Power & Market

I am sorry to have to report the death of another old friend, Gary North, who passed away a few days after his eightieth birthday. He was by training an economic historian and had a strong commitment to Austrian economics. He greatly admired Mises and Rothbard. He once asked Mises how he had been able to publish his famous article of 1920 on socialist calculation in a journal edited by Max Weber. Mises answered, “Well, I knew him, and I sent it in.” Gary wrote a notable study of Marx, Marx’s Religion of Revolution, and a long and learned commentary on biblical economics. He was also a founder of the Christian Reconstruction movement, along with his father-in-law, R.J. Rushdoony.

He was on Ron Paul’s staff in 1976, and he and Dr. Paul were close friends. For many years, he spoke at Mises Institute conferences, and he was the best debater I have ever heard. In his speaking style, he was highly organized and relentless; but he was in conversation kind and friendly. When I saw him at conferences, we would exchange stories of the old days. Now, alas, I cannot do that anymore.

David Gordon is a genius, a man whose intellectual abilities and output exceed mine. I make that claim without any sense of envy. I also claim our unequal conditions are beneficial to each other, and society in general. Because of these declarations, I am a classical liberal in the Misesian sense. Let me explain.

First, I need to define left and right as I see them. To do this, I paraphrase Paul Gottfried and delineate left and right in three aspects: artificial versus organic; egalitarian versus hierarchical; and international versus national.

To put the first divide into perspective, consider prohibition of alcohol in the early 1900s. A progressive on the left believed that without alcohol a New Soviet Man would arise. A man who no longer drank his wages, but instead spent his evenings writing poetry and taking his children to operas and symphonies. In contrast, a progressive on the right simply expected life to improve as families had their father’s beer money to use for more appropriate expenses, such as food and rent. Someone on the right would not expect a man’s essence to change, just his actions.1

A more recent example would be George W. Bush’s ownership society. This was a left progressive policy that expected a New Soviet Man to emerge as the keys to a home were turned over.

The next divide is a derivative of the first. Only an artificial construct could posit a world where all are equal in abilities and outcomes; a world where natural hierarchies do not arise. As if rearranging the means of production – property – could create a situation where my abilities equal David’s. More on this later.

The third and final divide is also a derivative of the first, an artificial notion that all groups and peoples agree on the very same means and ends. As if all necessarily share the same view of a good life and, hence, force is justified to instantiate that good life.

In the most general understanding, it is the appeal to the artificial that delineates the left and the right.

Based on the above, I am a man of the right. I neither believe in, nor appeal to, artificial constructs, I accept natural hierarchies and believe people tend to sort into groups with shared beliefs. However, being on the right does not necessarily make me a classical liberal.

Classical Liberalism = Property

“The program of liberalism, therefore, if condensed into a single word, would have to read: property, that is, private ownership of the means of production (for in regard to commodities ready for consumption, private ownership is a matter of course and is not disputed even by the socialists and communists).” Mises, Liberalism

The artificial has no place in classical liberalism. Once artificial arrangements are considered, the evil of what Mises termed, the Fourier complex, arises. This is the belief that one’s failings in life are the result of the current structure of the means of production.

I cannot conceive of a different arrangement of property, absent violence, where my abilities would equal David’s. I will never equal David, our differences are God-given, not structural. I do not believe that under the socialist scheme, "the average human type will rise to the heights of an Aristotle, a Goethe, or a Marx. And above this ridge new peaks will rise.” So I do not allow myself (paraphrasing Mises) to be overwhelmed and seek refuge in the solace of the saving lie of antiliberalism and socialism. Instead, I accept and find comfort in our relative positions.

The benefit of interpersonal differences and hierarchies

I met David once, years ago – we only shook hands at a Mises event on Jekyll Island, so I know little of him in a personal sense. However, I see and read his intellectual output regularly. He is able to produce succinct and detailed reviews and articles that draw on multiple and varied sources. Sure, I could do that as well. But instead of struggling to produce, at best, one similar article per month, David appears to do two or more per week.

I am willing to accept that David may also exceed my abilities in other areas. While David writes on philosophy and political economy, I produce, inter alia, data flows and reports. It may be true that he could produce twice my output, should he take the time to learn the software tools, etc. However, if he focused on data and reports, leaving me to write in his field, much less would be produced in total.

In fact, such a situation would not be to my liking. I much rather read David’s eight or so articles per month and muse on his insights than struggle for 160 hours to produce just one of them. I am better off by even an absolute advantage in David’s favor – we all are.

Conclusion

Being a classical liberal and man of the right, I am able to withstand the siren’s song of envy that loops endlessly in the mainstream media, arts, politics, etc. In all things, being armed with the truth is the best defense. So, instead of championing the destruction of our society, we must stand against the current ideologies, allowing subsequent generations to enjoy the production that arises from ownership of property and self, even when the distribution of talents and outcomes is unequal.  

• 1. As a classical liberal, I do not advocate prohibition. I am simply stating those on the left and right expected different outcomes. Certainly, prohibition was a policy failure and a violation of natural rights, and am application of force. However, no New Soviet Man arose due to prohibition. That is true in the US, as well as in the Soviet Union under Gorbachev.

