Posts

Of Workers and Wealth

Pope Leo XIII: Whether we have wealth or lack it makes no difference. What matters is to justly use what we have, especially if we are rich.


The great mistake made in regard to the matter now under consideration is to take up with the notion that class is naturally hostile to class, and that the wealthy and the working men are intended by nature to live in mutual conflict. So irrational and so false is this view that the direct contrary is the truth.

Just as the symmetry of the human frame is the result of the suitable arrangement of the different parts of the body, so in a State is it ordained by nature that these two classes should dwell in harmony and agreement, so as to maintain the balance of the body politic. Each needs the other: capital cannot do without labor, nor labor without capital. Mutual agreement results in the beauty of good order, while perpetual conflict necessarily produces confusion and savage barbarity.

Now, in preventing such strife as this, and in uprooting it, the efficacy of Christian institutions is marvellous and manifold. First of all, there is no intermediary more powerful than religion (whereof the Church is the interpreter and guardian) in drawing the rich and the working class together, by reminding each of its duties to the other, and especially of the obligations of justice.

Of these duties, the following bind the proletarian and the worker: fully and faithfully to perform the work which has been freely and equitably agreed upon; never to injure the property, nor to outrage the person, of an employer; never to resort to violence in defending their own cause, nor to engage in riot or disorder; and to have nothing to do with men of evil principles, who work upon the people with artful promises of great results, and excite foolish hopes which usually end in useless regrets and grievous loss.

The following duties bind the wealthy owner and the employer: not to look upon their work people as their bondsmen, but to respect in every man his dignity as a person ennobled by Christian character. They are reminded that, according to natural reason and Christian philosophy, working for gain is creditable, not shameful, to a man, since it enables him to earn an honorable livelihood; but to misuse men as though they were things in the pursuit of gain, or to value them solely for their physical powers – that is truly shameful and inhuman.

Again justice demands that, in dealing with the working man, religion and the good of his soul must be kept in mind. Hence, the employer is bound to see that the worker has time for his religious duties; that he be not exposed to corrupting influences and dangerous occasions; and that he be not led away to neglect his home and family, or to squander his earnings.

Furthermore, the employer must never tax his work people beyond their strength, or employ them in work unsuited to their sex and age. His great and principal duty is to give every one what is just. Doubtless, before deciding whether wages are fair, many things have to be considered; but wealthy owners and all masters of labor should be mindful of this – that to exercise pressure upon the indigent and the destitute for the sake of gain, and to gather one’s profit out of the need of another, is condemned by all laws, human and divine.

To defraud any one of wages that are his due is a great crime which cries to the avenging anger of Heaven. “Behold, the hire of the laborers. . .which by fraud has been kept back by you, crieth; and the cry of them hath entered into the ears of the Lord of Sabaoth.”

Lastly, the rich must religiously refrain from cutting down the workmen’s earnings, whether by force, by fraud, or by usurious dealing; and with all the greater reason because the laboring man is, as a rule, weak and unprotected, and because his slender means should in proportion to their scantiness be accounted sacred. Were these precepts carefully obeyed and followed out, would they not be sufficient of themselves to keep under all strife and all its causes?

But the Church, with Jesus Christ as her Master and Guide, aims higher still. She lays down precepts yet more perfect, and tries to bind class to class in friendliness and good feeling. The things of earth cannot be understood or valued aright without taking into consideration the life to come, the life that will know no death.

Exclude the idea of futurity, and forthwith the very notion of what is good and right would perish; nay, the whole scheme of the universe would become a dark and unfathomable mystery.

The great truth which we learn from nature herself is also the grand Christian dogma on which religion rests as on its foundation – that, when we have given up this present life, then shall we really begin to live. God has not created us for the perishable and transitory things of earth, but for things heavenly and everlasting; He has given us this world as a place of exile, and not as our abiding place.

As for riches and the other things which men call good and desirable, whether we have them in abundance, or are lacking in them-so far as eternal happiness is concerned – it makes no difference; the only important thing is to use them aright. . . .

Therefore, those whom fortune favors are warned that riches do not bring freedom from sorrow and are of no avail for eternal happiness, but rather are obstacles; that the rich should tremble at the threatenings of Jesus Christ – threatenings so unwonted in the mouth of our Lord – and that a most strict account must be given to the Supreme Judge for all we possess.

– from Rerum Novarum (1891)

How many American politicians do the Saudis own?

his explains a great deal about U.S. foreign — and domestic — policy. In also wonder the same thing about mainstream media outlets, with their determination to ignore or downplay the jihad threat, and their fixation on “Islamophobia” and “anti-Muslim backlash.” Not to mention their unstinting habit of tarring foes of jihad terror as “anti-Muslim.”

“How Many American Politicians Do the Saudis Own?,” by Michael Walsh, PJ Media, March 31, 2016:

If, since 9/11, you’ve begun to think that all American politicians are corrupt, that our national anger was deliberately misdirected to places where it could be expended with absolutely no result, and that our military has been exhausted in a series of pointless, unwinnable wars against third-rate Islamic nations… you’re absolutely correct.  Everywhere you look, from George W. Bush holding hands with various members of the Saudi “royal” family on down, the real enemy of civilization wraps its tentacles more tightly around us. Case in point: the sham GOP candidate, widely despised former Naval officer and second-most-loathed man in the U.S. Senate, the ineffable John McCain:

A nonprofit with ties to Senator John McCain received a $1 million donation from the government of Saudi Arabia in 2014, according to documents filed with the U.S. Internal Revenue Service.The Arizona Republican has strictly honorary roles with the McCain Institute for International Leadership, a program at Arizona State University, and its fundraising arm, the McCain Institute Foundation, according to his office. But McCain has appeared at fundraising events for the institute and his Senate campaign’s fundraiser is listed in its tax returns as the contact person for the foundation.

Though federal law strictly bans foreign contributions to electoral campaigns, the restriction doesn’t apply to nonprofits engaged in policy, even those connected to a sitting lawmaker.

Groups critical of the current ethics laws say that McCain’s nonprofit effectively gives Saudi Arabia — or any other well-heeled interests — a means of making large donations to politicians it hopes to influence. “Foreign governments are prohibited from financing candidate campaigns and political parties,” Craig Holman, the government affairs lobbyist for ethics watchdog Public Citizen, said. “Funding the lawmakers’ nonprofit organizations is the next best thing.”…

Read the rest here.

RELATED ARTICLES:

Another fake “Islamophobia” claim: Muslima admits she lied about being slashed and called “terrorist” in NYC

“The notion that Moroccan-Belgians suffer from widespread exclusion, discrimination, and suppression is ridiculous”

1 in 3 Americans Say Donald Trump Is the No. 1 Presidential Candidate for Their Money

LA86996LOGOLOS ANGELES, CA /PRNewswire/ — In anticipation of the upcoming presidential primaries for the 2016 presidential election, leading personal finance website GOBankingRates.com surveyed nearly 8,000 Americans to find out which candidate they think will be best for their money.  Although Donald Trump was the top pick overall from those surveyed, nearly 50 percent of millennials ages 18 to 24 said Bernie Sanders’policies would be best for them financially.

The survey posed the question, “Which presidential candidate would be best for you financially?” and is representative of the U.S. online population with a margin of error of 3 percent.

Respondents’ Answer Choices:

  • Donald Trump — 29%
  • Bernie Sanders — 26%
  • Hillary Clinton — 20%
  • Ted Cruz — 9%
  • Marco Rubio — 8%
  • Ben Carson — 8%

325674

Of those surveyed, 37 percent of the respondents answered “none of the above,” indicating that their favorite candidate was not listed or that they had not yet decided. The percentages listed above were taken from the remaining population of respondents.

See the full survey findings here.

“The economy is growing, but many Americans are still dissatisfied with slow-growing wages, high taxes or other fiscal policies that affect their bank accounts,” said Elyssa Kirkham, the GOBankingRates finance writer on the study.

“In the 2016 election, voters should be looking for a candidate who can help them build greater financial security as individuals, families and communities,” Kirkham said. “But opinions on the best way to do this are very divided, and this survey shows that many candidates are offering solutions that voters find favorable.”

Additional Findings:

  • 49 percent of millennial voters (ages 18 to 24) say that Sanders would be best for them financially, most likely because he supports free college and a $15 minimum wage.
  • Two-thirds of adults age 65 and older chose either Clinton or Trump as the candidate who would be best for them financially. Those two candidates have said they won’t cut Social Security.
  • For fiscal policy, women favor Democrats, whereas men favor Republicans.

