Hey, Jay, Enough Of Your Stinkin’ Easy Money!

Hey, Jay, Enough Of Your Stinkin’ Easy Money!

It doesn’t get any more pathetic than this. The Fed cuts the absurdly low money market rate by another 50 basis points at 10AM and before noon the Donald is banging the podium for more. 

So if you ever needed a final warning to get out of the casino, today’s back-to-back eruption of financial insanity from the two most powerful economic actors on the planet should be it. 

Even then, we might be inclined to give the Donald a tad bit of slack. After all, he’s an absolute dunderhead on economics and spent a lifetime as a leveraged real estate speculator, where, in fact, lower rates are always, but always, to be welcomed when you’re rolling the dice with other people’s money. 

Still, it doesn’t get any more primitive or dangerous than the Donald’s current conviction that the price of money should be graduated lower based on the current year international league tables of GDP growth or the level of presidential braggadocio, as the case may be. 

Effectively, however, the tiny posse of fools who run the ECB and the BOJ are burning down the financial foundations of their own economies. So the Donald insists we burn down ours, too. 

Folks, that’s the sum, substance and full extent of his “thinking”: 

“As usual, Jay Powell and the Federal Reserve are slow to act. Germany and others are pumping money into their economies. Other Central Banks are much more aggressive,” Trump said, referring to the Fed chairman. 

“The Federal Reserve is cutting but must further ease and, most importantly, come into line with other countries/competitors. We are not playing on a level field. Not fair to USA. It is finally time for the Federal Reserve to LEAD. More easing and cutting!”

By contrast, the empty suite and sniveling coward who announced today’s emergency 50 basis point cut deserves no quarter whatsoever. The man is so petrified of a hissy fit by the boys, girls and robo-machines in the trading pits that he has just plain abandoned any pretense of rational financial thought. 

In fact, you could dismiss his meandering comments at the post-announcement presser as risible drivel and be done with it.

Except, except….Powell and his merry band are so drunk with financial power that they now believe any ragged, threadbare, illogical excuse to display their muscle and placate the crybabies and bullies of Wall Street is all that’s required. That is, there are no trade- offs, no risks—just cut and print, rinse and repeat. 

Thus, spake Pusillanimous Powell, averring that the central bank’s action would provide– 

“….a meaningful boost to the economy” by loosening financial conditions and shoring up business and household confidence.

“We saw a risk to the outlook for the economy and chose to act,” Powell said, noting the impact on tourism and travel and on company supply chains. “I do know that the U.S. economy is strong…I fully expect that we will return to solid growth and a solid labor market as well.”

“We do recognize that a rate cut will not reduce the rate of infection, it won’t fix a broken supply chain; we get that, we don’t think we have all the answers,” Powell said. Still, he said, it will help support “overall economic activity.”

Needless to say, this is group think run amuck. There is apparently no longer a single Fed head who understands that interest rates are not merely one-way control dials, which exist solely to enable the FOMC to fine-tune the path of the nation’s $22 trillion GDP. 

Somewhere over the last decades of Keynesian central banking, the truth that savers are being harmed every time the Fed pleasures Wall Street speculators with another rate cut has been lost completely. So has the notion that rate signals intended to encourage homeowners to buy a house or businesses to build a plant also foster ever more carry trade speculation on Wall Street and reward C-suites for investing in Wall Street pleasing buybacks and M&A deals, not productive investment in plant, equipment, technology, intellectual capital and human resources. 

Accordingly, we have now reached the point were the Fed is no longer even in the business of safeguarding sound money and financial system efficiency and stability. Instead, it’s morphed into a grand macroeconomic underwriter, purporting to insure the US economy against any and all bumps in the road, regardless of their origin. 

We already had them insuring against the Donald’s Trade War madness with 3 rate cuts last summer. Then with their repo facility madness in the fall, they were essentially insuring against the adverse rate and growth impacts of Washington’s borrowing binge. 

And now they are throwing the untoward impacts of plagues and flood onto their underwriter’s table. So presumably anything could be next—even a mass outbreak of hangnails and toe fungus.

In fact, the true nature of central bank intervention in financial markets is just the opposite. To wit, tampering with asset prices is the most dangerous and potentially destructive thing any agency of the state could undertake because it fuels greed, recklessness, speculation, malinvestment and economic errors throughout the length and breadth of the system; and, to paraphrase Keynes’ famous observation about inflation, in ways that not one in a million could possibly comprehend. 

In other words, what was announced this morning had nothing to do with central banking by any even loose historical definition of the term. It was actually another, even more over-the-top exercise in monetary central planning of the GDP and all that is subsumed under its $22 trillion girth. 

But why in the world would anyone—even arrogant, self-regarding Fed heads—believe they can comprehend the infinite complexities and feedback loops of the GDP? That is, the $22 trillion here and the $85 trillion worldwide economy in which it is intricately and intimately intermeshed. 

Yet if you presume to know that a 1.05% money market rate rather than a 1.55% rate will produce optimum economic outcomes under the shadow of Covid-19 uncertainty and disruption, then you positively do need to comprehend all the highways and bi-ways weaving through $22 trillion of input/output tables that only crudely comprehend the blooming, buzzing mass of activity which is actually the US economy. 

Self-evidently, the Fed heads no longer even try to explain the macroeconomics of rate-cutting when they are cheek-by-jowl with the zero bound. They just assert ex cathedra that it will do some good—and not even from the actual quantitative flow economics that the Fed historically avowed. 

That is, back in the day, if credit was not flowing to homeowners because high rates made borrowing prohibitive, it turned the rate dials lower in order to reduce bank disintermediation and thereby give S&Ls the means to lend, home-buyers the incentive to borrow and home-builders a boost to their order books. 

And, by contrast, if rates got so low as to cause building activity to skyrocket, thereby fueling rampant wage, lumber and building lot inflation, they proceeded to dial up rates to cool things down. 

We think the powers of the free market were always up to the task of credit flow regulation on their own: Freely mobilized interest rates always clear markets and bring forth more savings if needed, and more credit demand where economics require. 

So central bank regulation of credit flows was never really necessary, but here’s the thing: In the present regime of massively subsidized and mispriced capital which the world’s central banks have fostered, there simply isn’t any credit flow channel to regulate. 

Debt capital has become virtually unlimited and tantamount to free so there simply are no interest rate or credit supply barriers to spending and investment. 

Likewise, the world economy has become so over-invested and malinvested in physical production capacity that the old-fashioned “demand-pull’” inflation just doesn’t happen. Or at least until now it hasn’t because the subsistence rice paddies and villages of the developing world had not yet been drained of cheap labor. 

That’s why today’s monetary central planners don’t even talk about credit flows to the main street economy any more. There is no problem there for their ministrations to solve. 

Instead, they talk about “easing financial conditions” and “supporting financial confidence”. That is to say, monetary policy is no longer even about money or credit; it’s an exercise in state-directed psy-ops. 

And when you look into the real purpose of Fed psy-ops, which was the explicitly acknowledged purpose of today’s emergency rate cut, you quickly come to understand why Wall Street has morphed into a casino and the Fed its dutiful handmaid. 

To wit, “easier” financial conditions mean low credit spreads and high stock prices or “risk on”. By contrast,”tighter” financial conditions are defined by widening credit spreads and falling stock prices and PE multiples and “risk off”. 

Needless to say, in today’s debt-entombed main street economy, the Fed’s psy-ops with respect to “financial conditions” are neither here nor there. No wannabe homebuyer is influenced by the Fed’s psy-ops and no businessman stocks or destocks inventories or adds or subtracts from CapEx budgets based on whether the casino has been coaxed into a temporary risk-on or risk off mood by the Fed heads. 

Stated differently, Fed policy is now almost exclusively about keeping stock prices high and rising, and nipping any even half-assed effort at correction in the bud, and violently so. 

Self-evidently, today’s grand exercise in psy-ops failed spectacularly and like never before. The casino shifted by 1200 Dow Points between the post-cut announcement high and the intra-day low. And in the wrong direction! 

Moreover, that bust comes on top of the 4800 Dow point plunge from the February 19th high to the February 28th intra-day low, which was followed by a 2000 point rise from last Friday’s low to Monday’s insane closing high. 

In other words, the Fed long ago exited the sound money business. After the great financial crisis and its balance sheet pumping spree thereafter it also existed the credit flow control business. 

And with today’s monumental error, it has now, apparently, euthanized its psy-ops tool, as well. 

In the days ahead we will elaborate on the truly dangerous new financial world that now exists in the wake of the Fed’s self-defenestration. But in the meanwhile, Gary Kaltbaum captured the madness now loose in the land in his trenchant commentary issued immediately after the Fed’s announcement:

Powell lowered rates in the past few minutes because the market was heading lower today. He wasn’t going to make the move today until he saw the DOW down 300 early. This is not about a virus. This is not about an economy. This is about the markets…AGAIN! This is about the Bernanke, Yellen, Powell, Kuroda, Carney, Draghi, LaGarde markets that have made markets addicted to their easier money moves with an unaccountable and limitless amount of conjured up money. Do you not think he sees what we have reported to you? That like a well-trained dog, markets react to his every whim?

So what did Powell just do…or at least try to do: He screwed Aunt Mary and Uncle Bob…AGAIN! Yes…how dare you want risk-less income investments! How dare you want a decent money market rate! Screw you Mr. and Mrs. Saver.

The continuation of the asset bubble. (SEE A CHART OF ANY INDEX PAST 11 YEARS) A widening of the wealth gap. Yes…all these politicians complaining about the wealth gap? Look no further. The continuation of the distorting or price and yield in bond markets.

BOTTOM LINE: Another in a long line of moves to stanch any bleeding in the markets. Mr. Powell is easily Mr. Obvious. By the way, do you know how pundits and futures markets give percentage chances of rate cuts in the future? Since we have nailed these rate cuts all the way down, here is our latest.


LASTLY: If we ever get to the day where markets do indeed shoot the middle finger back at these market interlopers…head for the hills. If we ever get to the day where the markets see these moves as desperation…head for the hills. Initial reaction…rally 700 points in minutes…drop 600 points in minutes…rally back 300 points in minutes. Welcome to your central bank markets. He got that last bit right. It may well have happened within minutes after he hit the send button.

Reprinted from The Ron Paul Institute for Peace and Prosperity.

Dr Jekyll and Mr Hyde: Which Hamilton Are You Talking About?

Dr Jekyll and Mr Hyde: Which Hamilton Are You Talking About?

We often hear people referred to as “Hamiltonians.” But that term always makes me wonder, which Hamilton do you mean?

I recently had the opportunity to speak to a class at the West Virginia University School of Law. The subject was the constitutionality of federal marijuana prohibition.

As I told the class, this is an open and shut case. It’s clearly unconstitutional. If you doubt me, ask yourself why alcohol prohibition required a constitutional amendment.

The simple fact is there is no delegated power for the feds to regulate marijuana within the borders of a state.

But over the years, federal courts have reinterpreted various clauses in the Constitution to “authorize” the federal government to do all kinds of things it was never intended to do. As Justice Clarence Thomas said in his dissent in the Raich medical marijuana case, if the federal government can regulate six plants in a woman’s back yard, the federal government has “no meaningful limits.”

And that’s where we are today  – at least according to federal judges and politicians.

As the professor of the class I spoke to put it, this is the Hamiltonian legacy.

During the class, she divided the students up between “Hamiltonians and Madisonians” for a debate. I couldn’t help but interject and ask, “Which Hamilton are you talking about?”

During the ratifying debates, Hamilton was every bit as Madisonian and Madison. He sold the Constitution as a document that gave the federal government only a few limited powers just like all the other supporters of the document. In fact, I use quite a few Hamilton quotes in my book Constitution – Owner’s Manual to explain the limited scope of various constitutional clauses.

But once the Constitution was ratified, he did a complete 180. He became an apologist for a national, centralized government with sweeping federal power – a vision of government that the ratifying conventions would have resoundingly rejected. This is precisely why Hamilton had to make limited government arguments during ratification. It was the only way the Constitution would have ever been adopted.

Consider the general welfare clause. Opponents of the Constitution worried that this phrase would open the door for the federal government to wield almost unlimited power. But in Federalist #83, Hamilton argued that their worry was misplaced because the general welfare clause was strictly limited to the enumerated powers that followed and was not a grant of general authority.

“This specification of particulars [the 18 enumerated powers of Article I, Section 8] evidently excludes all pretension to a general legislative authority, because an affirmative grant of special powers would be absurd as well as useless if a general authority was intended.”

But just seven years after the Constitution was ratified, Hamilton reversed course and argued for an expansive reading of the clause in his Report on Manufactures.

The National Legislature has express authority “To lay and Collect taxes, duties, imposts and excises, to pay the debts and provide for the Common defence and general welfare” with no other qualifications than that “all duties, imposts and excises, shall be uniform throughout the United states, that no capitation or other direct tax shall be laid unless in proportion to numbers ascertained by a census or enumeration taken on the principles prescribed in the Constitution, and that “no tax or duty shall be laid on articles exported from any state.” These three qualifications excepted, the power to raise money is plenary, and indefinite; and the objects to which it may be appropriated are no less comprehensive, than the payment of the public debts and the providing for the common defence and “general Welfare.” The terms “general Welfare” were doubtless intended to signify more than was expressed or imported in those which Preceded; otherwise numerous exigencies incident to the affairs of a Nation would have been left without a provision. The phrase is as comprehensive as any that could have been used; because it was not fit that the constitutional authority of the Union, to appropriate its revenues shou’d have been restricted within narrower limits than the “General Welfare” and because this necessarily embraces a vast variety of particulars, which are susceptible neither of specification nor of definition.

It is therefore of necessity left to the discretion of the National Legislature, to pronounce, upon the objects, which concern the general Welfare, and for which under that description, an appropriation of money is requisite and proper.

According to post-ratification Hamilton, the term “general welfare” did imply a “general authority” after the pre-ratification Hamilton emphatically rejected this reading.

Hamilton made a similar flip-flop on the necessary and proper clause. In Federalist 33, He asserted that the necessary and proper clause (along with the supremacy clause) merely stated a truism and gave no additional power to the federal government.

It may be affirmed with perfect confidence that the constitutional operation of the intended government would be precisely the same, if these clauses were entirely obliterated, as if they were repeated in every article. They are only declaratory of a truth which would have resulted by necessary and unavoidable implication from the very act of constituting a federal government, and vesting it with certain specified powers. [Emphasis added]

Hamilton went on to explain that the act of delegating a power logically implies the authority to “pass all laws NECESSARY and PROPER for the execution of that power,” but it doesn’t authorize the exercise of any additional powers. Hamilton wrote, “If there is any thing exceptionable, it must be sought for in the specific powers upon which this general declaration is predicated. The declaration itself, though it may be chargeable with tautology or redundancy, is at least perfectly harmless.” [Emphasis added]

But again, Hamiton changed his tune just a few years later and claimed the necessary and proper clause gave Congress the authority to charter a national bank, a power nowhere delegated to Congress by the Constitution.

In fact, during the Philadelphia Convention, James Madison proposed a provision “to grant charters of incorporation where the interest of the U. S. might require & the legislative provisions of individual States may be incompetent.” It was voted down 8-3.

Without an explicit constitutional authorization to charter corporations, Hamilton turned to the “perfectly harmless” necessary and proper clause to justify his bank. He rested his argument on the existence of “implied powers,” writing, “It is not denied that there are implied well as express powers, and that the former are as effectually delegated as the latter.”

Of course, this very notion contradicts his ratification-era argument that Congress was limited to its enumerated powers. He went on to argue that Congress is authorized to create a corporation because this implied power is necessary and proper.

“It is conceded that implied powers are to be considered as delegated equally with express ones. Then it follows, that as a power of erecting a corporation may as well be implied as any other thing, it may as well be employed as an instrument or mean of carrying into execution any of the specified powers, as any other instrument or mean whatever. The only question must be in this, as in every other case, whether the mean to be employed or in this instance, the corporation to be erected, has a natural relation to any of the acknowledged objects or lawful ends of the government.”

Hamilton drove his point home insisting the word necessary doesn’t literally mean “necessary,” but can simply mean needful, requisite, or even just incidental, useful, or conducive.

By Hamilton’s definition, the word necessary becomes so expansive as to include virtually anything the government wants to do. This was precisely the construction the anti-federalists objected to during the ratification debates leading Hamilton to accuse them of “exaggerated colors of misrepresentation as the pernicious engines by which their local governments were to be destroyed and their liberties exterminated.”

These two examples demonstrate how Hamilton drastically shifted from the limited federal power perspective taken by all of the supporters of the Constitution during the ratification process to a nationalist pushing for virtually unlimited federal authority. He did a classic bait-and-switch. Hamilton was a duplicitous bastard (literally a bastard.) And we should give his post-ratification pontification about the Constitution no credence.

What he said during ratification – now that matters. Because it was on that basis that the people agreed to approve the Constitution. As Thomas Jefferson said, “On every question of construction let us carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or intended against it, conform to the probable one in which it was passed.”

Reprinted from the Tenth Amendment Center.

End the Fed

End the Fed

In response to the potential economic downturn in the economy arising from the spread of the Coronavirus, the Federal Reserve dropped the federal funds rate by half a point — to a range of 1% to 1.25%. Ironically, after the Fed’s announcement, the stock market dropped 786 points or 2.9%.

The Fed’s aim is to stimulate economic activity. By lowering interest rates, the idea is to get businesses to expand operations with more loans and to get consumers to go deeper into debt by purchasing more items. 

The result of the Fed’s artificial economic “boost” will be the same as it has been since the Fed was established in 1913: a bubble of malinvestment and consumer loan defaults that will end up plunging the country in a bubble-bursting recession or even depression.

That’s because genuine prosperity in a country cannot be generated by central bank manipulations. If that were the case, every country on earth would be characterized by ever-growing standards of living. In fact, a central bank does the exact opposite — it lowers a nation’s standard of living through its artificial manipulations of interest rates and its expansion and contraction of the money supply.

The never-ending cycle of monetary crises and chaos shouldn’t surprise anyone. The Federal Reserve is a socialist institution, in that it is based on the socialist concept of central planning. A central bank consists of a board of government commissars who have the responsibility of planning the monetary affairs of hundreds of millions of people.

It cannot be done. Socialism is an inherently defective economic system. It produces monetary crises and chaos, which is what we have seen in  the United States since the Fed was established in 1913.

The Fed’s monetary destruction

The United States once had the finest monetary system in the world, one based on gold coins and silver coins. That was the system the Constitution brought into existence. The Constitution expressly states that the federal government would possess the power to coin money, not print it. It also expressly states that no state shall make anything but gold and silver coins legal tender.

As Milton Friedman and the Austrian school of economic thought have shown, the Fed’s manipulations produced the 1929 stock market crash, which U.S. officials falsely blamed on “free enterprise” rather than on the Fed. That led to the Great Depression, which President Franklin Roosevelt used as the excuse for converting America’s gold-coin, silver-coin system to one based on irredeemable Federal Reserve paper notes. 

The FDR regime made it felony for any American to possess gold coins. Everyone was required to deliver his gold coins to the U.S. government, which gave people irredeemable paper promissory notes in exchange, which FDR then quickly devalued, wiping out a large portion of peoples savings. 

It’s worth mentioning that the FDR regime nationalized gold without even the semblance of a constitutional amendment. 

