds sold to the public and various central banks. These bonds pay interest that is booked as an expense within the government’s annual budget. For fiscal year 2016 interest payments on these bonds totaled $432 billion, or more than $2,800 for each income tax return filed.

Trump needs no additional congressional authority to mint the coin, since the enabling legislation is already in place.

The second type of US fiat money consists of all coinage and a small amount of paper money with the designation “United States Note” rather than “Federal Reserve Note.” This type of paper money, issued mostly in $2 and $5 denominations, circulated alongside Federal Reserve Notes until the 1970s, and is still occasionally found in circulation today. Coins and US notes are not backed by government debt and pay no interest.

A few years ago, when Republicans in Congress were refusing to raise the national debt ceiling, an idea was floated for minting a platinum coin with a face value of one trillion dollars. This was and still is technically legal, thanks to a 1996 law authorizing the minting of platinum bullion and proof coins. The law empowers the Secretary of the Treasury to strike platinum coins in any denomination that he or she deems appropriate. The idea was that the trillion dollar coin would be minted and deposited at the Federal Reserve, which would then credit the government’s account with a trillion dollars. The government could then spend this newly created money by “writing checks” on this account without having to increase the national debt ceiling or issue additional interest-paying bonds.

The idea died when Republicans caved in and agreed to raise the national debt ceiling. Fast forward to 2017, and now it’s the Democrats who are playing budget brinksmanship in an effort to force President Trump to restore funding for many of their pet causes, such as environmental projects and Planned Parenthood. Currently the fight is over the legislation needed to avoid a government “shutdown” by the end of April. Shortly thereafter, Congress must deal with raising the national debt ceiling. Many Democrats can be expected to oppose such an increase if Trump is unwilling to fund their most critical spending priorities. By teaming up with conservative Republicans who oppose on principle any increase in the national debt, congressional Democrats would likely have the votes to block any debt ceiling increase and thus threaten another government “shutdown.”

However, President Trump has the option to do an end run around the Democrats’ plan by dusting off the “trillion dollar coin” idea and actually implementing it. He needs no additional congressional authority to do so, since the enabling legislation is already in place. This would be a bold move with far-reaching consequences, most of them good.

More importantly, the “trillion dollar coin” would sever the link between mounting federal deficits and ever-higher interest payments on the national debt.

For starters, it would deprive the Democrats of their most potent legislative weapon in their drive to maintain and increase spending on programs that subsidize and empower their core constituencies. Defeating the Democrats’ plans would not eliminate the deficit, but it would lead to less government spending than any plan forged by a “bipartisan consensus.”

More importantly, the “trillion dollar coin” would sever the link between mounting federal deficits and ever-higher interest payments on the national debt. Freezing and then lowering these interest payments are essential to the nation’s economic health, as this interest is a substantial drain on disposable income and productivity.

All government-created fiat money is inflationary, and money backed by hard assets would be preferable. But fiat money backed by “trillion dollar coins” is neither more nor less inflationary than fiat money backed by interest-paying bonds. Of the two choices, the “trillion dollar coin” option is better for both taxpayers’ pocketbooks and the nation’s economic health.




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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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