To see which presidential candidate Americans in your state think is best for their money here.

Methodology: Through a Google Consumer Survey, GOBankingRates surveyed 7,728 respondents online from Dec. 10-16, 2015. The survey posed the question, “Which presidential candidate would be best for you financially if elected?” and offered the following six candidates as options, displayed randomly: (1) Ben Carson, (2) Hillary Clinton, (3) Ted Cruz, (4) Marco Rubio, (5) Bernie Sanders and (6) Donald Trump, along with the option to select “None of the above.” The survey has a margin of error of 3 percent, and answers are representative of the U.S. online population.

About GOBankingRates

GOBankingRates.com is a leading portal for personal finance and consumer banking information, offering visitors the latest on everything from finding a good interest rate to strategies for saving money, investing for retirement and getting a loan. Its editors are regularly featured on top-tier media outlets, including U.S. News & World Report, Forbes, Business Insider, Daily Finance, Huffington Post and more. It specializes in connecting consumers with the best financial institutions and banking products nationwide.

U.S. Muslim Migrant Resettlement: How to follow the money

So many of our readers are eager to start researching the resettlement contractors working near you, so here are a few places to start to learn about how they are financed (this is in no way meant to be an all inclusive list, because I don’t know every place to research myself!).

But, first, although off-topic, I want you to see what a one-woman blogger accomplished in Chicago (not a refugee issue, but one involving fraud in the Chicago school system!).  See here (hat tip: Judy).  It can be done!

I’m tech-impaired, but if I can find stuff, so can you.  It just takes a little patience!

Call or write the non-profit group:

Start with contacting the resettlement agency near you (a handy list is here).  As IRS designated 501(c)3 organizations they are NOT allowed to keep their financial documents from you—they are required to give anyone who calls a copy of their financial statement and their Form 990 (if they have one).  Legitimate churches are not required to file Form 990’s so some of the contractors are doing this federal work (resettling refugees) pretending to be churches only.

Go to Guidestar:

Find their IRS Form 990’s on Guidestar by going here and registering to use Guidestar.  It can get tricky because you have to use their exact name as they filed on their Form 990.  For example, you won’t find the Hebrew Immigrant Aid Society, but you will find its Form 990 by typing in HIAS, Inc.

USA Spending.gov:

USA Spending.gov is a very handy site as long as you know the exact name of the entity you are searching for.  It also has the advantage of tracking across federal agencies and will give you grants and contracts!  Enter the name of the non-profit in the search window in upper right.

For example, you might find that a resettlement contractor is getting cashola, not just from the Office of Refugee Resettlement (in HHS), but from the US Justice Department from some voter registration grants.  If you don’t find the non-profit group listed, don’t give up right away, try to find the exact name it is using. I looked up a specific Catholic Charities this morning under its diocese name and nothing came up, but then I saw on their website that they had a slightly different name and found what I was looking for under that name.

Annual reports to Congress:

These are a treasure trove of information on grants and statistics on welfare use (among other things). I see here that they are late again.  FY2014 should have been released months ago.

Office of Refugee Resettlement:

Go here to programs and click on those of your choice to see who is getting all of the (your!) money!

Non-Profit Facts. com:

A reader sent me this website, which I have never used until today, so try it too by clicking here.  I did test it on the specific Catholic non-profit I searched at USA Spending.gov and was disappointed to see that this website did not mention the $140,000 HUD grant they had received in the last year.  However, there are still some useful bits of information here.  For example, I learned that this “church” group was not required to file a Form 990.

And, finally, you will need to check with your state and local governments about funding these ‘non-profit’ groups receive from you at that level.  This post is meant to address only federal money flowing to them.  You may have to use state public information laws to extract information from them.

Other suggestions that have worked for you?  Send them my way!

RELATED ARTICLES:

Iranian eBay founder having hissy fit over refugee resettlement backlash

Female genital mutilation in Minnesota Somali population not disappearing

VIDEO: How Do We Get Rid of the Fed? by Jeffrey A. Tucker

When, if ever, will there be reform of the money system?

Smart people have been urging sound money — and calling for the restraint or abolition of the Federal Reserve System — for a century. It became apparent early on that this new machinery did not serve the cause of science, as promised, but rather the state and its friends.

Something needs to change.

The problem is this: interest groups benefit from the status quo. The largest banks, the top-tier bond dealers, a deeply indebted government, and myriad special interests all benefit from the power to print. They have an investment in discretionary monetary policy and in fiat money.

F.A. Hayek’s thesis in his 1974 essay “The Denationalization of Money” was that liberty won’t be safe as long as the central bank controls money. At the same time, nationalized money will never be reformed, because all the wrong people love the system as it is. Hayek’s solution: total privatization through displacing rather than reforming the Fed.

Still, the cries for reform are growing ever louder and ever more passionate.

As they should.

Jackson Hole, Wyoming, has emerged as the implausible center for the most important debate in economics and politics today. For 35 years, world central bankers have met there in August to discuss strategies and methods. In the past, they have met alone. This year, their monopoly on ideas was challenged head on.

I saw it as I stepped off the plane into the airport in Jackson Hole. There were the greeters from the Federal Reserve, welcoming dignitaries and big shots. Close by, there were greeters for the people who invited me: sound-money advocates for free markets, many influenced by the supply-side school. Our group was made up of economists, journalists, historians, and other independent intellectuals.

Then there was a third group made up of left-wing activists who want the power to print democratized — inflationists who see the Fed as their magical tool to bring about their dream of an egalitarian utopia.

The Sound Money Camp

The talks at our opposition conference were exceptional — the best two-day conference on gold and sound money I’ve attended. Speaker after speaker chronicled the problems with the Fed. The board of governors meets, and the whole world waits to see whether rates will go higher, lower, or stay the same.

Billions and trillions are held hostage to their whims, purportedly rooted in science but actually based on no more or less knowledge of the future than you and I have.

It is incredible how much our economic structures have become dependent on the whims of this group of unelected monetary dictators. But their main dependent is actually government itself. The Fed stands ready to print all the money government needs in the event of any crisis. That promise itself has meant the elimination of all fiscal discipline.

Politicians talk and talk about restraint, about cutting the budget, about bringing revenue in line with spending. But as long as the Fed is there, it’s all talk. There is no need for authentic discipline. In a strange way, the Fed has usurped even the power of the president and the Congress.

Consider the effects. Without a Fed, the US would have been far less likely to invade Iraq because the government would not have been able or willing to pay for it (at least without politically impossible tax hikes). And without that invasion, there would have been no rise of ISIS and no refugee crisis in Europe today. The crisis is giving both the radical right and left in Europe a huge political boost, displacing not only the establishment but the classical liberals, too.

The spillover effects are endless.

It’s been the same with every war in the last hundred years. They’ve all been underwritten by the power to print.

To see the relationship between the rise of Leviathan and the power of the central bank requires a few steps of logic, and some economic understanding. Even more difficult to comprehend is the relationship between the Fed and economic instability. When the Fed monkeys with interest rates, it distorts investment patterns, diverting resources from rational economic ends toward those with far less merit.

People think of the Fed as the benefactor who saved us from the housing crash. But to get at the truth, look at the history leading up to the crash. What provided the implicit bailout guarantee for the entire banking sector? What incentivized the reckless lending that goosed up housing prices for so long? However you ask the question, the answers point back to the central bank.

The institution that caused the problem cannot also be a reliable fix for the problem.

Can the System Be Reformed?

What reforms? At the conference I attended, there were many ideas, from gold-price rules to full privatization.

Solving the problem from the point of view of economics is not difficult: get rid of central banking.

The real problem is political: how do we get from here to there?

None of the existing presidential contenders are capable to forming two coherent sentences on the topic. In fact, they are more frightened by the subject of monetary policy than they are of the civil war in Iraq. And journalists don’t ask about the subject because their own economic ignorance exceeds even that of the candidates.

My own contribution to this conference was to discuss the innovation of cryptocurrency and bitcoin. Hayek had a glimpse of the possibility that private markets could reinvent money. He speculated that it could happen with the initiative of banks. What he could not have imagined was the invention of a distribution network and an open-source protocol that has no central point of failure. It is “owned” by everyone and no one. It is the basis of a monetary system for the world.

When? Not soon but eventually.

I sat on a panel with the mighty George Gilder, one of the truly prophetic voices over the last three decades. He rightly sees the potential of this technology, and he is super excited about it.

