Scratch a conservative, find a statist

The newly minted Dr Matthew Hooton slithered into print on Friday last to make the case for state control of international trade.

Did I say make a case? Not a bit of it. The ever-odious doctor in conservative ideology simply told us that solutions to the international diesel dilemma will, and I quote, "require some sort of state control over international trade that we haven't seen since 1984."

"Diesel rationing," says the sickening spin doctor, "needs to be implemented urgently."

Reasons for this sudden need to abandon free trade, the price system and our minimal and ever-decreasing freedoms? Nah, just rhetoric: "If we run out of diesel," says his fire-filled column, "Covid will look like a rehearsal."

Covid, if you remember, was when government locked us up. There are people who enjoyed that -- and who still look with rosy-eyed affection at every over-bearing measure taken back then. 

This repellent reptile is clearly one of them.

FACT CHECK: "The United States is one of the only developed countries where health care is mostly left to the free market." ANSWER: FALSE

 

"Many critiques of US health care begin with the assumption that ... the United States is 'one of the only developed countries where health care is mostly left to the free market.' In truth, among wealthy nations, the United States may have one of the least-free health care markets—and it’s making health care less universal.

"In a free market, the government would control 0 percent of health spending. Yet the Organization for Economic Cooperation and Development (OECD) reports that in the United States, the government controls 84 percent of health spending. That’s a larger share than in 27 out of 38 OECD-member nations, including the United Kingdom (83 percent) and Canada (73 percent), each of which has an explicitly socialized health care system. When it comes to government control of health spending, the United States is closer to communist Cuba (89 percent) than the average OECD nation (75 percent).

"The idea that the US health sector has 'largely unregulated prices,' as the 'Los Angeles Times' has reported, is also incorrect. Direct government price-setting, price floors, and price ceilings determine prices for more than half of US health spending, including virtually all health insurance premiums.

"Many think that if prices are excessive, they must be market prices. But in the United States, government price-setting pushes health care prices higher than they would be in a free market. On top of that, the government pushes all medical prices and health insurance premiums upward through tax laws and regulations mandating excessive levels of health insurance. ...

"A few examples illustrate how frequently the government sets prices too high. ...

"US health care prices are excessive because the government intervenes. When health care operates under free-market principles, prices would fall like they do in other economic sectors, making health care increasingly more universal."

~ Michael F. Cannon from his article 'U.S. Health Care: The Free-market Myth'

When I hear warmists whinge about the rocketing cost of living, I think about climate justice.

When I hear warmists whinge about the rocketing cost of living, I think about climate justice.

Why?

Because these are climate activists complaining about the effects of climate activism.

Let's start with the cost of tomatoes, cucumbers, lettuces, capsicums ... you know, all the things now generally grown in greenhouses. To heat them economically, growers use gas. And "because carbon dioxide is a plant food, concentrations of the gas are sometimes elevated in greenhouses to accelerate growth....

...All this requires a lot of energy, making greenhouses vulnerable to climate taxes on carbon dioxide emissions and bans on hydrocarbons, which drive fuel and electricity prices higher.

Government policies have tripled natural gas prices for Simon Watson of 'NZ Hothouse,' a 25-year tomato producer in South Auckland, who says the very foundation of his business is crumbling.

Twenty-five years ago, gas was abundant and we were told it was going to last forever,” said Watson. “It was a wonderful thing.”

But the good times are gone. Natural gas supplies are running out [sic], and rising costs threaten to uproot the entire operation, disrupting hundreds of workers. Watson’s two plants represent about 10% of New Zealand’s 500 acres of covered crops in the upper North Island. He predicts many will have to cut back or close because they can’t afford to pay for gas.

And salad dodgers have to pay too.

Watson points out that 80% to 90% of supermarket products – from meat and dairy to sugary drinks and liquor – rely on gas-intensive processes. The decline in natural gas reserves is pushing prices higher.

As energy commentator Vijay Jayaraj explains, this is an entirely self-inflicted energy crisis.

This manufactured crisis reveals the true cost of climate virtue-signalling – not just in New Zealand but across the globe where similar policies are damaging the agricultural sector. ... The government and the energy industry have nine months to come up with a solution before the high energy demands of next winter make the situation catastrophic.

"Catastrophic" is precisely what warmists were after. So it's funny to see them whimpering now.

You want to ban gas, ban exploration of gas, to price gas off the market? Then, you know, how about sucking up the consequences without whimpering.

But it makes things no easier for the rest of us.

The marvellous price system

 

"[I]in a system in which the knowledge of the relevant facts is dispersed among many people, prices can act to coördinate the separate actions of different people ...  It is worth contemplating for a moment a very simple and commonplace instance of the action of the price system to see what precisely it accomplishes ...
"Assume that somewhere in the world a new opportunity for the use of some raw material, say, tin, has arisen, or that one of the sources of supply of tin has been eliminated. 

    "It does not matter for our purpose—and it is very significant that it does not matter—which of these two causes has made tin more scarce. All that the users of tin need to know is that some of the tin they used to consume is now more profitably employed elsewhere and that, in consequence, they must economise tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favour of what other needs they ought to husband the supply. If only some of them know directly of the new demand, and switch resources over to it, and if the people who are aware of the new gap thus created in turn fill it from still other sources, the effect will rapidly spread throughout the whole economic system and influence not only all the uses of tin but also those of its substitutes and the substitutes of these substitutes, the supply of all the things made of tin, and their substitutes, and so on; and all his without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes. 

    "The whole acts as one market, not because any of its members survey the whole field, but because their limited individual fields of vision sufficiently overlap so that through many intermediaries the relevant information is communicated to all. 

    "The mere fact that there is one price for any commodity—or rather that local prices are connected in a manner determined by the cost of transport, etc.—brings about the solution which (it is just conceptually possible) might have been arrived at by one single mind possessing all the information which is in fact dispersed among all the people involved in the process. ...

"The marvel is that in a case like that of a scarcity of one raw material, without an order being issued, without more than perhaps a handful of people knowing the cause, tens of thousands of people whose identity could not be ascertained by months of investigation, are made to use the material or its products more sparingly; i.e., they move in the right direction. 

    "This is enough of a marvel even if, in a constantly changing world, not all will hit it off so perfectly that their profit rates will always be maintained at the same constant or 'normal' level....

"I have deliberately used the word 'marvel' to shock the reader out of the complacency with which we often take the working of this mechanism for granted. I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind. 

    "Its misfortune is the double one that it is not the product of human design and that the people guided by it usually do not know why they are made to do what they do. But those who clamour for 'conscious direction'—and who cannot believe that anything which has evolved without design (and even without our understanding it) should solve problems which we should not be able to solve consciously—should remember this: The problem is precisely how to extend the span of our utilisation of resources beyond the span of the control of any one mind; and therefore, how to dispense with the need of conscious control, and how to provide inducements which will make the individuals do the desirable things without anyone having to tell them what to do."

~ FA Hayek from his famous 1945 article 'On the Use of Knowledge in Society.' Hat tip Russ Roberts from his recent EconTalk interview of Peter Boettke, “Who Won the Socialist Calculation Debate? — and David Henderson who notes: "When I taught this, I paused at the sentence, 'I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind.'”