Then, decade after decade, the Fed inflated the paper money supply to finance the ever-burgeoning expenses of the U.S. welfare-warfare state that came into existence in the FDR regime. At the same time, the Fed continued its monetary manipulations as part of its efforts to “plan” economic growth.

The result has been nothing but a series of monetary crises and chaos. Booms and busts, bubbles and bursting bubbles. And a never-ending devaluation of people’s money, to such an extent that silver coins, which FDR, for some reason, had not made a felony to possess, were ultimately driven out of circulation by all the bad money that the Fed was flooding into the economy every decade since 1913.

Ending the Fed

Nonetheless, many Americans have come to believe that the Fed must remain a permanent fixture in American life. Despite the monetary chaos the Fed has produced for the past 100 years, and the manner in which it has plundered and looted people through inflationary expansion of the money supply, the idea of dismantling the Fed scares such Americans to death.

But dismantling the Fed is the only way to restore a society that is based on genuine economic prosperity, one based on capital accumulation and free trade. There are no short cuts to genuine prosperity. Resorting to a central bank to “stabilize” or “boost” the economy through monetary manipulation is a fool’s errand. 

Among the best things that Americans could ever do is dismantle the Fed and establish a free-market monetary system, one in which government plays no role whatsoever. The ideal is to separate money and the state, just as our ancestors separated church and state. That would be a major step in the direction of liberty and genuine economic prosperity.

Reprinted from the Future of Freedom Foundation.

The Fed Slashes Rates as Powell Declares Economy ‘Strong’

The Fed Slashes Rates as Powell Declares Economy ‘Strong’

The Federal Reserve moved to an enact an emergency interest rate cut after officials saw the coronavirus having a material impact on the economic outlook, Chairman Jerome Powell said Tuesday.

Powell held a news conference following the central bank’s decision to cut overnight interest rates by half a percentage point. He said the Fed “saw a risk to the economy and chose to act” in a cut announced at 10 am ET.

“The magnitude and persistence of the overall effect on the U.S. economy remain highly uncertain and the situation remains a fluid one,” he said. “Against this background, the committee judged that the risks to the U.S. outlook have changed materially. In response, we have eased the stance of monetary policy to provide some more support to the economy.”

With this change, the target rate now is back down to 1.25 percent. The target rate was last at this level during mid-to-late 2017, in the midst of several rate hikes as the Fed dared to allow rates to climb. During that period, the Fed repeatedly declared the US economy to be “moderately strong” or “strong,” although it proceeded with extreme caution even then.


Since July 2019, however, the Fed has returned to cutting the target rate, fearing that the economy is weakening. Then in August 2019, it began pumping liquidity into the repo market in an effort to shore up hedge funds and banks.

All the while we’ve been assured everything is fine.

Today’s rate cut of 50 basis points, however, is the largest rate cut since December 2008, in the midst of the aftermath of the financial crisis.


This Is Fine!

The Fed’s announcement comes only days after Powell announced on Friday that “The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity.”

But if fundamentals are so strong, why the need to enact the biggest rate cut in more than a decade?

This is the usual flip-flopping we’ve been witnessing for years from the Fed. The Fed announces that the economy is stable and strong, but then it refuses to raise the target rate. Or the Fed may even cut the target rate, just as “a precaution.”

Those with particularly astute memories may recall the unfortunate similarity between Powell’s statement and John McCain’s declaration in September 2008 that “The fundamentals of our economy are strong, but these are very, very difficult times.”

In cases like this, it may be prudent to completely ignore the first part of the sentence about economic strength. The only information of importance lies in the second part of the sentence—the part about “difficult times” or “evolving risks.” The similarity between these two patronizing statements, of course, does not mean that Powell will be proven wrong in the same time frame as McCain. The Fed has become quite adept at creating new bubbles when old ones appear to weaken and at propping up market confidence with new bailouts, such as we saw with 2019 rescue of the repo markets.

So, the fact that we’re seeing some downturns now does now necessarily mean a full blown recession is right around the corner. Although the coronavirus outbreak presents serious problems in terms of the supply chain, the problems in Asia could actually drive more capital to the safety of the US and the dollar, postponing the economic reckoning in the US into the future yet again.

After all, other aspects of Fed policy show that the days of stimulus are far from over. The Fed is now nearly back to peak levels in terms of its portfolio, signaling that it is not at all willing to let the market have its head in terms of pricing Treasurys and a variety of other assets. The Fed knows there’s just not enough demand out there to soak it all up. As Doug French recently pointed out, after all, the private banks still haven’t shed all their shadow inventory, even in this booming economy.

But yet again we’re left with the question: if the Fed is slashing interest rates while “fundamentals are strong,” what must it do when things aren’t so “strong”? Negative rates and QE seem to be the logical next step.

On the other hand, the Fed has apparently not yet hit the panic button when it comes to interest paid on excess reserves (IOER). Today, it announced a cut to “the interest rate paid on required and excess reserve balances” down to 1.10 percent. The IOER is another tool the Fed uses to manage how much money leaves bank reserves, thus entering the real economy. The higher the IOER rate paid, the lower the opportunity cost banks face in keeping reserves locked up in reserves. In January, the interest paid on these reserves was up to 1.60 percent. The gap between the target federal funds rate and the IOER rate can be interpreted as an indicator of how badly the Fed wants to push reserves out the door of the banking system. In late 2019, the gap had been 20 basis points. But since late January, the Fed has narrowed this gap to 15 basis points, suggesting less urgency in the need for liquidity. Today’s cut to 1.10 percent keeps that gap at 15 basis points. This is a more moderate position than if the Fed had cut the IOER rate even more than than fed funds rate.

Reprinted from the Mises Institute.

The “F” Word

The “F” Word

There’s a four letter word beginning with ‘f’ that’s on a lot of people’s lips these days.

I’m talking about “free.”

Free just might be the most powerful word in the English language. It drastically alters people’s behaviors and can short-circuit mental reasoning like few other words can.

I can vividly remember many years ago when I worked events for a major league baseball franchise. The team would occasionally have “giveaway” nights in which the first 1,000 or 5,000 fans would receive a free souvenir gift.

Mind you, these gifts were typically low-quality, cheap trinkets that most folks would otherwise either never buy or not pay more than a couple bucks for. Valuable memorabilia autographed by star players these most definitely were not.

But because they were advertised as “free,” people lined up an hour or more before games to ensure their spot in line to get one. And the panicked and outraged looks on people’s faces after we ran out of the souvenirs struck me as completely irrational. Why do people get so worked up over something so cheap, just because it’s “free”?

It’s this experience that sticks with me as I see the groundswell of support for politicians like Bernie Sanders promising voters “free” stuff like healthcare, college and daycare. If people got that excited over a cheap souvenir given away for free at a baseball game, just imagine how downright hysterical people will get over the thought of getting such vital and expensive services like healthcare and college for “free.”

 There’s just something about the idea of getting something for free that makes people lose their minds.

And don’t dare try to convince the average Bernie supporter that nothing in life is free. Just like the lottery player wouldn’t care how his winnings would be paid for, Bernie bros can’t be bothered with the notion that all this “free” stuff actually comes with a cost.

And when pressed for a price tag, Bernie himself can’t seem to be bothered to come up with an answer.

Witness his February 60 Minutes appearance, when Sanders unapologetically answered, “No, I don’t” when directly asked if he had a price tag for all his programs. 

Nothing in life is free

As the old saying goes, “there’s no such thing as a free lunch.”

When politicians promise free stuff, what they really mean is that it would be free at the point of exchange for the user.

But University lecture halls don’t organically sprout from the ground, they need to be constructed. Hospitals and day cares need to be built. Doctors, nurses, daycare providers and professors need to get paid. 

When the government provides goods and services for “free,” it really means they are shifting their costs onto others, by force.

A Yahoo News headline was quickly seized on by social media and made into a meme exposing the reality of supposed “free” government programs.

It’s always amusing when the mask slips.

Third party payments make goods and services more costly

When a third party is paying the bill for something, that’s when costs explode. Because it’s free at the point of service, demand will rise. In a free market, when demand rises, prices will typically rise and both tamp down demand and encourage more supply. Market forces would push the price for this product toward equilibrium.

When the government is paying, however, the market forces are absent. Prices won’t rise, because they remain free at the point of service. Demand will continue to climb. 

But because payment is made by the government, and reimbursements paid to providers do not increase along with demand, there is no incentive in place to encourage supply to increase. Moreover, because the consumer is not the one actually paying, there’s little incentive for providers to compete for customers. Producers will have virtually no incentive to economize production in order to offer their product at a lower price, or improve quality to capture a larger share of the market. 

Non-price factors become more influential in the rationing of the goods and services. Costs in the form of shortages, long wait times and lower quality are forced upon consumers in lieu of prices. 

Meanwhile, demand for the “free” goods and services remains unchecked, so the amount of goods and services being consumed rises beyond government bureaucrats’ expectations. This process then mainly serves as an excuse for government to dig deeper into taxpayer wallets forcing them to subsidize more and more people desiring to acquire goods at someone else’s expense.

Why politicians love the F word

Politicians exploit the power of the F word to gain votes and power. Their political calculus is this: “If I can convince enough voters that they will get free stuff paid for by a small group of ‘rich’ others, I’ll secure enough votes to win the election.”

And because their time horizon of concern is the next election, any long-term consequences don’t concern them. When the bill comes due and the system begins to collapse, they’ll be out of office and the current officeholders will get the blame while they enjoy a cushy retirement or lobbying career.

The siren song of “free” is incredibly alluring, especially to the young. Voting is such a small price to pay for the potential of free college or healthcare. 

But “free” comes with a steep price. Society must choose: free stuff, or free people.

Bradley Thomas is creator of the website and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

Data Don’t Speak for Themselves

Data Don’t Speak for Themselves

Check out this graph, data for which were drawn from the USDA and CDC:

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With a correlation coefficient of about -0.94, these data indicate that for the decade 2000-2009 there was a strong inverse relationship between per capita consumption of beef and the number of suicides by handgun. That is, this correlation seems to imply that the decline in total beef consumed per person over the course of the decade was linked to the number of suicides by handgun, which rose at virtually the same rate.

This proves that there’s a relationship between an individual’s meat consumption and his likelihood to commit suicide, right?

Of course not; this correlation is spurious. These data were not the result of a study that tracked the mental health and dietary habits of individuals over a decade. Rather, to demonstrate this idea of spurious correlation, the graph‘s maker, Tyler Vigen, took data from the CDC and USDA and laid them on top of one another. That they correlate for so long–and so closely–is entirely coincidental.

Absent some theoretical framework with which to interpret data–that is, if we let the data “speak for themselves”–data correlations can seem to deny true principles. For instance, roughly 87,000 flights occur daily in the United States, ostensibly defying the laws of gravity. But the laws of gravity aren’t contravened by the flight of giant metal birds with fixed wings. Rather, the interaction between airspeed, air pressure, wing shape, and direction creates the lift that allows aircraft to soar thousands of feet above the earth. The laws of gravity are entirely satisfied, and anyone claiming that these flights are evidence that the laws of gravity have been overturned would be ridiculed mercilessly by his peers.

This principle is just as true in economics as it is in physics. For example, economic theory tells us that demand curves are downward sloping–i.e. as price increases, fewer units of a good are consumed–but some studies purport to find that raising the cost of labor by means of a minimum wage causes no change in employers’ demand for labor. If the relationship between labor and the law of demand isn’t being disproved, what’s going on? 

At first glance, the law of demand would seem to imply that an increase in the cost of labor would induce employers to decrease the number of workers they hire. But if the minimum wage is only binding on certain individuals, and if employers don’t hire any such individuals, then employers won’t be impacted by the change. Likewise, for those making more than a proposed wage floor, a rise in the minimum wage won’t constitute a “raise” because, at best, their incomes will remain unaffected.

For example, according to PayScale the estimated average yearly earnings of someone who throws freight at WinCo Foods in Boise, ID, is $17,000. Assuming full-time status (2,080 working-hours annually), that amounts to a wage of roughly $8.17/hour. Idaho’s minimum wage reflects the national minimum wage of $7.25/hour, so any increase in their wage floor of up to $0.92/hour won’t be binding on any of WinCo’s Boise-based freight throwers, and, all things equal, WinCo’s employment level won’t be impacted.

But such a lack of response in employment isn’t evidence that minimum wage laws have no disemployment effects, or that the law of demand is irrelevant to labor. All it would demonstrate is that we must be more careful in determining the impacts of minimum wage hikes. Indeed, including workers who make more than the amount of a given proposal to raise the minimum wage is distortive of a study’s results, at best. At worst, their inclusion is highly disingenuous. 

Fortunately, the minimum wage is among the most studied policies in economics, so a great deal of work on its disemployment effects has already been done with low wage-earners in mind. A study out of Denmark [pdf], for example, assessed the impact of minimum wage increases on teenagers, for whom, by law, the minimum wage rises nearly 40 percent at age 18. 

The authors found that while those who keep their jobs see a significant increase in take-home pay, labor as a proportion of total input falls by nearly half. Furthermore, the overall employment rate for teens falls by a third as 18-year-old workers find themselves jobless. The upshot of these effects, taken together, is that the level of total wages paid by employers remains virtually unchanged—a result completely in line with the law of demand.

But there are other ways that employment is distorted by the institution of a new wage floor. Quite often, in fact, the law of demand is satisfied in ways that are less immediately visible. 

Recent studies from Seattle, the University of Illinois at Urbana-Champaign [pdf], and New York University [pdf] provide good examples. In the Seattle study, workers saw declines in hours that completely offset their gains in hourly pay, leaving them with less take-home pay. The NYU study found that higher productivity workers were substituted for lower productivity workers. In addition to such findings, the UIUC study also found that in low-skilled, labor-intensive industries a 10 percent increase in the minimum wage resulted in an increase of more than 24 percent in spending on capital, in line with concerns that minimum wage hikes lead to faster automation.

Other impacts from minimum wage hikes that aren’t immediately obvious include reductions in non-wage benefits for workers both at and just above the wage floor, higher consumer prices [pdf], substituting increased customer responsibility for unskilled labor [pdf], higher credential requirements for would-be employees [pdf], delayed teen and minority entry into the job market, and slower job growth for as long as eight years after the increase.

In spite of (methodologically questionable) recent challenges, the decades-old consensus remains on solid empirical ground. In a review of more than 100 studies of the minimum wage in countries across the globe, less than 8 percent found that increasing the minimum wage had the kind of positive impact on employment found in studies that challenge the consensus view. About two-thirds of the studies, by contrast, found negative employment effects. 

When the authors narrowed their evaluation to the best-quality evidence, 85 percent of studies found the expected disemployment effects, while “very few–if any–cases [were found in which] a study provide[d] convincing evidence of positive employment effects of minimum wages” on those most susceptible to employment displacement. 

In other words, despite donning a scientific veneer, the claims of those who hold that labor is not subject to the law of demand are nearly as baseless as those who might argue that the flight of airplanes disproves the law of gravity. Given the weight of evidence, we should be immediately skeptical upon hearing of studies that purport to find net-zero (or net-positive) impacts resulting from minimum wage hikes. 

But even if the literature were murkier on the empirical relationship between wage floors and employment, such skepticism would still be warranted. Intuitively, we know that if the price of a good rises, we respond to that change by reducing our consumption of that good. While the response depends on the individual consumer’s capacity and desire to consume at a given price level (that is, their demand elasticity), at some point the next increase in price causes everyone* to consume less. Interpreting data within this theoretical framework allows one to forego the mockery of anyone possessed of passing familiarity with economic principles.

In the end, economist David Henderson’s First Pillar of Economic Wisdom remains a true guiding principle: there ain’t no such thing as a free lunch. And, indeed, in the immortal words of Wesley, “Anyone who says differently is selling something.”

*The exception is in goods for which demand is perfectly inelastic, but, given the ease with which unskilled laborers can be found in the labor market, one would be hard-pressed to argue convincingly that unskilled labor constitutes such a good.

Reprinted from Ignore This.

Physics and the Economic Calculation Problem

Physics and the Economic Calculation Problem

Throughout the nineteenth century, economic socialism was given its intellectual foundations by the Utopian Socialists such as Charles Fourier and Robert Owen, and by the ‘Scientific’ Socialists Karl Marx and Friedrich Engels. Austrian economics was only founded in 1873, with the publication of Carl Menger’s Principles of Economics. So while the greatest economic theory was still finding its legs, the task of refuting socialism fell into the laps of the classical economists. 

These economists argued that under centralized control of the means of production and provision of consumer goods to each person “according to his needs,” workers would have no incentive to be productive. Absent the dangling carrot that is the profit motive, no one would put effort into his duties. John Stuart Mill wrote: “Competition may not be the best conceivable stimulus, but it is at present a necessary one, and no one can foresee the time when it will not be indispensable to progress.” The socialists responded that there would be a “New Socialist Man” who would work to the benefit of the community and hence would not require monetary profit in the first place. 

These classical economists implicitly conceded that if the so-called incentive problem could be solved, then a socialist economy could be as productive and allow as much wealth creation as could a capitalist one. There was no principled argument against coercive government takeover of vast swathes of the economy. The best that the intellectual descendants of Adam Smith could do was argue that such a society would be ‘unrealistic’. But unrealistic is a far stretch from impossible, especially to the socialist, we’ll-mold-man-according-to-our-vision, thinker.

Exactly one-hundred years ago, the Austrian economist Ludwig von Mises went beyond those classical rebuttals to socialism and shattered the very foundations on which socialism rested (that an Austrian economist took the baton from his classical forebears and peered deeper into the nature of economics is rather common in the history of ideas). In a 1920 article, Economic Calculation in the Socialist Commonwealth, Mises explained the so-called economic calculation problem, one of the greatest intellectual achievements of the twentieth century.

In a monetary economy, consumers bid for various goods, the prices of which are determined by the consumers’ demand for and the producers’ (entrepreneurs or their associates) supply of them. These producers don’t necessarily transform raw materials into their final consumer products: a restaurant owner might purchase utensils from a firm that specializes in the production of forks and knives. This firm, in turn, might buy the raw materials that are required in order to create utensils in the first place. For example, maybe they buy stainless steel from an owner of land who mines minerals solely in order to sell them. Physically, the production process of this example runs according to the following recipe: minerals are extracted from the earth by the landowner, then the fork-and-knife firm transforms the minerals into utensils, then the restaurant owner ‘transforms’ them into a presentable meal, and finally the patron of the restaurant ‘consumes’ the presentable meal (part of which is the utensils). Economically, however, this entire production process flows backwards from the consumers’ demand for consumer goods: the more patrons the restaurant owner serves, the more he, in turn, demands utensils from the fork-and-knife firm, which then demands more minerals from the landowner. This is what is meant when economists say that ‘consumer is king’.

But the restaurant owner is not the only entrepreneur bidding for utensils—he is competing with homeowners, collectors, other restaurant owners, and speculators. Just as prices emerge on the consumer goods market between consumers and the entrepreneurs selling such goods, so too does a producer goods market between entrepreneurs and sellers of producer goods generate prices of producer goods. This is true for all stages of production, and again, this entire network of prices is ultimately driven by the consumers’ demand for consumer goods.

When the entrepreneur sells a good to a consumer, the price of that consumer good is his revenue. In our example, this would be the restaurant owner selling a steak dinner to a patron for twenty dollars. But entrepreneurs do not pursue revenue, but rather profit. In order to calculate whether or not he’s earned a profit, the restaurant owner must subtract the cost of producing the meal from the price at which he sold the meal. But what is that cost? It is the price of the producer goods that he purchased in order to create the meal in the first place—in our example, this includes not only the abovementioned utensils, but also whatever other producer goods went into the production of the meal. So, if the price of the sum of the producer goods exceeds the price of the final consumer good, the entrepreneur has incurred a loss. If the reverse is true, he’s earned a profit.

