Recommended Reads: The Paper Wealth Bezzle and Frebezzle, The Human Cost of Socialism and the Menace of Egalitarianism

The first link deals with paper stock market wealth as 'Bezzle' and 'Frebezzle'. 

Professor London School of Economics John Kay at the Project Syndicate explains: (hat tip Zero Hedge) [bold mine]

More than a half-century ago, John Kenneth Galbraith presented a definitive depiction of the Wall Street Crash of 1929 in a slim, elegantly written volume. Embezzlement, Galbraith observed, has the property that “weeks, months, or years elapse between the commission of the crime and its discovery. This is the period, incidentally, when the embezzler has his gain and the man who has been embezzled feels no loss. There is a net increase in psychic wealth.” Galbraith described that increase in wealth as “the bezzle.”

In a delightful essay, Warren Buffett’s business partner, Charlie Munger, pointed out that the concept can be extended much more widely. This psychic wealth can be created without illegality: mistake or self-delusion is enough. Munger coined the term “febezzle,” or “functionally equivalent bezzle,” to describe the wealth that exists in the interval between the creation and the destruction of the illusion.

Applying Bezzle and Frebezzle

There are numerous routes to bezzle and febezzle. In a Ponzi scheme, early investors are handsomely rewarded at the expense of latecomers until the supply of participants is exhausted. Such practices, illegal as practiced by Bernard Madoff, are functionally equivalent to what happens during an asset-price bubble.

Tailgating, or picking up dimes in front of a steamroller, is another source of febezzle. Investors search for regular small gains punctuated by occasional large losses, an approach exemplified by the carry trade by which investors borrowed euros in Germany and France to lend in Greece and Portugal.

The “martingale” doubles up on losing bets until the trader wins – or the money runs out. The “rogue traders” escorted from their desks by security guards are typically unsuccessful exponents of the martingale. And the opportunity to switch between the trading book and the banking book creates ready opportunities for financial institutions to realize gains and park losses.

Rings a bell? 

Read the terse article here

Next link, Austrian economist Dr. Richard Ebeling on the death, terror and destruction from applied socialism: The Human Cost of Socialism in Power

From the concluding section (Epic Times): [bold mine, italics original]

The significance of these accounts is not their uniqueness but, rather, their monotonous repetition in every country in which socialism was imposed upon a society. In country after country, death, destruction, and privation followed in the wake of socialism’s triumph. Socialism’s history is an unending story of crushing tyranny and oceans of blood.

Socialism as the Ideology of Death and Destruction

As the Soviet mathematician and dissident, Igor Shafarevich, who spent many years in the GULAG slave labor camps for his opposition to the communist regime, said in his book, The Socialist Phenomenon (1980):

“Most socialist doctrines and movements are literally saturated with the mood of death, catastrophe, and destruction . . . One could regard the death of mankind as the final result to which the development of socialism leads.”

That twentieth century socialism would lead to nothing but this outcome was understood at the time of the Bolshevik victory in Russia. It was clearly expressed by the greatest intellectual opponent of socialism during the last one hundred years, the Austrian economist, Ludwig von Mises.

Near the end of his famous 1922 treatise, Socialism: An Economic and Sociological Analysis, Mises warned that:

“Socialism is not in the least what is pretends to be. It is not the pioneer of a better and finer world, but the spoiler of what thousands of years of civilization have created. It does not build, it destroys. For destruction is the essence of it. It produces nothing, it only consumes what the social order based on private ownership in the means of production has created . . . Each step leading towards Socialism must exhaust itself in the destruction of what already exists.”

Read the entire article here

Last, the path to towards socialism via egalitarian policies. 

Here is a slice of Ludwig von Mises Institute Llewellyn H. Rockwell’s The Menace of Egalitarianism speech. (bold mine) 

What are we to understand by the word equality? The answer is, we don’t really know. Its proponents make precious little effort to disclose to us precisely what they have in mind. All we know is that we’d better believe it.

It is precisely this lack of clarity that makes the idea of equality so advantageous for the state. No one is entirely sure what the principle of equality commits him to. And keeping up with its ever-changing demands is more difficult still. What were two obviously different things yesterday can become precisely equal today, and you’d better believe they are equal if you don’t want your reputation destroyed and your career ruined.

This was the heart of the celebrated dispute between the neoconservative Harry Jaffa and the paleoconservative M.E. Bradford, carried out in the pages of Modern Age in the 1970s. Equality is a concept that cannot and will not be kept restrained or nailed down. Bradford tried in vain to make Jaffa understand that Equality with a capital E was a recipe for permanent revolution….

Now, do egalitarians mean we are committed to the proposition that anyone is potentially an astrophysicist, as long as he is raised in the proper environment? Maybe, maybe not. Some of them certainly do believe such a thing, though. In 1930, the Encyclopaedia of the Social Sciences claimed that “at birth human infants, regardless of their heredity, are as equal as Fords.” Ludwig von Mises, by contrast, held that “the fact that men are born unequal in regard to physical and mental capabilities cannot be argued away. Some surpass their fellow men in health and vigor, in brain and aptitudes, in energy and resolution and are therefore better fitted for the pursuit of earthly affairs than the rest of mankind.” Did Mises commit a hate crime there, by the standards of the egalitarians? Again, we don’t really know.

Then there’s “equality of opportunity,” but even this common conservative slogan is fraught with problems. The obvious retort is that in order to have true equality of opportunity, sweeping government intervention is necessary. For how can someone in a poor household with indifferent parents seriously be said to have “equality of opportunity” with the children of wealthy parents who are deeply engaged in their lives?

