Tag Archive for: Ludwig von Mises

How Government Lost 15 Million Acres of Public Land in the United States

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Non-market allocations of resources are doomed to result in catastrophic waste and mismanagement, evidenced by a recent New York Times story exploring how ‘millions of acres of public lands aren’t really open to the public.’

Leave it to the United States Government to lose track of almost three states worth of public land. Only an institution with so little incentive and ability to allocate resources for the betterment of human wellbeing could instantiate such a catastrophic waste of potential.

The following is a story of an engineer named Eric Siegfried, a Montana man who caught public officials in almost unimaginable levels of incompetence and waste. It is also a cautionary tale about the way extreme misallocations of resources are the predictable outcome of America’s current form of land use governance, which systematically severs control over certain resources from anyone equipped to use them rationally and effectively.

Multiple articles in the New York Times have recently reported on the findings of a group of private hunters and wilderness enthusiasts who have brought attention to millions of acres that nobody previously knew existed. A Times article published in February reported that, “Across America, 15 million acres of state and federal land is surrounded by private land, with no legal entry by road or trail. If this so-called landlocked land was one contiguous piece, it would form the largest national park in the country, nearly the size of Vermont, New Hampshire and Connecticut combined.” And, “Most of these inaccessible public lands are in the West, and, until recently, their existence was largely unknown.”

The land was only discovered, according to another recent Times article, because of a smartphone app called OnX. “OnX was born when Eric Siegfried, a mechanical engineer and part-time hunting guide in Montana, decided to make a Google Maps for the wilderness,” the Times reports.

Unlike Google maps, OnX is optimized for use in forests and other wild areas, displaying property lines, wind patterns, fire histories, and other data useful to outdoorsmen but not to ordinary civilians.

Times contributor Ben Ryder Howe writes, “Property data is often inaccurate and outdated, and early in the development of OnX Mr. Siegfried found himself asking, ‘Why is there no nationwide picture of land ownership, of public and private property boundaries, of who owns what?’” And so, according to Howe, “By collating state and county data and putting it on a microchip, Mr. Siegfried turned the project in the scrapbooking room into a company that just received more than $87 million from investors and that understands the American landscape arguably better than the government does.”

Howe points out that, “In answering the question of who owns what, OnX helped bring to light how much public land — often highly coveted — is not reachable by the public.”

Land is highly coveted because it is a form of capital which, if allocated properly, can vastly enrich its owners and other participants in the market.

There are countless ways that individuals, or society generally, could utilize 15 million acres of land. People could live on it, thus increasing housing affordability and expanding the range of available options of where to live. People could convert its raw materials into transportable resources such as lumber or oil, thus improving commodity abundance and lowering the threshold at which the poor could afford to have their needs met. People could employ unique characteristics of its ecosystems to conduct scientific research. Or the land could be preserved in its current state, if its environmental, recreational, and/or aesthetic properties are deemed more valuable. Manifold possible uses exist, many of which can probably only be imagined by the innovators of the future.

It is impossible to know a priori which combination of potential uses are the best allocation of such an enormous supply of capital. But one thing is clear: When so much wealth and potential are on the line, the difference between efficient and inefficient resource allocation is the difference between countless livelihoods saved or destroyed. When housing prices, or food prices, or gas prices, are increased or decreased by the availability or unavailability of a few million acres worth of resources, it can make or break the health and safety of anyone whose current standards of living are near the margin of viability. And even for those well enough above the margin to be unconcerned about basic necessities, changes in the cost of living can still make or break their access to important commodities and opportunities such as a higher education, the ability to start a small business, or any other ambition they might have that requires significant investment.

So how could such a massive amount of potential wealth have been unaccounted for and untapped for so long, and what should happen to it now that it has been discovered?

It is commonly understood, even by avowed socialists as well as arguably Karl Marx himself, that socialist economies are generally less conducive to economic growth than market economies, hence the latter often being dubbed “capitalist.” One primary reason for this is that markets result in a mechanism of resource allocation that maximizes efficiency like no socialist, communist, or fascist economy has ever been capable of. And that mechanism is known as the price system.

The price system is merely the logical consequence of resources being controlled by individuals rather than collectives, and exchanged voluntarily rather than by force. These are the characteristics of a market economy, and they result in consumers and producers having extremely precise knowledge, communicated via prices, of exactly how useful each resource is for a wide range of potential uses, given the nature and scarcity of the resource relative to alternatives. And this precise knowledge allows budgeting, financing, shopping for the best among many available products, and so on to be subject to highly accurate calculations.

This crucial difference between market and non-market economies was first clearly articulated by the economist Ludwig von Mises in his 1920 essay, “Economic Calculation in the Socialist Commonwealth.” In it, Mises offered the following example:

“Picture the building of a new railroad. Should it be built at all, and if so, which out of a number of conceivable roads should be built? In a competitive and monetary economy, this question would be answered by monetary calculation. The new road will render less expensive the transport of some goods, and it may be possible to calculate whether this reduction of expense transcends that involved in the building and upkeep of the next line. That can only be calculated in money. It is not possible to attain the desired end merely by counterbalancing the various physical expenses and physical savings. Where one cannot express hours of labor, iron, coal, all kinds of building material, machines and other things necessary for the construction and upkeep of the railroad in a common unit it is not possible to make calculations at all.”