Government economic policy is completely backwards. We are told that massive deficit spending, interest rates driven to zero, and now higher taxes on the "rich" will bring the American economy out of the doldrums or whatever fake malady seems to be popular. It is hard to imagine an economy in the doldrums when unemployment, the scourge of mankind for decades, is so low that businesses cannot attract enough workers. That's number one; i.e., is the US economy really so bad? I admit that it always could be better, but we are not in the Great Depression of the 1930s, in which one-fourth of those seeking work could not find a job. At least not yet. Stay tuned, though.

Stimulus Spending and the Cantillon Effect

But let's get back to the main point: Whether or not the US economy is underperforming, can government spending help? That has been the mantra since Keynesianism swept the economic and then government hallways shortly after World War II. So, we may ask ourselves, just how does government stimulus spending work? Well, from what I can conclude, the government sells its debt to the Fed (called monetizing the debt, which increases the monetary base), spends it on all kinds of programs, some (but not all) of us get more money in our pockets and spend it. So, we can see that, from government's perspective, spending is the key. More spending MUST mean that the economy is doing better. Keynesian economists call this increasing aggregate demand, just a fancy name for more spending.

The implied mechanism is that more spending via money created out of thin air somehow draws more goods out of hiding. Why these goods were hiding is not quite clear, except that aggregate demand was deemed to be too low. On the face of it, it appears logical. Let's say that you are the surprise inheritor of a great deal of money from a distant relative. Your personal lifestyle certainly will be stimulated. But let's consider the source of this windfall—your distant relative. He certainly did not print buckets of money that he left you in his will. Either he earned the money himself or inherited it from someone who did. In other words, the source of your newfound wealth was previous production. You are the new owner of that wealth. Whether you produced it or someone else, you are the new owner of what Professor Frank Shostak calls "something for something." This is in contrast to receiving stimulus dollars printed by the government. Now you have received "something for nothing." It is pure monetary inflation without any previous production in exchange. Therefore, any stimulus in the form of increased spending is pure smoke and mirrors, masking capital decumulation. The result is rising prices, at a minimum, and possibly hyperinflation if carried too far.

But let me give you two thought experiments. For the first one, let's assume that you and some others are marooned on an uncharted island, similar to the plot of the hit TV comedy Gilligan's Island. The only resources you have are whatever washed ashore when your ship sank, whatever natural resources are at hand, and whatever survival skills you possess. Now let's suppose that some large boxes wash ashore later. You rush to open them and find that they contain millions and millions of dollars in paper Federal Reserve notes. Not knowing when, or even if, you will be found, what good are these millions to you and your fellows? Do you all cheer, because now you all are rich? Since your most urgently desired goods certainly are not paper dollars, I doubt it. You all are left with the original resources—natural resources at hand, whatever goods washed ashore earlier, and your survival skills. But, you may say, I do not live on an uncharted island. I certainly can spend the millions and enrich my life. OK, now let's assume that in the middle of the night Federal Reserve chairman Jerome Powell wakes you and slides a suitcase with a million dollars in Federal Reserve notes under your bed. Wow! What would you do? You might spend a little time thinking how to spend the money, but sooner or later you will take your suitcase of money and start to spend. Then you are shocked to find out that Mr. Powell, like a magical Santa Claus, visited every one of America's 300 million-plus citizens and gave everyone of them a suitcase with a million dollars in Federal Reserve notes, too. You find that all the luxury cars are gone from dealers' lots. When you enquire about ordering one, you find that the price has skyrocketed. When government engages in stimulus spending, the same thing happens, only on a smaller scale. A fortunate few, mostly bankers and bond dealers, get the newly printed money first. They buy current goods at current prices. Good for them! But subsequent receivers of the new money find that prices have gone up and their newly acquired money really doesn't do them that much good. Then people much further down the line as recipients of the new money find that prices have gone up and their incomes haven't gone up nearly as much or not at all (think of retirees on fixed pensions). Rather than enticing production out of hiding, government stimulus spending has caused a transfer of wealth from the later receivers of new money to the earlier receivers of new money. This is known in economic circles as the Cantillon effect.

A Four-Point Plan from Forty Years Ago

So, what can government do, if anything, to aid the economy? I have four main points, all from the Republican platform of 1980. (These four points were articulated by vice presidential candidate George Herbert Walker Bush on the steps of the capitol building in Springfield, Illinois, in the summer of 1980. I was in attendance.)

1. Return to sound money by freezing the money supply. That requires two reforms. First, do not increase the monetary base by selling government debt to the central bank. Government must spend only what it raises in taxes or obtains through honest borrowing in the bond market. Secondly, forbid the ability of banks to engage in credit expansion through fractional reserve banking, whereby banks themselves create money out of thin air when they increase lending.
2. Cut government spending. Of course, this is exactly opposite of what government does today, but government spending is parasitical on the real economy. Government does not create goods and services itself. It can only hand out what it has taken from others. It is the private economy that brings people what they most urgently want, not what government thinks they want or what government wants them to have.
3. Number three, reduce regulations. The free market economy and the legal system are all that is needed to bring people what they most urgently want . Disputes are best resolved in the commercial and criminal justice systems.
4. Number four, once the budget is balanced, finally goes into surplus, and the debt is slowly being reduced, government can begin to cut taxes. Tax reductions will take money from the destructive power of government spending and increase the capital accumulation power of the private sector. Since the money supply has remained the same, increased production will result in a slow and steady fall in prices, benefiting all levels of society. The cost of living will fall and the standard of living will rise.