Then there is equality in a cultural sense, whereby everyone is expected to ratify everyone else’s personal choices. The cultural egalitarians don’t really mean that, of course: none of them demand that people who dislike Christians sit down and learn Scholastic theology in order to understand them better. And here we discover something important about the whole egalitarian program: it’s not really about equality. It’s about some people exercising power over others.

Read the rest here

US Labor Day Inflation: Why Government Statistics Should NOT be Trusted

Last weekend I wrote

I am not a fan of statistics, especially growth statistics popularly known as Gross Domestic Product (GDP). Such statistics attempts to quantify people’s actions by homogenizing disparate or heterogeneous individuals into aggregates. Think of it, if I value beer and you don’t share my values, then how can such values be “aggregated”. People’s values are in essence subjective therefore non-quantifiable.

And through accounting entries, the simplification process involves the isolation of interrelated variables and the impression to its audiences of the supposed constancy of people’s actions.

The important point is that individuals have different choices shaped by values, preferences and importantly social, political, market and even environmental conditions affecting these. In short, individual choices CHANGE across time. I may want ice cream this moment, later beer and pizza. Tomorrow I may want salad, fish and juice. My friends may treat me to a steak dinner. A strong typhoon may compel me to just consume canned goods and so forth.

These changes cannot be captured by statistics.

The same applies to statistics on price inflation

Austrian economist Dr. Richard Ebeling at the EPIC Times explains why government statistics have been incompatible with reality

First the construction of the US Consumer Price Index  (CPI) [bold mine]

How do the government statisticians construct the CPI? Month-by-month, the BLS tracks the purchases of 6,100 households across the country, which are taken to be “representative” of the approximately 320 million people living in the United States. The statisticians then construct a representative “basket” of goods reflecting the relative amounts of various consumer items these 6,100 households regularly purchase based on a survey of their buying patterns. They record changes in the prices of these goods in 24,000 retail outlets out of the estimated 3.6 million retail establishments across the whole country.

And this is, then, taken to be a fair and reasonable estimate – to the decimal point! – about the cost of living and the rate of price inflation for all the people of the United States.

Due to the costs of doing detailed consumer surveys and the desire to have an unchanging benchmark for comparison, this consumer basket of goods is only significantly revised about every ten years or so.

This means that over the intervening time it is assumed that consumers continue to buy the same goods and in the same relative amounts, even though in the real world new goods come on the market, other older goods are no longer sold, the quality of many goods are improved over the years, and changes in relative prices often result in people modifying their buying patterns.

Why there is no “average”

The fact is there is no “average” American family. The individuals in each household (moms and dads, sons and daughters, and sometimes grandparents or aunts and uncles) all have their own unique tastes and preferences. This means that your household basket of goods is different in various ways from mine, and our respective baskets are different from everyone else’s.

Some of us are avid book readers, and others just relax in front of the television. There are those who spend money on regularly going to live sports events, others go out every weekend to the movies and dinner, while some save their money for an exotic vacation.

A sizable minority of Americans still smoke, while others are devoted to health foods and herbal remedies. Some of us are lucky to be “fit-as-a-fiddle,” while others unfortunately may have chronic illnesses. There are about 320 million people in the United States, and that’s how diverse are our tastes, circumstances and buying patterns.

This means that when there is price inflation those rising prices impact on each of us in different ways….

The Consumer Price Index is an artificial statistical creation from an arithmetic adding, summing and averaging of thousands of individual prices, a statistical composite that only exists in the statistician’s calculations.

Why individuals actions depart from statistics

It is the individual goods in the subcategories of goods that we the buying public actually confront and pay when we shop as individuals in the market place. It is these individual prices for the tens of thousands of actual goods and services we find and decide between when we enter the retail places of business in our daily lives. And these monetary expenses determines for each of us, as individuals and particular households, the discovered change in the cost-of-living and the degree of price inflation we each experience.

The vegetarian male who is single without children, and never buys any types of meat, has a very different type of consumer basket of goods than the married male-female couple who have meat on the table every night and shop regularly for clothes and shoes for themselves and their growing kids.

It is the diversity of our individual consumer preferences, choices and decisions about which goods and services to buy now and over time under constantly changing market conditions that determines how each of us are influenced by changes in prices, and therefore how and by what degree price inflation or price deflation may affect each of us.

And it is government’s manipulation of money supply directly (unsterilized open market operations) and indirectly (through loanable funds in the banking system) that are key determinants in the distortion of pricing system and causing imbalances in the allocation of resources across markets and the production process. This can partly be seen in the money supply growth.

Nevertheless, here is the US Overall CPI as of July 201

Here is the Core Inflation rate (ex-food and energy) over the same period

Meanwhile here is the US Labor Day inflation

From CNN (hat tip Bob Wenzel)

Hamburger 10.3%

Steak 9%

Pork Chops +10.4%

Hotdogs 6.9%

Chicken 3%

Cheese 7.1%

Beer .4%

Soda –.4%

Two worlds apart.

Interventionism: Using Legal Coercion to Get Ahead in Life

Mainstream media (especially in the Philippines) never ceases to inculcate upon her audience of the need to have the "right" morals (mainly based on collectivism) for the political economy to prosper. Yet what they either ignore or omit to explain is how most of the unethical or unscrupulous behaviors have been products of the interventionist policies previously implemented. They also fail to deal with the potential ethical distortions from populist policies they advocate in addressing real time social problems.