This point was expanded on by Mises’s disciple, the Nobel Prize winning economist Friedrich Hayek, who gives another instructive example in his seminal 1945 essay “The Use of Knowledge in Society”:

“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. … 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 economize tin. There is no need for the great majority of them even to know where the more urgent need has arisen, or in favor 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 this without the great majority of those instrumental in bringing about these substitutions knowing anything at all about the original cause of these changes.”

Now think of the price system, or lack of one, in the context of Siegfried’s discovery.

When land is privately owned, the price system facilitates numerical comparisons between different possible uses of each plot of land (or useful subdivision thereof), such as people living on it, or excavating it for minerals, or growing crops on it, or conserving its current state—or countless other possibilities.

There is no way of knowing with certainty which is the best use of each plot of land, given the virtually infinite variables such as what alternative resources could be used for each of the possible uses of the land, how scarce and applicable to alternate uses each of those resources are, and so on. And of course, even the price system can’t account for all the variables, given that every event in the world comes with externalities, millions of uncertainties and butterfly effects that constantly shape our perception of the future into reality. But the price system accounts for more of the variables, and does so with more accuracy, than any other system because prices reflect each individual’s specific preferences and needs down to the cent whereas all other systems reflect either randomness or the preferences of some authoritarian subset of the population that has managed to dictate resource allocations according to their preferences while excluding the preferences of others.

(It is worth noting that the assumptions people make about the relative significance of one set of externalities over another tend to be totally unjustified. For example, there is a common assumption that the negative environmental externalities of industrial development such as logging or oil drilling outweigh the positive economic externalities. But it can just as easily be the case that when commodity prices are reduced by such supply increases, the resulting poverty alleviation and wealth creation generates positive externalities, such as more education and technological and scientific research, that outweigh the negative externalities.)

Private land is more likely than land governed any other way to be used for its optimal purpose, because its owner is free to sell it to the highest bidder, and the bidder with the most valuable idea of how to use it will typically be willing to pay the most for it. By contrast, “public” land is doomed to be allocated comparatively suboptimally. Because no individual is free to sell it to the highest bidder, it is instead trapped in its current use by whatever regulatory mire is preventing individuals from optimizing it.

Only in such a mire could the 15 million acres discovered by Eric Siegfried have been so tragically wasted. Individual property owners would almost certainly be too aware of their major assets to lose track of 15 million acres of real estate, because they themselves would be the ones to reap the rewards or punishments of the quality of their capital allocation choices.

Those acres, being “public” and thus illegal for individuals to settle, develop, or cultivate, were of so little use to anyone that nobody even bothered to do the basic research or exploration required to learn of their existence before it was discovered by accident. And all while there are millions of people without basic necessities, such as a peaceful place to sleep or grow food.

This arbitrary and incompetent allocation of 15 million acres should come as no surprise given the economics of public versus private ownership that have been well understood in the context of socialism and capitalism for more than a century. To solve the problem of rampant resource misallocation, the resources should be privatized so that individuals can start freely investing and innovating to make the most out of that which may otherwise be worthless enough to have abandoned completely.

AUTHOR

Saul Zimet

Saul Zimet is a Website and Data Coordinator for HumanProgress.org at the Cato Institute and a graduate student in economics at the John Jay College of Criminal Justice at the City University of New York.

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EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

Will ESG Reform Capitalism—or Destroy It?

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What “stakeholder capitalism” really means for the world.

Stakeholder capitalism has taken the global economy by storm in recent years. 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 stakeholder capitalism as an antidote to the excesses of “shareholder capitalism,” which they condemn as too narrowly focused on maximizing 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 is ostensibly about incentivizing business leaders 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.

Today’s dominant strain of stakeholder capitalism is the doctrine known as ESG, which stands for “environmental, social, and corporate governance.” The label was coined in the 2004 report of Who Cares Wins, a joint initiative of elite financial institutions invited by 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.”

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

Much progress has been made toward that goal. Since 2004, ESG has evolved from “guidelines and recommendations” to explicit standards that hold sway over huge swaths of the global economy.

These standards 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. 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?

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 maximize 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, consumers, not shareholders, are the principal stakeholders whose preferences reign supreme. And 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,” as Mises wrote in his paper “Profit and Loss.”

This is highly relevant to the “stakeholder capitalism” discussion, because it means 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 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.

Unfortunately, our market economy is far from free. The State has rigged capital markets for the benefit of its elite lackeys in the financial industry: like the “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 non-financial corporations also have to get with the ESG program if they want access to the Fed’s money tap and thus to capital. 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 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 the State supplants the consumer as the supreme stakeholder in the economy. The sick joke of stakeholder capitalism is that it “reforms” capitalism by transforming it into a form of socialism.

AUTHOR

Dan Sanchez

Dan Sanchez is the Director of Content at the Foundation for Economic Education (FEE) and the editor-in chief of FEE.org.

EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

The Economic Theory That Explains Biden’s Response to the Baby Formula Shortage

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In a famous lecture, economist Ludwig von Mises showed how government intervention begets more intervention.

Over the last month, president Biden invoked the Defense Production Act in an attempt to fix the formula shortage. In a statement, the White House highlighted that,

“The President is requiring suppliers to direct needed resources to infant formula manufacturers before any other customer who may have ordered that good. Directing firms to prioritize and allocate the production of key infant formula inputs will help increase production and speed up in supply chains.”