 

Ludwig von Mises: Capitalism's great defender

When Ludwig von Mises appeared on the economic scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly — there was virtually no systematic intellectual opposition to socialism or defence of capitalism. Quite literally, the intellectual ramparts of civilization were undefended. What von Mises undertook, and which summarises the essence of his greatness, was to build an intellectual defence of capitalism and thus of civilisation.

On the 100th anniversary of his birth in 1881, his student George Reisman penned this tribute to one of capitalism's greatest defenders. . .

A Tribute to Ludwig von Mises on the Anniversary of his Birth

by George Reisman

September 29, 2024, is the one-hundred-and-forty-third anniversary of the birth of Ludwig von Mises, economist and social philosopher, who passed away in 1973. Von Mises was my teacher and mentor and the source or inspiration for most of what I know and consider to be important and worthwhile in these fields of what enables me to understand the events shaping the world in which we live. I want to take this opportunity to pay tribute to him, because I believe that he deserves to occupy a major place in the intellectual history of the twentieth century.

Von Mises is important because his teachings are necessary to the preservation of material civilization. As he showed, the base of material civilisation is the division of labour. Without the higher productivity of labour made possible by the division of labour, the great majority of mankind would simply die of starvation. The existence and successful functioning of the division of labour, however, vitally depends on the institutions of a capitalist society — that is, on limited government and economic freedom; on private ownership of land and all other property; on exchange and money; on saving and investment; on economic inequality and economic competition; and on the profit motive that institutions everywhere under attack for several generations.

When von Mises appeared on the scene, Marxism and the other socialist sects enjoyed a virtual intellectual monopoly. Major flaws and inconsistencies in the writings of Adam Smith and Ricardo and their followers enabled the socialists to claim classical economics as their actual ally. The writings of Jevons and the earlier Austrian economists Menger and Böhm-Bawerk were insufficiently comprehensive to provide an effective counter to the socialists. Bastiat had tried to provide one, but died too soon, and probably lacked the necessary theoretical depth in any case.

Thus, when von Mises appeared, there was virtually no systematic intellectual opposition to socialism or defense of capitalism. Quite literally, the intellectual ramparts of civilisation were undefended. What von Mises undertook, and which summarises the essence of his greatness, was to build an intellectual defence of capitalism and thus of civilisation.

Capitalism operates to the material self-interests of all

THE LEADING ARGUMENT OF the socialists was that the institutions of capitalism served the interests merely of a handful of rugged exploiters and monopolists, and operated against the interests of the great majority of mankind, which socialism would serve. While the only answer others could give was to devise plans to take away somewhat less of the capitalists’ wealth than the socialists were demanding, or to urge that property rights nevertheless be respected despite their incompatibility with most people’s well-being, von Mises challenged everyone’s basic assumption. He showed that capitalism operates to the material self-interests of all, including the non-capitalists the so-called proletarians. In a capitalist society, von Mises showed, privately-owned means of production serve the market. The physical beneficiaries of the factories and mills therefore are all who buy their products. And, together with the incentive of profit and loss, and the freedom of competition that it implies, the existence of private ownership ensures an ever-growing supply of products for all.

Thus, von Mises showed to be absolute nonsense such clichés as poverty causes communism. Not poverty, but poverty plus the mistaken belief that communism is the cure for poverty, causes communism. If the misguided revolutionaries of the backward countries and of impoverished slums understood economics, any desire they might have to fight poverty would make them advocates of capitalism.

Socialism means chaos

Socialism, von Mises showed, in his greatest original contribution to economic thought, not only abolishes the incentive of profit and loss and the freedom of competition along with private ownership of the means of production, but makes economic calculation, economic coordination, and economic planning impossible, and therefore results in chaos — because socialism means the abolition of the price system and the intellectual division of labour; it means the concentration and centralisation of all decision-making in the hands of one agency: the Central Planning Board or the Supreme Dictator.

Yet the planning of an economic system is beyond the power of any one consciousness: the number, variety and locations of the different factors of production, the various technological possibilities that are open to them, and the different possible permutations and combinations of what might be produced from them, are far beyond the power even of the greatest genius to keep in mind. Economic planning, von Mises showed, requires the cooperation of all who participate in the economic system. It can exist only under capitalism, where, every day, businessmen plan on the basis of calculations of profit and loss; workers, on the basis of wages; and consumers, on the basis of the prices of consumers’ goods.

Von Mises’s contributions to the debate between capitalism and socialism the leading issue of modern times are overwhelming. Before he wrote, people did not realise that capitalism has economic planning. They uncritically accepted the Marxian dogma that capitalism is an anarchy of production and that socialism represents rational economic planning. People were (and most still are) in the position of Moliere’s M. Jourdan, who never realized that what he was speaking all his life was prose. For, living in a capitalist society, people are literally surrounded by economic planning, and yet do not realise that it exists. Every day, there are countless businessmen who are planning to expand or contract their firms, who are planning to introduce new products or discontinue old ones, planning to open new branches or close down existing ones, planning to change their methods of production or continue with their present methods, planning to hire additional workers or let some of their present ones go. And every day, there are countless workers planning to improve their skills, change their occupations or places of work, or to continue with things as they are; and consumers, planning to buy homes, cars, stereos, steak or hamburger, and how to use the goods they already have for example, to drive to work or to take the train, instead.

Yet people deny the name planning to all this activity and reserve it for the feeble efforts of a handful of government officials, who, having prohibited the planning of everyone else, presume to substitute their knowledge and intelligence for the knowledge and intelligence of tens of millions. Von Mises identified the existence of planning under capitalism, the fact that it is based on prices ( economic calculations ), and the fact that the prices serve to coordinate and harmonise the activities of all the millions of separate, independent planners.

He showed that each individual, in being concerned with earning a revenue or income and with limiting his expenses, is led to adjust his particular plans to the plans of all others. For example, the worker who decides to become an accountant rather than an artist, because he values the higher income to be made as an accountant, changes his career plan in response to the plans of others to purchase accounting services rather than paintings. The individual who decides that a house in a particular neighborhood is too expensive and who therefore gives up his plan to live in that neighborhood, is similarly engaged in a process of adjusting his plans to the plans of others; because what makes the house too expensive is the plans of others to buy it who are able and willing to pay more. And, above all, von Mises showed, every business, in seeking to make profits and avoid losses, is led to plan its activities in a way that not only serves the plans of its own customers, but takes into account the plans of all other users of the same factors of production throughout the economic system.

Thus, von Mises demonstrated that capitalism is an economic system rationally planned by the combined, self-interested efforts of all who participate in it. The failure of socialism, he showed, results from the fact that it represents not economic planning, but the destruction of economic planning, which exists only under capitalism and the price system.

Competition under capitalism is of an entirely different character than competition in the animal kingdom

VON MISES WAS NOT primarily anti-socialist. He was pro-capitalist. His opposition to socialism, and to all forms of government intervention, stemmed from his support for capitalism and from his underlying love of individual freedom, and his conviction that the self-interests of free men are harmonious indeed, that one man’s gain under capitalism is not only not another’s loss, but is actually others’ gain. Von Mises was a consistent champion of the self-made man, of the intellectual and business pioneer, whose activities are the source of progress for all mankind and who, he showed, can flourish only under capitalism.