At the Epic Times, Austrian economist, Dr. Richard Ebeling explains why this is so (ht: Bob Wenzel) [bold mine]

In an environment in which “public policy” determines individual lives and fortunes and in which social and economic life has become politicized, it is not surprising that many Americans have turned their attention to politics to improve their market position and relative income share. Legalized coercion has become the method by which they get ahead in life.

And make no mistake about it: Every income transfer, every tariff or import quota, every business subsidy, every regulation or prohibition on who may compete or how a product may be produced and marketed, and every restraint on the use and transfer of property is an act of coercion. Political force is interjected into what would otherwise be a system of peaceful and voluntary transactions.

Over time, interventionism blurs the distinction between what is moral and what is not. In ordinary life, most people take for granted that certain forms of conduct are permissible while others are not. These are the Golden Rules we live by. Government’s task in human society is to enforce and protect these rules, which are summarized in two basic principles: Neither force nor fraud shall be practiced in dealings with others; and the rights and property of others must be respected. In the moral order that is the free market economy, these principles are the wellspring of honesty and trust. Without them, America is threatened with ultimate ruin – with a war of all-against-all in the pursuit of plunder.

When individuals began to ask government to do things for them, rather than merely to secure their individual rights and honestly acquired property, they began asking government to violate other’s rights and property for their benefit.

These demands on government have been rationalized by intellectuals and social engineers who have persuaded people that what they wanted but didn’t have was due to the greed, exploitation, and immorality of others. Basic morality and justice has been transcended in the political arena in order to take from the “haves” and give to the “have not’s.” Theft through political means has become the basis of a “higher” morality: “social justice,” which is supposed to remedy the alleged injustices of the free market economy.

But once the market becomes politicized in this manner, morality begins to disintegrate. Increasingly, the only way to survive in society is to resort to the same types of political methods for gain as others are using, or to devise ways to evade the controls and regulations. More and more people, therefore, have been drawn into the arena of political intrigue and manipulation or violation of the law for economic gain. Human relationships and the political process have become increasingly corrupted.

In the 1920s, Ludwig von Mises explained a crucial aspect of this corruption of morality and law:

“By constantly violating criminal laws and moral decrees [people] lose the ability to distinguish between right and wrong, good and bad. The merchant, who began by violating foreign exchange controls, import and export restrictions, price ceilings, etc., easily proceeds to defraud his partners. The decay of business morals . . . is the inevitable concomitant of the regulations imposed on trade.”

Mises was, of course, repeating the lesson that the French classical economist Frederic Bastiat had attempted to teach in the 1850s in his famous essay, “The Law.” When the state becomes the violator of liberty and property rather than its guarantor, it debases respect for all law. People in society develop an increasing disrespect and disregard for what the law demands. They view the law as the agent for immorality in the form of legalized plunder for the benefit of some at the expense of others. And this same disrespect and disregard sooner or later starts to creep into the ordinary dealings between individuals. Society verges on the brink of lawlessness.

Read the rest here

So proposals to implement more interventionist solutions is like a dog chasing their own tail.

Do you know that Shanghai was once an Almost Free City-State?

Austrian economist Dr. Richard Ebeling narrates of Shanghai's laissez faire capitalism experience at the Northwood University blog: 

China’s impressive modernization since the death of Mao Zedong in 1976 and the end to the destructive madness of the Cultural Revolution has been epitomized by the dramatic growth of the industrial and port city of Shanghai, with its majestic skyline of impressive futuristic skyscrapers. It is forgotten that Shanghai already was a commercial and industrial center before the Second World War, built on the principles of laissez-faire capitalism.

Following the Chinese-British War of 1842, several ports along the China coast were opened to Western merchants. In these “treaty ports,” portions of the cities were recognized to be under European jurisdiction. Known as “concession” areas, the European powers administered these areas according to Western principles of the “rule of law,” with recognition and protection of property rights, personal freedom and civil liberties.

By the end of the 19th century, Shanghai had become the most important of the treaty ports. Indeed, it was the industrial, commercial and cultural center of modem China until the Japanese occupation of the city in December 1941, following the attack on Pearl Harbor.

Shanghai an Almost Free City-State

The Western-administered portions of Shanghai were divided into two districts: the French Concession and the International Settlement. A Consul-General appointed by Paris administered the French Concession.

But the much larger International Settlement was administered by a Municipal Council composed of fourteen members elected by the permanent foreign residents of the city, with the franchise based on being a “ratepayer,” i.e., a tax-paying property owner within the boundaries of the International Settlement. By the 1930s, around 90,000 Europeans and Americans lived in Shanghai.

Hence, Shanghai’s International Settlement was almost an independent “city-state” based on the nearly unhampered principles of free trade and free enterprise under the protection of the Western Powers (which ended up meaning mostly a British and American military presence).

In general, the economic policies of Shanghai’s International Settlement followed the ideas of Adam Smith’s system of natural liberty and laissez faire. The Municipal Council limited itself primarily to three functions: administration of justice; police protection of individual liberty and property; and the undertaking of a limited number of “public works,” such as construction of roads, traffic control (administered by Sikh policemen brought by the British from India), harbor patrol, and the dredging of the Whangpoo River that connects Shanghai with the mouth of the Yangtze.

Read the rest here

Quote of the Day: Defense of Liberty Must Emphasize on Principle versus Expediency

What must be developed is a case for freedom that starts with a better demonstration and defense of the nature of man in the world and what is necessary for his survival and improvement. In an age in which religion has lost it hold and appeal for many, such a defense of freedom must have its basis in reason, logic and objective reality.

Central to such a new defense of liberty must be its emphasis on principle versus expediency; that freedom is a tightly woven tapestry of principles that when compromised “at the margin” between individual liberty and political paternalism has the risk of incremental loses of freedom that cumulatively run the danger of an unplanned but no less serious “road to serfdom.”