In other words, the government is now engaging in what economist Don Lavoie referred to as non-comprehensive economic planning. It’s imposing rules requiring businesses to operate in a way that bureaucrats believe will quickly resolve this crisis. But the planning seems to have failed. Since Biden invoked the DPA, the number of stores out of stock has increase to 70% according to ABC news.

While some may be surprised that the US government can so quickly command industry, it should be no surprise at all. In fact, some basic understanding of government intervention shows that this sort of result is seemingly inevitable.

There have been several good articles explaining the source of this infant formula shortage. FEE’s own Jon Miltimore produced a great story on the topic. But, to keep it short, Abbott, one of the country’s largest formula producers, had a plant shut down by the FDA due to safety concerns.

But how could shutting down one plant in the whole country cause this? Well, formula production is one of the most tightly regulated industries in the US. Because of this, it’s very difficult to enter the market, so there are a few firms that  dominate the industry. So, when one has problems, the national supply is severely impacted.

One of the most harmful regulations are related to WIC and SNAP programs aimed at providing taxpayer subsidized formula to low-income consumers.

As reported in Time, Congress, in a supposed attempt to limit the cost of this program, made each state select one company to have formula which can be bought with WIC and SNAP in 1989. Since up to two thirds of formula is purchased with WIC and SNAP, the winners of these bids are able to crush competition.

Furthermore, until recently, the FDA banned importation of formula that listed ingredients in an order not prescribed by US bureaucrats. This limit on imports further restricts competition on a basis unrelated to health.

Meanwhile Fortune highlights research that shows despite European brands meeting safety regulations by and large, the FDA still restricts these imports due to the instructions being confusing.

Economist Alex Tabarrok highlights how price controls may be playing a role in the shortage as well.

Policy analyst Gabriella Beaumont-Smith examines the trade restrictions on baby formula, which includes tariffs of up to 17.5 percent.

In short, the industry is tangled in a web of intervention which is killing competition.

It’s this abundance of regulation that makes Biden’s use of the Defense Production Act so unsurprising.

In 1950, economist Ludwig von Mises gave a lecture titled “The middle of the road policy leads to socialism.” In this lecture, Mises expounded upon a theory now known by many as “the dynamics of interventionism.”

Mises uses an example of the dairy industry to show how intervention unfolds dynamically. Imagine the government decides that the price of milk is too high for poor people to afford it. In order to remedy the problem, the government passes a price control. For example, “milk cannot cost more than $2/gallon.”

But another problem arises. At this lower price, dairy farmers can no longer sell their milk at a high enough price to make a profit. Instead, they would be better off exiting the industry. But if dairy farmers exit, there will be less milk to buy. If the government wants to continue to make milk affordable and accessible, they’ll have to bail out the dairy industry. One way they could do this is by setting a price control on feed for cows.

But then producers of cattle feed will make losses. So, the interventions must occur again.

Intervention begets intervention.

This dynamic is exactly what is occurring in the formula industry. FDA regulations have made it impossible in the current industry for sufficient competition to arise.

This lack of competition combined with FDA shutdowns exacerbates the possibility of shortages like this. The shortages lead to the executive branch using the Defense Production Act to control the industries which provide imports to the formula industry.

Again, intervention begets intervention.

Some may accept the argument but argue that now that we have a crisis, we need to use things like the Defense Production Act to end it.

I disagree.

Government bureaucrats have insufficient knowledge and incentives to craft regulations which actually help. The Defense Production Act won’t help, because the government does not effectively plan the economy.

Need proof? The Abbot formula plant was shut down in February. The politicians and bureaucrats in Washington had from February to May to create and carry out a plan which would prevent this crisis. They failed.

Rather than solve the problem by using the same means that created it, central planners would be wise to lay down their Excel spreadsheets and let the market solve problems.

Allowing consumers to give their money and provide profits to companies which best solve their needs is how babies get fed.

Time to clean up the web of intervention.

AUTHOR

Peter Jacobsen

Peter Jacobsen is an Assistant Professor of Economics at Ottawa University and the Gwartney Professor of Economic Education and Research at the Gwartney Institute. He received his PhD in economics from George Mason University, and obtained his BS from Southeast Missouri State University. His research interest is at the intersection of political economy, development economics, and population economics. His website can be found here.

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EDITORS NOTE: This FEE column is republished with permission. ©All rights reserved.

Market Corrections Inspire Dangerous Political Panic by Jeffrey A. Tucker

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Some kinds of inflation people really hate, like when it affects food and gas. But now, with the whole of the American middle class heavily invested in stocks, there is another kind inflation people love and demand: share prices that increased forever.

Just as with real estate before 2008, people seem addicted to the idea that they should never go anywhere but up.

This is the reason that stock market corrections are so dangerous. The biggest danger is not economic. It is political. Such corrections push politicians and central bankers to undertake ever-more nutty political in do order to fix them.

To make the point, Donald Trump immediately blamed China, which has the temerity to sell Americans excellent products at low prices. Bernie Sanders blamed “free trade,” even though the United States is among the most protectionist in the world.

Nothing in this world is more guaranteed to worsen a correction that a trade war. But so far, that’s what’s been proposed.

Tolerance for Downturns

It was not always so. In the 1982 recession, the Reagan administration argued that it was best to let the market clear and grow calm. Once the recession cleaned up misallocations of resources, the economy would be well prepared for a growth path. Incredibly, the idea was sold to the American people, and it proved wise.