These monetary reformers who organized the event deserve congratulations for understanding the crucial role of digital technology in reforming money. I’m all for the gold standard, but never has the prospect of sensible monetary reform seemed more remote. Meanwhile, the reality of bitcoin is all around us.

Bonus: Here’s an outstanding interview with the author of the best single book on the topic in print today:

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.

Rome: Money, Mischief, and Minted Crises by Marc Hyden & Lawrence W. Reed

Ancient Rome wasn’t built in a day, the old adage goes. It wasn’t torn down in a day either, but a good measure of its long decline to oblivion was the government’s bad habit of chipping away at the value of its own currency.

In this essay we refer to “inflation,” but in its classical sense — an increase in the supply of money in excess of the demand for money. The modern-day subversion of the term to mean rising prices, which are one key effect of inflation but not the inflation itself, only confuses the matter and points away from the real culprit, the powers in charge of the money supply.

In Rome’s day, before the invention of the printing press, money was gold and silver coin. When Roman emperors needed revenue, they did more than just tax a lot; like most governments today, they also debased the money. Think of the major difference between Federal Reserve inflation and ancient Roman inflation this way: We print, they mint(ed). The long-term effects were the same—higher prices, erosion of savings and confidence, booms and busts, and more. Here’s the Roman story.

Augustus (reigned 27 BC – 14 AD), Rome’s first real emperor, worked to establish a standardized system of coinage for the empire, building off of the Roman Republic’s policies. The silver denarius became the “link coin” to which other baser and fractional coins could be exchanged and measured. Augustus set the weight of the denarius at 84 coins to the pound and around 98 percent silver. Coins, which had only been sporadically used to pay for state expenditures in the earlier Republic, became the currency for everyday citizens and accepted as payment for commerce and even taxation in the later Republic and into the imperial period.

Historian Max Shapiro, in his 1980 book, The Penniless Billionaires, pieces various sources together to conclude that “the volume of money he (Augustus) issued in the two decades between 27 BC and 6 AD was more than ten times the amount issued by his predecessors in the twenty years before.” The easy money stimulated a temporary boom, leading inevitably to price hikes and eventual retrenchment. Wheat and pork prices doubled, real estate rose at first by more than 150 percent. When money creation was slowed (late in Augustus’s reign and even more for a time under that of his successor, Tiberius), the house of cards came tumbling down. Prices stabilized but at the cost of recession and unemployment.

The integrity of the monetary system would remain intact until the reign of Emperor Nero (54-68 AD). He is better known for murdering his mother, preferring the arts to civic administration, and persecuting the Christians, but he was also the first to debase the standard set by Augustus. By 64 AD, he drained the Roman reserves because of the Great Fire of Rome and his profligate spending (including a gaudy palace). He reduced the weight of the denarius to 96 coins per pound and its silver content to 93 percent, which was the first debasement of this magnitude in over 250 years. This led to inflation and temporarily shook the confidence of the Roman citizenry.

Many successive emperors incrementally lowered the denarius’s silver content until the philosopher-emperor, Marcus Aurelius (reigned 161-180 AD), further debased the denarius to 79 percent silver to pay for constant wars and increased expenses. This was the most impure standard set for the denarius up to this point in Roman history, but the trend would continue. Aurelius’ son Commodus(reigned 177-192 AD), a gladiatorial wannabe, was likewise a spendthrift. He followed the footsteps of his forebears and reduced the denarius to 104 coins to the pound and only 74 percent silver.

Every debasement pushed prices higher and gradually chipped away at the public faith in the Roman monetary system. The degradation of the money and increased minting of coins provided short-term relief for the state until merchants, legionaries, and market forces realized what had happened. Under Emperor Septimius Severus’ administration (reigned 193-211 AD), more soldiers began demanding bonuses to be paid in gold or in commodities to circumvent the increasingly diminished denarius. Severus’ son, Caracalla (reigned 198-217 AD), while remembered for his bloody massacres, killing his brother, and being assassinated while relieving himself, advanced the policy of debasement until he lowered the denarius to nearly 50 percent silver to pay for the Roman war machine and his grand building projects.

Other emperors, including Pertinax and Macrinus, attempted to put Rome back on solid footing by increasing the silver content or by reforming the system, but often when one emperor improved the denarius, a competitor would outbid them for the army’s loyalty, destroying any progress and often replacing the emperor. Eventually, the sun set on the silver denarius as Rome’s youngest sole emperor, Gordian III (238-244 AD), essentially replaced it with its competitor, the antoninianus.

However, by the reign of the barbarian-born Emperor Claudius II (reigned 268-270 AD), remembered for his military prowess and punching a horse’s teeth out, the antoninianus was reduced to a lighter coin that was less than two percent silver. The aurelianianus eventually replaced the antoninianus, and the nummus replaced the aurelianianus. By 341 AD, Emperor Constans I (reigned 337-350 AD) diminished the nummus to only 0.4 percent silver and 196 coins per pound. The Roman monetary system had long crashed and price inflation had been spiraling out of control for generations.

Attempts were made to create new coins similar to the Neronian standard in smaller quantities and to devise a new monetary system, but the public confidence was shattered. Emperor Diocletian (reigned 284-305 AD) is widely known for conducting the largest Roman persecution of Christians, but he also reformed the military, government, and monetary system. He expanded and standardized a program, the annona militaris, which essentially bypassed the state currency. Many Romans were now taxed and legionaries paid in-kind (with commodities).

Increasingly, Romans bartered in the marketplace instead of exchanging state coins. Some communities even created a “ghost currency,” a nonexistent medium to accurately describe the cost and worth of a product because of runaway inflation and the volatility of worthless money. Diocletian approved a policy which led to the gold standard replacing the silver standard. This process progressed into the reign of Rome’s first Christian emperor, Constantine (reigned 306-337 AD), until Roman currency began to temporarily resemble stability.

But Diocletian did something else, and it yielded widespread ruin from which the Empire never fully recovered. In the year 301 AD, to combat the soaring hyperinflation in prices, he issued his famous “Edict of 301,” which imposed comprehensive wage and price controls under penalty of death. The system of production, already assaulted by confiscatory taxes and harsh regulations as well as the derangement of the currency, collapsed. When a successor abandoned the controls a decade or so later, the Roman economy was in tatters.

The two largest expenditures in the Roman Empire were the army, which peaked at between 300,000-600,000 soldiers, and subsidized grain for around 1/3 of the city of Rome. The empire’s costs gradually increased over time as did the need for bribing political enemies, granting donatives to appease the army, purchasing allies through tributes, and the extravagance of Roman emperors. Revenues declined in part because many mines were exhausted, wars brought less booty into the empire, and farming decreased due to barbarian incursions, wars, and increased taxation. To meet these demands Roman leaders repeatedly debased the silver coins, increasingly minted more money, and raised taxes at the same time.

In a period of about 370 years, the denarius and its successors were debased incrementally from 98 percent to less than one percent silver. The massive spending of the welfare/warfare state exacted a terrible toll in the name of either “helping” Romans or making war on non-Romans. Financial and military crises mixed with poor leadership, expediency, and a clear misunderstanding of economic principles led to the destruction Rome’s monetary system.

Honest and transparent policies could have saved the Romans from centuries of economic hardships. The question future historians will answer when they look back on our period is, “What did the Americans learn from the Roman experience?”

(For more on lessons from ancient Rome, visit www.fee.org/rome).

Marc Hyden is a political activist and an amateur Roman historian. Lawrence W. Reed is President of the Foundation for Economic Education.

Marc Hyden

Marc Hyden is a conservative political activist and an amateur Roman historian.

Lawrence W. Reed

Lawrence W. (“Larry”) Reed became president of FEE in 2008 after serving as chairman of its board of trustees in the 1990s and both writing and speaking for FEE since the late 1970s.

Take the Politics out of Money

You have to admire the moxie of a man that flies a gyrocopter on the Capitol lawn and risks being shot Capitol Police to protest corruption and demand campaign finance reform.

Laudable though his intentions may have been, campaign finance laws are less about reform and more about protecting incumbents from challengers. If we truly wish to reform government, we should be less concerned with getting the money out of politics and more concerned with getting the politics out of money.

The government spends gigantic amounts of money and regulates large swaths of economic activity. These actions create powerful incentives for affected interests to lobby politicians for privileges. As long as the political process has the power to create and destroy fortunes, people will compete to manipulate the system. This incentive problem is inherent to politics and cannot be eliminated by campaign finance reform.