As Friedrich Hayek argued, minor or marginal “exceptions” to advance seemingly “good causes” through government regulation, redistribution, or planning, always threaten to become a slippery slope:

“The preservation of a free system is so difficult precisely because it requires a constant rejection of measures which appear to be required to secure particular results, on no stronger grounds than that they conflict with a general rule [of non-government intervention], and frequently without our knowing what will be the costs of not observing the rule in the particular instance. A successful defense of freedom must therefore be dogmatic and make no concessions to expediency, even where it is not possible to show that, besides the known beneficial effects, some particular harmful result would also follow from its infringement. Freedom will prevail only if it is accepted as a general principle whose application to particular instances requires no justification. It is thus a misunderstanding to blame classical liberalism for having been too doctrinaire. Its defect was not that it adhered too stubbornly to principles, but rather that it lacked principles sufficiently definite to provide clear guidance . . .

“People will not refrain from those restrictions on individual liberty that appear to them the simplest and most direct remedy of a recognized evil, if there does not prevail a strong belief in definite principles. The loss of such belief and the preference for expediency is no part the result of the fact that we no longer have any principles that can be rationally defended.”

As Hayek argued on another occasion, if the cause of liberty is to prevail once again, it is necessary for friends of freedom to not be afraid of being radical in their case for classical liberalism – even “utopian” in a right meaning of the term. To once more make it a shining and attractive ideal to imagine a world of free men who are no longer slaves to others, whether they be monarchs or majorities.

It would be a world of sovereign individuals who respect each other, who treat each other with dignity and who view each other as an end in himself, rather than one of those pawns to be moved and sacrificed on that chessboard of society to serve the ends of another who presumes to impose coercive control over his fellow human beings.

This is an excerpt from a speech by American libertarian author and Northwood University economics professor Dr. Richard Ebeling published at the Northwood Blog (hat tip Bob Wenzel)

Quote of the Day: Perpetual price inflation as means to assure full employment

…And these were the policies that Keynes did his best to try to overthrow in the pages of his book, "The General Theory." He argued that a market economy was inherently unstable, open to swings of irrational investor optimism and pessimism, which resulted in unpredictable and wide fluctuations in output, employment, and prices. Only government, he believed, could take the long view and rationally keep the economy on an even keel by running deficits to stimulate the economy during depressions and surpluses to rein it in during inflationary booms. He therefore attacked the notion of annual balanced budgets; instead, government should balance its budget over the “business cycle.”

To do this job, Keynes said, governments should not be hamstrung by the “barbarous relic” of the gold standard. Wise politicians, guided by brilliant economists like himself, had to have the flexibility to increase the money supply, manipulate interest rates, and change the foreign-exchange rates at which currencies traded for each other. They required this power so they could generate any amount of spending needed to put people to work through public-works projects and government-stimulated private investments. Limiting increases in the money supply to the quantity of gold would only get in the way, Keynes insisted.

Keynes believed not only that the market economy could not keep itself on an even keel he also believed that it would be undesirable to allow the market to work. He once said that to have the market determine prices and wages to balance supply and demand was to submit society to a cruel and unjust “economic juggernaut.” Instead, he wanted wages and prices to be politically fixed on the basis of “what is ‘fair’ and ‘reasonable’ as between the [social] classes.”

The level of wages imposed by trade unions, for example, was to be viewed as sacrosanct, even if many workers were priced out of the market because the level was higher than potential employers thought those workers were worth. The government, instead, was to print money, run deficits, and push up prices to any level needed to make it again profitable for employers to hire workers. In other words, perpetual price inflation was to be the means to assure “full employment” in the face of aggressive trade unions demanding excessive wages.

This is from libertarian author and economics professor Richard Ebeling on the myths of Keynesianism published at the Epic Times.  (hat tip Bob Wenzel) The Keynesian policy prescription essentially means two wrongs (interventions and inflationism) make a right.

How Hyperinflationary Policies Ushered in China’s Communist Rule

Austrian economist and professor at Northwest University Richard M. Ebeling in a recent article articulates how the Chinese government’s hyperinflationary policies, which financed her war with Japan 1937-1945 and the civil war compounded by the “dictatorial” Nationalist government, ushered in the communist tyrannical rule.

Here is a slice. From Epic Times (hat tip Bob Wenzel) (italics original)

Inflations have undermined the cultural and economic fabric of society, bringing about social chaos and revolution. Inflation is the enemy of social order and economic stability. Inflation can destroy accumulated wealth, ruin the entire well being of broad sections of a country’s population, and sometimes bring about radical change in a nation’s political system. When combined with war, inflations tear apart the human community.

One example is the Great Chinese Inflation of the 1930s and 1940s. Indeed, the destruction of the Chinese monetary system during this period helped Mao Zedong’s communist movement come to power on the Chinese mainland in 1949.

In the nineteenth and early twentieth centuries, Imperial and then Republican China had no central bank. The monetary system was based on a diverse network of private banks operating in the various regions of the country. While copper was widely used in coins, the primary medium of exchange was silver, and the entire Chinese economy functioned on an informal silver standard for most of this time. A year after Chiang Kai-shek’s Nationalist (or Kuomintang) Party came to power in Nanking in 1927, the Central Bank of China was established with its headquarters in Shanghai, and the country was formally put on a Chinese silver-dollar standard.