That was the last time in American history we’ve seen anything like a laissez-faire attitude prevail. After the 1990s dot com boom and bust, the Fed intervened in an effort to repeal gravity. After 9/11, the Fed intervened again, using floods of paper money to rebuild national pride. That created a gigantic housing bubble that exploded 7 years later.

By 2008, the idea of allowing markets to clear became intolerable, and so Congress spent hundreds of billions of dollars and the Fed created trillions in phony money, all to forestall what desperately needed to happen.

Now, with dramatic declines in stock markets around the world, we are seeing what happens when governments and central banks attempt to counter market forces.

Markets win. Every time. But somehow it doesn’t matter anymore. There’s no more science, no more rationality, no more concern for the long term, so far as the Fed is concerned. The Fed is maniacally focused on its member banks’ balance sheets. They must live and thrive no matter what. And the Fed is in the perfect position now to use public sentiment to bolster its policies.

The Right and Wrong Question 

In the event of a large crash, the public discussion going forward will be: What can be done to re-boost stock prices? This is the wrong question. The right question should be: What were the conditions that led to the unsustainable boom in the first place? This is the intelligent way to address a global meltdown. Sadly, intelligence is in short supply when people are panicked about losing their retirement funds they believed were secure.

Back when people thought about such things, the great economic Gottfried von Haberler was tapped by the League of Nations to write a book that covered the whole field of business cycle theory as it then existed. Prosperity and Depressioncame out in 1936 and was republished in 1941. It is a beautiful book, rooted in rationality and the desire to know.

The book covers six core theories: purely monetary (now called Chicago), overinvestment (now called Austrian), sudden changes in cost (related to what is now called Real Business Cycle), underconsumption (now called Keynesian), psychological (popular in the financial press), and agricultural theories (very old fashioned).

Each one is described. The author then turns to solutions and their viability, assessing each. The treatise leans toward the view that permitting the recession (or downturn or depression) run its course is a better alternative than any large policy prescription applied with the goal of countering the cycle.

Haberler is careful to say that there is not likely one explanation that applies to all cycles in all times and in all places. There are too many factors at work in the real world to provide such an explanation, and no author has ever attempted to provide one. All we can really do is look for the primary causes and the factors that are mostly likely to induce recurring depressions and recoveries.

He likened the business cycle a rocking chair. It can be still. It can rock slowly. Or an outside force can come along to cause it to rock more violently and at greater speed. Detangling the structural factors from the external factors is a major challenge for any economist. But it must be done lest policy authorities make matters worse rather than better.

The monetary theory posits that the quantity of money is the key factoring in generating booms and busts. The more money that flows into an economy via the credit system, the more production increases alongside consumption. This policy leads to inflation. The pullback of the credit machine induces the recession.

The “overinvestment” theory of the cycle focuses on the misallocation of resources that upsets the careful balance between production and consumer. Within the production structure in normal times, there is a focus on viability in light of consumer decisions. But when more credit is made available, the flow of resources is toward the capital sector, which is characterized by a multiplicity of purposes. The entire production sector mixes various time commitments and purposes. Each of them corresponds with an expectation of consumer behavior.

Haberler calls this an overinvestment theory because the main result is an inflation of capital over consumption. The misallocation is both horizontal and vertical. When the consumer resources are insufficient to realize the plans of the capitalists, the result is a series of bankruptcies and an ensuing recession.

Price Control by Central Banks

A feature of this theory is to distinguish between the real rate of interest and the money rate of interest. When monetary authorities push down rates, they are engaged in a form of price control, inducing a boom in one sector of the production structure. This theory today is most often identified with the Austrian school, but in Haberler’s times, it was probably the dominant theory among serious specialists throughout the world.

In describing the underconsumption theory of the cycle, Haberler can hardly hide his disdain. In this view, all cycles result from too much hoarding and insufficient debt. If consumer were spend to their maximum extent, without regard to issues of viability, producers would feel inspired to produce, and the entire economy could run off a feeling of good will.

Habeler finds this view ridiculous, based in part on the implied policy prescription: endlessly inflate the money supply, keep running up debts, and lower interest rates to zero. The irony is that this is the precisely the prescription of John Maynard Keynes, and his whole theory was rooted in a 200-year old fallacy that economic growth is based on consumption and not production. Little did Haberler know, writing in the early 1930s, that this theory would become the dominant one in the world, and the one most promoted by governments and for obvious reasons.

The psychological theory of the cycle observes the people are overly optimistic in a boom and overly pessimistic in the bust. More than that, the people who push this view regard these states of mind as causative of economic trends. They both begin and end the boom.

Haberler does not deny that such states of mind are important and contributing elements to making the the cycle more exaggerated, but it is foolish to believe that thinking alone can bring about systematic changes in the macroeconomic structure. This school of thought seizes on a grain of truth, and pushes that grain too far to the exclusion of real factory. Interestingly, Haberler identifies Keynes by name in his critique of this view.

Haberler’s treatise is the soul of fairness but the reader is left with no question about where his investigation led him. There are many and varied causes of business cycles, and the best explanations trace the problem to credit interventions and monetary expansions that upset the delicate balance of production and consumption in the international market economy.

Large-scale attempts by government to correct for these cycles can result in making matters worse, because it has no control over the secondary factors that brought about the crisis in the first place. The best possible policy is to eliminate barriers to market clearing — that is to say, let the market work.

The Fed is the Elephant in the Room

And so it should be in our time. For seven years, the Fed, which controls the world reserve currency, has held down interest rates to zero in an effort to forestall a real recession and recreate the boom. The results have been unimpressive. In the midst of the greatest technological revolution in history, economic growth has been pathetic.