Such “reforms” mean little else than incumbent politicians writing the rules today for the elections they will run in tomorrow. No one should be surprised when they write rules that subtly shift the odds in their favor. One example is the rules limiting individual contributions.

These rules force candidates to draw small amounts of money from a large pool of donors. Incumbents have the advantage of name recognition and established fundraising networks. The longer they have been in office, the more developed this network will become.

These rules benefit incumbents by putting challengers and unknowns at an immediate and even greater fundraising disadvantage, making it hard for them to get the traction to even have a shot at the election.

If someone wants to run outside the current two party duopoly, they put themselves at a huge fundraising disadvantage because third parties lack an established fundraising network. The clichéd version of politics is a smoke filled room where billionaires quaff brandy, but the reality is that the support of the existing party structure is much more important than any one donor. No outsider can appeal to the Elon Musks or Mark Zuckerbergs of the world to fund their campaigns against such entrenched networks. By keeping individuals’ money out of politics, we are ensuring politics as usual.

Campaign finance rules strengthen the role of political parties in choosing candidates. Political parties are not obligated to support everyone that runs under their name. If the goal is reform, one must recognize that political parties benefit from the status quo because they were instrumental in creating it.

What this means is that anyone that strays too far from the party line risks losing indispensable party support. (Former Sen. Jim Bunning’s career was cut short in this way when his own party leadership deliberately torpedoed his fundraising.) Campaign finance rules can have the impact of forcing candidates to work with political parties, thereby strengthening the power and influence of the party system.

Under the guise of creating a level playing field, the current system instead rewards those that find (or create) loopholes and push the envelope on what is legally permissible. Unexpected campaign contributions are the performance enhancing drugs of modern politics. Lobbyists gain power when they find creative ways to circumvent the law and funnel large amounts of money to candidates in need, gaining the perfectly legal influence and access to affect policy.

This is also why those who can bundle contributions are so valuable and why their downfall can create such a ruckus. While small increases in spending have a negligible effect on outcomes, someone that can exploit a loophole or bend the law can raise substantially more funds than an ethically constrained competitor.

Lastly, we must remember that even if a rule is ideal in theory, humans must enforce it. As the newly elected Governor of Wisconsin, Scott Walker made many political enemies. In retaliation, a prosecutor convinced a judge to authorize home invasions and police raids of prominent Walker supporters.

Such incidents should serve as a reminder that the law is a cudgel that those with power will use to bludgeon those without, given the opportunity. Lois Lerner and the IRS targeted the tea party because complex rules allow for such discretionary abuse. Grassroots organizations now need lawyers just to get off the ground. Incumbents use these rules to their advantage, strangling opposition in the cradle.

As long as politicians remain free to reward their friends and punish their enemies, they will never want for a gourmet meal or a drinking buddy. The problem of corruption is a symptom of the disease of big government.

Politicians control so much of the economy, either outright or indirectly, that those with the most to gain will always find a way to persuade politicians that what’s in their interests is the same as to what’s in the public interest. Campaign finance laws are just the insult to injury: extra power introduced to a system that is supposed by “reformed” by its exercise.

The solution to politicians being bought is to ensure that they have less power to put on auction.

Stewart Dompe

Stewart Dompe is an instructor of economics at Johnson & Wales University. He has published articles in Econ Journal Watch and is a contributor to the forthcoming Homer Economicus: Using The Simpsons to Teach Economics.

For the Love of Money?

Money at the margin, not everything for money by Gary M. Galles:

It’s not unusual to hear market systems criticized for relying too much on money, as if this comes at the expense of the altruistic relationships that would otherwise prevail. Ever heard the phrase “only in it for the money”? It’s as if self-interest has a stink that can corrupt transactions that generate benefits for others, turning them into offenses. So this line of thinking suggests reliance on market systems based in self-ownership would be tantamount to creating a world where people only do things for money, and lose the ability to relate to one another on any other terms.

People Don’t Do Everything for Money

One need not go far to see the falsity of the claim that everything is done for money in market systems. My situation is but one example: I have a Ph.D. in economics from a top graduate program. It is true that, as a result, I have an above-average income. But I did not do it all for the money. One of my major fields was finance, but if all I cared about was money—as my wife reminds me when budgets are particularly tight—I would have gone into finance rather than academia and made far more. But I like university students. I think what I teach is important, and I value the ability to pass on whatever wisdom I have to offer. I like the freedom and time to pursue avenues of research I find interesting. I enjoy the ability to tell and write the truth as I see it (particularly since I see things differently from most) and I prefer a “steady job” to one with far more variability.

Every one of those things I value has cost me money. Yet I chose to be a professor (and would do it again). While it’s true that the need to support my family means that I must acquire sufficient resources, many things beyond just money go into choosing what I do for a living. And the same is true for everyone.

Ask any acquaintances of yours who they know that only does things for money. What would they say? They would certainly deny it about themselves. While they might apply this characterization to people they don’t know, beyond Dickens’s Ebenezer Scrooge and his comic book namesake, Scrooge McDuck, they would be unable to provide a single convincing example. If market critics performed that same experiment, they would recognize that they are condemning a mirage, not market arrangements.

Confusing Ends and Means

Beyond the fact that all of us forego some money we could earn for other things we value, the fact that every one of us gives up money we have earned for a vast multitude of goods, services, and causes also reveals that individuals don’t just do things for the money. Each of us willingly gives up money up to further many different purposes we care about. Money is not the ultimate end sought, but a means to a vast variety of possible ends. Mistakenly treating money as the end for which “people do everything” is fundamentally flawed—both for critics of the market and for the participants in it.

To do things for money is nothing more than to advance what we care about. In markets, we do for others as an indirect way of doing for ourselves. This logic even applies to Scrooge. His nephew Fred’s assertion that he doesn’t do any good with his wealth is false; he lends to willing borrowers at terms they find worth meeting, expanding the capital stock and the options of others.

That an end of our efforts is to benefit ourselves, in and of itself, merits neither calumny nor congratulations. Money’s role is that of an amoral servant that can help us advance whatever ends we ultimately pursue, while private property rights restrict that pursuit to purely voluntary arrangements. Moral criticism cannot attach to the universal desire to be able to better pursue our ends or to the requirement that we refrain from violating others’ rights, only to the ends we pursue.

To do things for money in order to achieve world domination could justify moral condemnation. But the problem is that your intended end will harm others, not the fact that you did some things for money, benefitting those you dealt with in that way, to do so. Using money to build a leprosarium, as Mother Teresa did with her Nobel Prize award, does not justify moral condemnation. Similarly, using money to support your family, to live up to agreements you made with others, and to try not to burden others is being responsible, not reprehensible. Further, there is nothing about voluntary arrangements that worsens the ends individuals choose. But by definition, they place limits on ends that require harming others to achieve them.

It is true that money represents purchasing power that can be directed to ends others object to. Money is nothing more than a particularly powerful tool, and all tools can be used to cause harm. Just as we shouldn’t have to forego the benefits of hammers because somebody could cause harm with one, there’s no reason to think society would be better off without money or the market arrangements it makes possible just because some people can use those things for harmful ends. And if the ends aren’t actually causing harm, then the objections over them come down to nothing more than disagreements about inherently subjective valuations. Enabling a small class of people to decide which of these can be pursued and which can’t makes everyone worse off.

Those who criticize people for doing everything for money also do a great deal for money themselves. How many campaigns have religious groups and nonprofit organizations run to get more money? How much of government action is focused on getting more money? Why do the individuals involved not apply the same criticism to themselves? Because they say they will “do good” with it. But every individual doing things for money also intends to do good, as he or she sees it, with that money. And if we accept that people are owners of themselves, there is no obvious reason why another’s claims about what is “good” should trump any “good” that you hold dear, or provide for another in service through exchange.

Criticizing a Straw Man

Given that the charge that “people do everything for money” in market systems is both factually wrong and logically lame, why do some keep repeating it? It creates a straw man easier to argue against than reality, by misrepresenting alternatives at both the individual and societal level.

At the individual level, this assertion arises when people disagree about how to spend “public” resources (when we respect private property, this dispute disappears, because the owner has the right to do as he or she chooses with it, but cannot force others to go along with or allow it; “public” resources are obtained by force). The people who wish to spend other people’s confiscated resources in ways the original owners disagree with claim a laundry list of caring benefits their choice would provide, but foreclose similar consideration of the harms that would be caused to those they claim care only about money. That, in turn, is used to imply that the purportedly selfish person’s claims are unworthy of serious attention. (Something similar happens when politicians count “multiplier effects” where government money is spent, but ignore the symmetrical negative “multiplier effects” radiating from where the resources are taken.)