Under voluntary conditions (a free market), profits and losses are signals—a profit indicates that the entrepreneur is satisfying consumers in transforming producer goods into consumer good that they demand. A loss indicates consumer dissatisfaction with that particular line of production*. In either case, the entrepreneur may adjust his activities. In the first, he might demand more producer goods in order to try to earn even greater profits, while in the second, he might abandon his project in order to cut his losses. No matter what the entrepreneur does next, his decision will take in knowledge about what consumers want, and then transmit this knowledge ‘backwards’ to owners of producer goods. Without the ability to calculate his profit/loss, the entrepreneur cannot know what to do next in order to better satisfy consumers. 

Prices emerge on the producer goods market precisely because 1) these producer goods are privately owned, 2) entrepreneurs bid for them according to what they think consumers demand of their (the entrepreneurs’) final consumer products, and 3) money is sound**. Under centralized control of the means of production, there is no producer goods market. So the socialist institution has no idea what the prices of these producer goods are, and therefore has no profit/loss mechanism. Economic waste, such as shortages, surpluses, inefficient choices of which particular producer goods to employ in the creation of consumer goods, and reduction in total wealth (called economic regression) are all inevitable under a socialist order.

No matter how superhuman the “New Socialist Man” might be, no matter how selfless and communitarian, he will never overcome this calculation problem. The knowledge encoded in the profit/loss system that emerges in a free market cannot be recovered by a socialist Leviathan. Counterintuitively, it is centralized, coercive planning that causes destructive economic chaos, rather than an unplanned, voluntary system.

But is that really true? Had Mises shown that, following deductively from first principles, collective ownership of producer goods forces the socialist institution to provide consumer goods in wildly erroneous proportions relative to its decentralized, free market counterpart? The socialistic institution could always get lucky, and provide exactly what would’ve been provided in a free market. But then, a cow could similarly ‘get lucky’ and appear spontaneously in deep space. In neither case would we have a good explanation for why these seem to be regularities of nature.

A physical transformation is impossible if, no matter how much knowledge is brought to bear, it cannot be achieved. For example, building a generic spaceship out of raw materials is evidently possible, given that it has happened. However, building a particular spaceship that can travel faster than the speed of light is impossible in principle, since the laws of Einstein’s special relativity forbid any massive object from traveling at such a speed. No matter how much more knowledge civilization acquires, we will never be able to violate the laws of nature.

The converse is also true—if no law of nature explicitly forbids a particular transformation from being achievable, then people are capable of causing said transformation, given the requisite knowledge. This implies that what we intuitively think of as wealth is more fundamentally about knowledge than about the particular resources a person owns. For example, a farmer who owns the raw materials of land and seeds is capable of transforming them into edible crops, while a professor of history may not know what to do with those same resources. Furthermore, a person can grow wealthier without acquiring any new resources by instead acquiring more knowledge. The value of land with oil reserves only shot up in value after people learned how they could employ oil to their advantage, and not a moment before that. So the set of all possible transformations that the same scarce resources may undergo depends on what their owner knows what to do with them.  

An economy is a particular way that knowledge is arranged in the universe, distributed across the minds of creative people. As we’ve seen, this knowledge can grow (or shrink, as when civilization regresses), causing a concomitant increase in economic wealth. Can we express this more exactly? Are there laws of nature that govern, constrain, and explain changes in the growth of knowledge and wealth?

A new fundamental theory in physics, constructor theory, seems to be able to express all other laws of physics in terms of possible and impossible transformations. This is a deeper mode of explanation than the so-called prevailing conception of physics, which had held that theories are to be expressed in terms of ‘initial conditions plus laws of motion’. That mode of explanation worked in explaining domains of reality in which exact predictions of what will happen is possible, such as when Newton accurately predicted the future speed and position of moving objects with his theory of classical mechanics. 

But there are aspects of reality that are unpredictable, even in principle. One of those is the growth of knowledge, and therefore all economic phenomena. Despite the mockery they’ve received, Austrian economists have long understood that predictions cannot help in understanding, or criticizing, the principles of economics. The theorems and explanations of Austrian economics are not expressed in terms of predicting exactly what will happen, as would be required by the prevailing conception, but what can possibly happen, and what cannot happen in principle***. At long last, physics has caught up to them.

If socialism is truly impossible in principle, then it must be forbidden by some law of nature. Specifically, the impossibility of economic calculation under socialism should be manifest in (or be deducible from) physical laws that govern the possible ways knowledge can be arranged and its relationship to the growth of wealth. Constructor theory provides the mathematical formalism necessary for precisely these kinds of laws—principles of nature that don’t predict what will happen, but that express what can be caused to happen, and what cannot be caused to happen. 

Here, we reach the boundary of present scientific understanding, and so I have reached the limits of my precision. I don’t know what transformations, exactly, will be shown to be impossible, nor do I know how the arguments will even be stated in their constructor theoretic form. While constructor theory has solved some problems in physics and elsewhere already, a constructor theory of knowledge has not yet been created, and hence a constructor theory of economics is even further from our present vantage point. But I am optimistic. If laws of nature come to show, via the formalism of constructor theory, that economic calculation is physically impossible in principle under socialism, then denial of what Mises had shown one-hundred years ago will carry the same logic as denial of the existence of dinosaurs, or of the roundness of the earth. 

*More technically, a profit signals that the entrepreneur is engaged in a line of production of which consumers approve, and a loss signals a corresponding disapproval.

**I won’t expound on sound money in this essay.

***Many of these theorems are counterfactual in nature (so-called ceteris paribus arguments), and constructor theory has already demonstrated an ability to handle other regularities that require reference to counterfactuals, such as those of information

The WTO Is Both Irrelevant and Unnecessary

The WTO Is Both Irrelevant and Unnecessary

The World Trade Organization (WTO) is in a state of crisis. Despite grandiose dreams of a global trade organization that would enforce global bureaucrats’ broad vision for multilateral trade agreements, the world looks more and more like it neither wants nor needs an organization like the WTO.

CNBC reports this week that the WTO is in “a reform-or-die moment,” as both the US and Chinese governments appear uninterested in taking orders from the WTO.

It once seemed like the World Trade Organization (WTO) was a very big deal. When it was formed in the 1990s, scores of states—rich and poor, large and small—gathered to put together “rules” for how the sovereign states of the world would interact on trade. As Razeem Sally has noted, however, multilateral agreements were not what made global liberalization happen:

since the 1980s there has been a veritable trade-policy revolution outside the West, with region after region shifting from protection and isolation to freer trade and global economic integration. Observers often forget that this has come more “from below” than “from above.”

Share of Total Tariff Reduction, by Type of Liberalization, 1983–2003, by Percentage:


Moreover, during the heady days of the 1990s, when the weaker General Agreement on Tariffs and Trade​ (GATT) gave way to the stronger WTO, it was assumed trade would be regularized and mandated worldwide through multilateral action. But although international trade did indeed increase over this period, it remains unclear that the WTO was the cause.

Doubts about the WTO had already surfaced nearly twenty years ago. For example, economist Andrew Rose in 2002 concluded, “An extensive search reveals little evidence that countries joining or belonging to the GATT/WTO have different trade patterns than outsiders.”

In a separate 2002 paper, Rose writes:

Despite my use of over sixty measures of trade policy, I have been unable to find convincing evidence that membership in the multilateral trade system is associated with more liberal trade policy.

So, if the WTO isn’t driving global trade, what is?

Well, it could be any number of things. As Rose notes:

Why has trade grown faster than income, if not because of the GATT/WTO? Who knows? But there are plenty of other candidates. Higher rates of productivity in tradables, falling transport costs, regional trade associations, converging tastes, the shift from primary products towards manufacturing and services, growing international liquidity, and changing endowments are all possibilities.

Similarly, in a 2004 Bank of England paper researchers Maria Barriel and Mark Dean write:

First, productivity growth in the tradable goods sector has caused a fall in the relative price of such goods, and so increased trade. Second, tariff rates have fallen in most major economies, reducing the cost of international trade and increasing the returns to specialisation.

Factors other than tariffs dominate, however.  The authors contend that a drop in tariffs was responsible for only 21 percent of “the increase in the trade to total final expenditure ratio” from 1980 to 2000.

But even if cuts in tariffs were the overwhelming force behind growing trade, we still couldn’t assume that this was attributable to the WTO or its predecessor, GATT.

Indeed, we have little reason to thank the WTO for what liberalization has come about in the past twenty years. The the so-called Doha Round—which was the successor agreement to the the Uruguay Round and attempted to expand the WTO’s mandate—is now regarded as a failure by supporters’ standards:

“The WTO hasn’t produced any big achievements since 1994, when the Uruguay Round closed, and has progressively lost its attractiveness,” Fredrik Erixon, an international trade expert at the Brussels-based think tank ECIPE, told CNBC via email.

“All in all, WTO has not managed to make the multilateral trade framework move ahead since it was established more than 20 years ago,” economist Jean-Pierre Cling observed in 2014. This is due to a wide gulf between the ambitions of the WTO and “the new power relationship prevailing in the world economy, with new emerging powers (China, India, etc.).”

Moreover, the lion’s share of liberalization in China took place before it entered the WTO:

By the time China entered the World Trade Organization in 2001 the import regime had been almost entirely transformed….the average statutory tariff, which stood at the relatively high level of 56 percent in 1982, was reduced to 15 percent by 2001. The share of all imports subject to licensing requirements fell from a peak of 46 percent in the late 1980s to fewer than 4 percent of all commodities by the time China entered the WTO.

Since then, there are growing signs that the world’s states are hitting the brakes on trade liberalization. That’s a bad thing, because it increases consumers’ cost of living. But it’s especially a blow to entrepreneurs and small business owners who depend on access to affordable inputs for the goods and services they produce. Put another way: trade barriers often hit the productive classes the most.

But just as the liberalization we saw during the late 1980s and the 1990s was primarily a product of unilateral action, the growing turn toward protectionism is a result of domestic politics. And now the process is going in reverse:

Carmen Dorobăț pointed this out last year:

What no one recognizes is that the common reason for the breakdown of world economic relations is the combination of interventionist domestic policies and government-led, top-down, faulty trade integration, which serves only interest groups and is subject to perverse incentives. The positive effects of inter-governmental multilateral trade agreements are minor at best. Their negative effects, however, such as stifling global trade, diversion of trade flows, or increasing red tape, have been growing at an alarming rate.

The WTO was not the reason world trade was liberalized during the 1980s and 1990s. Thus, it is unnecessary. And now, even if such a thing were desirable, the WTO is in no position to force liberalization on countries like the US, China, or India. Thus, the WTO is also irrelevant.

The time has come to move on. Trade liberalization is an excellent thing. Countries that do it have been often been shown to have higher incomes and to be resilient. If anything, the WTO is now becoming a tool for large states to drive harder bargains with the rest of the world. That’s a step in the wrong direction, and we’d be better off in a world of bilateral agreements and unilaterally liberalized trade.

Reprinted from the Mises Institute.

Trump’s Budget: More Warfare, Slightly Less Welfare

Trump’s Budget: More Warfare, Slightly Less Welfare

Listening to the howls from Democrats and the applause from Republicans, one would think President Trump’s proposed fiscal year 2021 budget is a radical assault on the welfare state. The truth is that the budget contains some minor spending cuts, most of which are not even real cuts. Instead they are reductions in the “projected rate of growth.” This is the equivalent of saying you are sticking to your diet because you ate five chocolate chip cookies when you wanted to eat ten.

President Trump’s plan reduces the Department of Education’s budget by nearly 8 percent, leaving the department with “only” $66.6 billion. Cuts to other departments are similarly small, while reductions in entitlement spending consist mostly of reforms that will not affect most of those dependent on these programs.

President Trump deserves credit for proposing an $11.6 billion cut in funding for the Department of State and the US Agency for International Development (USAID). Foreign aid does little to help impoverished people overseas. Instead, it benefits foreign government officials willing to do the US government’s bidding. The State Department and USAID are extensively involved in US intervention abroad, including efforts to overthrow governments.

President Trump’s budget proposes a number of increases in spending. For example, his budget spends around 900 million additional dollars on vocational education. It also includes additional spending on items including infrastructure and childcare.

Few in DC have expressed concern over the fact that President Trump’s $4.8 trillion budget proposal is the largest budget in American history. There is also little outcry from supposedly antiwar progressive Democrats over Trump’s proposal to spend hundreds of billions of dollars on militarism. This is not surprising, as many progressives are happy to support increased warfare spending as long as conservatives go along with increased welfare spending. Similarly, many conservatives are happy to support increased welfare spending as long as it means that progressives will vote for increased warfare spending. So, Congress is unlikely to approve any of President Trump’s spending cuts, but Congress will gleefully agree to all of his spending increases.

Even if Congress agrees to all of President Trump’s cuts, federal deficits will still be over $1 trillion for the next several years. However, President Trump claims that the budget will balance in fifteen years. In order to show a balanced budget by 2035, the administration assumes 3 percent economic growth for most of the next decade. This level of growth is unlikely to come to pass. Instead, the current boom will likely end soon, and the economy will experience another major recession. Signs that we are on the verge of a downturn include rising homelessness and the Federal Reserve’s bailout of the repurchasing market.

The current economic boom is built on debt, and the debt-based economy is facilitated by the Federal Reserve’s easy money policies. The massive amount of debt held by consumers, businesses, and especially government is the main reason the Fed feels compelled to maintain historically low interest rates. If rates were to increase to market levels, government interest payments would be unstable. This would cause the government debt bubble to burst, leading to a major crisis. However, continuing on the current path of low interest rates will inevitably lead to a dollar crisis and the collapse of the welfare-warfare Keynesian system.

Continuing to waste billions on wars abroad and failed programs at home while pretending that we can avoid a crisis via phony cuts and Fed-fueled growth will only make the inevitable collapse more painful. The only way to avoid economic disaster is to cut spending and audit, then end, the Federal Reserve.

Reprinted from the Ron Paul Institute for Peace and Prosperity.

Another Massive Budget Deficit to Start 2020

Another Massive Budget Deficit to Start 2020

The Trump administration posted another massive budget deficit to start out calendar-year 2020.

According to the latest data released by the U.S. Treasury Department, Uncle Sam spent $32.6 billion more than it took in last month. That compares with an $8.7 billion surplus in January 2019. Analysts had projected an $11.5 billion shortfall in January.

That brings the total deficit in FY2020 to $389.2 billion. So far, the deficit in fiscal 2020 is about $79 billion bigger than it was at this point in FY2019, a 25 percent gain.

According to the Congressional Budget Office, the federal budget shortfall will hit $1.02 trillion in FY 2020 and rise into the foreseeable future.  The CBO warns that the ballooning national debt poses a “significant risk” to the economy and financial system.

Overspending continues to drive the ever-widening deficits. The federal government took in $372 billion in January. That was a 10 percent increase in revenue compared with January 2019. But spending was up $405 billion. That represents a 22 percent increase year-on-year.

Through just the first four months of FY2020, Trump and company have already spent nearly $1.5 trillion.

These are the kind of budget deficits one would expect to see during a major economic downturn. The federal government has only run deficits over $1 trillion in four fiscal years, all during the Great Recession. We’re approaching that number today, despite having what Trump keeps calling “the greatest economy in the history of America.”

Generally, during economic expansions, government spending on social programs shrinks and tax revenues climb with increased economic activity. Revenues have increased over the last year, even with the Republican tax cuts, but they haven’t kept pace with the increase in government spending.

President Trump didn’t even mention the growing national debt during his State of the Union address. As Peter Schiff noted in a tweet, “During his 90-minute #SOTU address President Trump did not urge Congress to cut one dime of government spending, or eliminate one government agency or department, even as the national debt is soaring by record amounts during an economy he claims is booming.”

Much has been made in cuts to social programs in Trump’s proposed 2021 budget. But there are spending increases in other areas and the overall spending plan comes in at $4.8 trillion compared to $4.4 trillion in actual outlays during FY2019.

Republicans argue that economic growth will ultimately fix the national debt. The Trump plan claims to balance the budget in 15 years. But this scenario depends on 3 percent GDP growth every year and no recession. Last year, GDP growth was 2.3 percent.

The CBO warns that the growing “debt would dampen economic output over time.”

In fact, studies have shown that GDP growth decreases by an average of about 30 percent when government debt exceeds 90% of an economy. Total U.S. debt already stands at around 106.9 percent of GDP. Ever since the US national debt exceeded 90 percent of GDP in 2010, inflation-adjusted average GDP growth has been 33 percent below the average from 1960–2009, a period that included eight recessions.

Europe’s spending binge serves as a prime example of the impact of debt on economic growth.

The reality is America’s fiscal condition is circling the drain. The bottom line is that the spending trajectory is unsustainable. If the U.S. government is running $1 trillion deficits now, what will the country’s financial situation look like when the next recession hits?

Reprinted from the Tenth Amendment Center.

How the Fed Rules and Inflates

How the Fed Rules and Inflates

[From chapter 23 of The Case Against the Fed.]

Having examined the nature of fractional reserve and of central banking, and having seen how the questionable blessings of Central Banking were fastened upon America, it is time to see precisely how the Fed, as presently constituted, carries out its systemic inflation and its control of the American monetary system.

Pursuant to its essence as a post-Peel Act Central Bank, the Federal Reserve enjoys a monopoly of the issue of all bank notes. The U. S. Treasury, which issued paper money as Greenbacks during the Civil War, continued to issue one-dollar “Silver Certificates” redeemable in silver bullion or coin at the Treasury until August 16, 1968. The Treasury has now abandoned any note issue, leaving all the country’s paper notes, or “cash,” to be emitted by the Federal Reserve. Not only that; since the U.S. abandonment of the gold standard in 1933, Federal Reserve Notes have been legal tender for all monetary debts, public or private.

Federal Reserve Notes, the legal monopoly of cash or “standard,” money, now serves as the base of two inverted pyramids determining the supply of money in the country. More precisely, the assets of the Federal Reserve Banks consist largely of two central items. One is the gold originally confiscated from the public and later amassed by the Fed. Interestingly enough, while Fed liabilities are no longer redeemable in gold, the Fed safeguards its gold by depositing it in the Treasury, which issues “gold certificates” guaranteed to be backed by no less than 100 percent in gold bullion buried in Fort Knox and other Treasury depositories. It is surely fitting that the only honest warehousing left in the monetary system is between two different agencies of the federal government: the Fed makes sure that its receipts at the Treasury are backed 100 percent in the Treasury vaults, whereas the Fed does not accord any of its creditors that high privilege.

The other major asset possessed by the Fed is the total of U.S. government securities it has purchased and amassed over the decades. On the liability side, there are also two major figures: Demand deposits held by the commercial banks, which constitute the reserves of those banks; and Federal Reserve Notes, cash emitted by the Fed. The Fed is in the rare and enviable position of having its liabilities in the form of Federal Reserve Notes constitute the legal tender of the country. In short, its liabilities — Federal Reserve Notes — are standard money. Moreover, its other form of liability — demand deposits — are redeemable by deposit-holders (i.e., banks, who constitute the depositors, or “customers,” of the Fed) in these Notes, which, of course, the Fed can print at will. Unlike the days of the gold standard, it is impossible for the Federal Reserve to go bankrupt; it holds the legal monopoly of counterfeiting (of creating money out of thin air) in the entire country.