There is a reason for this, and it is not only about foolish monetary policy. It is about regulation that inhibits business creation and economic adaptability. It’s about taxation that pillages the rewards of success and pours the bounty into public waste. It is about a huge debt overhang that results from the declaration that all governments are too big to fail.

Whether a correction is needed now or later or never is not for policymakers to decide. The existence of the business cycle is the market’s way of humbling those who claim to have the power and intelligence to outwit its awesome and immutable forces.

Jeffrey A. Tucker
Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.  Follow on Twitter and Like on Facebook.

Capitalists Have a Better Plan: Why Decentralized Planning Is Superior to Bureaucracy and Socialism by Robert P. Murphy

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To early 20th-century intellectuals, capitalism looked like anarchy. Why, they wondered, would we trust deliberative, conscious guidance when building a house but not when building an economy?

It was fashionable among these socialist intellectuals to espouse “planning” as a much more rational way to organize economic activity. (F.A. Hayek wrote a famous essay on the phenomenon.) But this emphasis on central planning was utterly confused both conceptually and empirically.

Ludwig von Mises made the most obvious rejoinder, pointing out that there is “planning” in the market economy, too. The difference is that the planning isdecentralized in a market, spread out among millions of entrepreneurs and resource owners, including workers. Thus, in the debate between socialism and capitalism, the question isn’t, “Should there be economic planning?” Rather, the question is, “Should we restrict the plan design to a few supposed experts put in place through the political process, or should we throw open the floodgates and receive input from millions of people who may know something vital?”

This second question came to be known as the “knowledge problem.” Hayek pointed out that in the real world, information is dispersed among myriad individuals. For example, a factory manager in Boise might know very particular facts about the machines on his assembly line, which socialist planners in DC could not possibly take into account when directing the nation’s productive resources. Hayek argued that the price system in a market economy could be viewed as a giant “system of telecommunications,” rapidly transmitting just the essential bits of knowledge from one localized node to the others. Such a “web” arrangement (my term) avoided a bureaucratic hierarchy in which every bit of information had to flow up through the chain of command, be processed by the expert leaders, and then flow back down to the subordinates.

Complementary to Hayek’s now-better-known problem of dispersed knowledge, Mises stressed the calculation problem of socialist planning. Even if we conceded for the sake of argument that the socialist planners had access to all of the latest technical information regarding the resources and engineering know-how at their disposal, they still couldn’t rationally “plan” their society’s economic activities. They would be “groping in the dark.”

By definition, under socialism, one group (the people running the state, if we are talking about a political manifestation) owns all of the important productive resources — the factories, forests, farmland, oil deposits, cargo ships, railroads, warehouses, utilities, and so on. Thus, there can be no truly competitive markets in the “means of production” (to use Karl Marx’s term), meaning that there are no genuine prices for these items.

Because of these unavoidable facts, Mises argued, no socialist ruler could evaluate the efficiency of his economic plan, even after the fact. He would have a list of the inputs into a certain process — so many tons of steel, rubber, wood, and man-hours of various types of labor. He could contrast the inputs with the outputs they produced — so many houses or cars or bottles of soda. But how would the socialist planner know if this transformation made sense? How would the socialist planner know if he should continue with this operation in the future, rather than expanding it or shrinking it? Would a different use of those same resources produce a better result? The simple answer is that he would have no idea. Without market prices, there is no nonarbitrary way of comparing the resources used up in a particular process with the goods or services produced.

In contrast, the profit-and-loss test provides critical feedback in the market economy. The entrepreneur can ask accountants to attach money prices to the resources used up, and the goods and services produced, by a particular process. Although not perfect, such a method at least provides guidance. Loosely speaking, a profitable enterprise is one that directs scarce resources into the channel that the consumers value the most, as demonstrated through their spending decisions.

In contrast, what does it mean if a particular business operation isunprofitable? It means that its customers are not willing to spend enough money on the output to recoup the monetary expenses (including interest) necessary to buy the inputs. But the reason those inputs had certain market prices attached to them is that other operations were bidding on them, too. Thus, in Mises’s interpretation, an unprofitable business enterprise is siphoning away resources from channels where consumers would prefer (indirectly and implicitly) that the resources be deployed.

We must never forget that the economic problem is not to ask, “Will devoting these scarce resources to project X make at least some people better off, compared to doing nothing with these resources?” Rather, the true economic problem is to ask, “Will devoting these scarce resources to project X make people better off compared to using the resources in some other project Y?”

To answer this question, we need a way of reducing heterogeneous inputs and outputs into a common denominator: money prices. This is why Mises stressed the primacy of private property and the use of sound money as pillars of rational resource allocation.

Robert P. Murphy
Robert P. Murphy

Robert P. Murphy has a PhD in economics from NYU. He is the author of The Politically Incorrect Guide to Capitalism and The Politically Incorrect Guide to The Great Depression and the New Deal.

In Defense of Private Property: Mises and Aristotle by Jeffrey A. Tucker

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I’ve just reacquainted myself with two seminal texts: Aristotle’s Politics and Ludwig von Mises’s Socialism. Though written nearly two and a half millennia apart, it’s remarkable how these two gigantically important treatises parallel each other.