This general line draws support from a misquotation of the Bible. While more than one recent translation of 1 Tim 6:10 renders it “the love of money is a root of all sorts of evils,” the far less accurate King James Version rendered it, “the love of money is the root of all evil.” When one simply omits or forgets the first three words, it becomes something very different—“money is the root of all evil.” Portray those who disagree with your “caring” ends as simply loving money more than other people, and they lose every argument by default. Naturally, it’s a seductive strategy.

At the societal level, criticizing market systems as tainted by the love of money implies that an alternate system would escape that taint and therefore be morally preferable. By focusing attention only on an imaginary failing of market systems that would be avoided, it allows the implication of superiority to be made without having to demonstrate it. This is a version of the Nirvana fallacy.

By blaming monetary relationships for people’s failings, “reformers” imply that taking away markets’ monetary nexus will somehow make people better. But no system makes people angels; all systems must confront human flaws and failings. That means a far different question must be addressed: How well will a given system do with real, imperfect, mostly self-interested people? And it shouldn’t be necessary, but most political rhetoric makes a second question nearly as important: Does the given system assume that people are not imperfect and self-interested when they have power?

Given that the utopian alternatives offered always involve some sort of socialism or other form of tyranny, an affirmative case for them cannot be made. Only by holding the imaginary “sins” of market systems to impossible standards, while holding alternatives to no real standards except the imagination of self-proclaimed reformers, can that fact be dodged. But there’s nothing in history or theory that demonstrates that overwriting markets with expanded coercion makes people more likely to do things for others. As Anatole France noted, “Those who have given themselves the most concern about the happiness of peoples have made their neighbors very miserable.” And as economist Paul Heyne wrote, “Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced . . . something very close to hell on earth.”

Money at the Margin

Money is not everything. But changes in the amounts of money to be earned or foregone as a result of decisions change our incentives at the many margins of choice we face, and so change our behavior. Such changes—money at the margin—are the primary means of adjusting our behavior in the direction of social coordination in a market system.

Changes in monetary incentives are how we adapt to changing circumstances, because whatever their ultimate ends, everyone cares about commanding more resources for those purposes they care about. It is how we rebalance arrangements when people’s plans get out of synch, which is inevitable in our complex, dynamic world. In such cases, changing money prices allow each individual to provide added incentives to all who might offer him assistance in achieving his ends, even if he doesn’t know them, doesn’t know how they would do so, and doesn’t think about their wellbeing (in fact, it applies even if he dislikes those he deals with, as long as the benefits of the arrangements exceed his perceived personal cost of doing so).

For instance, consider a retail gas station faced with lengthy lines of cars. That reflects a failure of social cooperation between the buyers and the seller. Those in line are revealing by their actions that they are willing to bear extra costs beyond the current price to get gas, but their costs of waiting do not provide benefits to the gas station owner. So the owner will convert those costs of waiting in line, which are going to waste, into higher prices (unless prevented by government price ceilings or antigouging directives) that benefit him. That use of money at the margin benefits both buyers and sellers and results in increased amounts of gasoline supplied to buyers.

Further, people can change their behavior in response to price changes in far more ways than “outsiders,” unfamiliar with all the local circumstances, realize. This makes prices, in turn, far more powerful than anyone recognizes.

Consider water prices. If water prices rose, your first thought might well be that you had no choice but to pay them. You might very well not know how many different responses people have already had to spikes (ranging from putting different plants in front yards to building sophisticated desalinization plants). Similarly, when airline fuel prices rose sharply, few recognized in advance the number of changes that airlines could make in response: using more fuel-efficient planes, changing route structures, reducing carry-on allowances, lightening seats, removing paint, and more.

If people recognized how powerful altered market prices are in inducing appropriate changes in behavior, demonstrated by a vast range of examples, they would recognize that the cost of abandoning money at the margin, which enables these responses by offering appropriate incentives to everyone who could be of assistance in addressing the problem faced, would enormously exceed any benefit.

Massive Improvements in Social Cooperation

If we could just presume that individuals know everyone and all the things they care about and the entirety of their circumstances, we could imagine a society more focused on doing things directly for others. But in any extensive society, there is no way people could acquire that much information about the large number of people involved. Instead, this would extend the impossible information problem that Hayek’s “The Use of Knowledge in Society” laid out in regard to central planners. You can care all you want, but that won’t give you the information you need. Beyond that insuperable problem, we would also have to assume that people cared far more about strangers than human history has evidenced.

Those information and other-interestedness requirements would necessarily dictate a very small society. But the costs of those limitations, if people recognized them, would be greater than virtually anyone would be willing to bear.

Without a broad society, the gains from cross-pollination of ideas and different ways of doing things would be hamstrung. The gains from comparative advantage (areas and groups focusing on what they do best, and trading with others doing the same thing) would similarly be sharply curtailed. A very small society would eliminate the incentive for large-scale specialization (requiring more extensive markets) and division of labor that makes our standard of living possible. Virtually every product that involves a large number of separate arrangements—such as producing cars or the gasoline to power them—would disappear, because the arrangements would be overwhelmed by the costs of making them without money as the balance-tipper. As Paul Heyne once put it,

The impersonal transactions that constitute the market system . . . have, over the course of a few centuries, enormously expanded our ability to provide [for] one another . . . while at the same time vastly extending our freedom both by offering us a multitude of options and by freeing us from arbitrary restrictions on our choice of life goals and on the means to further those goals. To reject impersonal transactions as unethical amounts to rejecting the foundation of modern life.

Conclusion

A pastiche of false premises leads many to reject out of hand what Hayek recognized as the “marvel” of market systems, which, if they had arisen from deliberate human design, “would have been acclaimed as one of the greatest triumphs of the human mind.” This is great for those who seek power over others—they have an endless supply of bogeymen to promise to fight.

But it’s a disaster for social coordination. The record of disasters inflicted on society demonstrates what follows when voluntary arrangements are replaced by someone else’s purportedly superior vision.

But it’s often forgotten. We must continue to make the case.

ABOUT GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University. His recent books include Faulty Premises, Faulty Policies (2014) and Apostle of Peace (2013).

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Islamic State accumulating gold, silver and copper to mint its own currency

The Islamic State is not a state and not Islamic, Obama tells us. But it grounds all its actions in explicit statements of the Qur’an and Sunnah, and is busy accumulating all the ordinary features of a state. Does anyone have the will to stop it in its tracks?

An update on this story. “Islamic State reportedly buying silver, gold as it prepares to issue currency,” by Mitchell Prothero, McClatchy, November 20, 2014 (thanks to Jerk Chicken):

IRBIL, Iraq — The Islamic State is accumulating gold, silver and copper in markets throughout northern and western Iraq, dealers report, in an apparent effort to stockpile enough precious metal to follow through on a pledge to mint its own currency.

On Nov. 11, the Islamic State’s Beit al Mal, an ancient Islamic term akin to “Department of Treasury,” announced that the group would reintroduce the dinar currency of the Umayyad Caliphate, which ruled an empire that stretched from modern Iran to Spain for much of the seventh and eighth centuries. The announcement – which included images of three types of coins in gold, copper and silver – drew skepticism from experts, who doubted that the Islamic State could arrange a system to mint and issue a modern currency.

But interviews with dealers in precious metals indicate that the Islamic State has begun the complex process of issuing the currency, a reminder that as the best-financed non-state actor in history – with a revenue stream from oil sales and aggressive taxation – it’s been able to install bureaucratic controls over the large swath of territory it’s claimed in Iraq and Syria.

Hajj Samir, a gold trader in the city of Fallujah who asked that his full name not be used for security reasons, said that since the announcement, foreign jihadists had been buying all of the gold and silver in the city’s markets.

He said he alone had sold more than 15 pounds of gold to foreigners who were members of the Islamic State. “They said it was for gifts for their wives, but now I know why, and all the traders say the same thing,” he said. “We’ve been making trips to Baghdad to get more, and they buy all of it.”

Osman Ahmed, a 37-year-old gold trader in Mosul, said he’d been selling large amounts of gold and silver in the city, even though he now spent most of his time in Irbil, the capital of Iraq’s Kurdish region.

“We don’t ask why they’re buying so much,” he said. “But even silver in small shops outside the city is sold out.”

The purchases have reached the point that traders like Ahmed have been traveling between Mosul and the Kurdish cities of Irbil and Suleimaniyah to renew their stocks. The Islamic State buys it all, he said.