The American people need to be told the truth. Government can help the economy only by protecting you and your property. A free market economy, limited government, and the rule of law are the keys to prosperity and peace.

The benefits of privatization are well documented by empirical studies, so they will not be rehashed in this piece. Yet many still assume that some commodities are beyond privatization. Too often proponents of privatization fail to appreciate that humans are sentimental characters, and as a result, they are unwilling to commodify resources deemed to be sacred. A leading advocate of radical privatization, Walter Block in an interview with this writer expressed the view that even natural resources like forests and rivers should be privatized to induce greater levels of efficiency. Walter Block may appear unsentimental, but I doubt that even those in agreement would recommend the privatization of citizenship.

Citizenship is the next major frontier in the privatization revolution. Currently, only the American government is allowed to grant citizenship to foreigners, but why should this be the case, when the lives of ordinary Americans are impacted by immigration? And contrary to what you think, privatization will improve the quality of immigrants. There is no guarantee that the loved ones of naturalized Americans who legally migrate to the US will become productive citizens. When choosing to sponsor family members, people rarely consider their productive potential; such decisions are inspired by love and loyalty.

In contrast, if professional associations were authorized to approve citizenship, then they would have an incentive to select the best candidates and engage in thorough research to eliminate unsavory characters. For example, accountants, chefs, and educators would relocate to America after being granted citizenship. Furthermore, indirectly, privatization might stimulate entrepreneurship by creating demand for companies specializing in providing these professional associations with intelligence on prospective citizens.

By now readers are obviously wondering how standards would be maintained in the absence of government regulations. This concern is understandable, but lacking directives from the government, private associations will orchestrate their own regulations. Reprobate member agencies who grant citizenship to dubious personalities will have their privileges rescinded. Because professional bodies want to preserve the integrity of the system, they will automatically institute mandatory requirements for all parties. A case in point is that one professional body could subject its members to annual audits. If we are being objective, then clearly privatizing citizenship has merits. When the government is the sole provider of citizenship there is no onus to ensure that prospective citizens will offer a positive contribution to society.

Since privatization is divorced from sentiment, it can attenuate some of the disadvantages associated with government provision of citizenship. On the other hand, neither will privatization marginalize people interested in sponsoring loved ones based on sentiment. Such individuals can always join a professional body to assist in securing employment for family members. Under the new dispensation, except for the elderly and children, all prospective citizens would have to apply for citizenship through a professional body. So even those sponsoring sentimental applications would have to demonstrate that their relatives will work upon arrival in America.

Immigrants can either enrich or degrade the quality of society; therefore, American citizens should be positioned to determine the quality of the people who acquire citizenship. And unfortunately, the current system of allotting citizenship does not cultivate accountability. Anti-immigration activists may contend that these proposals would flood the country with new immigrants; however, they are mistaken. On the contrary, the discriminatory nature of privatization actually limits immigration by selecting competitive candidates. Moreover, privatization is not an affirmation of open immigration; mechanisms can be designed to monitor the borders in order to stem the flow of illegal immigration. Privatization may not alleviate all problems, but at least it elevates the quality of immigrants.

Similarly, a new approach to drugs is also required. Instead of lobbying for the legalization of drugs, we should suggest a framework to manage the consequences of legalization. Liberals are quick to remind us that the war on drugs has been a failure, yet few ponder how drug dealers will manage their affairs in this environment. However, the problem is not complicated, because trading drugs is just another business. Like other professionals, druggists can institute regulations to determine the rules of the games, and agents who disregard these stipulations will be excommunicated.

In general, the success of an entrepreneur is based on his reputation. Hence, agents who engage in fraudulent activities or sell inferior drugs will be driven out of the market. Further, legalization will remove the stigma of drug dealing and consequently could discourage druggists from financing illicit activities, since the costs of penetrating legitimate financial systems will have been minimized. Presently, the proceeds of drugs are perceived as dark money, and as such, drug dealers are isolated in the financial community. But the normalization of drugs will unleash numerous opportunities for dealers to engage in legitimate commerce. By minimizing the cost of participating in the economy for dealers, legalization makes illicit transactions expensive. Clearly, if the proceeds of drugs are not seen as tainted, then a druggist will be motivated to engage the financial system, instead of aiming to increase his wealth through illegal means.

Although these suggestions will elicit criticism, the truth is that we cannot comment on the efficacy of policies without testing their utility. We have been relying on stale approaches to effect positive change to no avail. So, at this stage, policymakers must shed old biases and invest in innovative alternatives to yield new insights.