They both come to the defense of property and realistic forms of political order in the face of all kinds of dreamers, fanatics, and would-be dictators. A central contribution of each book is to defend the institution of private property against its enemies, who, both Aristotle and Mises knew, would smash all that is wonderful about life.

They took different pathways toward the same goal. Aristotle focused on what makes people happy and permits the realization of the virtuous life. But he had very little conception of economics, and his theory of property was problematic, to say the least. Mises, on the other hand, focused on economic science, and presented a far more coherent vision of property, freedom, and economic growth.

Even so, they cover the same basic territory. What kind of social and political order is most conducive to human flourishing, and what is the role of private property and private life in this order?

Aristotle spoke of the impossibility of the realization of self under common ownership.

“In a state having women and children common, love will be watery; and the father will certainly not say ‘my son,’ or the son ‘my father.’ As a little sweet wine mingled with a great deal of water is imperceptible in the mixture, so, in this sort of community, the idea of relationship which is based upon these names will be lost; there is no reason why the so-called father should care about the son, or the son about the father, or brothers about one another. ”

The absence of ownership, then, leads to the disregard of one’s own life and the life of others. “How immeasurably greater is the pleasure, when a man feels a thing to be his own,” Aristotle writes, “for the love of self is a feeling implanted by nature and not given in vain…”

Everything is at stake: benevolence, gifting, appreciation, and even love. “There is the greatest pleasure in doing a kindness or service to friends or guests or companions, which can only be rendered when a man has private property,” writes Aristotle. “The advantage is lost by the excessive unification of the state.”

These are hugely profound insights. To be sure, Aristotle’s conception of private property is seriously marred by his defense of slavery, and he is reluctant to admit women into the realm of citizens who deserve what we call rights today. To read this material, one must always keep in mind how lost the contributions of the Enlightenment truly were on the ancient philosophers. They knew nothing of universal rights, freedom of speech, and freedom of religion. Still, given that proviso, we can see Aristotle working his way toward a coherent theory of the social order.

He goes further to condemn looting of property through the political system. “If the poor, for example, because they are more in number, divide among themselves the property of the rich, is not this unjust? … if this is not injustice, pray what is?” The reverse is also true, he wrote. It would be unjust for the rich to use their power and wealth to pillage the poor.

Aristotle repeats his injunction and summarizes: “I do not think that property ought to be common, as some maintain, but only that by friendly consent there should be a common use of it; and that no citizen should be in want of subsistence.”

Mises took this whole analysis much further. The first third of Socialism presents a complete theory of social order and the place of property within it. He treats property not as an ethic or plan from the top but as a technology, something created out of social consensus and made necessary by the existing of material privation.

The extension of the division of labor provides more opportunities for growing wealth, and, eventually the creation of money, which is the key to rational economic calculation in a modern economy. Without private property in capital goods, writes Mises, there is no hope for making sense of the main material challenges society faces.

We know about the opponents of Mises’s views. He was surrounded by an academic class of philosophers and economists who were generally sympathetic to the ideals of socialism. “Socialism is the watchword and catchword of our day,” he wrote. “The socialist idea dominates the modern spirit. The masses approve it. It expresses the thoughts and feelings of all; it has set its seal upon our time.”

Later in the book, Mises addresses prevailing religious ideas at the time, which had turned decisively to favor the socialist idea. He took them apart, one by one, showing that most of the religious thinkers of his day had no conception of the practical need for a thriving society to have modern economic institutions rooted in private property ownership.

Mises takes his argument further to point out that the end of property really is the end of freedom. Every would-be tyrant excoriates private property, not because communism would be great for the people but because private ownership is a barrier to the tyrant’s power and control. In its absence, power rules and there is nothing like freedom. Without private property, there can be no free press, freedom of religion, or freedom of association.

The parallels with Aristotle’s book are uncanny. I’m trying to think of the problems Aristotle faced in the 4th century, BC. There was the epic influence of Plato and his many pupils. Plato wrote, whether ironically or not, in favor of a communist utopia with no property, no families, no ownership, no private life, and he found this to be the only society that is consistent with justice and social harmony.

Aristotle took on Plato, who was representative of the first group of enemies of property in all times: the highly educated philosophy elite. So it ever was and ever shall be.

In addition, in Aristotle’s time, there was an official religion that was stable and reliable and he urged people to be faithful to it. It served the ruling class but it was not utterly insane. But the world must have been populated with self-proclaimed prophets everywhere, people serious about jazzing up the population with some frenzied dream. Always and everywhere this seems to have included the socialist idea. If we could just throw all things into the commons, all human division would disappear and utopia would appear!

This group, the mystics and spiritual dreamers, then, was the second group of enemies of property. Then and now.

But there was still another dangerous force in the land: would-be tyrants. They lie to people. They come to power through promises of democracy. They use the destabilization of revolution to displace one government and push a much worse one. Despots resent the private life of the people that ownership makes possible. They proclaim the wonders of common ownership, but the result of their visions is always the same: more power to the dictators.

We really do face a choice. We suffer under the tyrant’s boot or we uphold the sanctity of private ownership. Aristotle discerned this in the 4th century, BC. Mises drove the point home with his marvelous book of 1922. They lived in radically different times and spoke from a different perspective. But their concern was the same. Ownership and freedom are inseparable ideals, both in their times and in ours.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

Is the “Austrian School” a Lie?

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Is Austrian economics an American invention? by STEVEN HORWITZ and B.K. MARCUS.

Do those of us who use the word Austrian in its modern libertarian context misrepresent an intellectual tradition?