The American banking system now comprises two sets of inverted pyramids, the commercial banks pyramiding loans and deposits on top of the base of reserves, which are mainly their demand deposits at the Federal Reserve. The Federal Reserve itself determines its own liabilities very simply: by buying or selling assets, which in turn increases or decreases bank reserves by the same amount.

At the base of the Fed pyramid, and therefore of the bank system’s creation of “money” in the sense of deposits, is the Fed’s power to print legal tender money. But the Fed tries its best not to print cash but rather to “print” or create demand deposits, checking deposits, out of thin air, since its demand deposits constitute the reserves on top of which the commercial banks can pyramid a multiple creation of bank deposits, or “checkbook money.”

Let us see how this process typically works. Suppose that the “money multiplier” — the multiple that commercial banks can pyramid on top of reserves, is 10:1. That multiple is the inverse of the Fed’s legally imposed minimum reserve requirement on different types of banks, a minimum which now approximates 10 percent. Almost always, if banks can expand 10:1 on top of their reserves, they will do so, since that is how they make their money. The counterfeiter, after all, will strongly tend to counterfeit as much as he can legally get away with. Suppose that the Fed decides it wishes to expand the nation’s total money supply by $10 billion. If the money multiplier is 10, then the Fed will choose to purchase $1 billion of assets, generally U.S. government securities, on the open market.

Figure 10 and 11 below demonstrates this process, which occurs in two steps. In the first step, the Fed directs its Open Market Agent in New York City to purchase $1 billion of U.S. government bonds. To purchase those securities, the Fed writes out a check for $1 billion on itself, the Federal Reserve Bank of New York. It then transfers that check to a government bond dealer, say Goldman, Sachs, in exchange for $1 billion of U.S. government bonds. Goldman, Sachs goes to its commercial bank — say Chase Manhattan — deposits the check on the Fed, and in exchange increases its demand deposits at the Chase by $1 billion.


Where did the Fed get the money to pay for the bonds? It created the money out of thin air, by simply writing out a check on itself. Neat trick if you can get away with it!

Chase Manhattan, delighted to get a check on the Fed, rushes down to the Fed’s New York branch and deposits it in its account, increasing its reserves by $1 billion. Figure 10 shows what has happened at the end of this Step One.

The nation’s total money supply at any one time is the total standard money (Federal Reserve Notes) plus deposits in the hands of the public. Note that the immediate result of the Fed’s purchase of a $1 billion government bond in the open market is to increase the nation’s total money supply by $1 billion.

But this is only the first, immediate step. Because we live under a system of fractional-reserve banking, other consequences quickly ensue. There are now $1 billion more in reserves in the banking system, and as a result, the banking system expands its money and credit, the expansion beginning with Chase and quickly spreading out to other banks in the financial system. In a brief period of time, about a couple of weeks, the entire banking system will have expanded credit and the money supply another $9 billion, up to an increased money stock of $10 billion. Hence, the leveraged, or “multiple,” effect of changes in bank reserves, and of the Fed’s purchases or sales of assets which determine those reserves. Figure 11, then, shows the consequences of the Fed purchase of $1 billion of government bonds after a few weeks.

Note that the Federal Reserve balance sheet after a few weeks is unchanged in the aggregate (even though the specific banks owning the bank deposits will change as individual banks expand credit, and reserves shift to other banks who then join in the common expansion.) The change in totals has taken place among the commercial banks, who have pyramided credits and deposits on top of their initial burst of reserves, to increase the nation’s total money supply by $10 billion.


It should be easy to see why the Fed pays for its assets with a check on itself rather than by printing Federal Reserve Notes. Only by using checks can it expand the money supply by ten-fold; it is the Fed’s demand deposits that serve as the base of the pyramiding by the commercial banks. The power to print money, on the other hand, is the essential base in which the Fed pledges to redeem its deposits. The Fed only issues paper money (Federal Reserve Notes) if the public demands cash for its bank accounts and the commercial banks then have to go to the Fed to draw down their deposits. The Fed wants people to use checks rather than cash as far as possible, so that it can generate bank credit inflation at a pace that it can control.

If the Fed purchases any asset, therefore, it will increase the nation’s money supply immediately by that amount; and, in a few weeks, by whatever multiple of that amount the banks are allowed to pyramid on top of their new reserves. f I it sells any asset (again, generally U.S. government bonds), the sale will have the symmetrically reverse effect. At first, the nation’s money supply will decrease by the precise amount of the sale of bonds; and in a few weeks, it will decline by a multiple, say ten times, that amount.

Thus, the major control instrument that the Fed exercises over the banks is “open market operations,” purchases or sale of assets, generally U.S. government bonds. Another powerful control instrument is the changing of legal reserve minima. If the banks have to keep no less than 10 percent of their deposits in the form of reserves, and then the Fed suddenly lowers that ratio to 5 percent, the nation’s money supply, that is of bank deposits, will suddenly and very rapidly double. And vice versa if the minimum ratio were suddenly raised to 20 percent; the nation’s money supply will be quickly cut in half. Ever since the Fed, after having expanded bank reserves in the 1930s, panicked at the inflationary potential and doubled the minimum reserve requirements to 20 percent in 1938, sending the economy into a tailspin of credit liquidation, the Fed has been very cautious about the degree of its changes in bank reserve requirements. The Fed, ever since that period, has changed bank reserve requirements fairly often, but in very small steps, by fractions of one percent. It should come as no surprise that the trend of the Fed’s change has been downward: ever lowering bank reserve requirements, and thereby increasing the multiples of bank credit inflation. Thus, before 1980, the average minimum reserve requirement was about 14 percent, then it was lowered to 10 percent and less, and the Fed now has the power to lower it to zero if it so wishes.

Thus, the Fed has the well-nigh absolute power to determine the money supply if it so wishes.1 Over the years, the thrust of its operations has been consistently inflationary. For not only has the trend of its reserve requirements on the banks been getting ever lower, but the amount of its amassed U.S. government bonds has consistently increased over the years, thereby imparting a continuing inflationary impetus to the economic system. Thus, the Federal Reserve, beginning with zero government bonds, had acquired about $400 million worth by 1921, and $2.4 billion by 1934. By the end of 1981 the Federal Reserve had amassed no less than $140 billion of U.S. government securities; by the middle of 1992, the total had reached $280 billion. There is no clearer portrayal of the inflationary impetus that the Federal Reserve has consistently given, and continues to give, to our economy.

    • 1. Traditionally, money and banking textbooks list three forms of Fed control over the reserves, and hence the credit, of the commercial banks: in addition to reserve requirements and open market operations, there is the Fed’s “discount” rate, interest rate charged on its loans to the banks. Always of far more symbolic than substantive importance, this control instrument has become trivial, now that banks almost never borrow from the Fed. Instead, they borrow reserves from each other in the overnight “federal funds” market.

Reprinted From

Short-sighted state governments rack up $1 Trillion in liabilities

Short-sighted state governments rack up $1 Trillion in liabilities

As if the national debt and federal entitlement liabilities weren’t enough. Now we get word that state governments have racked up more than a trillion dollars in unfunded healthcare benefits for state government workers. That’s trillion – with a ‘T’.

In a report released earlier this month, the American Legislative Exchange Council (ALEC) revealed the total, adding “That’s an average of $3,107 of unfunded OPEB liabilities for every resident of the United States.” 

The financial liabilities, labeled “Other post-employment benefits,” or OPEB for short, calculate the present value of health insurance coverage benefits promised to state government employees when they retire.

Virtually every state government promises fully- or partially- paid health insurance coverage to their employees in retirement.  

More than 40 percent of the benefit plans, according to the ALEC report, operate on a pay-as-you-go basis, meaning there has been no money set aside. And the states that do set aside some funds to help pay for the benefits typically don’t set aside much. Indeed, the ALEC report notes “The average funding ratio for state OPEB plans is 9.4%.”

States with the highest OPEB liabilities per capita are Alaska at $18,500 followed by New Jersey at $14,500 and Hawaii at $12,200.

The liability totals disclosed in the ALEC report differ from the “official” figures produced by most state governments, however. This is because ALEC uses a more realistic discount rate to calculate the present value of the liabilities. State governments are notorious for using impractical discount rates in order to make liabilities look less daunting.

This latest trillion-dollar revelation of yet more irresponsible government promises turning into taxpayer-crushing liabilities illustrates a key point made by Hans-Hermann Hoppe in his 2001 book “Democracy: The God That Failed.”

Because a politician’s top priority is getting re-elected, they have a high time preference. That is, they place a high priority on spending now with little regard for future consequences, because several years down the road they will no longer be in office and the mounting debt and liabilities will become someone else’s problem.

Referring to elected officials in a democracy as “temporary caretakers” of government assets and finances, Hoppe wrote that such caretakers are “not held liable for debts incurred during his tenure of office. Rather, his debts are considered ‘public,’ to be repaid by future (equally nonreliable) governments.”

There is no incentive for elected politicians in a democracy to concern themselves with the long-term value of the government’s financial condition. “A democratic ruler can use the government apparatus to his personal advantage, but he does not own it,” wrote Hoppe. Because there is no ownership, politicians are incentivized to use the resources temporarily at their disposal for their own personal gain, which often results in long-term financial pain.

Which brings us back to the OPEB liabilities faced by state governments. For decades, state politicians have promised generous retirement benefits to state employees to curry favor (and donations) from state employees, and to access the deep pockets of state government unions.

Such retiree health benefits for state government employees are far more generous than the private sector, where owners need to be more conscious of long-term financial implications.

According to this recently-released report by the Manhattan Institute, the growing OPEB liabilities have “also revealed the extent of the gulf between the public and the private sectors. Larger private-sector firms began to offer retiree health-care coverage in the 1940s, but new accounting rules issued in the 1980s drove most firms to halt the practice.”

The report continues, “The portion of large and midsize firms offering retiree health benefits fell from 45% in 1988 to 24% in 2017. Smaller companies were less likely to offer such benefits. Today, only 15% of private-sector workers have access to employer-provided retiree health benefits. In contrast, 70% of state and local workers are eligible for employer-provided retiree health benefits.”

Naturally, politicians who are merely temporary caretakers of money taken from citizens by force will be quite willing to exchange generous benefits for better odds of winning re-election. 

Leftists accuse capitalists of being greedy and self-interested. But the latest revelation of another trillion-dollar government liability underscores the greed and self-interest of the political class. Short-sighted desire to win the next election and maintain power is the driving force behind mounting government debt and liabilities. Not some altruistic desire to take care of others.

A free society based on private property would not only be morally preferable but would enjoy a far better preservation and accumulation of wealth. Private ownership incentivizes the increase of asset values, while democratic government incentivizes elected officials to use up resources in the short-term for personal gain at the expense of impoverishing future generations through crushing debt.  

Bradley Thomas is creator of the website and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

Foreign Aid Just Empowers Corrupt Regimes. End It.

Foreign Aid Just Empowers Corrupt Regimes. End It.

The Senate’s vote to acquit Donald Trump on both articles of impeachment this month brought a much-needed end to the tiring impeachment saga America has been subject to in the last few months.

The impeachment controversy arose when President Donald Trump initially withheld military aid from Ukraine unless President Volodymyr Zelensky provided revelatory information about political rivals such as presidential candidate Joe Biden and his son Hunter Biden’s business dealings. After a whistleblower alleged that Trump may have abused power, the managerial class was off to the races to launch an impeachment inquiry against him. For the past few months, DC pundits have yammered on about the implications of impeachment while the rest of the country has been busy getting on with their lives the way that normal people not living off government largesse do.

Now that the impeachment trial is over, maybe we can actually talk about more relevant issues like foreign aid. For more than seventy-five years, foreign assistance has played an integral role in American foreign policy. In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired.

School textbooks tend to make foreign aid look like a simple process, but as with anything the government runs, foreign aid has its obligatory share of red tape. Fergus Hodgson of Econ Americas noted that “Little of the development funds trickle down to the target communities,” in explaining why countries like Ethiopia and Haiti remain backwards. More importantly, Hodgson provided an unpleasant depiction of where foreign aid money generally goes:

A confiscatory portion goes to the pockets of federal bureaucrats and U.S. contractors, and another sizable chunk goes to urban, middle-class, or affluent partners in recipient countries. Further, one-fifth of U.S. aid goes through local governments, which tend to be corrupt and incompetent.

As far as the countries where the bulk of foreign aid is going, they’re not necessarily the most institutionally sound. War-ravaged countries such as Afghanistan ($5.1 billion), Iraq ($880 million), and Yemen ($565 million) received substantial aid in the fiscal year of 2018—be it in economic or military form. The first two countries have been subject to US invasions, in which the US government may have spent more than $5 trillion trying to turn them into Western-style democracies. In the case of Yemen, the US has been dragged into a proxy war all thanks to its “special relationship” with the Kingdom of Saudi Arabia. After nearly two decades of nation building, there appears to be no end in sight to American involvement in the region.

Thanks to the ruling class’s Russophobia, Ukraine was easy to side with in the Crimean conflict after Russia ramped up its intervention in the Crimean Peninsula. This resulted in the US disbursing a total of $559 million in aid to Ukraine in 2018. Foreign aid to Ukraine was at the center of the now concluded impeachment charade.

None of the aforementioned countries are exemplars of clean governance. Transparency International’s 2018 Corruption Perceptions Index revealed that Afghanistan, Iraq, Ukraine, and Yemen have putrid corruption rankings of 172nd, 168th, 120th, and 176th place, respectively.

Foreign Aid Encourages Bad Behavior

Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation. Also, such programs aren’t free. Someone ultimately has to pay for them. At the 2011 Conservative Political Action Conference, former congressman Ron Paul famously declared that

Foreign aid is taking money from the poor people of a rich country and giving it to the rich people of a poor country.

Thanks to a steady flow of outside funding, governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. Like subsidizing American banks making bad decisions at the domestic level, giving foreign aid to corrupt governments or factions within a country only encourages bad behavior.

DC has become so detached from the concept of rational economics that it treats the blood and sweat of taxpayers as malleable inputs that can be squeezed out of the population and sent abroad on a legislative whim. All of this is done with complete disregard for the unforeseen consequences that these policies inevitably produce.

Economist Frédéric Bastiat’s essay “That Which is Seen, and That Which is Not Seen” offers various points to consider when approaching the subject of government transfers such as foreign aid. What is seen is the recipient government being propped up thanks to the aid injection, which pleases both the recipient country’s elites and US foreign policy wonks.

However, what is not seen are the potential reform movements that would emerge under normal political circumstances. These movements often hold the key to breaking free of the cycle of corruption and poverty that many of these countries find themselves in. But when foreign aid enters the equation, the establishment government is artificially propped up at reformist factions’ expense. Domestically speaking, foreign aid money is clearly coming from American taxpayers. In an ideal world, this money would be in the hands of American taxpayers and put to use in the private sector. Sadly, most political leaders will never take these concerns into consideration. The signing ceremonies of foreign aid agreements and the subsequent ego boosts are too irresistible to DC do-gooders, so they’ll work diligently to keep the foreign aid gravy train in place.

Let’s not kid ourselves. It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history. Policymakers will have to think outside the box if they want to see more nations join the ranks of the developed world.

Some Alternatives to Consider

Indeed, there are more practical alternatives to using heavy-handed state measures to help developing countires. First off, bilateral free trade is a much better way to handle the issue of economic development. Expanding trade relations makes sense with regions such as Central America, which stand to benefit from the inflow of North American capital. Increased trade and investment will raise living standards in these capital-starved regions while also providing American consumers and entrepreneurs access to a new market of goods and services.

Another foreign aid alternative to consider is the revival of exchange programs such as the renowned collaboration between the University of Chicago and the Pontifical Catholic University of Chile in the 1950s. This program helped create a new generation of free market economists who would craft the very policies that catapulted Chile into the highest echelons of economic development in Latin America. The exchange program between the two universities still exists, but these efforts could be replicated and expanded to other countries without much state sponsorship.

Neither of these solutions involve dumping foreign aid into these regions or using military intervention to help them. The key to beating poverty from Santiago de Chile to Kinshasa (in the Congo) is still to increase these countries’ capital stock, not confiscate Americans’ wealth and ship it off in the form of foreign aid packages. The only serious way to do this is through policies which reduce regulatory barriers, respect property rights, expand commerce, and otherwise facilitate capital formation.

But this may be too much to ask of Western politicians who are fixated on using the government to solve every conceivable socioeconomic problem they encounter.

Reprinted from the Mises Institute.

China’s Economic Schemes Hurt the Chinese Most of All

China’s Economic Schemes Hurt the Chinese Most of All

In his State of the Union Address—February 4, 2020—President Trump outlined his reasons for punishing nations that manipulate their economies in order to achieve some internal policy goal, such as China. The president claimed that such manipulation was unfair and harmful to its trading partners. His main concern is that by manipulating its economy China “steals” jobs. It does this in several ways:

  1. By keeping the yuan at a lower exchange rate against other currencies—meaning that the People’s Bank of China gives more yuan for each dollar than would occur in a free currency market—Chinese goods are cheaper in terms of foreign currency than they would be otherwise.
  2. By subsidizing its industries, Chinese goods can be offered at a lower price.
  3. By erecting tariffs against some imported goods, China prevents foreign companies from producing more and employing more people than they would otherwise.

The president claimed that his policies were working, that manufacturing jobs were returning to the US and have created a “Blue Collar Boom,” with unemployment statistics at very low levels for many politically sensitive segments of the labor market.

I agree with the president in his desire that China cease manipulating its economy, but my reasons are not the same as his. More importantly, I would not recommend reciprocal interventions to punish China. Instead, I would follow the Barron maxim of “minding our own business and setting a good example.” I would point out the following consequences of Chinese economic interventions:

  1. China itself pays for the interventions, not its trading partners. In fact, Chinese economic interventions constitute a transfer of wealth from China to its customers overseas. Goods that previously cost X in the US market now cost less than X. Americans pocket the difference, which increases our wealth. The Chinese people pay high taxes or higher prices. China’s subsidies to business distort the Chinese economy away from producing more desirable products. (If this were not the case, there would be no need for subsidies.) Its tariffs on imported goods reduce the supply of them within China, leading to higher prices and/or shortages within China. In other words, Americans and the rest of the world benefit at the expense of the Chinese people.
  2. This is good for Americans, so why should we complain? That Chinese economic interventions are good for Americans is true in the short run, but what about the long run? By intervening in its economy, China weakens its productive capital base. It is this capital base that will pump out the many things that Americans will desire in the future. Anything that weakens a trading partner’s capacity to generate wealth means that its trading partners will be less wealthy too. Therefore, even loyal Americans should advise China to eschew economic manipulations that benefit them in the short run.

No one has ever explained this phenomenon better than Frederic Bastiat in his classic essay “That Which Is Seen, and That Which Is Not Seen.” Henry Hazlitt brought Bastiat’s insights up to date in Economics in One Lesson. There are actually two lessons: the first is that one must consider the consequences of an economic act not only for those who will benefit but also those for who will be harmed. Of course, it is usually easy to point out those who will benefit. It is difficult if not impossible to quantify those who are harmed, especially if the harm constitutes benefits that never occurred but would have absent the intervention. Hazlitt’s second lesson is that one must look not only to the short-term benefit of an economic act but also to its long-term costs. For example, steel import restrictions may result in a boom for the US steel industry with no apparent short-term consequences. But if US steel were already competitive in terms of price, quality, and service, there would be no need for import restrictions. We can conclude through economic logic that steel prices, quality, and/or service will deteriorate with the restrictions in place, harming Americans in the long run.