Zakaria Ahmed, 33, a Mosul resident who’s no relation to Osman Ahmed and whose brother is an Islamic State official, said he’d been told that the currency project was encountering difficulties because U.S.-led coalition airstrikes had made moving valuables more difficult. The airstrikes also have added to worries that any minting facility could be destroyed from the air.

But he said his understanding was that planning for the currency was proceeding apace. “It is still in an ongoing process to be released,” he said by phone.

The Islamic State’s plans also may be behind a new zeal among the group’s fighters to salvage copper on the battlefield. Marwan al Obeidi, speaking by phone from the Iraqi city of al Qaim, said the need for copper for coins had led to the looting of the copper wiring used in electric transmission cables.

The gold and silver purchases are strange enough, he said. “But what is striking is how elements of the organization have seized power transmission cables and other copper components,” Obeidi said. The fighters are burning the insulation off the cables and harvesting the copper, he said.

Zakaria Ahmed said it was uncertain that residents of Islamic State-controlled areas would embrace the currency. He said residents who were tired of their sons being killed in fighting and already were facing economic uncertainty didn’t see much benefit from the reintroduction of a currency that was last in circulation more than 1,000 years ago.

With doubts high among some people that the Islamic State can outlast the international coalition arrayed against it, Ahmed predicted that “no one will use” the new currency, “even if we assume that it enters the market.”

Still, the accumulation of so much gold, silver and copper has a benefit, he said. It provides a valuable asset “for use by the Islamic State.”

Read more here.

What Gave Bitcoin Its Value? by Jeffrey A. Tucker

Those who use the work of Mises to challenge bitcoin should think again.

Many people who have never used bitcoin look at it with confusion. Why does this magic Internet money have any value at all? It’s just some computer thing that someone made up.

Consider the criticism of goldbugs, who have, for decades, pushed the idea that sound money must be backed by something real, hard, and independently valuable.

Bitcoin doesn’t qualify, right?

Maybe it does. Let’s take a closer look.

Bitcoin first emerged as a possible competitor to national, government-managed money nearly six years ago. Satoshi Nakamoto’s white paper was released October 31, 2008. The structure and language of this paper sent the message: this currency is for computer technicians, not economists nor political pundits. The paper’s circulation was limited; novices who read it were mystified.

But the lack of interest didn’t stop history from moving forward. Two months later, those who were paying attention saw the emergence of the “Genesis Block,” the first group of bitcoins generated through Nakamoto’s concept of a distributed ledger that lived on any computer node in the world that wanted to host it.

Here we are six years later and a single bitcoin trades at $500 and has been as high as $1,200 per coin.The currency is accepted by many thousands of institutions, both online and offline. Its payment system is very popular in poor countries without vast banking infrastructures but also in developed countries. And major institutions—including the Federal Reserve, the OECD, the World Bank, and major investment houses—are paying respectful attention.

Enthusiasts, who are found in every country, say that its exchange value will soar in the future because its supply is strictly limited and it provides a vastly superior system to government money. Bitcoin is transferred between individuals without a third party. It is nearly costless to exchange. It has a predictable supply. It is durable, fungible, and divisible: all crucial features of money. It creates a monetary system that doesn’t depend on trust and identity, much less on central banks and government. It is a new system for the digital age.

Hard lessons for hard money

To those educated in the “hard money” tradition, the whole idea has been a serious challenge. Speaking for myself, I had been reading about bitcoin for two years before I came anywhere close to understanding it. There was just something about the whole idea that bugged me. You can’t make money out of nothing, much less out of computer code. Why does it have value then? There must be something amiss. This is not how we expected money to be reformed.

There’s the problem: our expectations. We should have been paying closer attention to Ludwig von Mises’s theory of money’s origins—not to what we think he wrote, but to what he actually did write.

In 1912, Mises released The Theory of Money and Credit. It was a huge hit in Europe when it came out in German, and it was translated into English. While covering every aspect of money, his core contribution was in tracing the value and price of money—and not just money itself—to its origins. That is, he explained how money gets its price in terms of the goods and services it obtains. He later called this process the “regression theorem,” and as it turns out, bitcoin satisfies every condition of the theorem.

Mises’s teacher, Carl Menger, demonstrated that money itself originates from the market—not from the State and not from social contract. It emerges gradually as monetary entrepreneurs seek out an ideal form of commodity for indirect exchange. Instead of merely bartering with each other, people acquire a good not to consume, but to trade. That good becomes money, the most marketable commodity.

But Mises added that the value of money traces backward in time to its value as a bartered commodity. Mises said that this is the only way money can have value.

The theory of the value of money as such can trace back the objective exchange value of money only to that point where it ceases to be the value of money and becomes merely the value of a commodity…. If in this way we continually go farther and farther back we must eventually arrive at a point where we no longer find any component in the objective exchange value of money that arises from valuations based on the function of money as a common medium of exchange; where the value of money is nothing other than the value of an object that is useful in some other way than as money…. Before it was usual to acquire goods in the market, not for personal consumption, but simply in order to exchange them again for the goods that were really wanted, each individual commodity was only accredited with that value given by the subjective valuations based on its direct utility.

Mises’s explanation solved a major problem that had long mystified economists. It is a narrative of conjectural history, and yet it makes perfect sense. Would salt have become money had it otherwise been completely useless? Would beaver pelts have obtained monetary value had they not been useful for clothing? Would silver or gold have had money value if they had no value as commodities first? The answer in all cases of monetary history is clearly no. The initial value of money, before it becomes widely traded as money, originates in its direct utility. It’s an explanation that is demonstrated through historical reconstruction. That’s Mises’s regression theorem.

Bitcoin’s use value

At first glance, bitcoin would seem to be an exception. You can’t use a bitcoin for anything other than money. It can’t be worn as jewelry. You can’t make a machine out of it. You can’t wear it, eat it, or even decorate with it. Its value is only realized as a unit that facilitates indirect exchange. And yet, bitcoin already is money. It’s used every day. You can see the exchanges in real time. It’s not a myth. It’s the real deal.

It might seem like we have to choose. Is Mises wrong? Maybe we have to toss out his whole theory. Or maybe his point was purely historical and doesn’t apply in the future of a digital age. Or maybe his regression theorem is proof that bitcoin is just an empty mania with no staying power, because it can’t be reduced to its value as a useful commodity.

And yet, you don’t have to resort to complicated monetary theory in order to understand the sense of alarm surrounding bitcoin. Many people, as I did, just have a feeling of uneasiness about a money that has no basis in anything physical. Sure, you can print out a bitcoin on a piece of paper, but having a paper with a QR code or a public key is not enough to relieve that sense of unease.

How can we resolve this problem? In my own mind, I toyed with the issue for more than a year. It puzzled me. I wondered if Mises’s insight applied only in a predigital age. I followed the speculations online that the value of bitcoin would be zero but for the national currencies into which is converted. Perhaps the demand for bitcoin overcame the demands of Mises’s scenario because of a desperate need for something other than the dollar.

As time has passed—and I read the work of Konrad GrafPeter Surda, and Daniel Krawisz—finally the resolution came. I will cut to the chase and reveal it: Bitcoin is both a payment system and a money. The payment system is the source of value, while the accounting unit merely expresses that value in terms of price. The unity of money and payment is its most unusual feature, and the one that most commentators have had trouble wrapping their heads around.

We are all used to thinking of currency as separate from payment systems. This thinking is a reflection of the technological limitations of history. There is the dollar and there are credit cards. There is the euro and there is PayPal. There is the yen and there are wire services. In each case, money transfer relies on third-party service providers. In order to use them, you need to establish what is called a “trust relationship” with them, which is to say that the institution arranging the deal has to believe that you are going to pay.

This wedge between money and payment has always been with us, except for the case of physical proximity. If I give you a dollar for your pizza slice, there is no third party. But payment systems, third parties, and trust relationships become necessary once you leave geographic proximity. That’s when companies like Visa and institutions like banks become indispensable. They are the application that makes the monetary software do what you want it to do.

The hitch is that payment systems we have today are not available to just anyone. In fact, a vast majority of humanity does not have access to such tools, which is a major reason for poverty in the world. The financially disenfranchised are confined to only local trade and cannot extend their trading relationships with the world.

A major, if not a primary, purpose of developing Bitcoin was to solve this problem. The protocol set out to weave together the currency feature with a payment system. The two are utterly interlinked in the structure of the code itself. This connection is what makes bitcoin different from any existing national currency, and, really, any currency in history.