Von Mises demonstrated that competition under capitalism is of an entirely different character than competition in the animal kingdom. It is not a competition for scarce, nature-given means of subsistence, but a competition in the positive creation of new and additional wealth, from which all gain. For example, the effect of the competition between farmers using horses and those using tractors was not that the former group died of starvation, but that everyone had more food and the income available to purchase additional quantities of other goods as well. This was true even of the farmers who lost the competition, as soon as they relocated in other areas of the economic system, which were enabled to expand precisely by virtue of the improvements in agriculture. Similarly, the effect of the automobile’s supplanting the horse and buggy was to benefit even the former horse breeders and blacksmiths, once they made the necessary relocations.

In a major elaboration of Ricardo’s Law of Comparative Advantage, von Mises showed that there is room for all in the competition of capitalism, even those of the most modest abilities. Such people need only concentrate on the areas in which their relative productive inferiority is least. For example, an individual capable of being no more than a janitor does not have to fear the competition of the rest of society, almost all of whose members could be better janitors than he, if that is what they chose to be. Because however much better janitors other people might make, their advantage in other lines is even greater. And so long as the person of limited ability is willing to work for less as a janitor than other people can earn in other lines, he has nothing to worry about from their competition. He, in fact, outcompetes them for the job of janitor by being willing to accept a lower income than they. Von Mises showed that a harmony of interests prevails in this case, too. For the existence of the janitor enables more talented people to devote their time to more demanding tasks, while their existence enables him to obtain goods and services that would otherwise be altogether impossible for him to obtain.

He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally

ON THE BASIS OF such facts, von Mises argued against the possibility of inherent conflicts of interest among races and nations, as well as among individuals. For even if some races or nations were superior (or inferior) to others in every aspect of productive ability, mutual cooperation in the division of labour would still be advantageous to all. Thus, he showed that all doctrines alleging inherent conflicts rest on an ignorance of economics.

He argued with unanswerable logic that the economic causes of war are the result of government interference, in the form of trade and migration barriers, and that such interference restricting foreign economic relations is the product of other government interference, restricting domestic economic activity. For example, tariffs become necessary as a means of preventing unemployment only because of the existence of minimum wage laws and pro-union legislation, which prevent the domestic labor force from meeting foreign competition by means of the acceptance of lower wages when necessary. He showed that the foundation of world peace is a policy of laissez-faire both domestically and internationally.

In answer to the vicious and widely believed accusation of the Marxists that Nazism was an expression of capitalism, he showed, in addition to all the above, that Nazism was actually a form of socialism. Any system characterised by price and wage controls, and thus by shortages and government controls over production and distribution, as was Nazism, is a system in which the government is the de-facto owner of the means of production. Because, in such circumstances, the government decides not only the prices and wages charged and paid, but also what is to be produced, in what quantities, by what methods, and where it is to be sent. These are all the fundamental prerogatives of ownership. This identification of socialism on the German pattern, as he called it, is of immense value in understanding the nature of present demands for price controls.

Von Mises showed that all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention

VON MISES SHOWED THAT all of the accusations made against capitalism were either altogether unfounded or should be directed against government intervention, which destroys the workings of capitalism. He was among the first to point out that the poverty of the early years of the Industrial Revolution was the heritage of all previous history that it existed because the productivity of labour was still pitifully low; because scientists, inventors, businessmen, savers and investors could only step by step create the advances and accumulate the capital necessary to raise it. He showed that all the policies of so-called labour and social legislation were actually contrary to the interests of the masses of workers they were designed to help — that their effect was to cause unemployment, retard capital accumulation, and thus hold down the productivity of labour and the standard of living of all. 

In yet another major original contribution to economic thought, he showed that depressions were the result of government-sponsored policies of credit expansion designed to lower the market rate of interest. Such policies, he showed, created large-scale malinvestments, which deprived the economic system of liquid capital and brought on credit contractions and thus depressions. Von Mises was a leading supporter of the gold standard and of laissez-faire in banking, which, he believed, would virtually achieve a 100% reserve gold standard and thus make impossible both inflation and deflation.

I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works

WHAT I HAVE WRITTEN of von Mises provides only the barest indication of the intellectual content that is to be found in his writings. He authored over a dozen volumes. And I venture to say that I cannot recall reading a single paragraph in any of them that did not contain one or more profound thoughts or observations. Even on the occasions when I found it necessary to disagree with him (for example, on his view that monopoly can exist under capitalism, his advocacy of the military draft, and certain aspects of his views on epistemology, the nature of value judgments, and the proper starting point for economics), I always found what he had to say to be extremely valuable and a powerful stimulus to my own thinking. I do not believe that anyone can claim to be really educated who has not absorbed a substantial measure of the immense wisdom present in his works.

Von Mises’s two most important books are Human Action and Socialism, which best represents the breadth and depth of his thought. These are not for beginners, however. They should be preceded by some of von Mises’s popular writings, such as Bureaucracy and Planning For Freedom.

The Theory of Money and Credit, Theory and History, Epistemological Problems of Economics, and The Ultimate Foundations of Economic Science are more specialised works that should probably be read only after Human Action. Von Mises’s other popular writings in English include Omnipotent Government, The Anti-Capitalistic Mentality, Liberalism, Critique of Interventionism, Economic Policy, and The Historical Setting of the Austrian School of Economics. For anyone seriously interested in economics, social philosophy, or modern history, the entire list should be considered required reading. [All titles of von Mises currently in print can be ordered on this web site, or downloaded free here.]

Courage

VON MISES MUST BE JUDGED not only as a remarkably brilliant thinker but also as a remarkably courageous human being. He held the truth of his convictions above all else and was prepared to stand alone in their defence. He cared nothing for personal fame, position, or financial gain, if it meant having to purchase them at the sacrifice of principle. In his lifetime, he was shunned and ignored by the intellectual establishment, because the truth of his views and the sincerity and power with which he advanced them shattered the tissues of fallacies and lies on which most intellectuals then built, and even now continue to build, their professional careers.

It was my great privilege to have known von Mises personally over a period of twenty years. I met him for the first time when I was sixteen years old. Because he recognised the seriousness of my interest in economics, he invited me to attend his graduate seminar at New York University, which I did almost every week thereafter for the next seven years, stopping only when the start of my own teaching career made it no longer possible for me to continue in regular attendance.

His seminar, like his writings, was characterised by the highest level of scholarship and erudition, and always by the most profound respect for ideas. Von Mises was never concerned with the personal motivation or character of an author, but only with the question of whether the man’s ideas were true or false. In the same way, his personal manner was at all times highly respectful, reserved, and a source of friendly encouragement. He constantly strove to bring out the best in his students. This, combined with his stress on the importance of knowing foreign languages, led in my own case to using some of my time in college to learn German and then to undertaking the translation of his Epistemological Problems of Economics, something that has always been one of my proudest accomplishments.