The president measures economic progress in terms of increase in employment (or decrease in unemployment) rather than an increase in wealth. Laboring more is not necessarily a sign of economic progress. Communist countries, such as the former Soviet Union, had zero unemployment! The state chose a job for everyone. But no one would claim that decades of full employment made the unfortunate citizens of the Soviet Union wealthier. The opposite occurred. In a free market economy without the burden of onerous labor laws, high taxes, and other interventions, there is no barrier to full employment for the simple reason that there is no limit to economic satisfaction. Even a frugal person who desired no additional economic goods certainly would be pleased that he need labor less to achieve and maintain his current level of economic satisfaction.

The greater China’s capital base, the greater the potential for a further expansion of the division of labor to employ this additional capital more productively. We Americans should wish that the entire world were free market capitalist economies so that we would have access to cheaper, better, and more varied products and services. China’s integration into the world economy has benefited Americans tremendously. So, Mr. President, I also want China to end its economic interventions, but I do not want to punish China through tariffs and other means for doing so. Our response should be to declare unilateral free trade. Let’s lead the world by setting a good example and look forward to a world of peace and prosperity.

Reprinted from the Mises Institute.

Book Review | Capitalism in America: An Economic History of the United States – Alan Greenspan & Adrian Wooldridge

Book Review | Capitalism in America: An Economic History of the United States – Alan Greenspan & Adrian Wooldridge

Given Alan Greenspan’s notorious reputation among libertarians as a Randian free-marketeer who became corrupted during his time in the Federal Reserve and ended up being largely responsible for the easy money policy that contributed to the Great Recession, I was curious as to how he would characterize particular events in the economic history of the United States, especially the financial crises. I’ll first present some praise and scrutiny to the discussions on the Great Depression and Great Recession, respectively, and then briefly summarize my thoughts on the other aspects of the book.

The Great Depression

I was positively surprised of how he and his co-author addressed the roots of the Great Depression, citing the trade barriers caused by Hoover signing the Smoot-Hawley tariff and retaliatory tariffs consequently being levied by other powers; admitting that malfeasance by the Fed was a relevant factor; and explaining that Hoover’s and Roosevelt’s interventions in the market largely only worsened the crisis. His negative descriptions of Roosevelt’s massive programs of National Industrial Recovery Act [NIRA] and the New Deal are worth quoting: “The NRA [National Recovery Administration],” Greenspan writes, “was responsible for implementing a vast process of government-sponsored cartelization: regulating production in entire industries and raising prices and wages according to government fiat,” and also explains that Roosevelt’s “stimulus package” of public sector jobs out-crowded private sector jobs after in the short-term seeming to help recover the economy during 1935-6 (serving as an empirical/historical example against the Keynesian advocacy for having the government trying to “stimulate” the economy).

The Great Recession

Though his take on the Great Depression may be commended, Greenspan was far more defensive when discussing the Great Recession. On the one side, he rightly mentioned Freddie Mac and Fannie Mae, as well as other government measures aggressively encouraging home ownership, as being important factors. However, while he mentions low interest rates as a factor, he blames this on a “savings excess” in emerging economies after the Asian economic crisis of 1997 that pressed global interest rates down and thus fueling a global bubble by boosting asset prices.

Even if this is true despite the savings rate in the US falling from 7.4% in 1998 to 2.5% in 2005 (see picture below, data from FRED) [1], one must recall that the interest rate nowadays isn’t naturally “pushed up” or “pressed down” by economic forces alone; central banks set a “discount rate”, meaning the interest rate they charge for loans to commercial banks and other financial institutions, and additionally “target” the market interest rate through purchasing securities like government bonds (though more recently, in quantitative easing, they’ve additionally started buying other assets like mortgage-backed securities).

The Austrian Business Cycle Theory (ABCT) explains that if the artificial interest rate set by the central bank is lower than the natural rate determined by the equilibrium between the supply and demand of loan-able funds, that the loan-market will be inaccurately reflected in the visible interest rate and create incentives to fuel an unsustainable bubble. Blaming a “savings excess” as a factor to the crisis thus suffers from the same fallacy as blaming “overproduction”, the symptom is treated as the root cause, while the real question is why the gap between supply and demand take a long time to close (i.e. if there are any barriers thereto).

Greenspan further outright denies that “easy money” policy by the Federal Reserve had anything to do with the crisis. This seems to be a logical extension of his previous claim of a savings excess, as he argues that this “global savings glut” limited “the Federal Reserve’s ability to influence interest rates through the federal funds rate (which is the only interest rate that the Fed controls)”. Furthermore, while he concedes that “the ‘easy money’ critics are right to argue that a low federal funds rate (at only 1 percent between mid-2003 and mid-2004) lowered interest rates for ARMs [Adjustable-Rate Mortgages],” he claims that this rate peaked two years before the crisis and accordingly, according to Greenspan, “Market demand obviously did not need ARM financing to elevate home prices during the last two years of the expanding bubble.”

A statistic further draws into question these claims of a “savings excess/glut” is that the effective federal funds rate rose from 4.07% in December 1998 to 6.62% in November 2000 (thereafter plummeting to 1.52% by December 2001), which may make us wonder why this “saving excess” took so long to affect this metric. In fact, we might wonder whether this is really just a scapegoat to cover for Greenspan & Co’s efforts to pull the economy out of the bust of the dot-com bubble at this time by cutting rates and in the process setting in motion what has come to be known as the housing bubble.

General Thoughts on the Book

Despite these heated disagreements on the nature of business cycles, I thought the book overall was enlightening and well-written. Greenspan and his co-author rightly emphasized the significance of creative destruction for economic development, and for the most part smoothly described how market trends, innovation, and government regulations interacted in the process. They illustrate well how damaging government taxes and regulations can be to the economy, particularly small businesses, and don’t adhere to Keynesian dogma in their economic theory, though, as illustrated, some obfuscation and common myths may have been used to deflect criticism from Greenspan’s involvement in causing the Great Recession.

With this in mind, I recommend those who want to learn more about economic history to check out this book. If you disregard (or read with scrutiny) the parts of the business cycle, much of the book has a lot of page-turning material drawing you into the beautiful process of people improving each others lives through the economic interactions throughout American history. If you only want to understand business cycles better, however, the following books are, in my opinion, more adequate:

Reprinted from Mises Revived.

In A True Free Market, It’s Hard To Be Rich

In A True Free Market, It’s Hard To Be Rich

One interesting feature of libertarian theory is its ability to offer a critique of corporate capitalism from the perspective of laissez faire economics. The political economics of societies with large corporations are troublesome, and if you read left-wing literature you’re sure to encounter an endless stream of analysis discussing the problems with large and powerful corporations. What’s interesting, therefore, about the implications of Austrian – libertarian – economics is that under this interpretation one might conclude that free markets make the accumulation of wealth rather difficult to accomplish. A true free market may not favor large corporations – rent seeking from profitable cash cows – or permit much wealth inequality at all.

The argument that free market economics does not support the formation of large firms comes from the application of “Austrian” (so-called) economics to business strategy. This application finds that free market profits are very difficult to accumulate and can be consistently obtained only through entrepreneurial innovation. These conclusions fit well with the ideas of Stephan Kinsella, a famous free market opponent of intellectual property laws, in terms of how market structure generates both innovation and profits when firms cannot monopolize innovation through patents. Finally, the failure of the merger movement in the 19th century, as discussed by Gabriel Kolko, provides further evidence that large firms are inherently economically wasteful. 

Large firms substitute truly productive innovation with monopoly power and economies of scale (in addition to political influence). Society’s current financial system realizes and rationalizes profits mainly through funding and capitalizing this style of large, integrated firms. It may be the case that the promotion of this structure of the firm is the cause of the industrial boom and bust cycle. Naturally, central banking was meant to solve this problem, but many find that it has made the problem worse.

The alternative to large monopoly firms would be much smaller firms where manager-owners personally know their employees. Instead of rent seeking, large firms controlling society’s stable resource channels, most “cash-cow” economic activities would be distributed between a class of petite bourgeoisie who hardly make profits and are in fact more nimble than large firms. Top innovators would have the most wealth, but only in proportion to the value they create via entrepreneurship. In all likelihood, no single firm or person could monopolize innovation, so the gains of innovation would be highly distributed. This alternative world of free markets and distributed wealth may have been unobtainable in the past due to technological limitations, but these limitations no longer exist.

Austrian Economics And Profits

Business strategy is a conventional sub-field of business administration. The traditional master of this field is Michael Porter of Boston Consulting Group. His paradigm of strategy is called Industrial Organization and sees the marketplace as an environment where competing forces constantly try to chip away at a firm, which must gain as much of a competitive advantage as possible in order to survive. In particular, a firm must gain some sort of monopoly advantage over competitive players such as competitors or even suppliers and customers in order to realize profits. Profit is what a firm can gain through some unnatural advantage it forces upon its competition. Michael Porter has conceded to peers such as (socialist) marketing guru Philip Kotler that this feature of capitalism is one of its harsh and unfair realities; it is one which has to be mitigated. Porter’s book, “Rethinking Capitalism,” examines this. However, some people think Porter’s interpretation of business strategy is wrong.

Robert Jacobson wrote an article in “The Academy of Management Review” called, “The ‘Austrian’ School of Strategy”. He argues that Porter’s interpretation of business strategy relies on flawed economic assumptions from neoclassical economics which Austrian economics corrects. Using Austrian economics, Jacobson provides an alternative theory of strategy and profits.

Jacobson’s main complaint with Porter is that the old view of strategy doesn’t give enough attention to the dynamism of an economy being constantly disrupted by technology. In neoclassical economics, the economy reaches an equilibrium. In this equilibrium, firms reach a point where no one is making any profits. However, using the ideas of Menger, Hayek, Mises and Schumpeter, Jacobson argues that the market is in a state of disequilibrium. In Schumpeter’s language, the market is an environment of “creative destruction.”

In a dynamic economy, profits would not be a result of monopoly power, but a consequence of and incentive for engaging in discovery and innovation. New products, processes and organizational techniques are what are called entrepreneurial innovation. You can make profits when the value of base resources – their current price – plus the cost of adding value through production is less than what customers will pay for a final product. You are discovering a use of scarce resources that is more valuable than the current use. Until the supply chain converts over to apply the appropriate amount of those resources to the new use, the resources will be underpriced. Profit gained from the process of restructuring how resources are used is the reward for the restructuring effort.

In Jacobson’s language, “Entrepreneurship is an action that successfully directs the flow of resources towards the fulfillment of customer needs.” In contrast to neoclassical markets which assumes that entrepreneurs have perfect knowledge, Austrian economics assumes that there is ignorance aplenty in the market, and ample opportunity for entrepreneurial profits by correcting market ignorance. However, just like in neoclassical economics, Jacobson admits that any time profits are realized, they will be short lived. New opportunities signal other market participants to imitate. As they do, profits are distributed quickly until no one can profit anymore. Firms must constantly innovate to realize consistent profits.

There are certain features of a firm that would make it able to realize entrepreneurial profits. Some firms have more information than others. This might be idiosyncratic, related to the luck or experience of its employees. Firms that act more quickly can get a head start and leverage it to their advantage – only if they stay ahead in the race. Firms that are more competent in obtaining and using information would be most likely to make consistent profits.

In this “Austrian” view of business strategy, innovation means tiny improvements in a thousand places. Innovation is an ongoing, sleepless and comprehensive process. There are no profits otherwise.

Jacobson argues that flexibility is key to profit making. He notes that some firms have adopted a style which is inherently more flexible. This style, in fact, has additional costs compared to a more stable mode of business. However, depending on the environment, flexibility costs may be necessary to thrive.

Do Patents Help Or Hurt Innovation?

Stephan Kinsella, a lawyer who favors Hans-Herman Hoppe’s argumentation ethics defense of libertarian rights theory, is famous for arguing that libertarian property theory does not support the legitimacy of intellectual property laws. Although Kinsella’s argument is philosophical and logical, he has also discussed empirical arguments about the importance of IP.

He wrote, “…it is striking that there seems to be no empirical studies or analyses providing conclusive evidence that an IP system is indeed worth the cost. Every study I have ever seen is either neutral or ambivalent, or ends up condemning part or all of IP systems.” 

While I think that Kinsella’s point is probably true, I can neither defend nor argue against it empirically. However, in addition to the legal and empirical arguments against IP, what would the economic argument against it be? Kinsella links to an article that discusses a study which examined the question, and the author references a period of English history during the development of the steam engine.

“The authors argue that there have been some cases where a period of patent-free innovation took place in a way that ensured that the innovators were still rewarded. Their prime example is the case of the mining industry in Cornwall, England, where the expiration of several patents on steam engines spurred a period of openly shared innovations that led to rapid improvements in steam engine design. (You can read an academic examination of this period if you’re so inclined) The lack of intellectual property allowed multiple improvements to be incorporated in a single design, while the innovators benefited from having their mines operate more efficiently ahead of their competition.” 

In an environment without patents, open innovation occurs. If a user of a service, good or resources can improve the efficiency by which they are able to use it, they will gain. Referencing “Austrian” business strategy, we see that this sort of activity – in a free market – is where profits must be realized. Therefore, profit motive would be a driving force for experienced users to make small improvements to the technology they’re using.

Whenever entrepreneurial innovation occurs, it’s imitated. Profits can be realized, but very quickly others will copy the efficiency benefits of any given innovation. On the other hand, any innovations others develop will be available to the whole market very quickly. The power of this arrangement becomes apparent when one considers the structure of the economy.

In an economy, base resources are converted through a supply chain of added value until they become a variety of consumer products. This supply chain has multiple layers, and the entire structure is a complex, dynamic spider’s web. At every level, individual resources, parts or products are available for purchase by clients and customers who compete with each other to obtain these goods. Petroleum, for example, can be converted into gasoline or plastics. There is an annual total petroleum production, but the percentage of that total which converts to either gasoline or plastic can change depending on what balance of the two is most valuable to final consumption. The base resource level is called “upstream” of the middle parts level. The consumer level is “downstream”. Resources flow from the top through the added value chain to the bottom. This arrangement creates complex relationships that can be competitive and cooperative at the same time.

If I am a petroleum refinery, I may compete with other refineries for access to petroleum at a low price, and for customers and clients who will buy gasoline at a high price. In spite of this competition, my competitors and I will all be in agreement that high gasoline prices benefit our common bottom lines. We are competing, but we have a cooperative relationship relative to other places in the added value chain. When competition is seen to occur across the entire supply chain, and the entire economy, rather than within narrow industrial categories, the value of open innovation becomes clear.

The coal mines of Cornwall all profited, though they were competitors, from efficient delivery of coal to areas serviced by coal mines of other regions. The Cornwall mines competed against each other, but they competed more against mines of other regions. The railroad was the medium that defined which layer of competition mattered more. The markets to which the railroad connected Cornwall were more valuable than local competitive advantage. This force, plus open innovation, led to early important improvements in the locomotive which created competitive economic value and profits despite none of the creators of innovation deriving monopoly profits from it.

Gabriel Kolko And The Failure of the 19th Century Merger Movement in the USA

Left-wing scholar Gabriel Kolko famously argued, in Triumph of Conservatism, that the 19th century Progressive political movement in the USA was actually a front for big business to promote regulations that protected them from competition. He starts his book discussing the merger movement of the late 19th century. This movement, though full of its share of shysters hoping to make a buck off of hyping big profits for investors, was based on the idea that the structure of the newly realized American “firm” was failing to “rationalize the economy.”  What does this strange phrase mean?

Wikipedia provides one explanation: “In economics, rationalization is an attempt to change a pre-existing ad hoc workflow into one that is based on a set of published rules. There is a tendency in modern times to quantify experience, knowledge, and work. Means–end (goal-oriented) rationality is used to precisely calculate that which is necessary to attain a goal. Its effectiveness varies with the enthusiasm of the workers for the changes being made, the skill with which management applies the rules, and the degree to which the rules fit the job.”

In other words, rationalization means creating a consistent production process where revenue is stable. It means the ability to make a plan, and to be able to carry out that plan. It is the architect’s approach to business, and given the scale of American big business, it is the architect’s approach to social organization. There’s one problem: society doesn’t want to be planned. It can’t be planned. The economy, at a minimum, is dynamic and in disequilibrium. A review of Kolko’s book mentions exactly how this problem affected big businesses:

“Despite the merger movement between 1897 and 1901, ‘the first decades of the century were years of intense and growing competition.’ Giant corporations often didn’t even do very well, making mediocre profits. A financial journal observed in 1900 that ‘the most serious problem that confronts trust combinations today is competition from independent sources… In iron and steel, in paper and in constructive processes of large magnitude the sources of production are being multiplied, with a resultant decrease in profits…’ ”

Big profits don’t last long. Big businesses faced constant pressure from smaller competitors as profits flattened and increasing numbers of entrants captured them. Those capable of innovating would swamp big business, knocking out yesteryear’s titans. No wonder fat cat tycoons wanted government regulations.

Is Artificial Credit Fueled Booms and Busts A Game Theoretic Problem?

The big businesses, which could not rationalize the economy, can’t be blamed for seeking stability. Though they were surely motivated by greed, they also faced an insurmountable problem. When taking a base resource and choosing which uses of it are best, how can anyone possibly know?

In a market economy firms compete to use resources, and the alternative uses they have in mind, the competition itself, represent how the economy chooses how to use base resources. Competition, however, presents a paradox. The assumption is that one firm has the best knowledge of how to produce the most value with a base resource. This firm would be the winner of market competition (which isn’t to say there’s only one winner at a time). In order for the market to realize this firm is the winner – that its knowledge is best – other firms have to try and fail, through competition, to apply their knowledge. Does the effort of the losing firms represent a waste of real resources?

A free market economist would argue that competition is necessary for the discovery and information sharing it facilitates.  This may be true, and the free market may be better than centrally planned alternatives, but this does not mean that the competitive process isn’t wasteful. In order for competing firms to have the resources to embark on possibly futile quests to win the market, they need credit. If too much credit is applied to an industry, it will take too long to learn who the losers are. This means wasted real resources. However, if no credit is applied to an industry, the firms can’t play the game of guessing and proving who deserves to win. What’s the right balance?

Determining the right amount of credit necessary to capitalize an economy might be impossible. This could be the cause of the boom and bust cycle. Credit is applied, it creates capitalization which leads to innovation and scale. The cycle continues. Waste is distributed throughout the banking system until finally scale and innovation fail to create more value than the waste the banking system creates in order to provide credit.  This is an industrial bust. Central banking solves this problem, by making it worse.

In today’s economy we have stagnation. We have long-lived super cash cow firms, we have tech giant monopolies, and we have an industrial structure where very few industrial categories have been added relative to the past. It’s somewhat clear how this is a product of Progressive economic regulations, sustained government economic intervention, central banking and fiat money. We also have the greatest wealth inequality gap of all time.  Meanwhile, costs of living are pricing the middle class out of a middle class lifestyle.