We trace our roots back through the 20th century’s F.A. Hayek and Ludwig von Mises (both served as advisors to FEE) to Carl Menger in late 19th-century Vienna, and even further back to such “proto-Austrians” as Frédéric Bastiat and Jean-Baptiste Say in the earlier 19th century and Richard Cantillon in the 18th. Sometimes we trace our heritage all the way back to the late-Scholastic School of Salamanca.

Nonsense, says Janek Wasserman in his article “Austrian Economics: Made in the USA”:

“Austrian Economics, as it is commonly understood today,” Wasserman claims, “was born seventy years ago this month.”

As his title implies, Wasserman is not talking about the publication of Principles of Economics by Carl Menger, the founder of the Austrian school. That occurred 144 years ago in Vienna. What happened 70 years ago in the United States was the publication of F.A. Hayek‘s Road to Serfdom.

What about everything that took place — most of it in Austria — in the 74 years before Hayek’s most famous book? According to Wasserman, the Austrian period of “Austrian Economics” produced a “robust intellectual heritage,” but the largely American period that followed was merely a “dogmatic political program,” one that “does a disservice to the eclectic intellectual history” of the true Austrian school.

Where modern Austrianism is “associated with laissez-faire economics and libertarianism,” the real representatives of the more politically diverse tradition — economists from the University of Vienna, such as Fritz Machlup, Joseph Schumpeter, and Oskar Morgenstern — were embarrassed by their association with Hayek’s bestseller and its capitalistic supporters.

These “native-born Austrians ceased to be ‘Austrian,'” writes Wasserman, “when Mises and a simplified Hayek captured the imagination of a small group of businessmen and radicals in the US.”

Wasserman describes the popular reception of the as “the birth of a movement — and the reduction of a tradition.”

Are we guilty of Wasserman’s charges? Do modern Austrians misunderstand our own tradition, or worse yet, misrepresent our history?

In fact, Wasserman himself is guilty of a profound misunderstanding of the Austrian label, as well as the tradition it refers to.

The “Austrian school” is not a name our school of thought took for itself. Rather it was an insult hurled against Carl Menger and his followers by the adherents of the dominant German Historical School.

The Methodenstreit was a more-than-decade-long debate in the late 19th century among German-speaking social scientists about the status of economic laws. The Germans advocated methodological collectivism, espoused the efficacy of government intervention to improve the economy, and, according Jörg Guido Hülsmann, “rejected economic ‘theory’ altogether.”

The Mengerians, in contrast, argued for methodological individualism and the scientific validity of economic law. The collectivist Germans labeled their opponents the “Austrian school” as a put-down. It was like calling Menger and company the “backwater school” of economic thought.

“Austrian,” in our context, is a reclaimed word.

But more important, modern Austrian economics is not the dogmatic ideology that Wasserman describes. In his blog post, he provides no actual information about the work being done by the dozens of active Austrian economists in academia, with tenured positions at colleges and universities whose names are recognizable.

He tells his readers nothing about the  books they have produced that have been published by top university presses. He does not mention that they have published in top peer-reviewed journals in the economics discipline, as well as in philosophy and political science, or that the Society for the Development of Austrian Economics consistently packs meeting rooms at the Southern Economic Association meetings.

Have all of these university presses, top journals, and long-standing professional societies, not to mention tenure committees at dozens of universities, simply lost their collective minds and allowed themselves to be snookered by an ideological sleeper cell?

Or perhaps in his zeal to score ideological points of his own, Wasserman chose to take his understanding of Austrian economics from those who consume it on the Internet and elsewhere rather than doing the hard work of finding out what professional economists associated with the school are producing. Full of confirmation bias, he found what he “knew” was out there, and he ends up offering a caricature of the robust intellectual movement that is the contemporary version of the school.

The modern Austrian school, which has now returned to the Continent and spread across the globe after decades in America, is not the dogmatic monolith Wasserman contends. The school is alive with both internal debates about its methodology and theoretical propositions and debates about its relationship to the rest of the economics discipline, not to mention the size of the state.

Modern Austrian economists are constantly finding new ideas to mix in with the work of Menger, Böhm-Bawerk, Mises, and Hayek. The most interesting work done by Austrians right now is bringing in insights from Nobelists like James Buchanan, Elinor Ostrom, and Vernon Smith, and letting those marinate with their long-standing intellectual tradition. That is hardly the behavior of a “dogmatic political program,” but is rather a sign of precisely the robust intellectual tradition that has been at the core of Austrian economics from Menger onward.

That said, Wasserman is right to suggest that economic science is not the same thing as political philosophy — and it’s true that many self-described Austrians aren’t always careful to communicate the distinction. Again, Wasserman could have seen this point made by more thoughtful Austrians if he had gone to a basic academic source like the Concise Encyclopedia of Economics and read the entry on the Austrian school of economics.

Even a little bit of actual research motivated by actual curiosity about what contemporary professional economists working in the Austrian tradition are doing would have given Wasserman a very different picture of modern Austrian economics. That more accurate picture is one very much consistent with our Viennese predecessors.

To suggest that we do a disservice to our tradition — or worse, that we have appropriated a history that doesn’t belong to us — is to malign not just modern Austrians but also the Austrian-born antecedents within our tradition.

Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

B.K. Marcus

B.K. Marcus is managing editor of the Freeman.