Read the details here

 

The real effects of inflationary policies to the Chinese political economy. Again Professor Ebeling

But it is nonetheless true that whatever basis of popular support Chiang’s government might have had against the communists at the end of the Second World War, especially among the country’s middle class, was undermined by the inflation. It destroyed the wealth and savings of the Chinese middle class, and created chaos in virtually all commercial dealings due to the loss of a reliable and stable medium of exchange for purposes of rational economic calculation and business planning.

In addition, the inflation and its effects drove some segments of the rural population into a more severe poverty than even the war had generated. Thus, whatever support the Nationalist government may have had in the countryside soon withered away, as well.

Also, during and after the war, the Nationalist government imposed unworkable price and wage controls as a supposed tool to “fight” price inflation that only succeeded in creating even more distortions and imbalances throughout the Chinese economy due to shortages, black markets, and mounting corruption.

Its policies produced the social and economic unrest that played right into the hands of the communists, as Mao’s revolutionary government promised to do away with the corruption and abuse of Chiang’s Nationalist government.

The hyperinflationary policy followed by the Nationalist Chinese government, therefore, helped bring about more than half a century of Marxist tyranny on the mainland of China, a communist tyranny under Mao Zedong that historians have estimated cost the lives of at least 80 million innocent men, women and children in the name of building the “bright socialist future.”

I find some relevance with China’s inflationary policies of 1930-40s with current stylized policies and politics. Except that the sequence appears to be backwards.

Then inflationary policies had been designed to finance China’s war economy. However today, both China and Japan have been inflating bubbles with the aim of generating economic growth (really—statistical growth, and really—subsidies to the cronies of the Chinese government and State Owned Enterprises (SOE) as well as Japan’s Wall Street) and the ensuring of the tenures of their respective political leaders. 

[Note I included Japan in the above commentary due to the recent controversy which has historical significance.]

However, slowing growth even from statistical measures from the intensifying embrace of bubble policies have placed increased political pressure on both governments. And instead, the current bubble (inflationist) policies have amplified on the credit risks (and other associated risks) for both economies amidst an environment of slowing growth.

So to divert the public’s attention from the real problems, both governments has resorted to diversionary tactic of brinkmanship politics via territorial disputes aimed at the incitement of nationalist sentiment to generate popular support for their respective governments. 

This has also been impliedly contrived to further justify their current inflationary policies with even bigger defense spending. Both China and Japan, a staunch US ally, will raise their defense budget this year.

The peculiarity is that despite the hullabaloo over Senkaku Islands and so the so-called “China threat’ as portrayed by western media, the Chinese government as well as partly Chinese investors continue to indirectly finance the US war machine via record acquisition of US Treasuries. 

The danger of inflationism has been its relationship with wars. The next question is what happens when all these seeming theatrics risks becoming real even by accident? Will massive inflationism lead to World War III or even a nuclear Armageddon?

Or will communism and its close sibling socialism rear its ugly head again, not just in China but to practitioners of inflationism elsewhere?  

Recently Adolf Hitler’s anti-semitic book 'Mien kampf' has seen a surge in sales.

Signs of things to come?

Quote of the Day: The crisis of government paternalism

This “crisis” of government paternalism was accelerated by monetary and related interventionist policies in the United States and Europe that produced another “boom-bust” cycle in the first decade of the 21^st century. It has had all of the hallmarks of the type of business cycle that the Austrians—and especially, Hayek—had explained decades earlier. Financial markets were awash with loanable funds made possible due to aggressive monetary expansion by central banks; interest rates were artificially pushed far below any market-based level; business investment borrowing, home borrowing, and consumer credit borrowing were far in excess of actual savings rates able to sustain them.

The capital, resources, and labor of society were misallocated and misdirected into various directions throughout these economies, all of which was going to necessitate a significant “adjustment” period when the “bubbles” of the boom finally burst. But rather than allowing the required adjustments and reallocations of capital and labor, and accepting that government welfare and related spending had to be permanently reduced or eliminated, governments have resisted these needed changes.

In many countries, the presumed “austerity” policies have really involved little or no reduction in the levels of government spending and redistribution, but noticeable increases in taxes. “Austerity” means squeezing the private sector to maintain a blotted government sector. The implicit psychology of many in Europe and the United States is that if the current crisis can “somehow” be gotten over, then the trend line of intrusive and growing government spending of past decades can be returned to in the future.

This is from Austrian economic professor and former President of Foundation for Economic Freedom Richard M Ebeling in an interview with the Austrian Economics Center (AEC).  This crisis of paternalism has spread to Asia.

Quote of the Day: Financial markets do not work like real markets

The first thing we need to keep in mind is that the euro and the US dollar are currencies subject to monetary central planning. They are monopoly monies controlled and issued by central banks. Their quantity is determined by the decisions of the monetary central planners who oversee them; they influence the amount of "reserves" banks have for lending purposes, and through this control over the supply of money in the banking system can manipulate a variety of interest rates, especially in the short run.

As a consequence, financial markets do not work like real markets. We cannot be sure what the amount of real savings may be in the society to support real and sustainable investment and capital formation. We cannot know what the "real cost" of borrowing should be, since interest rates are not determined by actual, private sector savings and investment decisions. And, therefore, there is no guarantee that the amount of investments undertaken and their time horizons are compatible with the available resources not also being demanded and used for more immediate consumer goods production in the society.

This is why countries around the world periodically experience booms and busts, inflations and recessions − not because of some inherent instabilities or "irrationalities" in financial markets, but because of monetary central planning through central banking that does not allow market-based financial intermediation to develop and work as it could and would in a real free-market setting.