Let Nakomoto speak from the introductory abstract to his white paper. Observe how central the payment system is to the monetary system he created:

A purely peer-to-peer version of electronic cash would allow online payments to be sent directly from one party to another without going through a financial institution. Digital signatures provide part of the solution, but the main benefits are lost if a trusted third party is still required to prevent double-spending. We propose a solution to the double-spending problem using a peer-to-peer network. The network timestamps transactions by hashing them into an ongoing chain of hash-based proof-of-work, forming a record that cannot be changed without redoing the proof-of-work. The longest chain not only serves as proof of the sequence of events witnessed, but proof that it came from the largest pool of CPU power. As long as a majority of CPU power is controlled by nodes that are not cooperating to attack the network, they’ll generate the longest chain and outpace attackers. The network itself requires minimal structure. Messages are broadcast on a best effort basis, and nodes can leave and rejoin the network at will, accepting the longest proof-of-work chain as proof of what happened while they were gone.

What’s very striking about this paragraph is that there is not even one mention of the currency unit itself. There is only the mention of the problem of double-spending (which is to say, the problem of inflationary money creation). The innovation here, even according to the words of its inventor, is the payment network, not the coin. The coin or digital unit only expresses the value of the network. It is an accounting tool that absorbs and carries the value of the network through time and space.

This network is called the blockchain. It’s a ledger that lives in the digital cloud, a distributed network, and it can be observed in operation by anyone at any time. It is carefully monitored by all users. It allows the transference of secure and non-repeatable bits of information from one person to any other person anywhere in the world, and these information bits are secured by a digital form of property title. This is what Satoshi called “digital signatures.” His invention of the cloud-based ledger allows property rights to be verified without having to depend on some third-party trust agency.

The blockchain solved what has come to be known as the Byzantine generals’ problem. This is the problem of coordinating action over a large geographic range in the presence of potentially malicious actors. Because generals separated by space have to rely on messengers and this reliance takes time and trust, no general can be absolutely sure that the other general has received and confirmed the message, much less its accuracy.

Putting a ledger, to which everyone has access, on the Internet overcomes this problem. The ledger records the amounts, the times, and the public addresses of every transaction. The information is shared across the globe and always gets updated. The ledger guarantees the integrity of the system and allows the currency unit to become a digital form of property with a title.

Once you understand this, you can see that the value proposition of bitcoin is bound up with its attached payment network. Here is where you find the use value to which Mises refers. It is not embedded in the currency unit but rather in the brilliant and innovative payment system on which bitcoin lives. If it were possible for the blockchain to be somehow separated from bitcoin (and, really, this is not possible), the value of the currency would instantly fall to zero.

Proof of concept

Now, to further understand how Mises’s theory fits with bitcoin, you have to understand one other point concerning the history of the cryptocurrency. On the day of its release (January 9, 2009), the value of bitcoin was exactly zero. And so it remained for 10 months after its release. All the while, transactions were taking place, but it had no posted value above zero for this entire time.

The first posted price of bitcoin appeared on October 5, 2009. On this exchange, $1 equaled 1,309.03 Bitcoin (which many considered overpriced at the time). In other words, the first valuation of bitcoin was little more than one-tenth of a penny. Yes, if you had bought $100 worth of bitcoin in those days, and not sold them in some panic, you would be a half-billionaire today.

So here is the question: What happened between January 9 and October 5, 2009, to cause bitcoin to obtain a market value? The answer is that traders, enthusiasts, entrepreneurs, and others were trying out the blockchain. They wanted to know if it worked. Did it transfer the units without double-spending? Did a system that depended on voluntary CPU power actually suffice to verify and confirm transactions? Do the rewarded bitcoins land in the right spot as payment for verification services? Most of all, did this new system actually work to do the seemingly impossible—that is, to move secure bits of title-based information through geographic space, not by using on some third party but rather peer-to-peer?

It took 10 months to build confidence. It took another 18 months before bitcoin reached parity with the U.S. dollar. This history is essential to understand, especially if you are relying on a theory of money’s origins that speculates about the pre-history of money, as Mises’s regression theorem does. Bitcoin was not always a money with value. It was once a pure accounting unit attached to a ledger. This ledger is what obtained what Mises called “use value.” All conditions of the theorem are thereby satisfied.

Final accounting

To review, if anyone says that bitcoin is based on nothing but thin air, that it cannot be a money because it has no real history as a genuine commodity, and whether the person saying this is a novice or a highly trained economist, you need to bring up two central points. One, bitcoin is not a stand-alone currency but a unit of accounting attached to an innovative payment network. Two, this network and therefore bitcoin only obtained its market value through real-time testing in a market environment.

In other words, once you account for the razzle-dazzle technical features, bitcoin emerged exactly like every other currency, from salt to gold, did. People found the payment system useful, and the attached accounting was portable, divisible, fungible, durable, and scarce.

Money was born. This money has all the best features of money from history but adds a weightless and spaceless payment network that enables the entire world to trade without having to rely on third parties.

But notice something extremely important here. The blockchain is not only about money. It is about any information transfers that require security, confirmations, and total assurance of authenticity. This pertains to contracts and transactions of all sorts, all performed peer-to-peer. Think of a world without third parties, including the most dangerous third party ever conceived of by man: the State itself. Imagine that future and you begin to grasp the fullness of the implications of our future.

Mises would be amazed and surprised at bitcoin. But he might also feel a sense of pride that his monetary theory of more than 100 years ago has been confirmed and given new life in the 21st century.

20121129_JeffreyTuckeravatarABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. He speaks at FEE summer seminars and other events.

For the Love of Money? by Gary M. Galles

Money at the margin, not everything for money.

It’s not unusual to hear market systems criticized for relying too much on money, as if this comes at the expense of the altruistic relationships that would otherwise prevail. Ever heard the phrase “only in it for the money”? It’s as if self-interest has a stink that can corrupt transactions that generate benefits for others, turning them into offenses. So this line of thinking suggests reliance on market systems based in self-ownership would be tantamount to creating a world where people only do things for money, and lose the ability to relate to one another on any other terms.

People Don’t Do Everything for Money

One need not go far to see the falsity of the claim that everything is done for money in market systems. My situation is but one example: I have a Ph.D. in economics from a top graduate program. It is true that, as a result, I have an above-average income. But I did not do it all for the money. One of my major fields was finance, but if all I cared about was money—as my wife reminds me when budgets are particularly tight—I would have gone into finance rather than academia and made far more. But I like university students. I think what I teach is important, and I value the ability to pass on whatever wisdom I have to offer. I like the freedom and time to pursue avenues of research I find interesting. I enjoy the ability to tell and write the truth as I see it (particularly since I see things differently from most) and I prefer a “steady job” to one with far more variability.

Every one of those things I value has cost me money. Yet I chose to be a professor (and would do it again). While it’s true that the need to support my family means that I must acquire sufficient resources, many things beyond just money go into choosing what I do for a living. And the same is true for everyone.

Ask any acquaintances of yours who they know that only does things for money. What would they say? They would certainly deny it about themselves. While they might apply this characterization to people they don’t know, beyond Dickens’s Ebenezer Scrooge and his comic book namesake, Scrooge McDuck, they would be unable to provide a single convincing example. If market critics performed that same experiment, they would recognize that they are condemning a mirage, not market arrangements.

Confusing Ends and Means

Beyond the fact that all of us forego some money we could earn for other things we value, the fact that every one of us gives up money we have earned for a vast multitude of goods, services, and causes also reveals that individuals don’t just do things for the money. Each of us willingly gives up money up to further many different purposes we care about. Money is not the ultimate end sought, but a means to a vast variety of possible ends. Mistakenly treating money as the end for which “people do everything” is fundamentally flawed—both for critics of the market and for the participants in it.

To do things for money is nothing more than to advance what we care about. In markets, we do for others as an indirect way of doing for ourselves. This logic even applies to Scrooge. His nephew Fred’s assertion that he doesn’t do any good with his wealth is false; he lends to willing borrowers at terms they find worth meeting, expanding the capital stock and the options of others.

That an end of our efforts is to benefit ourselves, in and of itself, merits neither calumny nor congratulations. Money’s role is that of an amoral servant that can help us advance whatever ends we ultimately pursue, while private property rights restrict that pursuit to purely voluntary arrangements. Moral criticism cannot attach to the universal desire to be able to better pursue our ends or to the requirement that we refrain from violating others’ rights, only to the ends we pursue.