Today, von Mises’s ideas at long last appear to be gaining in influence. His teachings about the nature of socialism have been confirmed in the first-hand observations of honest news reporters with extensive experience in Soviet Russia, such as Robert Kaiser, Hedrick Smith, John Dornberg, and Henry Kamm. They are being confirmed at this very moment by the actions of millions of angry workers in Poland.

Some of von Mises’s ideas are being propounded by the Nobel prizewinners F.A. Hayek (himself a former student of von Mises) and Milton Friedman. They exert a major influence on the writings of Henry Hazlitt and the staff of the Foundation for Economic Education, as well as such prominent former students as Hans Sennholz. Von Mises’s monetary theories permeate the pages of recent best-selling books on personal investments, such as those by Harry Browne and Jerome Smith. And last, but certainly not least, they appear to be exerting an important influence on the present President of the United States [Ronald Reagan], who has acknowledged reading Human Action and has expressed his admiration for it.

Von Mises’s books deserve to be required reading in every college and university curriculum not just in departments of economics, but also in departments of philosophy, history, government, sociology, law, business, journalism, education, and the humanities. He himself should be awarded an immediate posthumous Nobel Prize indeed, more than one. He deserves to receive every token of recognition and memorial that our society can bestow. For as much as anyone in history, he laboured to preserve it. If he is widely enough read, his labours may actually succeed in helping to save it.

* * * * 

Economist George Reisman was a student of Ludwig Von Mises, Pepperdine University Professor Emeritus of Economics, and the author of Government Against the Economy and Capitalism: An Economic Treatise [free download here, or buy it here or here]. His blog is here, his website here, and all his publications here. This essay originally appeared in 1981, on the occasion of Mises’s one-hundredth birthday, and appeared recently at the Mises Institute blog.

 

It's no wonder so many get interest so wrong, when they think it's the price of money. Because as Andreas Granath outlines in this guest post, it's actually the price of time ...

Why Interest Rates Are Not the Price of Money

by Andreas Granath

According to mainstream economics, interest rates are the price of money, but the 'Austrian' school of economics says differently. To understand these conflicting ideas, we must understand what prices, money, and interest are.

First of all, prices are exchange-ratios between goods and/or services. An apple might be exchanged for a pear or two bananas. In that case we can conclude that the price of an apple, at that moment, is either one pear or two bananas. However, direct exchange has many disadvantages, and one of them is the price system. Expressing an apple’s price in pears and bananas doesn’t tell a dairy farmer or baker much about his product’s purchasing power. The exchange-ratios (prices) in a barter system are vast, specific, and ever-changing.

Money solves this problem. Since money is a generally-accepted medium of exchange, it is also a common denominator in which we express prices. Suppose that an apple exchanges for $1 (e.g., 1/20th an ounce of gold). Given the above exchange-ratios (prices), a pear would also cost $1 whereas a banana would cost half a dollar. Thus, money prices help agents navigate and communicate better within the economy.

When we have money prices of other goods, we also have a price of money. A seller of goods or services is a buyer of money and vice versa. Money purchases goods and goods purchase money. Therefore, the price of money is inverted to the price of goods and services. If the price of one apple is one dollar, then the price of one dollar is one apple. The price of money is the array of goods for which money can be traded at any given moment. Finding out the overall price of money, however, is not so easy since we need to know all the ever-changing prices in the economy.

Some economists speak of an alteration in the so-called general “price level” and notice when frequently-purchased goods depreciate or appreciate, however, there is no economically meaningful way to define a general price level.

Interest, therefore, is not technically the price of money. But what is interest and why do some economists get it wrong? 

It might be better said that interest is the price of time. It is the premium some people pay for not being able to wait, as well as the discount some people get for being able to wait.

Interest is best explained by the concept of time preference, which means that people necessarily prefer present consumption more than future consumption. Suppose that John Smith wants to buy a house that he cannot yet afford. Since Smith has a very high time preference, he doesn’t even bother saving some money. Instead, he asks his cousin if he can borrow $100,000. Although his cousin values having his $100,000 stuffed under his mattress, he agrees to loan Smith his money. However, because of the sacrifice of not having access to the money in the present, he charges his cousin an interest premium of $105,000.

By observing this transaction, we can draw some conclusions. First, the price of the $100,000 in this case was one house. Second, the price of the loan provided was the 5% interest rate that amounted to $5000 in this case. Finally, suppose the money with which Smith paid back the loan was money he had earned from labor. In that case, the price of $105,000 was the amount of labor hours for which Smith was paid wages.

That said, many economists interpret this observation in the following way: since $100,000 can be exchanged for $100,000 today, the price of a dollar is a dollar. However, since the interest rate over a year is 5%, the price of today’s dollar is priced at 1.05 dollars-in-a-year. Hence, the conclusion that the interest rate is merely the “price” of money.

To sum up, I would like to end with a quote from an article on this same subject from economist Nicolás Cachanosky. He writes:

...if you get money and pay interest, eventually the day will come when you have to return the amount of money (plus interest.) If you have to return it, then you didn’t buy the money and so the interest rate is not the price of buying money.

* * * * 

Andreas Granath lives in southern Sweden with his wife and two daughters. He currently is working with valves for the marine industry. His passion for Austrian economics and Libertarianism began some years ago and he is self taught in the two studies. He writes for the Swedish Ludwig von Mises Institute.
His piece previously appeared at the Mises Wire.

The Myth of Finite Resources

"Intellectuals, politicians, and journalists treat the idea that capitalism inevitably leads to ecological disaster as an unquestionable truth — ... that free markets cause the destruction of Mother Earth and that we must enact socialist policies to prevent an ecological doomsday scenario. But, what if I told you that economic facts do not buttress this hypothesis at all? And what if I added that an ingenious economist already proved the compatibility of capitalism and environmentalism as early as 1981? ...
    "One of the charges most frequently levelled against capitalism is that this social system must necessarily lead to ecological disaster. After all, the earth’s resources, the eco-socialist argument goes, are finite. Evil capitalists and greedy businessmen will gradually exploit non-renewables until we are doomed because we are out of natural resources. Karl Marx proposed this hypothesis as early as 1867 ...

"Inspired by Jean-Jacques Rousseau, Marx believed that the cause for ecological disaster is to be found in the introduction of private property rights. ... Rousseau and Marx’s solution to this alleged problem was the abolition of capitalism and property rights, a solution which has presently been voiced as vociferously as never before by the eco-socialists. ... While reading fairy tales and fables can certainly be an entertaining pastime activity, it is by now about time to return to reality ...

"In a free-market economy, the price of a resource is determined by its scarcity. If a resource becomes more abundant due to an increase in supply and/or a decrease in demand, its price will typically drop. If a given resource, vice versa, becomes more scarce due to a decrease in supply and/or an increase in demand, its price will usually rise. This change in scarcity and price, in turn, affects the behaviour of any rational market participant with an entrepreneurial mindset, producer and consumer alike. In his groundbreaking monograph, 'The Ultimate Resource,' American economist Julian L. Simon observes, 'Heightened scarcity causes prices to rise. The higher prices present opportunity and prompt inventors and entrepreneurs to search for solutions.' In a capitalist society, the depletion of a nonrenewable resource is prevented by three emerging patterns of behaviour, all of them caused by the increase in the resource’s price.
    "[Between them, rising prices and] the profit motive offer an incentive to the rational businessman to obtain and store more units of the nonrenewable resource in question. ... and to start developing substitutes for the nonrenewable resource in question ... [Meanwhile] the desire to economise motivates rational buyers to become less dependent on the nonrenewable resource in question. ...