The root of the problem seems to go back to the failure of firms to rationalize the economy. Profit seeking, credit fueled, scale requiring firms seem to be structured poorly. They require sustained profits to survive, just as the broader economy requires constant growth. This absolute need for profits, to keep financing channels open, leads to a need for either limited monopoly advantages (barriers to entry, patents, etc.), or expanded markets. In the case of the latter, the stated foreign policy of the United States from the 1890s to the 1930s was to use the military to open up foreign markets for American goods. It was argued that if these markets weren’t made available, the economy would collapse. I suppose the monopolized competitive firm and credit capitalism would have collapsed without such drastic colonialist measures.

The solution to this problem isn’t to rationalize the economy with integrated firms. The solution lies with an added value supply chain that features small flexible firms which have the ability to manage their competitive and cooperative relationships dynamically. In this author’s opinion, the lack of a technology which could facilitate the management of competition and cooperation is why this option wasn’t available in the 19th century. However, with technology such as blockchain, contemporary society now has a tool which can accomplish this managing of relationships.

How A Free Market Economy Would Look

A free market economy would look very different from today’s corporate, credit capitalist economy. With government enforced barriers removed, big firms would face constant competitive pressures. Well established economic activity would resolve to best practices. This would remove the ability to sustain profits. Such a market would follow rules similar to what neoclassical economics calls “perfect competition.” There would be many small firms, none of whom would make profits.

These small firms would be the industrial/information age equivalent of Yeoman farms. There might be owner/managers who make a slightly bigger salary than his employees, but he would be more invested in the firm and more connected to its history. The lack of profits means that the firm would operate near break-even. This puts even more pressure on the manager to not accept a salary much higher than employees, because all other such firms could out compete each other by lowering the managers’ salary. This is why these firms would be like Yeoman farmsteads. The owner would create the firm out of pride, a sense of family or personal history or petty social status, more so than some leap of wealth associated with ownership. The product or parts they produce will be commodities, and client/supplier relationships will become less important.

With technology, complex supply and logistics chains can create modern levels of production scale and quality even when incorporating a large variety of participants at every level. This is the “Uber-ization” of a manufacturing supply chain. If a small factory can achieve through scale more efficiency than smaller workshops, then the commodity part they produce will become a market dominated by firms all of around that same size.

The exception to Yeoman manufacturing and service fulfillment is the economy generated by entrepreneurial innovators. Successful innovators can both realize profits consistently and also develop natural monopolies that can achieve – at least temporarily – great scale. There would certainly be large, sexy, wealthy firms in this kind of economy. Nevertheless, they might take the form of partnerships, leveraging the combined skill and experience of a set of specific people.  The partnerships would last only as long as talent was kept fresh. These kinds partnerships were actually common in the economy of the 1950s and 60s in the US, but have since engaged in numerous mergers to become massive transnational firms.

Blockchain might be a key technology in this vision of a truly free market industrial economy. Instead of vertically integrating a supply chain inside of a corporate firm, a supply chain can be integrated through a series of relationships between erstwhile competitors, managed by smart contracts. There were reasons why corporate firms vertically integrated. Investment decisions required some guarantee of price stability of resources within the supply chain relevant to the investment. 

With blockchain, prices wouldn’t be guaranteed the way integrated corporate firms do using transfer prices. Instead, while the prices of stages in the supply chain would remain dynamic, the sharing of value between cooperating firms would be guaranteed. So, if I am promised 30% of profits of a supply chain’s final customer sales value, that could be 30% of $10 million, or 30% of $8 million – but my gains or losses would be in proportion to my competitors’ as well. Such a guarantee would be relevant because what is being managed is not the nominal value of resources, but the game theoretic consequences pertaining to competition. If gains and losses are realized fairly between competing firms, they might choose to cooperate in certain ways to help their joint competition with other areas of the economy. If all firms can agree that the final value of an added value supply chain would reach at least a certain threshold, and that the objective division of value between participants is guaranteed from the beginning, then they would be able to invest money into a large and complex cooperative infrastructure that can achieve scale.

Cooperating competitors would be more flexible and dynamic than a large corporate firm. Imagine an agricultural supply chain. To modernize it to new levels of efficiency, many improvements can be added. Self-driving delivery vehicles, an IT platform, warehouses, automated cargo ships, and a large variety of customers with their own varied demand curves. It would be exceedingly difficult to integrate a single firm across such a chain, let alone one with enough breadth to capture a large share of the market. If it was integrated as such, it would have a substantial calculation problem. 

However, if multiple firms at every level of such a supply chain engage in a smart contract enforced bidding and fulfillment process that is built around the vision of the planned infrastructure, then that infrastructure can be developed flexibly. One car company could produce the self-driving truck, only to later be outbid by another company that offers one for cheaper. A large integrated firm would be loath to take losses in one department when it has monopoly control over a supply chain. In a decentralized structure, competition would still occur where it can occur. However, the relationships between all farmers, as one group, all self-driving truck manufacturers, as one group, and shippers, as one group, would be fixed. The final value of the integrated supply chain can be partially rationalized, even if it can’t be perfectly forecast.

Today, if you want to buy a car you have to consider tradeoffs. Maybe Lincoln has the best interiors. Ford has the best engines. GM has the best service and support. Forgive me car enthusiasts, this is a hypothetical. In this scenario I have to decide which feature is most important to me. What if I could have a car with Lincoln interiors, Ford motors, and GM service? In corporate, credit capitalism, these companies can’t share their best features with each other to maximize the value each feature adds to the marketplace overall. They use their feature as a monopoly advantage. Those who love luxury interiors must buy Lincoln, so Lincoln can overcharge these customers and make profits. In my opinion, a better arrangement is one where almost every car on the market has captured the value of Lincoln’s interior design expertise. Lincoln’s profits would come from being the very most innovative design firm, when it comes to interiors, serving a very large market share of all automobile customers. Customers would own cars with Lincoln interiors, GM service, and Ford motors.

It’s Hard To Be Wealthy In A Free Market

In my opinion, Libertarianism should be seen as a disappointing ideology for the super-rich. Regional and local gentry, too, would probably stand to lose a fair amount of social status in a truly free market. They might have to downsize their McMansion and sell their boat. I genuinely believe that libertarian free markets would inherently be wealth equalizing. They would not create total social equity, however. People are different and have different skills and make different decisions. Some circumstances, due to birth, are genuinely unfair. That doesn’t mean that the disadvantaged have a right to infringe upon others’ rights to have every unfairness of birth corrected and resolved. All societies, even in communism, have unequal social status problems. Also, people just like to live different lifestyles and have different priorities. Libertarian free market economies would not be equity utopias dreamed of by the “eliminate negative outcomes” progressives of the modern era. Nevertheless, libertarian ideology does perceive a free market which is not very friendly to the rich, and only gives temporary rewards in proportion to merit.

Someone should call the GOP and inform them that the free market is not their friend. Someone should call the leaders of the populist right and teach them that the free market is their best friend. Someone should call the liberal socialist left and convince them that free markets come closest to their localist, equalist ideal. Hopefully, with new technologies like blockchain, we can solve the economic problems which have plagued free societies for 200 years, and have a freer world.

Politicians Still Misunderstand High Insulin Prices

Politicians Still Misunderstand High Insulin Prices

In 2015, the Centers for Disease Control ranked diabetes seventh among the leading causes of death in the United States. If current trends continue, skyrocketing death rates and other serious consequences of poorly managed diabetes will continue.

Managing diabetes is challenging, often requiring strict dieting, regular exercise, and taking a variety of medications. For an increasing number of diabetics, insulin injections taken multiple times a day are indispensable for managing their conditions.
Tragically, many diabetics who depend on insulin find themselves struggling to afford it. From 2012 to 2016, the price of insulin doubled, costing some over $5,000 a year. Reports finding “horror stories everyday” of diabetics choosing between their medical needs and their financial needs have become heartbreakingly common.

Read the full article at the Independent Institute.

Is Anarcho-Capitalism A Contradiction?       

Is Anarcho-Capitalism A Contradiction?       

Is it possible for a stateless society to adequately protect property rights?

Any Rothbardian anarcho-capitalist has no doubt been confronted with the assertion that a state is necessary to enforce the property rights so vital to a market-based, capitalist system. 

Is this true?

Defining the State 

Before proceeding any further, its imperative to establish what we mean when describing “the state.”

In a brilliant 1974 lecture entitled “Society Without a State,” presented online here, Murray Rothbard laid out a concise definition:

“Let me say from the beginning that I define the state as that institution which possesses one or both (almost always both) of the following properties: (1) it acquires its income by the physical coercion known as “taxation”; and (2) it asserts and usually obtains a coerced monopoly of the provision of defense service (police and courts) over a given territorial area.”

Rothbard further refined his description in describing the state as an organization, that by its use of physical coercion, “has arrogated to itself a compulsory monopoly of defense services over its territorial jurisdiction.”

The State Is Coercion

With the definition of a state established, what is the proper role of the state? For those minarchists who believe a state is necessary, they insist the proper role of the state is to protect the rights of individuals. Namely, to protect people from physical harm or theft.

Such protection however, requires police, investigators, courts, prisons and judges. How are these services to be funded? Via taxation, they’ll concede. 

However, the aggression used by the state to collect taxes violates the very theft the state is supposedly established to protect against. Intellectual consistency leads us to conclude that the state cannot simultaneously protect us from theft while committing it. 

Even those who believe in free, competitive markets as being the most moral and efficient method of production and exchange for all other goods and services, will nevertheless maintain that the state must provide a system of law enforcement and courts to carry out the protection of rights – including property rights.

In his essay, Rothbard begs to differ. “But it is certainly conceptually possible for such services to be supplied by private, non-state institutions, and indeed such services have historically been supplied by other organizations than the state.”

He continues, “My contention is that all of these admittedly necessary services of protection can be satisfactorily and efficiently supplied by private persons and institutions on the free market.”

To be clear, Rothbard is not naïve in his thinking, acknowledging that “mankind is a mixture of good and evil.” There is no utopian vision of a stateless society in which bad actors and aggression magically become extinct. He persuasively makes the case however, that voluntary arrangements for security and criminal justice would not only be fairer and more efficient, but tend to minimizeboth the opportunity and the moral legitimacy of the evil and the criminal” with the removal of the state’s monopoly on violence and provision of defense services.

Markets in Security

Beginning with security, we already see a robust system of private security being enlisted by businesses and individuals to protect their property, in no small part because the current system of government policing is not up to the task. 

We can look to the city of Detroit, in which last year it was reported the city has seen massive increases in private security companies providing protection because local citizens and businesses have lost faith in the government to keep their persons and property safe.

For those who can’t afford to pay directly for security, Rothbard wrote, widespread and affordable protection services could “be supplied by insurance companies who will provide crime insurance to their clients.”

“In that case,” he continued, “insurance companies will pay off the victims of crime or the breaking of contracts or arbitration awards and then pursue the aggressors in court to recoup their losses. There is a natural market connection between insurance companies and defense service, since they need pay out less benefits in proportion as they are able to keep down the rate of crime.”

As Rothbard demonstrated, understanding how society could transition to exclusively private security should not be that intellectually challenging. 

Why Not Markets in Criminal Justice?

This leads us, however, to the somewhat more difficult case of how to replace the government court system. In his essay, Rothbard asserts that “any society, be it statist or anarchist, has to have some way of resolving disputes that will gain a majority consensus in society.”

When protection agencies catch a criminal who has committed, or is in the act of committing, aggression against another’s person or property, there must a system in which victims can recoup their losses and/or ensure the perpetrator receives appropriate punishment. For this, Rothbard argued, a system of private, voluntary arbitration courts will suffice. 

Indeed, Rothbard cites a 1970 book written by the Harvard and University of Virginia educated legal scholar William C. Wooldridge entitled “Uncle Sam, the Monopoly Man.”  Even in 1970, Wooldridge wrote that “Arbitration has grown to proportions that make the courts a secondary recourse in many areas and completely superfluous in others.”

Again, just as in security, the market has been providing arbitration services to supplement the government court system’s shortcomings. 

Critics may object Rothbard wrote, “that arbitration only works successfully because the (government) courts enforce the award of the arbitrator.” 

“Wooldridge points out however, that arbitration was unenforceable in the American courts before 1920, but that this did not prevent voluntary arbitration from being successful and expanding in the United States and in England,” he continued.

Moreover, as Rothbard highlighted, Wooldridge pointed out “the successful operations of merchant courts since the Middle Ages, those courts which successfully developed the entire body of the law merchant. None of those courts possessed the power of enforcement.”

“In other words, private arbitration is, and has been for generations, successfully settling disputes,” Rothbard concluded.

The market process, Rothbard added, would ensure the most trustworthy arbitrators would rise to the top. “As in other processes of the market, the arbitrators with the best record in settling disputes will come to gain an increasing amount of business, and those with poor records will no longer enjoy clients and will have to shift to another line of endeavor,” he wrote.  

But how would the system of courts in a free society be funded?

“Courts might either charge fees for their services, with the losers of cases obliged to pay court costs, or else they may subsist on monthly or yearly premiums by their clients, who may be either individuals or the police or insurance agencies,” Rothbard argued. Entrepreneurial ingenuity and technological advancements would also produce funding mechanisms yet to be imagined. 


Rothbard’s essay serves as an outstanding introduction to the provision of security, law and courts in a stateless society. The enforcement of private property rights, contrary to anarcho-capitalist skeptics and critics, can indeed be capably handled through voluntary market exchanges. No corrupting and coercive influence of the government is needed.

Bradley Thomas is creator of the website and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

#123 Paul Snow

#123 Paul Snow

CEO of Factom, Paul Snow, gives me the 101 on Factom. We also discuss blockchain use cases (especially having autonomy over your digital ID and data), tokenization, and the overall importance of bitcoin and crypto. This is how we become sovereign individuals.

Factom is a decentralized publication protocol for building record systems that are immutable and independently verifiable, and uses Bitcoin as that anchor of verification.

Don’t trust, verify!

We received our education about tokenized salvation, me and Paul 🙂

– Probably not Willie Nelson

Metrics vs People in Economic Analysis

Metrics vs People in Economic Analysis

Metrics are created to establish quantifiable ways to determine certain trends, be they positive, negative, or neutral. As far as the metrics appropriately signal what they’re intended to represent, they may be quite useful to a certain extent, but unless one is conscious of their limitations, they can be “cheated” and accordingly become misleading indicators. Unless we are conscious of how they may be manipulated in this manner, we run the risk of acquiring a false understanding of both the theory and history involved.

Economic metrics are generally interpreted as more or less accurate ways to determine how the economy is going relative to previous times, and how the economy is going is by extent presumed to be in line with the well-being of the people. Gross Domestic Product (GDP), for instance, is the main metric analyzed to this end [1]; if it goes up, the economy is supposedly doing better, and if it goes down, it’s doing worse. This metric is said to be based on the five components

C (Consumer spending) + G (Government spending) + I (investment) + EX (exports) – IM (imports).

From this, it might be said that imports are bad for the economy and that an increase in any of the others is good for the economy, which has in recent years led to a quite unfortunate resurgence of Protectionism (i.e. establishing trade barriers like tariffs). Further mathematical manipulation of this equation also leads to what is called the “multiplier”, which, for instance, claims that an increase in government spending can create a sort of scattering effect adding more to the economy than what was taken from it through taxes. By this logic, it doesn’t matter what the government spends money on; just that in some way or another the economy will be “stimulated” by it. The deception here can, however, be broken through if we understand the limitations of the metric at hand.

Why would it, for instance, be considered a positive that people increase their consumption? If it was due to a decrease in poverty that led to less people dying of thirst and hunger it may indeed be a positive, but why should a Black Friday surge in consumption of things the buyers may end up not even getting much practical use of be treated the same way? How about a trend of increasing leisure and focus on minimalism in a given population? This would be represented negatively on various economic metrics, but should they really be condemned for making personal choices that make them happier just because of some collective metric claiming that the population “overall” is worse off for it? How about if government spending increases due to the government initiating a war? Are we to see that as a good thing only because an economic metric or two increases? Many more examples could be mentioned, but this will probably suffice for the point at hand.

In addition to these clear problems to the representation of underlying trends in social and economic metrics, even if they had accurately represented statistical trends in the past, it could still cease to be so if they were to be used as targets for policy, according to “Goodhart’s law“, named after Charles Goodhart, the former chief economic adviser to the bank of England. His brief explanation of the “law” is that “Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Robert Lucas has further explained that

Given that the structure of an econometric model consists of optimal decision rules of economic agents, and that optimal decision rules vary systematically with changes in the structure of series relevant to the decision maker, it follows that any change in policy will systematically alter the structure of econometric models.”

After all, it is the collective outcome of people’s individual actions that are represented in these metrics, and is it really worth it that we be coerced into doing something that supposedly increase them but actually makes us worse off? Living free and making personal decisions based on what we believe is the best for ourselves and others shouldn’t be tossed aside to satisfy some arbitrary numbers. The government may find it a convenient way to gather support for its policies, but we free minds can see through this propaganda, however subtle. Consider what is best for people as individuals, not as collectives based on some abstract model of speculative economic relationships.

No action can be considered virtuous unless it is undertaken freely, by a person’s voluntary consent;” that is the libertarian creed – our creed. We find Austrian economics to be the tradition most appropriately analyzing economic phenomena by its individualistic and causal-realist methodology, standing as a preferable alternative to the collectivist and abstract mathematical approach to economics devised mainly by Leon Walras and John M. Keynes. We follow the Austrian tradition because it actually analyzes and describes people’s actions and its consequences, not just metrics spuriously representing them. The limits to growth is the extent to which a metric can be manipulated without eventual side effects; there’s no limit to individuals’ pursuit of bettering the conditions of themselves, their families, and their friends.

Reprinted from Mises Revived.

Following Federal Lawsuit, Richland, Wa. Drops Unconstitutional Street-Fees Law

Following Federal Lawsuit, Richland, Wa. Drops Unconstitutional Street-Fees Law

Following a federal lawsuit brought by the Institute for Justice, the City of Richland has ended its practice of unconstitutionally forcing homeowners to upgrade city streets as a condition of obtaining a building permit. As a result of that change, Linda Cameron is free to renovate her Richland home without first paying upwards of $60,000 to upgrade an adjacent city street.

“It is a shame that it took a federal lawsuit for the city to recognize that it was violating its citizen’s constitutional rights,” said IJ Senior Attorney Paul Avelar. “But with this change, Linda and other homeowners are free to renovate their property without having to pay a ransom to the city.”

Linda’s fight started in October 2018, when she decided it was time to renovate the modest one-bedroom, one-bathroom home she had lived in for more than 40 years. She hired a contractor, drew up plans for an additional bedroom and bathroom and submitted a permit application to the city. The city’s building inspector approved her permit as being structurally sound, but the Richland Public Works Department rejected it because it didn’t also include plans to renovate a public street that ran along the back of her property—a street that she didn’t even use to access her driveway. To get her home renovation permit, Richland’s municipal code said Linda also had to improve the city’s street. Linda would have to widen 400 feet of street; build curbs, gutters and streetlights; and add sidewalks that didn’t connect to any other sidewalks. An engineer estimated the changes Linda would have to make at $60,000.

Linda attempted to negotiate with the city, but that was a dead end. The city manager said the law said what it said, so Linda would just have do as she was told. Instead, Linda partnered with the Institute for Justice and filed a federal lawsuit challenging Richland’s imposition of so-called “impact fees” as a condition of getting a building permit. Municipalities may legally charge fees to recoup the impact development has on public infrastructure, but, typically, these fees are imposed on developers to cover the real impacts of new property development. For example, if a developer wants to build a 100-home subdivision, a city could charge an impact fee to recoup the cost of installing new sewer lines or installing traffic signals for increases in traffic.