This is from former FEE President, author and professor Richard Ebeling in an interview with Anthony Wile at the Daily Bell

When the crisis comes don't blame the markets for what is truly a product of monetary central planning

Richard Ebeling: The Case For Freedom and Free markets in the writings of Ludwig von Mises, F.A. Hayek and Ayn Rand

Dr. Richard Ebeling, American libertarian author, former president of the Foundation for Economic Education (FEE) and professor of economics, in a recent speech dealt with the works of Ludwig von Mises, Friedrich von Hayek and Ayn Rand as providing for the intellectual and ethical foundations for the case of Freedom and Free markets.  

From Dr. Ebeling at the Northwood University Blog (bold mine)

Three names are widely associated with the cause of human freedom and economic liberty in the 20^thcentury: Friedrich A. Hayek, Ludwig von Mises, and Ayn Rand. Indeed, it can be argued that Hayek’s The Road to Serfdom (1944) and The Constitution of Liberty (1960), Mises, Socialism ((1936) Human Action(1949), and Rand’s The Fountainhead (1943) and Atlas Shrugged (1957) did more to turn the intellectual tide of opinion away from collectivism in the second half of the twentieth century than any other works that reached out to the informed layman and general public.

Now, in the second decade of the 21st century their enduring influence is seen by the continuing high sales of their books, and the frequency with which all three are referred to in the media and the popular press in the face of the current economic crisis and the concerns about the revival of dangerous statist trends in the United States and other parts of the world.

The Influence of Mises, Hayek, and Rand

In Hayek’s case, his influence has reached inside academia, that bastion of the social engineering mentality in which too many professors, especially in the social sciences, still dream wistfully about society being remade in their own images of “social justice” and political correctness – regardless of the expense in terms of people’s personal and economic liberty.

Hayek’s message of intellectual humility – that there is more to the complexities of the world than any government planning or intervening mind can ever master – has forced some in that academic arena to take seriously the possibility that there may be “limits” to what political paternalism can achieve without undermining the essential institutional foundations of a free and prosperous society.

Mises continues to be recognized as the most original and influential member of the Austrian School of Economics during the greater part of the 20th century. Mises stands out as that unique and original thinker who proved why socialist planning cannot work, that government intervention breeds inescapable distortions and imbalances throughout the market, and how central bank manipulation of money and interest rates sets in motion the booms and busts of the business cycle. The current recession has brought new attention to the Austrian theory of money and economic fluctuations, which was first formulated by Mises in the early decades of the 20th century.

While the academe of philosophers is still not willing to give Ayn Rand the respect and serious attention that others believe she rightly deserves, it is nonetheless true that her novels and non-fiction writings, especially The Virtue of Selfishness (1964) and Capitalism: the Unknown Ideal (1966), continue to capture the interest and imagination of a growing number of students in the halls of higher education in the United States. In other words, her ideas continue to reach out to that potential generation of “new intellectuals” that Rand hoped would emerge to offer a principled and morally grounded defense of individualism and capitalism.

The Common Historical Contexts of Their Time

Hayek, Mises and Rand each made their case for freedom and the political order that accompanies it in their own way. While Mises was born in 1881 and, therefore, was 18 years older than Hayek (who was born in 1899) and nearly a quarter of a century older that Rand (who was born in 1905), there were a number of historical experiences they shared in common, and which clearly helped shape their ideas.

First, they came from a Europe that was deeply shaken by the catastrophic destruction and consequences of the First World War. Both Mises and Hayek saw the horrors of combat and the trauma of military defeat while serving in the Austro-Hungarian Army, as well as experiencing the economic hardships and the threat of socialist revolution in postwar Vienna. Rand lived through the Russian Revolution and Civil War, which ended with the triumph of Lenin’s Bolsheviks and the imposition of a brutal and murderous communist regime; she also experienced “socialism-in-practice” as a student at the University of Petrograd (later Leningrad, now St Petersburg) as the new Marxist order was being imposed on Russian society.

Second, they also experienced the harsh realities of hyperinflation. Rand witnessed the Bolshevik’s intentional destruction of the Russian currency during the Russian Civil War and Lenin’s system of War Communism, which was designed as a conscious attempt to bring about the abolition of the market economy and capitalist “wage-slavery.” In postwar Germany and Austria, Mises and Hayek watched the new socialist-leaning governments in Berlin and Vienna turn the handle of the monetary printing press to fund the welfare statist and interventionist expenditures for instituting their collectivist dreams. In the process, the middle classes of Germany and Austria were decimated and the social fabric of German and Austrian society were radically undermined.

Third, Rand was fortunate enough to escape the living hell of socialism-in-practice in Soviet Russia by being able to come to America in the mid-1920s. But from her new vantage point, she was able to observe the rise and impact of “American-style” collectivism, during the Great Depression and the coming of Franklin Roosevelt’s New Deal in the 1930s. In Europe, Mises and Hayek watched the rise of fascism in Italy in the 1920s and then the triumph of Hitler and National Socialism in Germany in 1933, the same year that FDR’s New Deal was implemented in the United States. For both Mises and Hayek, the Nazi variation on the collectivist theme not only showed it to be one of the most deadly forms that socialism could take on. It represented, as well, a dark and dangerous “revolt against reason” with the Nazi’s call to the superiority of blood and force over the human mind and rational argumentation.

Their Common Premises on Collectivism and the Free Society

What were among the common premises that Mises, Hayek and Rand shared in the context of the statist reality in which they had lived? Firstly, I would suggest that it clarified conceptual errors and political threats resulting from philosophical and political collectivism. The “nations,” “races,” “peoples” to which the totalitarian collectivists appealed resulted in Mises, Hayek and Rand reminding their readers that these do not exist separate or independent from the individual human beings who make up the membership of these short-hand terms for claimed human associations.  Anything to be understood about such “collectives” of peoples can only realistically and logically begin with an analysis of and an understanding into the nature of the individual human being, and the ideas he may hold about his relationships to others in society.