The Crowding-Out Tipping Point: Increasing economic growth means shrinking government by James A. Dorn

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The size and scope of government in the United States today would have been beyond the imagination of the American founders. For more than a century after the Constitution’s ratification, Americans took limits on government power seriously.

At the start of the 20th century, total government spending was less than 10 percent of GDP, with the majority of spending taking place at the state and local levels. In 1900, federal spending was a mere 2.8 percent of GDP compared to 21.1 percent in 2014. Meanwhile, state and local spending stood at 5 percent of GDP in 1900, but reached 11.5 percent in 2014. Overall government spending now stands at nearly 33 percent of GDP.

That tectonic shift is largely due to the growth of entitlements and the regulatory state. Nearly half of federal spending goes toward Social Security, Medicare, and Medicaid; government imposes huge regulatory costs on the private sector; and the higher taxes needed to finance big government erode economic incentives to work, save, and invest.

How big is too big?

There is a growing body of evidence that bigger government means slower growth of real GDP. Once the level of total government spending as a percentage of GDP reaches a tipping point, estimated to be from 15 percent to 25 percent of GDP, additional expansion crowds out private productive investment and slows economic growth. An overreaching government diminishes economic freedom and limits private exchange opportunities, restricting the range of choices open to individuals.

In a pioneering study of the link between government growth and national wealth, which appeared in the fall 1998 issue of the Cato Journal, economists James Gwartney, Randall Holcombe, and Robert Lawson found that a 10 percentage point increase in government spending as a percentage of GDP decreases real GDP growth by 1 percentage point. Thus, if government spending went from 25 percent of GDP to 35 percent, real GDP growth would slow over the longer term by a full percentage point. They also found that a 10 percentage point increase in the government’s share of GDP lowered private investment by 1.6 percentage points.

Factors of growth

One of their study’s key findings was that secure property rights — which includes a legal system that protects persons and property, enforces contracts, and limits the power of government by a just rule of law — play an important role in promoting economic growth.

The late Bernhard Heitger, an economist at the Kiel Institute for World Economics, more fully developed the positive relationship between property rights and economic growth in his pathbreaking article in the winter 2004 Cato Journal. In that article, Heitger distinguished between proximate and ultimate determinants of economic growth. The former are well known: additions to physical and human capital and technological progress (also known as “total factor productivity”). But Heitger was interested in the question of what drives capital accumulation and innovation. His answer: the structure of property rights and the associated incentives.

Conventional growth theory took private property rights and incentives as givens. Heitger rigorously showed that private property rights and the rule of law are the ultimate sources of economic growth and the wealth of nations. Well-defined private property rights improve efficiency and increase per capita income. In turn, as a nation grows richer, people demand stronger protection of their property rights, advancing institutional change.

Using data from an international cross-section of countries from 1975–95, Heitger found that “a doubling of the property rights index more than doubles per capita income” and that “more secure property rights significantly raise the accumulation of physical and human capital.”

Bauer’s foresight

That outcome would not have surprised Peter Bauer, a pioneer of development economics. He was critical of the simplistic idea that physical capital accumulation is the key determinant of economic growth. As early as 1957, in his classic Economic Analysis and Policy in Underdeveloped Countries, Bauer noted:

It is misleading to think of investment as the only or the principal determinant of development. Other factors and influences, such as institutional and political forces, the qualities and attitudes of the population, and the supply of complementary resources, are often equally important or even more important.

In the same book, Bauer also anticipated modern endogenous growth theory, stating: “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital.” What mattered to Bauer, and to other classical liberals, in the process of development was freedom — namely, the freedom to pursue one’s happiness without government interference except to protect life, liberty, and property. (See James A. Dorn, “Economic Development and Freedom: The Legacy of Peter Bauer.”)

In that sense, Bauer argued that “the principal objective and criterion of economic development” is “the extension of the range of choice, that is, an increase in the range of effective alternatives open to people.” Free markets — resting on effective private property rights — and free people are thus the ultimate determinants of economic growth. When government expands beyond its core functions, it undermines the primacy of property, diminishes the principle of freedom, and erodes the wealth of nations.

The United States falls

The loss of economic freedom in the United States is revealed in the annual Economic Freedom of the World Report, published by the Fraser Institute along with the Cato Institute and a number of global think tanks. In 2000, the United States was the second most economically free country in the world, based on data from 1998. Today it is ranked 12th, based on 2012 data.

To move up the freedom ladder, the United States needs to change the climate of ideas and recognize the importance of private property rights and the rule of law. A legal framework that safeguards persons and property means incentivizing individuals to take responsibility for their actions and allowing people to learn from their mistakes. It means cutting back the size and scope of government and not bailing out businesses.

The nature of government is coercion; the nature of the market is consent. The “great constitutional charter” that George Washington referred to in his first inaugural address (April 30, 1789) was intended to bind Congress to the powers enumerated in Article 1, Section 8 of the Constitution. Thomas Jefferson reiterated Washington’s admonition by stating in his first inaugural address (March 4, 1801): “The sum of good government” is “a wise and frugal government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned.”

Wise and frugal

The challenge for the 114th Congress is to return to “a wise and frugal government.” A first step would be to understand the detrimental effects of expanding government power on economic liberties — especially on private property rights. If history has taught us anything, it is that the size and scope of government matter, both for freedom and prosperity.

ABOUT JAMES A. DORN

James A. Dorn is vice president for monetary studies, editor of the Cato Journal, senior fellow, and director of Cato’s annual monetary conference.