But when there is no impact, there can be no impact fee. The Supreme Court has explained that impact fees charged without impacts are unconstitutional; indeed, they are little more than extortion. Linda’s case demonstrates why. Linda just wanted to add a second bedroom to her one-bedroom home, but Richland said that before she could, she would have to spend tens of thousands of dollars widening a city street behind her house. It’s obvious that Linda’s second bedroom would not have an impact on the street. The city just wanted Linda to pay for a new street, so it wouldn’t have to.

“If cities want new streets or sidewalks, they can pay for those through normal channels. What they can’t do is force homeowners like Linda to pay for them by imposing unconstitutional conditions on building permits,” said IJ Attorney Patrick Jaicomo. “Thankfully, Richland has agreed to stop that practice. Under its new ordinance, homeowners will be able to once again use and enjoy their property without paying the city for the privilege.”

After the lawsuit was filed, Richland agreed to change its law to impose an impact fee only where there was an impact. After Richland changed its law, Linda’s application was granted without any conditions.  Now, she can get to work on renovating her home and other homeowner in Richland are free from similar treatment in the future. 

Reprinted from the Institute for Justice.

Three Revolutionary Ideas

Three Revolutionary Ideas


So many ideas that we take for granted had once been considered revolutionary. Historically, common responses to founders of such ideas have been charges of heresy, ostracism, or death. Famously, Socrates was sentenced to die for “corrupting the youth”, which is a euphemism for his genius Socratic method. Effectively, Socrates was killed for popularizing the very idea of discourse—a concept now so deeply ingrained in Western Civilization that it hums unexamined in the background, silently serving as the primordial soup from which all other new ideas emerge. And its earliest champion was killed over it.

Socrates is far from the only example. Nineteenth century physicist Ludwig Boltzmann received harsh criticism for using the conceptual atom in his theoretical work, and it is thought that this contributed to his suicide at the age of 62. He has since been vindicated, and the atom is widely accepted by scientists and laypeople alike. 

There is no dearth of these tales. But if history is riddled with awesome ideas that are not appreciated until long after their origins, could there be such ideas floating about right now, under our noses?

There are. In fact, I can think of three ideas that are so deep, so potentially useful, and so paradigm-shifting that widespread acceptance of even one of them would transform civilization for the better. I musingly call these ‘The Big Three’: critical rationalism, praxeology, and constructor theory.

Critical rationalism

Critical rationalism is our best theory of knowledge and how it can grow. The twentieth century philosopher Karl Popper spent his career developing and advocating for it across books, essays, and lectures. The theory is concisely summarized in the title a compendium of his essays: All Life is Problem Solving. As people, we face problems—conflicts between ideas, to quote the physicist David Deutsch. This is true not only in science, but in our personal lives, in economics, and it’s even true for both genes and creatures of the biosphere. The theory is as deep as it is wide—critical rationalism applies anywhere in nature where knowledge can be found.

How do people solve problems? They conjecture solutions. For the scientist, this takes the form of creating explanations, or hypotheses, of some physical phenomenon. For the entrepreneur, this could be offering an original product to the market. For the gene, this could be a mutation that allows it to spread at the expense of its rivals (to be sure, this process is not conscious). Notice what these cases have in common—something genuinely novel has entered Reality. Before Einstein’s theory of general relativity, no one ever held the thought that “space-time tells matter how to move; matter tells space-time how to curve”, to quote the physicist John Wheeler. Before the invention of the wheel, there were no such objects in the entire Universe. And biology is well-known to create chemicals that do not exist anywhere else—proteins, for example, can’t be found in the dark oceans of the cosmos, and yet they abound on Earth, in the presence of life.

But if we are only ever guessing solutions to problems, how can we be sure of ourselves? We can’t. Here was another stroke of genius by Popper. The quest for foundations, for certainty, was itself a mistake. In science, for example, even our most basic presumptions are forever tentative, forever liable to revision and improvement. We can never know how a new theory will change our worldview, and so no assumption is perfectly secure. 

Typically, more than one solution is conjectured to solve a given problem. By the 1600s, for example, there were two rival explanations for the motion of falling objects: that of the ancient Greek philosopher, Aristotle, and that of the contemporary thinker, Galileo Galilei. Aristotle held that objects fell at a speed proportional to their weight, while Galileo conjectured that all objects fall at a uniform rate, independent of their weight. What to do in such a problem-situation in which more than one solution is offered? Popper explained that we criticize all candidate solutions. This step is itself a creative process, as our methods of criticism and criteria for what constitutes a good explanation are themselves ever-evolving and improving. 

In science, the most salient form of criticism is the so-called crucial experiment. When two or more theories attempt to explain the same phenomenon, we conduct an experiment whose outcome contradicts the predictions made by all but one of the rival theories. In the case of Aristotle’s and Galileo’s explanations of falling objects, the test was straightforward—drop objects of different weights from some height and record their time to impact. Famously, if only apocryphally, Galileo did just that by dropping balls from the Leaning Tower of Pisa. Veracity of this tale aside, only Galileo’s theory was in fact shown to be consistent with experimental outcomes. Aristotle’s explanation of motion was banished from the scientific community and relegated to the history books.

And so critical rationalism holds that we conjecture as many solutions as we want, criticize all of them, and retain those that survive. Even after some scientific explanation survives scrutiny, its shortcomings are eventually exposed, and we must conjecture new solutions yet again. Galileo’s theory was soon improved and brought into a much deeper explanatory framework by the seventeenth century physicist, Isaac Newton. And Newton’s theory was further superseded in the early twentieth century by both quantum mechanics and Einstein’s theory of relativity. The scientific process is open-ended, as problems are latent in all of our theories, and we are forever trying to solve problems in our worldview, to resolve errors in our theories.

In general, the scientific method proceeds as follows: whatever our current understanding of the world is, it invariably contains gaps and misconceptions, and there are phenomena for which it cannot account. We then conjecture a new theory that resolves at least one such flaw in our worldview. We criticize that theory with all of the tools at our disposal, only one of which is experimentation. For example, we demand that the new theory is internally consistent, not arbitrary, and so on. A theory that fails those criticisms doesn’t need to be corroborated by experimental evidence. Only when we have multiple candidate theories to explain the same phenomenon do we conduct the crucial experiment. Once we have criticized all available theories, we retain whichever have survived. But we then find ourselves in a new, deeper problem-situation, for even with our updated worldview, there remain gaps in our understanding of reality—some that would never have even been previously conceivable. The entire scientific scheme in the critical rationalist framework is shown in Figure 1.


Figure 1. Diagrammatic representation of Popper’s critical rationalism. Discover a problem/unexplained phenomena, propose several potential theories/solutions (TS1, TS2, etc.), criticize all potential theories/solutions until one remains, eliminate errors/explain phenomena by applying the surviving theory/solution, discover new problems (P21, P22, etc.), repeat.


Many of the so-called crises in science today are a result of bad philosophy—that is, of ignoring critical rationalism. In contrast to much of what is done in research, we cannot simply gather more data and hope to better understand Reality. Rather, we must first conjecture an explanation—or several rival explanations—and then criticize all such candidate theories. Data serves as a mode of criticism—theories make different predictions about how the world ought to behave, and those theories whose predictions are inconsistent with data are said to be falsified, while those theories whose predictions are consistent with data are said to be corroborated. Moreover, it is logically impossible to go from data to theories’, since interpreting a set of data is itself a theoretical act. So, no amount of data-gathering can help us to solve problems absent some good explanation of what we expect to observe. Rival philosophies, such as empiricism–which emphasizes only what we can observe—and inductivism—which claims that we proceed from observations to theories—are false. So much effort is wasted by researchers and thinkers who are stuck in these mistaken frameworks.

So, acceptance of critical rationalism would save many scientific fields that have stagnated in the last few decades, because researchers would reorient away from the overemphasized activity of gathering data towards the overlooked but fundamental activity of explaining reality

Because critical rationalism shifts the emphasis from data to problems and conjectured solutions, the philosophy reaches far beyond science and into other important areas, such as how to live. A state of unhappiness is a problem-situation, and conjecturing explanations of why one is in such a state can inform a person as to what action to take. If the action still fails to resolve the problem, the person can conjecture yet another solution, and so on, in a trial-and-error fashion. A person continuously takes action in striving to go from problem-situation to better problem-situation. In fact, all of life takes this form, even if only implicitly. 


Economics was always destined to be treated differently than the hard sciences. Unlike physics and chemistry, in which the objects of study are predicable systems like stars, planets, and metals, economics is a science of people—and people are themselves creative, and hence unpredictable even in principle. This is cause for concern only for those who think that the goal of science is prediction. But as we’ve seen, critical rationalism implies that the goal of science is rather to solve problems in our worldview, to explain Reality. Prediction, then, is merely a way of testing, of criticizing theories. So, the fact that people are inherently unpredictable is no problem for the critical rationalist.

Nevertheless, the astonishing effectiveness with which physicists had been able to predict the motion of objects ranging in size and speed from bullets to planets made an impression on thinkers in other fields. And critical rationalism was only discovered in the last century, so scientists and philosophers alike were vulnerable to all sorts of misconceptions that Popper’s ideas would eventually resolve. In the meantime, predictions, mathematics, and sensory experience were thought to be fundamental to all sciences. 

But, following Popper, our goal is to explain Reality with whatever tools we have at our disposal. The methods used by so-called Austrian economists are a priori and deductive—they begin with an axiom so self-evidently true that to deny it would entail a self-contradiction. They then proceed to deduce logical implications of that axiom. In this way, no experiment could contradict their conclusions, because they were founded and deduced by logic alone. *

The Austrian school of economics was founded by the Viennese Carl Menger with the publication of his 1871 book, Principles of Economics. Menger and a few others ushered in the ‘marginal revolution’ in economic thought, so-called because they recognized that goods are consumed ‘at the margins’, an idea that solved the diamond-water paradox. Why is water typically cheaper than diamonds, if the former is more fundamental to human survival? The first generation of Austrian economists realized that ‘water as such’ and ‘diamonds as such’ are never consumed by the economic actor. Rather, a person consumes either a unit of water or a unit of diamonds at the margins—he purchases whatever he values the most at a particular moment in time, after all of his lower values have already been satisfied. So, even though water is more biologically necessary than are diamonds, if John has already satisfied his desire to hydrate, then the next purchase he may prefer is a unit of diamond, rather than another unit of water. People make choices at the margins of their present scale of values. Value, then, is not intrinsic in any scarce resource, but rather is in the eye of the economic beholder. This subjectivist approach to economics contradicted both Adam Smith’s classical school and the nascent Marxist view. 

But how we could anyone be sure that Austrian economics is correct, and those rival theories false? In physics, we could conduct a crucial experiment, as had been done successfully many times by that point in history. Enter Ludwig von Mises, arguably the greatest economist of all-time. In his 1949 magnum opus, Human Action, Mises elegantly derived—and explained—the entire edifice of Austrian economics via praxeology, the science of human action.

Mises’ praxeology begins with the irrefutable axiom that man acts purposefully (I welcome the reader to reject the axiom and notice what happens). It is astounding how many conclusions follow. For example, in acting purposefully, it is immediately implied that John has chosen to pursue end A rather than end B. Had end A been unavailable, John would have indeed pursued end B. In this way, the action axiom implies the scale of values mentioned above. Furthermore, pursuing end A requires the use of some means, which, because they are being directed towards end A, they cannot be directed towards other ends. In other words, man acts in a world of scarce means. 

Because time is a scarce resource, then, all else being equal, man prefers to satisfy his ends sooner rather than later. In this way, the concept of time preference is derived. 

Mises goes on to apply this way of thinking to ever more complex scenarios, starting with one man alone on an island to a society with diverse individuals desiring a multitude of ends. Through this deductive approach, he shows how prices emerge, the role of profits and losses in an economy, and, crucially, the damaging effects of coercive intervention into an economy of free actors.

I am only scratching the surface of what Mises accomplished. From first principles, he not only built an entire edifice of economic thought, but he also provided the explanation for why this school, the Austrian school, is the only correct one. After Mises, the Austrian school and its praxeological methods were here to stay, even though they remain the object of dismissal or mockery by economists from other schools of thought who demand that economics be empirical.

Murray Rothbard took the baton from Mises and continued developing Austrian economics. He also applied it forcefully to politics, creating the legal philosophy of anarcho-capitalism. Libertarianism had been defended in various forms in the past, but no one had unified praxeology, morality, and the concept of private property so thoroughly. In doing so, Rothbard spawned his greatest brainchild—a consistent and elegant defense of a society without government and any other violations of the so-called nonaggression principle.

What Mises and Rothbard have demonstrated is that understanding is not limited to experimentally testable explanations. The dogma that scientific theories must be mathematical, and must make predictions about how objects will behave, is false. And with respect to politics, Austrian economics suggests that no government intervention may possibly improve the overall standard of living of mankind, to put it mildly. The ideas of these great men have radical implications that can be summarized in nine words:

You cannot coerce your way to a better world.

Constructor theory 

The last of the Big Three is the youngest but perhaps the most fundamental. Constructor theory is officially less than a decade old, if the clock starts with the publication of its foundational paper in 2013 by physicist David Deutsch. 

As with most of our deepest theories in physics and elsewhere, constructor theory’s beauty is in its simplicity. That’s not to say that the details wouldn’t take effort to understand, but it’s not some impenetrable labyrinth of mathematics and jargon. You don’t have to be an expert in physics or epistemology or anything else to understand the ideas behind and within constructor theory.

In what Deutsch calls the prevailing conception of physics, theories take the form of ‘initial conditions plus laws of motion’. For example, Newton’s physics, called classical mechanics, allows you to predict an object’s future position and momentum (mass times velocity) as long as you know all of the forces acting on it, as well as its current position and momentum. As we’ve seen, the success of Newtonian physics and other physical theories to predict a system’s behavior over time was so impressive that predictive ability became a standard by which future theories would be judged. 

In the 1800s, the theory of electromagnetism, while explaining a different class of phenomena than did Newton’s theory, also took the form of ‘initial conditions plus laws of motion’. In this case, the motion of charged particles, such as electrons, could be predicted if one knew the forces acting on them, and again, their initial state.

Even with the advent of general relativity and quantum mechanics in the 20th century, this paradigm reigned supreme. Although the state of a system was no longer necessarily expressed in terms of its position and momentum, the theories were still cast in terms of trajectories over time. Even in the notoriously weird quantum mechanics, something called a wavefunction evolved predictably over time, given particular laws of motion for that wavefunction.

So, theories were thought to be all about what actually happens in the world. To reiterate, given some state of the world at any point in time, a successful theory, it was thought, should predict (or retrodict) the state of the world at some other time. In this prevailing conception, a theory provides equations of motion that predict what will happen to some system, given some current state, or initial conditions, of this system. Whether this system is a ball rolling down a hill, or the entire universe itself, or a quantum wave function, the prevailing conception is all about predicting what will happen to the system in question.

But some of our deepest explanations simply don’t conform to this prevailing conception. Consider the other two of The Big Three—critical rationalism and praxeology. In neither case do we predict the future according to some equation coupled with data of initial conditions. And, funnily enough, as I’d mentioned, one of the criticisms of praxeology is that it does not employ such equations! But the point is that some of our deepest theories of Reality simply cannot be expressed in terms of the prevailing conception. If Reality is as unified and comprehensible as most scientists fully expect it to be, then there has to be a way of formally unifying those theories that do conform to the prevailing conception, such as the ones I’d mentioned earlier, with these other theories that cannot be put in terms that the prevailing conception can handle. Other examples of the latter, by the way, include evolution by natural selection and computation.

So if our worldview is ever going to encompass both the wildly successful theories that do conform to the prevailing conception, as well as all of our theories that explain higher level phenomena — such as praxeology and critical rationalism — then we need some new theory, one that provides a language in which we can express all of the theories in the prevailing conception, as well as our other theories. This theory, it turns out, is constructor theory.

A final preliminary note—there is a host of principles that most working scientists accept, but that are only implicit and cannot be expressed in any of the prevailing conception’s theories. The principle of testability, that a theory must be falsifiable, is one such example. Until constructor theory, people just took that as a methodological rule, a rule of how science ought to be done. But constructor theory naturally and elegantly makes this principle explicit. Another example that seems to hold true but that the prevailing conception has no room for is the so-called Turing Principle, which essentially states that it is possible to build a computer that can simulate any physical process. 

These two principles, along with others, have no place in the prevailing conception, because they’re not about initial conditions and predicting the future state of a system. In fact, they’re about what’s physically possible and what’s impossible.

This leads us to the governing idea of constructor theory — that is, all of the laws of physics can be expressed in terms of which transformations are possible and which transformations are impossible, and why.

So while theories that conform to the prevailing conception will tell you the trajectory of the state of a system according to some laws of motion and given some initial state of a system, constructor theory tells you which trajectories are possible according to that theory, which are impossible, and why. While in the prevailing conception, what matters is what will happen, constructor theory is all about what can be caused to happen in principle. What actually happens is only an emergent consequence of what can possibly happen.

As a brief example, in Einstein’s famous theory of special relativity, no object with mass can travel faster than the speed of light. And so, in the prevailing conception, you have some object and its initial velocity, and the equations of special relativity can tell us the object’s velocity at any future point in time. In those equations, it turns out to be impossible for the object’s velocity to ever exceed the speed of light in a vacuum.

In constructor theoretic terms, we can say that the object’s velocity cannot be transformed into a velocity that’s greater than the speed of light, or, equivalently, that transforming an object’s speed into a speed that’s greater than the speed of light in a vacuum is an impossible task.

In that example, we don’t get much purchase by switching to constructor theoretic terms, because the prevailing conception already has a handle on the phenomenon at hand. But what about questions that we can ask about other aspects of Reality? For example, under what conditions is life possible, in principle? That certainly can’t be answered by the prevailing conception. How about: what resources are required to build a universal computer—a computer that can simulate any other computer? There’s no way we can answer these questions in terms of initial conditions plus laws of motion, but we might be able to answer them in terms of possible and impossible transformations. For example, maybe it’s impossible for life to emerge in the absence of a genetic code, or any other sort of code. Maybe that can be shown under constructor theory. Maybe constructor theory can also show exactly under what conditions a universal computer can be built.

There are all sorts of questions that one can ask once one understands the power of constructor theory. And notice that the theory brings in counterfactuals into fundamental physics. In other words, what’s fundamental is not what actually happens, but rather what could’ve been caused to happen. So, what’s interesting about, say, a computer, is not that it runs a particular program, but that it could be caused to run other programs.

And since constructor theory can just as well account for theories in the prevailing conception, as I had briefly shown with my special relativity example, we see that the prevailing conception is really just a limiting case that allows for classes of phenomena that do conform to an ‘initial condition plus laws of motion’ kind of theory. Constructor theory allows for a much wider class of phenomena, including those that are unpredictable in principle, those that require counterfactuals to explain, and those that can’t be explained by resorting to a reductionist framework, in which we explain greater, bigger, or more complex phenomena in terms of their constituent parts. All of this is possible because of the single genius idea that all of the laws of physics can be expressed in terms of transformations that are possible and transformations that are impossible, and why.