Furthermore, political collectivism was a dangerous tool in the hands of the ideological demagogues who used the notions of the “people’s will,” or the “nation’s purposes,” or the “society’s needs,” or the “race’s interests,” to assert their claim to a higher insight that justified the right for those with this “special intuitive gift” to guide and rule over others.

Secondly, all three rejected positivism’s denial of the human mind as something real, and as source for knowledge about man and his actions. Mises and Rand, especially, emphasized the importance of man’s use of his reasoning ability to understand and master the world in which he lived, and the importance of reasoned reflection for conceiving rational rules and institutions for a peaceful and prosperous society of free men.  Mises and Rand considered the entire political trend of the 20thcentury to be in the direction of a “revolt against reason.”

Even Hayek, who is sometimes classified as an “anti-rationalist” due to his emphasis on the limits of human reason for designing or intentionally constructing the institutions of society, should also be classified as an advocate of man’s proper use of his reasoning powers when reflecting on man and society. While the phrasing of his arguments sometimes created this confusion, in various places Hayek went out of his way to insist that he was never challenging the centrality of man’s reasoning and rational faculty. Rather, he was reminding central planners and social engineers that one of the important uses of man’s reasoning ability is to understand the limits of what man can and cannot know or hope to do in terms of trying to remake society according to some preconceived design.

Thirdly, all three firmly believed that there was no societal arrangement conceivable for free men and human betterment other than free market capitalism. Only a private property order that respects and protects the right of the individual to his life, liberty, and honestly acquired possessions give people control over their own lives. Only the voluntary associative arrangements of the marketplace minimize the use of force in human relationships. Only the market economy allows each individual the institutional means of being free from the power of the government and its historical patterns of plunder and abuse. And only the market economy gives each individual the latitude to live for himself and use his knowledge and abilities to further his own ends as he best sees fit.

And, finally, Mises, Hayek, and Rand all emphasized the importance of the intellectuals in society in influencing the tone and direction of political, economic, and social ideas and trends. These “second-hand” thinkers of ideas were the driving force behind the emerging and then triumphing collectivist ideas of the 19th and 20th centuries. They were the molders of public opinion who have served as the propagandizers and rationalizers for the concentration of political power and the enslavement and deaths of hundreds of millions of people – people who were indoctrinated about the need for their selfless obedience and sacrifice to those in political power for a “greater good” in the name of some faraway utopia.

The Consequentialist Rationale for Freedom

But where they differed was on the philosophical justification for the free society and the rights of individuals within the social order. Both Mises and Hayek were what today might go under the term “rule utilitarians.” Any action, policy or institution must be evaluated and judged on the basis of its “positive” or “negative” consequences for the achievement of human ends.

However, the benchmark for such evaluation and judgment is not the immediate “positive” or “negative” effects from any action or policy. It must, instead, be placed into a longer-run context of theoretical insight and historical experience to determine whether or not the policy or action and its effects are consistent with the sustainability of the overall institutional order that is judged to be most effective in furthering the long-run possible goals and purposes of the members of society, as a whole.

Thus, the rule utilitarian is concerned with the “moral hazard” arising from an action or policy implemented. That is, will it create “perverse incentives” that results in members of society acting in ways inconsistent with the long-run betterment of their circumstances?

Welfare payments may not only involve a transfer of wealth from the productive “Peters” in society to the unproductive “Pauls.” It may also reduce the motives of the productive members of society to work, save and invest as much as they had or might, due to the disincentive created by the higher taxes to pay for the redistribution. At the same time, such wealth transfers may generate an “entitlement” mentality of having a right to income and wealth without working honestly to earn it. Thus, the “work ethic” is weakened, and a growing number in society may become welfare dependents living off the honest labor of others through the paternalistic transfer hands of the State.

The net effect possibly is to make the society poorer than it otherwise might have been, and therefore making everyone potentially worse off in terms of the longer-run consequences of such policies.

Read the rest here.

I would add the great Murray Rothbard, but contra rule utilitarians Mr. Rothbard was a champion of natural rights based libertarianism

Richard Ebeling: How Karl Marx Brought Ruin to the World

Splendid article from Austrian economist and Northwood University professor Dr. Richard M. Ebeling on the horrific consequences from the bad ideas of Karl Max. (hat tip EPJ)

Karl Marx was born on May 5, 1818 in the German Rhineland town of Trier, and died on March 14, 1883 in London.It is worth recalling, also, that there was a time when Marx was an anti-communist.

It is said that by its fruit you will know the tree. The last one hundred years is a clear testament to the consequences of Marx’s influence on modern history.

Accepting the “classical” labor theory of value, he concluded the workers were “exploited” by the “capitalists.” Marx claimed that “profit” was a portion of the workers’ output extracted by the property owners as the “price” the workers had to pay to have access to the privately owned physical means of production, without which they could not produce and survive.

The Austrian economist, Eugen von Boehm-Bawerk, in Capital and Interest (1884) and Karl Marx and the Close of His System (1896), demonstrated that Marx had confused “”profit” with “interest.” In a competitive market, profit is a temporary discrepancy between selling price and costs-prices, eventually competed away by businesses bidding up wages for workers (and other resource prices) to work for them, and those same businesses then competing for consumers to buy their output by offering their wares at better selling prices than their rivals.