"Ultimately, there is only one resource which is necessary to replenish all others, namely the human mind. It is for this reason that Julian Simon chose to name his groundbreaking study 'The Ultimate Resource.' 'The main fuel to speed the world’s progress,' he explains, 'is our stock of knowledge, and the brake is our lack of imagination. The ultimate resource is people—skilled, spirited, hopeful people—who will exert their wills and imaginations for their own benefit.' ...

"The eco-socialists are undoubtedly right in pointing out that the earth contains only a certain amount of nonrenewable resources in a fixed quantity. ...  More importantly, though, the eco-socialist errs in concluding that natural resources must be finite because the earth contains them in a limited quantity. Rather, in a free-market economy, as the resource becomes more scarce the price of the natural resource increases. Changes in producer and consumer patterns, in turn, prevent its depletion. In Simon’s words, 'Population growth and increase of income expand demand, forcing up prices of natural resources. The increased prices trigger the search for new supplies [or substitutes, and provides more human capital for the search and investigation.] Eventually new sources and substitutes are found.' ...

"The key economic problem of a socialist economy [however] is that the price of a resource will not rise if it becomes more scarce. Price ceilings effectively prevent an increase in price, thereby demotivating businessmen from increasing their production of non-renewables, and/or developing substitutes for them. The result, as can be witnessed in socialist countries all over the globe, are shortages and famines.
    "Thus, if people are truly concerned with the potential depletion of finite resources, they should start questioning their political convictions. The solution to preventing the exhaustion of the earth’s resources are not government controls but free markets and free minds. To paraphrase Ayn Rand, 'If concern with [the environment] and human suffering were the [eco-socialists]’ motive, they would have become champions of capitalism long ago; they would have discovered that it is the only political system capable of producing abundance'.”

~ Martin Hooss from his post 'The Myth of Nonrenewable Resources'

RELATED POSTS

• Why We Need Private Property to Deal with Scarce Resources - Patrick Barron, NOT PC
• Environmentalism Refuted - George Reisman, MISES DAILY 
• Some propositions on property rights – and IP - NOT PC

"This view of capitalism as a spontaneous information-processing machine—as a 'telecommunications system'—was one of the great insights of the century."

Cartoon from The Essential Hayek (p.7)

"Hayek’s most lasting contribution to economics [is] the notion that free markets and free prices are a means of conveying and exploiting information.
    "In any society, the central economic problem is how to best organise production and employ available resources in order to satisfy the needs and desires of millions of different people. Many of Hayek’s contemporaries believed that the best way forward was via central planning, which would allow resources to be directed to [allegedly] socially useful areas while avoiding the chronic instability of capitalism. Hayek begged to differ.
    "Centralised systems may look attractive on paper, he argued, but they suffered from a basic and incurable ailment: the 'division of knowledge' problem.
    "In order to know where resources should be directed, the central planner needs to know both what goods people want to buy and how they can most cheaply be produced. But this knowledge is held in the minds of individual consumers and businesspeople, not in the filing cabinets (or, later, computers) of a government planning agency, and the only practical way for customers and firms to relay this knowledge to each other, Hayek argued, is through a system of market-determined prices.
    "'We must look at the price system as such a mechanism for communicating information if we want to understand its real function,' he wrote in his 1945 paper, 'The Use of Knowledge in Society.' In a market system, people simply go out and buy the things they like, leaving unwanted goods on the shelves. If they want more of something—say, heating oil—it becomes scarce and its price rises, thereby prompting oil companies to increase production and consumers to economize. If people decide to use less oil, say, because natural gas has become cheaper, the price of oil will fall, and its production will be scaled back—all this taking place without any orders being issued by a government agency. 'I am convinced that if it were the result of deliberate human design, and if the people guided by the price changes understood that their decisions have significance far beyond their immediate aim, this mechanism would have been acclaimed as one of the greatest triumphs of the human mind,' Hayek wrote.
    "This view of capitalism as a spontaneous information-processing machine—a 'telecommunications system' was how Hayek referred to it—was one of the great insights of the century. It may have been implicit in the work of some previous economists, notably Adam Smith, but Hayek was the first to spell it out."

~ John Cassidy from his article 'The Hayek Century'

There’s No Natural ‘Carrying Capacity’ for the Human Population

 

You may assume that this planet has a natural "carrying capacity" beyond which the human population just cannot go. Sounds reasonable, right? There are sonly so many billions the planet can support, right? Wrong, says Don Boudreaux in this guest post: for humans left free to produce, the planet has no natural carrying capacity. The reason, he explains, is that the planet's ultimate resource is the human mind ...

There’s No Natural ‘Carrying Capacity’ for the Human Population: An Essay Inspired by the Happy News that the Human Population Has Reached Eight Billion

by Don Boudreaux

The late, great Julian Simon spent decades battling intellectually against biologists and zoologists who were convinced that human population growth, if governments did not hold it in check with draconian measures, would spell doom for multitudes of humans. (I might as well have used the present tense above, because many of the scientists with whom Simon did battle, including the most prominent, Paul Ehrlich, are still alive.) These students of animal development and behaviour insist that every species inhabits an environment with a natural “carrying capacity.” If the population of a species grows in number beyond the limits of its environment’s carrying capacity, the death rate of members of that species will rise, while its members’ birth rate fall, because species members will confront unusual difficulty gaining access to food, water, and shelter. The species’ population is thus confined to the limits of its environment’s carrying capacity by the brutality of uncaring nature.

Simon argued that humans, at least those of us who live in free societies, are a categorically different sort of species. He observed that to the extent to which we, members of the human species, inhabit a social environment characterised by free and innovative markets, our species does not inhabit a natural environment with a finite carrying capacity. Simon’s argument starts with the fact that we humans are uniquely enterprising and innovative. When this fact combines with the further reality that market prices are signals about which specific resources are becoming more scarce relative to other resources, human entrepreneurship and creativity are incited to discover ways both to make currently known stocks of scarce resources go further and, more importantly, to discover either new sources of those resources or more abundant substitutes. When we succeed in these endeavours, as we now normally do, we literally produce more resources.

Simon’s explanation is revolutionary. Contrary to what most people seem to believe, we don’t obtain resources from an existing stock created for us by nature, leaving fewer resources available for use tomorrow each time we withdraw some amount for our use today. Instead, resources are ultimately fruits of the human mind and effort. And so we produce more petroleum, more tungsten, more copper, more bauxite in the same way that, when our demand for apple pies or Apple laptops increases, we produce more apple pies and Apple laptops.

For humans in market economies, therefore, the environment has no natural ‘carrying capacity.’