To do things for money in order to achieve world domination could justify moral condemnation. But the problem is that your intended end will harm others, not the fact that you did some things for money, benefitting those you dealt with in that way, to do so. Using money to build a leprosarium, as Mother Teresa did with her Nobel Prize award, does not justify moral condemnation. Similarly, using money to support your family, to live up to agreements you made with others, and to try not to burden others is being responsible, not reprehensible. Further, there is nothing about voluntary arrangements that worsens the ends individuals choose. But by definition, they place limits on ends that require harming others to achieve them.

It is true that money represents purchasing power that can be directed to ends others object to. Money is nothing more than a particularly powerful tool, and all tools can be used to cause harm. Just as we shouldn’t have to forego the benefits of hammers because somebody could cause harm with one, there’s no reason to think society would be better off without money or the market arrangements it makes possible just because some people can use those things for harmful ends. And if the ends aren’t actually causing harm, then the objections over them come down to nothing more than disagreements about inherently subjective valuations. Enabling a small class of people to decide which of these can be pursued and which can’t makes everyone worse off.

Those who criticize people for doing everything for money also do a great deal for money themselves. How many campaigns have religious groups and nonprofit organizations run to get more money? How much of government action is focused on getting more money? Why do the individuals involved not apply the same criticism to themselves? Because they say they will “do good” with it. But every individual doing things for money also intends to do good, as he or she sees it, with that money. And if we accept that people are owners of themselves, there is no obvious reason why another’s claims about what is “good” should trump any “good” that you hold dear, or provide for another in service through exchange.

Criticizing a Straw Man

Given that the charge that “people do everything for money” in market systems is both factually wrong and logically lame, why do some keep repeating it? It creates a straw man easier to argue against than reality, by misrepresenting alternatives at both the individual and societal level.

At the individual level, this assertion arises when people disagree about how to spend “public” resources (when we respect private property, this dispute disappears, because the owner has the right to do as he or she chooses with it, but cannot force others to go along with or allow it; “public” resources are obtained by force). The people who wish to spend other people’s confiscated resources in ways the original owners disagree with claim a laundry list of caring benefits their choice would provide, but foreclose similar consideration of the harms that would be caused to those they claim care only about money. That, in turn, is used to imply that the purportedly selfish person’s claims are unworthy of serious attention. (Something similar happens when politicians count “multiplier effects” where government money is spent, but ignore the symmetrical negative “multiplier effects” radiating from where the resources are taken.)

This general line draws support from a misquotation of the Bible. While more than one recent translation of 1 Tim 6:10 renders it “the love of money is a root of all sorts of evils,” the far less accurate King James Version rendered it, “the love of money is the root of all evil.” When one simply omits or forgets the first three words, it becomes something very different—“money is the root of all evil.” Portray those who disagree with your “caring” ends as simply loving money more than other people, and they lose every argument by default. Naturally, it’s a seductive strategy.

At the societal level, criticizing market systems as tainted by the love of money implies that an alternate system would escape that taint and therefore be morally preferable. By focusing attention only on an imaginary failing of market systems that would be avoided, it allows the implication of superiority to be made without having to demonstrate it. This is a version of the Nirvana fallacy.

By blaming monetary relationships for people’s failings, “reformers” imply that taking away markets’ monetary nexus will somehow make people better. But no system makes people angels; all systems must confront human flaws and failings. That means a far different question must be addressed: How well will a given system do with real, imperfect, mostly self-interested people? And it shouldn’t be necessary, but most political rhetoric makes a second question nearly as important: Does the given system assume that people are not imperfect and self-interested when they have power?

Given that the utopian alternatives offered always involve some sort of socialism or other form of tyranny, an affirmative case for them cannot be made. Only by holding the imaginary “sins” of market systems to impossible standards, while holding alternatives to no real standards except the imagination of self-proclaimed reformers, can that fact be dodged. But there’s nothing in history or theory that demonstrates that overwriting markets with expanded coercion makes people more likely to do things for others. As Anatole France noted, “Those who have given themselves the most concern about the happiness of peoples have made their neighbors very miserable.” And as economist Paul Heyne wrote, “Market systems do not produce heaven on earth. But attempts by governments to repress market systems have produced . . . something very close to hell on earth.”

Money at the Margin

Money is not everything. But changes in the amounts of money to be earned or foregone as a result of decisions change our incentives at the many margins of choice we face, and so change our behavior. Such changes—money at the margin—are the primary means of adjusting our behavior in the direction of social coordination in a market system.

Changes in monetary incentives are how we adapt to changing circumstances, because whatever their ultimate ends, everyone cares about commanding more resources for those purposes they care about. It is how we rebalance arrangements when people’s plans get out of synch, which is inevitable in our complex, dynamic world. In such cases, changing money prices allow each individual to provide added incentives to all who might offer him assistance in achieving his ends, even if he doesn’t know them, doesn’t know how they would do so, and doesn’t think about their wellbeing (in fact, it applies even if he dislikes those he deals with, as long as the benefits of the arrangements exceed his perceived personal cost of doing so).

For instance, consider a retail gas station faced with lengthy lines of cars. That reflects a failure of social cooperation between the buyers and the seller. Those in line are revealing by their actions that they are willing to bear extra costs beyond the current price to get gas, but their costs of waiting do not provide benefits to the gas station owner. So the owner will convert those costs of waiting in line, which are going to waste, into higher prices (unless prevented by government price ceilings or antigouging directives) that benefit him. That use of money at the margin benefits both buyers and sellers and results in increased amounts of gasoline supplied to buyers.

Further, people can change their behavior in response to price changes in far more ways than “outsiders,” unfamiliar with all the local circumstances, realize. This makes prices, in turn, far more powerful than anyone recognizes.

Consider water prices. If water prices rose, your first thought might well be that you had no choice but to pay them. You might very well not know how many different responses people have already had to spikes (ranging from putting different plants in front yards to building sophisticated desalinization plants). Similarly, when airline fuel prices rose sharply, few recognized in advance the number of changes that airlines could make in response: using more fuel-efficient planes, changing route structures, reducing carry-on allowances, lightening seats, removing paint, and more.

If people recognized how powerful altered market prices are in inducing appropriate changes in behavior, demonstrated by a vast range of examples, they would recognize that the cost of abandoning money at the margin, which enables these responses by offering appropriate incentives to everyone who could be of assistance in addressing the problem faced, would enormously exceed any benefit.

Massive Improvements in Social Cooperation

If we could just presume that individuals know everyone and all the things they care about and the entirety of their circumstances, we could imagine a society more focused on doing things directly for others. But in any extensive society, there is no way people could acquire that much information about the large number of people involved. Instead, this would extend the impossible information problem that Hayek’s “The Use of Knowledge in Society” laid out in regard to central planners. You can care all you want, but that won’t give you the information you need. Beyond that insuperable problem, we would also have to assume that people cared far more about strangers than human history has evidenced.

Those information and other-interestedness requirements would necessarily dictate a very small society. But the costs of those limitations, if people recognized them, would be greater than virtually anyone would be willing to bear.

Without a broad society, the gains from cross-pollination of ideas and different ways of doing things would be hamstrung. The gains from comparative advantage (areas and groups focusing on what they do best, and trading with others doing the same thing) would similarly be sharply curtailed. A very small society would eliminate the incentive for large-scale specialization (requiring more extensive markets) and division of labor that makes our standard of living possible. Virtually every product that involves a large number of separate arrangements—such as producing cars or the gasoline to power them—would disappear, because the arrangements would be overwhelmed by the costs of making them without money as the balance-tipper. As Paul Heyne once put it,

The impersonal transactions that constitute the market system . . . have, over the course of a few centuries, enormously expanded our ability to provide [for] one another . . . while at the same time vastly extending our freedom both by offering us a multitude of options and by freeing us from arbitrary restrictions on our choice of life goals and on the means to further those goals. To reject impersonal transactions as unethical amounts to rejecting the foundation of modern life.

Conclusion

A pastiche of false premises leads many to reject out of hand what Hayek recognized as the “marvel” of market systems, which, if they had arisen from deliberate human design, “would have been acclaimed as one of the greatest triumphs of the human mind.” This is great for those who seek power over others—they have an endless supply of bogeymen to promise to fight.

But it’s a disaster for social coordination. The record of disasters inflicted on society demonstrates what follows when voluntary arrangements are replaced by someone else’s purportedly superior vision.

But it’s often forgotten. We must continue to make the case.

ABOUT GARY M. GALLES

Gary M. Galles is a professor of economics at Pepperdine University.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.