What Marx had failed to fully understand was that production takes time, and that if workers would not or could not wait until the product was finished and sold to consumers to receive their wages, then someone had to “advance” those wages to them over the production period.

That, Boehm-Bawerk showed, is what the employers did, so that what workers received while working was the discounted value of their marginal product. The “gain” received by employers over their costs of production, even in long-run equilibrium, was the implicit interest for having ‘waited” for the product to be finished and sold, when they might have done other things with the “savings” they had advanced to those workers during the period of production.

If it is recognized that “time” has value, and, therefore, an intertemporal price, the notion that workers were or could be “exploited” in open, competitive markets for resources and finished goods was fundamentally wrong.

On this foundation of sand, Marx constructed his theory of the “injustice” of capitalism that has, in various forms, continued to plague the ideas and policies of countries around the world.

In the 20th century, it inspired the communist revolutions that led to the deaths of tens of millions of innocent men, women, and children. For those not aware of the magnitude of this human catastrophe, I recommend, The Black Book of Communism (1997), written by former French socialists and “fellow-travelers, that tells the horrific tale of “socialism-in-practice,” wherever those guided by Marx’s ideas came to power.

Or Paul Hollander’s edited volume, From the Gulag to the Killing Fields (2007), that brings together excerpts from the personal accounts of those who lived through the “building” of the brave new worker’s paradise, with all their tragic details about the fate of those considered “enemies of the people,” or merely expendable cogs in the wheel of socialist central planning.

Pls read the rest here

Here are the ten planks of the communist manifesto (Wikipedia.org)

About four them are prominent features in today’s supposed market economies; particularly progressive taxation, central banking, centralization of communications and transport (this is more indirect for more open economies and direct for authoritarian states) and public school.

One would wonder how the mainstream supposedly loathes communism as to embrace some of its principles, and how communist principles have been adorned as “capitalism”.

George Orwell in 1984 would call such opaqueness and blatant contradiction as Blackwhite newspeak: (bold original)

...this word has two mutually contradictory meanings. Applied to an opponent, it means the habit of impudently claiming that black is white, in contradiction of the plain facts. Applied to a Party member, it means a loyal willingness to say that black is white when Party discipline demands this. But it means also the ability to believe that black is white, and more, to know that black is white, and to forget that one has ever believed the contrary. This demands a continuous alteration of the past, made possible by the system of thought which really embraces all the rest, and which is known in Newspeak as doublethink.

Richard Ebeling: No Voting Right for Those Living at the Taxpayer’s Expense

Parasites should be disenfranchised from the rights to suffrage argues Austrian economist and Northwood University professor Richard Ebeling at the Epic Times

One of the most sacred ideas in our democratic era is the belief in the universal and equal right of all citizens to have the voting franchise. Yet, some have argued against this “right.” But their challenge to an unlimited right to vote has not been based on grounds of gender, age, or property ownership.

One such critic was the famous British social philosopher and political economist, John Stuart Mill. In his 1859 book, “Reflections on Representative Government,” (Chapter 8, ‘Of the Extension of the Suffrage’), Mill argued that those who received “public assistance” (government welfare) should be denied the voting franchise for as long as they receive such tax-based financial support and livelihood.

Simply put, Mill reasoned that this creates an inescapable conflict of interest, in the ability of some to vote for the very government funds that are taxed away from others for their own benefit. Or as Mill expresses it:

“It is important, that the assembly which votes the taxes, either general or local, should be elected exclusively by those who pay something towards the taxes imposed. Those who pay no taxes, disposing by their votes of other people’s money, have every motive to be lavish and none to economize.

“As far as money matters are concerned, any power of voting possessed by them is a violation of the fundamental principle of free government . . . It amounts to allowing them to put their hands into other people’s pockets for any purpose which they think fit to call a public one.”

Mill went on to explain why he considered this to be especially true for those relying upon tax-based, redistributed welfare dependency, which in 19th century Great Britain was dispersed by the local parishes of the Church of England. Said Mill:

“I regard it as required by first principles, that the receipt of parish relief should be a peremptory disqualification for the [voting] franchise. He who cannot by his labor suffice for his own support has no claim to the privilege of helping himself to the money of others . . .

“Those to whom he is indebted for the continuance of his very existence may justly claim the exclusive management of those common concerns, to which he now brings nothing, or less than he takes away.

“As a condition of the franchise, a term should be fixed, say five years previous to the registry, during which the applicant’s name has not been on the parish books as a recipient of relief.”

Read the rest here.

Declaring Independence from Big Government

A splendid message from Dr. Richard Ebeling,

Never before in history had a people declared and then established a government based on the principles of the individual’s right to his life, liberty, and property. Never before was a society founded on the ideal of economic freedom, under which free men may peacefully produce and exchange with each other on the terms they find mutually beneficial without the stranglehold of regulating and planning government.

Never before had a people made clear that self-government meant not only the right of electing those who would hold political office and pass the laws of the land, but also meant that each human being had the right to be self-governing over his own life. Indeed, in those inspiring words in the Declaration, the Founding Fathers were insisting that each man should be considered as owning himself, and not be viewed as the property of the state to be manipulated by either king or Parliament.

It is worth remembering, therefore, that what we are celebrating every July 4 is the idea and the ideal of each human being’s right to his life and liberty, and his freedom to pursue happiness in his own way, without paternalistic and plundering government getting in his way.

I hope that the torch of the freedom and the principle of upholding individual’s right to his life, liberty, and property will not just be an American ideal but for the entire world to espouse.

To my American readers, Happy Independence Day!