As Simon tirelessly documented, his account of humans’ relationship with the natural environment is amply confirmed by history, especially by modern history. Over the past few centuries the human population has grown remarkably – earlier this month it hit eight billion. At the same time there’s also been astounding growth in humans’ standard of living. Were there a natural carrying capacity on earth for the human population, history offers no evidence of it. Quite the contrary.

Despite the economic soundness of his argument and its consistency with the data – and despite his famous victory in a 1980 wager with Ehrlich on whether or not a bundle of five natural resources would become more scarce over the course of a decade – Simon’s argument left many biologists and zoologists unconvinced. And biologists and zoologists aren’t alone. Pick at random a professor, student, news reporter, or blogger and ask him if we humans are today threatening our long-term survival by over-using resources. Chances are high that the answer you’ll get is an unhesitating yes. You’ll likely be further told that our only hope of avoiding the terrible fate of billions of us being done in by natural forces is for us, especially those of us in rich countries, to dramatically reduce our consumption.

There is, I suppose, something gratifying in counselling personal sacrifice. Sacrifice often is admirable and worthwhile, as when you sacrifice your time to help a neighbour in distress, or sacrifice your comfort today in order to undergo painful medical treatments that will better ensure that you’ll survive past tomorrow. But sacrifice for sacrifice’s sake is, at best, pointless. Costs are incurred in exchange for no benefits....

If Simon is correct, green-inspired efforts to encourage or compel those of us in market economies to reduce our consumption today yield no benefits. Such efforts conserve no resources; they simply result in our producing fewer resources, an outcome that is utterly useless. The uselessness of this outcome lies in the reality that whenever we “need” new resources, we can produce these.

Was Simon naively pollyannaish? Has history’s apparent confirmation of his thesis simply been a matter of good luck? No.

Consider a recent essay in the Wall Street Journal – an essay whose title speaks volumes: “One Man’s Trash Is Another’s Clean Fuel.” The authors, Nick Stork and Joe Malchow, report very Simonesque news:

In a lesson about how the energy transition is likely to play out, landfill operators’ ability to make use of excess gas has exploded in recent years. New facilities are being created to convert trash into renewable natural gas, molecularly identical to the gas that heats homes. The process cuts down greenhouse-gas emissions while creating a low-carbon energy source…

The potential has spurred major sanitation and energy companies to break into this new market. This year Houston’s Waste Management Corp. announced an $825 million investment to boost renewable natural-gas capture. In October the British company BP agreed to acquire Archaea Energy (which one of us founded and the other invested in), a company that designs, builds and operates RNG plants in the U.S. to convert waste emissions. Archaea produces 6,000 oil-equivalent barrels a day through 13 RNG facilities with plans to construct 88 more to serve rising demand. Our only input is trash.

Quiet, private innovation in gas processing made this possible. Archaea sells largely to voluntary buyers who wish to lock in clean gas at fair prices. RNG still comes at a premium compared with other fuel sources, but driving down the cost of producing RNG will mean more of it is available to buyers on attractive terms. We are working to lower the price of RNG by creating standardized and modular production facilities with decreased operating costs, higher processing efficiency, and uptime rates that start above 90 percent.

Energy – indeed, low-carbon energy – from trash!

If turning trash into energy that’s transmissible over long distances nevertheless sounds either fanciful or likely insignificant in its long-term impact, imagine yourself as a native American roaming 600 years ago through the woodlands of what is today western Pennsylvania. You’re thirsty and bend down to enjoy a drink of water from a brook, only to discover that the water at that spot is undrinkable because it’s polluted with a smelly, oily, noxious substance oozing out a few feet upstream. How plausible would this You of 600 years ago have found a prediction that the icky stuff that pollutes your drinking water would, in just a few centuries, be a much-sought-after ‘natural’ resource that powers much of humanity’s activities?

Julian Simon died almost twenty-five years ago, just shy of his 66th birthday. Were he still alive today, he would surely celebrate our population of eight billion and remind anyone who would listen that, far from pushing humans closer to the earth’s carrying capacity, the creative potential of those eight billion human minds will further expand our access to resources. We need only to allow this creativity to operate freely.

Donald J. Boudreaux is a senior fellow with American Institute for Economic Research and with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University; a Mercatus Center Board Member; and a professor of economics and former economics-department chair at George Mason University. He is the author of the books The Essential Hayek, Globalization, Hypocrites and Half-Wits, and his articles appear in such publications as the Wall Street Journal, New York Times, US News & World Report as well as numerous scholarly journals. He writes a blog called Cafe Hayek and a regular column on economics for the Pittsburgh Tribune-Review. Boudreaux earned a PhD in economics from Auburn University and a law degree from the University of Virginia.

This post originally appeared at the AIER blog.

World-class surfer of central banks' tidal wave of counterfeit capital,

Klaus Schwab, speaking to fellow surfers at his absurdly influential World 

Economic Forum. [Image credit: World Economic Forum, CC BY 2.0, via Wikimedia Commons]

Vladimir Lenin once boasted that capitalists would sell the rope to hang themselves -- and then set about organising things to make that happen. He failed, but so-called capitalists still line up to keep trying: one latest attempt being something they call 'stakeholder capitalism,' characterised by so-called 'responsible investing.' As Dan Sanchez explains in this Guest Post, it's anything but...

"ESG" -- Capitalism's 'Great Reset'?

Guest Post by Dan Sanchez

Capitalism needs few descriptive adjectives beyond the words "laissez-faire" or "unhampered." In recent years however, so-called "stakeholder capitalism" has taken the global economy by storm. Its champions proclaim that it will save—and remake—the world. Will it live up to its hype or will it destroy capitalism in the name of reforming it?

Proponents pitch their "stakeholder capitalism" as an antidote to the excesses of so-called “shareholder capitalism,” which they condemn as too narrowly focused on maximising profits (especially short-term profits) for corporate shareholders. This, they argue, is socially irresponsible and destructive, because it disregards the interests of other stakeholders, including customers, suppliers, employees, local communities, and society in general.

"Stakeholder capitalism" [which earns every inverted comma we can muster - Ed.] is ostensibly about offering business leaders incentives to take these wider considerations into account and thus make more “sustainable” decisions. This, it is argued, is also better in the long run for businesses’ bottom lines.

The Rise and Reign of ESG

Today’s dominant strain of "stakeholder capitalism" is the doctrine known as ESG, which stands for “environmental, social, and corporate governance.” Got that? The acronym was coined in the 2004 report of Who Cares Wins, a joint initiative of elite financial institutions invited by no less than the United Nations “to develop guidelines and recommendations on how to better integrate environmental, social and corporate governance issues in asset management, securities brokerage services, and associated research functions.”

In other words, how best to make businesses throw themselves under the bus before governments do it for them.

Who Cares Wins operated under the auspices of the UN’s Global Compact, which, according to the report, “is a corporate responsibility initiative launched by Secretary-General Kofi Annan in 2000 with the primary goal of implementing universal principles in business.” For "universal" read "the UN's."

Much "progress" has been made toward that goal. Since 2004, ESG has evolved from talk of “guidelines and recommendations” to hard, explicit standards that hold sway over huge swathes of the global economy and billions of dollars worth of investment decisions. ESG has begun to move the world.

These standards to which businesses are all-but required to dance are set by ESG rating agencies like the Sustainability Accounting Standards Board (SASB) and enforced by investment firms that manage ESG funds. One such firm is Blackrock, whose CEO Larry Fink is a leading champion of both ESG and SASB.

In December, Reuters published a report titled “How 2021 became the year of ESG investing” which stated that, “ESG funds now account for 10% of worldwide fund assets.”

And in April, Bloomberg reported that ESG, “by some estimates represents more than $40 trillion in assets. According to Morningstar, genuine ESG funds held about $2.7 trillion in managed assets at the end of the fourth quarter.”

To access any of that capital, it is no longer enough for a business to offer a good return on investment (or, sometimes, any at all). It must also report “environmental” and “social” metrics that meet ESG standards.

Is that a welcome development? Will the general public as non-owning “stakeholders” of these businesses be better off thanks to the implementation of ESG standards? Is stakeholder capitalism beginning to reform shareholder capitalism by widening its perspective and curing it of its narrow-minded fixation on profit uber alles?

Capitalism Is for Consumers

To answer that, some clarification is in order. First of all, “shareholder capitalism” is a misleading term for laissez-faire capitalism. It is true that, as Milton Friedman wrote in his 1970 critique of the “social responsibility of business” rhetoric of the time:

In a free‐enterprise, private‐property system, a corporate executive is an employee of the owners of the business. He has direct responsibility to his employers. That responsibility is to conduct the business in accordance with their desires, which generally will be to make as much money as possible while conforming to the basic rules of the society, both those embodied in law and those embodied in ethical custom.

Since the owners of a publicly traded corporation are its shareholders, it is true that they are and ought to be the “bosses” of a corporation’s employees—including its management. It is also true that corporate executives properly have a fiduciary responsibility to maximise profits for their shareholders.

But that does not mean that shareholders reign supreme under capitalism. As the great economist Ludwig von Mises explained in his book Human Action:

The direction of all economic affairs is in the market society a task of the entrepreneurs [which, according to Mises’s technical definition includes shareholding investors]. Theirs is the control of production. They are at the helm and steer the ship. A superficial observer would believe that they are supreme. But they are not. They are bound to obey unconditionally the captain's orders. The captain is the consumer.

The “sovereign consumers,” as Mises calls them, issue their orders through “their buying and their abstention from buying.” Those orders are transmitted throughout the entire economy via the price system. Entrepreneurs and investors who correctly anticipate those orders and direct production accordingly are rewarded with profits. But if one, as Mises says, “does not strictly obey the orders of the public as they are conveyed to him by the structure of market prices, he suffers losses, he goes bankrupt, and is thus removed from his eminent position at the helm. Other men who did better in satisfying the demand of the consumers replace him.”

Under laissez-faire capitalism therefore, the principal "stakeholders" whose preferences reign supreme are not not shareholders, but consumers. And (as Mises wrote in his paper “Profit and Loss”) shareholder profit is a measure of—and motivating reward for—success “in adjusting the course of production activities to the most urgent demand of the consumers.” 

What this means for the “stakeholder capitalism” discussion is that, to the extent that the profit-and-loss metric is discounted for the sake of competing objectives (like serving other “stakeholders”), the sovereign consumers are dethroned, disregarded, and relatively impoverished.

Now it’s at least conceivable that ESG standards are not competing, but rather complementary to the profit-and-loss metric and thus serving consumers. In fact, that’s a big part of the ESG sales pitch: that corporations who adopt and adhere to ESG standards will enjoy higher long-term profits, because breaking free of their fixation on short-term shareholder returns will enable them to embrace more “sustainable” business practices.

In a free unhampered market, whether that promise would be fulfilled or not would be for the sovereign consumers to decide, and ESG would rise or fall on its own merits.

Who Complies Wins

Unfortunately, our market economy is far from free or unhampered. The State has instead rigged capital markets for the benefit of its elite lackeys in the financial industry: like those “Who Cares Wins” fat cats who started the ESG ball rolling in 2004 under the auspices of the United Nations.

One of the prime ways the State rigs markets is through central bank policy.

The prodigious amount of newly created money that the Federal Reserve and other central banks have pumped into financial institutions in recent years has transferred vast amounts of real wealth to those institutions from the general public. As a result, those institutions—big banks and investment companies—are now much more beholden to the State and much less beholden to consumers for their wealth.

As they say, “he who pays the piper calls the tune.” So it’s no surprise that these institutions are stumbling over themselves to get on board the State’s ESG bandwagon. 

And that means that if non-financial corporations want access to the Fed’s money tap, and thus to the stream of counterfeit capital gushing out, they too have to get with the ESG program. Especially as the average consumer becomes increasingly impoverished by disastrous economic policies, the incentive for corporations to earn market profit by pleasing consumers is being progressively superseded by the incentive to gain access to the Fed’s flow of loot by meeting the State’s “social” standards.

By increasingly controlling capital flows, the State is gaining ever more control over the entire economy.

This may explain the recent willingness of so many corporations to alienate customers and sacrifice profits on the altar of “green” and “woke” politics. It's not necessarily that they embrace the nonsense themselves (though many do); it's that the governments and their well-rewarded agents have rigged businesses' financial incentives that way.

It is no coincidence that Klaus Schaub, the preeminent champion of the “Great Reset” also co-authored a book titled Stakeholder Capitalism. The upshot of "stakeholder capitalism" is that consumer is supplanted as the economy's supreme stakeholder by The State. The sick joke of stakeholder capitalism therefore is that it “reforms” capitalism by transforming it into a form of socialism. Lenin would be laughing up his sleeve.

Dan Sanchez is the Director of Content at the Foundation for Economic Education (FEE), editor-in-chief of FEE.org, and writer for (among others) The Mission, the Ron Paul Institute for Peace and Prosperity, David Stockman’s Contra Corner, and many other popular web sites. He wrote a weekly column for Antiwar.com.
At the Mises Institute, Dan was editor of Mises.org and launched the Mises Academy, the first ever free-market economics online learning platform.
Dan has delivered speeches for FEE, Praxis, the Mises Institute, Liberty on the Rocks, America’s Future Foundation, and more.

A version of his post first appeared at FEE.Org.

Once again, we face an economic crisis (stagflation? crash? debt bonfires?) from which few appear to have long-term answers. As guest reviewer David Weinberger outlines, Lawrence White's book does a masterful job of reconstructing the twentieth-century's contest over economic ideas of our time, helping to explain why the noisiest economists today seem to have so little of sense to say .... and from whom the most sense (and best answers) might be found.

'The Clash of Economic Ideas': The Perfect Book for Understanding Our Economic Climate

guest review by David Weinberger

Few books on economics today are readable, let alone interesting, but Lawrence White’s The Clash of Economic Ideas (2012) is both. It offers a lively overview of the major policy debates of the last century and the economists who shaped them, and in so doing it provides helpful context to make sense of our current economic landscape.

For example, what caused economists to move away from free-market ideas? Contrary to what many assume, it was not the Great Depression. Dr. White explains that two ideologies developed in the late-nineteenth century: first a political movement known as “Progressivism,” and second an intellectual movement known as the “German Historical School.” Together they encouraged the belief that “experts,” or self-anointed leaders of a newly emerging “scientific” mode of inquiry, should use the government to direct other people’s lives. Furthermore, early forms of Marxism and Socialism were also seducing intellectuals into self-flattery at this time. It is thus no wonder that in the US, federal power was significantly expanded around the turn of the 20th century, through legislation such as the Sherman Antitrust Act, the Hepburn Act, the Federal Reserve Act, as well as the establishment of the federal income tax. [And here in New Zealand, the illiberal Liberals with the persuasive influence of Pember Reeves were busily ramping up the engine of state for the First Labour Government to then manufacture NZ's Welfare State.]

Moreover, the growth of government power was hardly unique to these places. In fact, major countries around the globe centralised their economies in even more destructive ways. The disaster of Soviet communism is well known. Lesser known, however, is the economic record of Nazi Germany. An important section of the book delineates the extent to which the National Socialist German Workers (Nazi) Party exacted control of the economy under Hitler, which included exchange controls; a centralized “Four Year Plan”; nationalised agricultural policies; import quotas; price and wage controls; rationing; and decrees dictating the quantities of goods that businesses must produce. Put simply, the Third Reich was no friend of free markets.

As much of the world degenerated into centralised graveyards during the 1930s and 1940s, capitalism remained under fire due to the mistaken belief that it caused the Great Depression plaguing the globe, which cast serious doubt on free-market solutions. Nevertheless the mercurial F.A. Hayek -- fresh from his best-selling success with The Road to Serfdom -- emerged to combat this erroneous view. Together with others including Milton Friedman and Karl Popper, they launched the Mont Pelerin Society in 1947 to reintroduce the virtues of free enterprise and classical economic principles, and to expose the folly of central planning.

Building on the insight of earlier economists like Ludwig von Mises, one of their arguments against centralisation was that government planners face an intractable “calculation problem.” In a free economy, businesses plan based on information provided by prices on the market, which are determined by firms and entrepreneurs freely bidding for resources. If a business plans a project that cannot cover the cost of resources plus earn a profit, it means that the fruit of that project—the final good or service—is not in high enough demand by consumers to render the use of those resources worth the cost, and the business should not proceed. This profit-and-loss calculation is vital for planning and growth, both for individual firms and for the economy, and its absence lies at the heart of what is wrong with central planning. Lacking market prices, central planners have no way to know whether their plans cover their costs, which leads to a squandering of resources and wealth so monumental that even basic necessities like food go unproduced. Hence the widespread famines engendered by communist states.

Moreover, consider the fate of the consumer in each of these cases. While we often hear that under capitalism corporations “exploit” customers, the truth is that in a profit-and-loss economy consumers are ultimately the ones in control. They decide the price of the products and services that corporations produce, not the other way around. Firms survive by pleasing consumers, by producing goods and services that their customers want, which is all the more reason why price signals are imperative for planning, as even minor miscalculations by a business can mean the difference between survival and failure. Under communism, by contrast, the consumer counts for nothing and state planners face no consequences for exploiting them while recklessly devouring resources. They, not the desires of the customer, dictate what resources get created and in what quantities.

White does a masterful job of reconstructing issues like these - including a masterful takedown of the Keynes/Fisher fiscal and monetary meddling that still plagues us today -- and readers will walk away with a good introductory grasp of the economists and ideas that animated the policy debates over the last hundred years. For that, it is well worth a read.

* * * * 

David formerly worked at a public policy institution. Follow him on Twitter @DWeinberger03. Email him at davidweinberger916@gmail.com. His article previously appeared at the Foundation for Economic Education.

"Why do consumers, who interact with markets every day, have essentially no idea where prices come from?"

"Why do consumers, who interact with markets every day, have essentially no idea where prices come from? I think it’s because they have zero incentive to learn. If I’m a price-taking customer buying in a competitive spot market, then all that matters to me is the price. I could have a crazy theory about where the price comes from that involves the phases of the moon and the appetite of my pet cat. Or I could have a sophisticated theory based on supply and demand analysis. The market won’t punish me for my crazy theory any more than it will reward me for my sophisticated theory. In many areas, knowing something makes you better at it. Knowing about ocean currents and weather patterns makes you a better sailor. Knowing about chemistry and physiology makes you a better pharmacist. But knowing about supply and demand does nothing to make you better at grocery shopping. This is one of the virtues of free markets–they require precious little economic knowledge from their participants. On the other hand, this is one of the great challenges of economic education. People have little tangible incentive to learn and understand economics."

~ Washington Uni economist Ian Fillmore, quoted in 'People Don't Understand Prices'

"Broken supply-chains..."

"Broken supply-chains are the story of the moment but what I find truly remarkable is that virtually no one any longer understands that it is the price system, and the price system alone that allows the supply-chain to operate.... [to bring] food to your table, along with everything else. It is the price mechanism that makes the capitalist system indispensable. That this is not common knowledge makes our way of life vulnerable to being driven into the sand ..."

~ Steven Kates, from his post 'The price mechanism is the single most important element of the market economy'

“12 Myths of International Trade"

"As Adam Smith noted more than two centuries ago, a nation can gain from trade whenever a good can be acquired from foreigners more cheaply than it can be produced domestically. When foreign governments subsidise their exports to us, they are subsidising [New Zealand] consumers. Of course, the subsidies are costly to the taxpayers funding them. With time, they are likely to tire from the burden and bring the subsidies to a halt. If foreigners are subsidising their producers, some argue we should do the same. This makes no sense. Merely because foreigners are wasting their resources propping up inefficient suppliers is no reason for us to engage in the same folly. As with other trade restrictions, export subsidies will channel more of our resources toward production of things we do poorly and away from things we do well. A smaller output and lower level of income will result. Put simply, neither individuals nor nations can expect to get ahead by spending more time producing things they do poorly."

~ from “12 Myths of International Trade,” a June 2000 Staff Report of the US Joint Economic Committee. This paragraph probably written by Jim Gwartney

"It is the maxim of every prudent master of a family, never to attempt to make at home what it will cost him more to make than to buy. The tailor does not attempt to make his own shoes, but buys them of the shoemaker. The shoemaker does not attempt to make his own clothes, but employs a tailor. The farmer attempts to make neither the one nor the other, but employs those different artificers.
    "What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom. If a foreign country can supply us with a commodity cheaper than we ourselves can make it, better to buy it of them with some part of the produce of our own industry, employed in a way in which we have some advantage."

~ Adam Smith, Wealth of Nations

 

“Hence it is not enough to establish the technological feasibility of a production plan; it is also necessary to determine its economic cost – that is, the value of opportunities forgone by this plan. The complexity of deliberately tracing out such cost implications of each plan necessitates that this be done unconsciously by relying on the information supplied by a price system.”

~ Don Lavoie, Rivalry and Central Planning, Cambridge University Press, 1985, p. 148

[Hat tip Don Boudreaux]

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