Constructor theory is several decades younger than the other two of the Big Three, and so many of its accomplishments remain to be discovered (but read here, here, and here for scientific problems it has already solved). Still, constructor theory has many philosophical implications for our worldview, and even for our understanding of the role of people in the cosmos. Consider all of the transformations that are capable of being caused. Of those, only an extremely tiny minority occur “naturally”—there are few unique objects there are across the universe. Stars, planets, black holes, asteroids, and a whole lot of cold, dark, and empty.

Now consider what people have created in just the last few thousands of years. People have converted rocks into cathedrals. They’ve mixed the fiery energy of the sun with the guts of Earth itself to produce the orderly, purposeful devices that prevail in our digital age. They’ve turned wolves into dogs, trees into books, and metal into vehicles that fly through space. And the set of transformations that people are capable of causing is limited by what they know how to do. It follows, then, that both people and knowledge are fundamental in a constructor theoretic understanding of Reality—only people are capable of causing any transformation capable of being caused, and their repertoire at any moment is limited by their knowledge. 

Constructor theory also demands that we be philosophical optimists. Any problem that we face requires some transformation of our environment from the problematic state to an unproblematic state. But, as we’ve seen, people can render any transformation permitted by the Laws of Nature, so long as they acquire the requisite knowledge. It follows that any problem we face is necessarily solvable (see Deutsch’s 2011 book, The Beginning of Infinity, for a longer discussion), it is just a matter of creatively discovering the solution. 


The Big Three are available for anyone to study. I have only introduced them in this essay. ** Each contains so much more than I’ve offered in these brief pages. 

Widespread understanding of any of The Big Three would would resolve so many errors in our collective consciousness. Taken together, The Big Three constitute a revolution in the making on par with any of those that came before. There are numerous connections between them, but that’s for another essay. The curious reader might already be putting the pieces together. 

Socrates himself could never have imagined that our understanding of Reality might deepen and unify to such an astonishing degree. Although we remain infinite in our ignorance, our knowledge is deeper than in any age past. And yet, here we are, sitting atop a goldmine of mind-bending explanations. Best get digging.

*An open problem is how praxeology can be said to be empirical, if it is deducible from logic alone. This is one of the ways in which The Big Three come together, but that is a story for another essay.

**I hardly even mentioned knowledge, and the fundamental role it plays in each of the Big Three.

The Theory and Brief History of Money and Banking

The Theory and Brief History of Money and Banking

The ultimate purpose of this booklet is to give the reader a solid grasp of how money works in today’s world. Yet before diving into the particulars of central banks, repo markets, and LIBOR—all topics that will be covered in future chapters—we should first provide a general framework giving the basic theory or “economic logic” of money and banking.

In short: why do we have money in the first place? Where does it come from, and what determines its form (livestock, metal ingots, coins, paper notes, electronic ledger entries, etc.)? What qualities make for a good money? What role do banks play—is it something other than what money itself does for us?

In this chapter, we’ll answer these elementary yet essential questions. To be clear, we are not here offering an actual history lesson, though we do mention some important historical episodes and illustrative examples. Rather we are providing a mental framework for understanding everything else that follows in the booklet.

The Limits of Direct Exchange

To understand the importance of money, let’s first imagine a society without money. In a world limited to barter, or what economists more precisely call direct exchange, there would still be private property and people would still benefit from voluntary trade. Because economic value is subjective—the “utility” of a good is in the eye (or mind) of the beholder—we can have win-win exchanges, in which both parties walk away correctly believing that they got the better end of the deal.

However, if society were limited to direct exchange—in which individuals only accept items in trade that they plan on using personally—then people would miss out on many advantageous transactions. Let’s consider a simplistic example. Suppose there are three individuals: a farmer, a butcher, and a cobbler. The farmer starts out with some eggs that he’s just taken from his hens. He would like to trade his eggs in order to get his tattered shoes repaired. The problem, though, is that the cobbler doesn’t want any eggs—but he would be willing to repair the shoes for bacon.

Unfortunately, the farmer doesn’t currently have bacon. However, his neighbor the butcher does have bacon. Yet the butcher doesn’t want to trade with the cobbler, because the butcher’s shoes are just fine. What the butcher would really like are some eggs. Yet, the farmer himself doesn’t like the taste of bacon, and would rather eat his own eggs.

In a world limited to direct exchange, these men are at an impasse, because no single transaction would benefit any pair of them. Yet all of them could improve their situation with a rearrangement of the goods.

The solution is to introduce indirect exchange, in which at least one person accepts an item in trade that he doesn’t plan on using himself but holds merely to trade away again in the future. In our example, suppose that the farmer has an epiphany: Even though he personally dislikes its taste, he trades his eggs to the butcher to obtain the bacon. Then he takes the bacon to the cobbler, who accepts it as payment for fixing his tattered shoes.

direct exchange diagram

After these two trades, all three individuals are better off than they were originally. Remember, though, that the solution relied on the farmer accepting an item in trade—in this case the bacon—that he didn’t plan on using himself. Economists call such a good a medium of exchange. Just as air is a “medium” through which sound waves travel, the bacon served as a medium through which the farmer’s ultimate exchange was effected—namely giving up his eggs in order to receive shoe-repair services.

Media of Exchange and the Origin of Money

As our fable illustrated, individuals can often improve their position by trading away goods that are less marketable and accepting goods that are more marketable, even if they don’t personally plan on using the items. As the founder of the Austrian school, Carl Menger, demonstrated in an 1892 essay1 (though earlier economists had anticipated some of the explanation), this principle is all we need to explain the emergence of money.

As individuals in the community seek to trade away their less marketable (or less liquid) goods in exchange for more marketable (or more liquid) goods, a snowball process is set in motion: those goods that started out with a wide appeal based on their intrinsic qualities see a boost in their popularity simply because they are so popular. (For a more modern example, the prisoners in a World War II POW camp would gladly trade away their rations in exchange for cigarettes even if they were nonsmokers, because enough of the other prisoners were smokers.2) Eventually, one or two commodities become so popular that just about everyone in the community would be willing to accept them in trade. At that point, money has been born.

A formal definition for money is that it’s a universally accepted medium of exchange. Menger’s explanation showed how such a commodity could emerge from its peers merely through voluntary transactions and without any individual seeing the big picture or trying to “invent” money. (See the endnotes for recent anthropological criticism of Mengerian-type explanations of the origin of money.3)

The Qualities of a Good (Commodity) Money

Money that emerged in the process we’ve described would necessarily be commodity money, in which the monetary good itself is also a regular commodity. (In Chapter 3 we will discuss fiat money, in which the monetary good serves no other function than to be the money.) Historically, many types of commodities have served as money in various regions, including livestock, shells, tobacco, and of course the precious metals gold and silver.

What would make a community gravitate towards some commodities but not others? Besides having a wide marketability, an individual would want a medium of exchange to possess the following qualities: ease of transport, durability, divisibility, homogeneity, and convenient size and weight for the intended transactions.

In our fable above, although bacon served as the medium of exchange, it would be ill-suited to serve this purpose generally, as bacon is perishable. Likewise, a shotgun might be very valuable in certain communities, but it’s not divisible; you can’t cut it in half to “make change.” Diamonds might seem like a great candidate for a medium of exchange, but they aren’t homogeneous: one giant diamond is more valuable than five smaller diamonds that (combined) weigh the same amount.

These types of considerations help explain why eventually gold and silver emerged as the market’s commodity monies of choice. These precious metals satisfied all of the criteria of what makes a convenient medium of exchange, and once the community generally agreed, they were money.

Monetary Calculation

The emergence of money meant that a single commodity was on one side of every transaction. This greatly reduced the calculations required to navigate the marketplace. For example, consider a merchant whose business required him to closely follow twenty different goods. In a world of pure barter—where each good traded directly against every other good—in principle he would have to keep track of 190 separate barter “prices”4 (meaning the ratios at which one good traded for another). But if one of those twenty goods also serves as the monetary good—maybe it’s silver—then the merchant only needs to keep track of nineteen different prices (all quoted in silver), because each of the other goods is always being bought and sold against silver.

Moving from a state of barter to a monetary economy allows for economic decisions to be appraised in terms of a standard unit. With the use of money, business owners can engage in accounting, where they can easily calculate whether they had a profitable year. Trying to compare revenues to expenses would be much more difficult in a pure barter system. A factory owner could know that her operation used up certain quantities of hundreds of input commodities (including labor hours), in order to produce certain quantities of dozens of outputs, but without being able to reckon these physically distinct commodities in terms of money prices, she would face the same type of problem plaguing socialist central planners.5

The Function of Monetary Coins (and Tokens)

We have seen how a commodity money can emerge spontaneously from a prior state of barter, facilitating exchanges and profit/loss calculations. However, even though a community benefits tremendously from the existence of money, there would still be limitations if the money remained in its “raw” form. It would hamper trade if shopkeepers had to perform metallurgical tests on hunks of metal that customers presented for payment to verify that the hunks were indeed silver (or gold, etc.) of the claimed weight.

The solution to this problem is to coin the raw hunks of metal into recognizable disks of a uniform size and purity (or “fineness”). We should emphasize that a full-bodied coin was not money because of the stamping process; the markings on the coin merely indicated to the community that the hunk of metal in question did indeed contain the specified weight in the underlying commodity that served as money.

In addition to striking full-bodied coins, another possible solution is for reputable outlets to issue token coins, which represent redemption claims on the issuer for a specified amount of the actual money commodity. Note that to perform their function well, even token coins would need to be recognizable in the community and difficult to counterfeit. For a modern example, consider the plastic chips issued by casinos: A Las Vegas casino needs to have chips that are distinctive and “authentic”-looking, and which can’t be easy for outsiders to replicate. Because such chips will be instantly redeemed by the casino, within its walls (and even perhaps in the surrounding neighborhood) they are “as good as money.” But a gambler who travels back home wouldn’t be able to buy groceries with chips issued from a Las Vegas casino.

Just as the money itself can arise without the intervention of political authorities, so too can the private sector handle the operations of turning the commodity money into coins. Indeed, numismatists agree that some of the highest-quality coins (and tokens) ever produced originated in eighteenth-century Britain from private mints.

The full story is too long to tell here,6 but the quick version is that the British Royal Mint had utterly failed to provide the common people with coins that could serve their needs for everyday commerce, and regulations prohibited banks from issuing notes in small denominations. As a result, employers resorted to various inconvenient remedies, including paying their workers in waves (so that, say, the first third of the employees would spend their new wages in town, after which the employers could then collect the coins in order to pay the second third of their workers, etc.) and making arrangements with the local tavern owners so that the workers’ beer tabs would effectively reduce the wages they were owed. The shortage of government-produced coinage was so severe that even obviously counterfeit coins were tolerated because bad money was better than no money at all.

In this intolerable situation, Thomas Williams, the principal owner of the giant Parys copper mine, hit upon the bright idea of installing a commercial-scale mint on the premises. He then struck (token) coins out of the copper with instructions on where they could be redeemed for money, and paid his workers—the ones actually mining the copper—with these token coins. Soon afterwards Matthew Boulton, famous for his collaboration with James Watt in the refinement of the modern steam engine, followed suit with the privately owned Soho Mint, where he was the first to implement a process of using steam power to mass-produce exquisite coinage. The following photos exhibit the remarkable craftsmanship of the privately struck coins and tokens from this era.7

Peck 1075 Coin
 A Penny from a Soho Mint 1797 pattern striking. Photo Credit: Bill McKivor, The Copper Corner.
Promissory Half Penny 1791
 A 1791 token promising a half-penny to the bearer. Photo Credit: Bill McKivor, The Copper Corner.

The Function and Origin of Banks

Even in a community with a commodity money stamped into high-quality coins, there would still be limitations on commerce. For example, wealthy individuals would be nervous about holding vast sums of gold or silver in their homes where they would be vulnerable to theft, and it would be inconvenient to transport large amounts of coin or bullion for every transaction involving a significant purchase price.

bank solves these problems by providing a secure location where members of the community can store their excess supplies of money. (The other main function of banks is to serve as credit intermediaries, which act as a conduit between borrowers and savers.) The goldsmith was a logical person to also act as banker, because his business already involved storing stockpiles of gold. It was easy enough for members of the community to deposit coins with the goldsmith in exchange for an official receipt indicating how much of the money commodity they (the depositors) had stored with him.

Exchange Gold for Promissory Note Diagram

The reason a booklet on the mechanics of money must also cover banking is that—to put it bluntly—banks enjoy the legal ability to create money. In Chapter 5 we will explain this process in much greater detail, but for now let us quote the Chicago Federal Reserve on the historical origins (at least in England) of this practice:

[B]anks can build up deposits by increasing loans and investments so long as they keep enough currency on hand to redeem whatever amounts the holders of deposits want to convert into currency. This unique attribute of the banking business was discovered many centuries ago.

It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their “deposit receipts” whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.

Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment. [Emphasis added.]8

Once the banker (such as the goldsmith) realized that his deposit receipts (“notes”) were treated by at least some members of the community as being “as good as money,” he could lend out some of the coins that his customers had deposited with him, even though the customers still held paper receipts entitling them to immediate redemption. The whole operation was viable so long as the banker always had enough coins on hand to satisfy whoever might show up to demand their deposits back.

Exchange Gold for Promissory Note Many Diagram

This booklet will focus on the mechanics and economic implications of the fact that banks have the legal ability to create money, but we’ll wrap up our historical sketch here with a note on the judicial treatment. If someone hands over an item for safekeeping in which the specific article is important—such as a college student placing her furniture in a storage unit for the summer, or a diner checking his coat when entering a restaurant—this is handled under bailment law. In such a situation, the person acting as a warehouser obtains physical possession but not legal ownership of the items in question, and is obligated to act as their custodian until the actual owner wishes to retrieve them. It would be a breach of contract for the manager of a storage facility to rent out the student’s couch, even if he had it safely back in her storage unit when she returned from summer break.

However, when the deposited items are fungible goods, such as wheat or oil, then the relationship is more nuanced. With such an “irregular deposit,” the depositor isn’t entitled to the specific physical items that were handed over for safekeeping, but instead merely expects to receive comparable items back. In the typical scenario, this is the type of deposit applicable to money; the people handing over coins to the goldsmith didn’t care about receiving back those particular coins, they merely wanted to be assured of obtaining the same number of comparable coins when they redeemed their deposit receipts (i.e., banknotes).

As a result of various court rulings, it is now standard to treat the deposit of money with a bank as a loan, so that the depositor becomes a creditor of the bank and the actual ownership of the money transfers to the banker, even for “demand deposits,” which are payable upon notice. Rightly or wrongly,9 it is this legal treatment that allowed the proverbial goldsmith to lend out some of the coins that his depositors had placed with him for safekeeping, and which allows modern banks to engage in “fractional reserve banking.” To reiterate, it is this practice by which banks can create (and destroy) money—a process that we will fully explain in Chapter 5.

We will close this chapter with an excerpt from an opinion issued by Lord Cottenham in the 1848 case Foley v. Hill and Others:

The money placed in the custody of a banker is, to all intents and purposes, the money of the banker, to do with as he pleases; he is guilty of no breach of trust in employing it; he is not answerable to the principal if he puts it into jeopardy, if he engages in a hazardous speculation; he is not bound to keep it or deal with it as the property of his principal; but he is, of course, answerable for the amount, because he has contracted.10

Judge Reading Ruling

Reprinted from the Mises Institute.

What Robert Reich is hiding from millennials

What Robert Reich is hiding from millennials

Former Labor Secretary Robert Reich’s latest video presentation attempts to explain to millennials why they are so broke. Disappointingly, millennials will be left wanting, as Reich never delves deeper than surface-level observations and conceals some inconvenient facts that may lead viewers to a very different conclusion than Reich would like them to reach.

Produced by his organization called “Inequality Media” and published at, Reich’s latest commentary is entitled “Four reasons why millennials don’t have any money.”

Declaring that millennials are “working hard, starting families and trying to build wealth,” Reich laments “(B)ut as a generation, they’re way behind” older generations.

Millennials, Reich continues, are “deeper in debt, only half as likely to own a home, and more likely to live in poverty than their parents.

“If we want to address their problems, we need to understand those problems,” he concludes.

Closer inspection of his four main points, however, reveals that Reich himself either doesn’t understand the source of these problems, or is intentionally obscuring them.

“Number one: Stagnant wages”

With no explanation offered, Reich begins by informing viewers that “Median wages grew by an average of 0.3% per year between 2007 and 2017, including the Great Recession – just as millennials were beginning their careers. Before that, between the mid-1980s and mid-1990s, wages grew at three times that rate.”

No doubt, entering the workforce during the Great Recession was a very perilous task. Such a daunting labor market put many a millennial behind schedule in terms of financial advancement.

But the economy has been in recovery mode for about a decade now, so why the continued slow income growth?

A significant factor can be found right in the theme Reich is examining: age. As noted in this 2018 MarketWatch article: “But it’s worth noting that the aging of America’s workforce is having a downward impact on pay.

The median weekly earnings of 55-to-64 year old’s is 28% higher than that of 25-to-34 year old’s. That’s logical — pay improves as a worker’s career advances.”

With more experienced, higher-paid workers aging out of the workforce, median wages are bound to be dragged down. “The San Francisco Fed studied this issue in depth in March 2016,” the MarketWatch article continued. The study found that as baby boomers retire “the fraction of exits occurring from above the median wage has gotten larger,” which naturally drags down the median. 

Moreover, as the economy recovered, more low-wage workers that lost their jobs during the recession began to re-enter the workforce, applying more downward pressure on median wages.

“Second: As wages have stagnated, the costs of essentials like housing and education have been going through the roof”

Here, Reich points out how millennials own fewer homes, and further points out that, adjusted for inflation, “the average college education in 2018 cost nearly three times what it did in 1978.”

Like his first point, Reich offers no potential explanations for this phenomenon. 

In higher education, as with healthcare, a system increasingly reliant on third-party payers for the expenses has been a major driver of exploding tuition costs. As summed up in this College Board articlewith third parties paying part or all of the bills (via government and private ‘scholarships,’ subsidized loans, and subsidies of institutions), schools can often raise fees without dire financial or academic consequences.”

In 2018-19, according to College Board, undergraduate and graduate students received a total of $246 billion in student aid in the form of grants, tax credits and loans.

Indeed, there’s been a stunning 416 percent rise in total federal, state and institutional student aid loans since 1989, adjusted for inflation. Pell Grants, the federal government’s largest college grant tuition assistance program nearly tripled in real terms during that time.

With billions in federal student aid, grants and below-market interest loans courtesy of the U.S. Department of Education artificially inflating demand for college, tuition prices were sure to explode. Why does Reich deprive millennial viewers of this vital information?

“Third: As a result of all of this, debt”  

Here Reich informs viewers that “the average graduate carries a whopping $28,000 in student loan debt,” and that as a generation, “millennials are more than one trillion dollars in the red.”

We already addressed a primary driver of rising tuition costs that Reich ignores. But here we can further note that the levels of student loan debt is so crushing because such a significant share of millennials are not earning enough to afford the debt payments. 

Young people are often drawn into college on the promise that a college degree is their only ticket to career success. 

But increasingly, it is not. As Ohio University economist Richard Vedder has written, “The Federal Reserve Bank of New York said that 41.4 percent of recent college graduates in December 2018 were ‘underemployed,’ doing jobs mostly held by those with lesser education.”

In other words, more than two-fifths of recent grads are in jobs that don’t require a college degree. As Vedder notes, this is because “(W)e actually have too many college graduates for the number of professional, managerial, and technical jobs available.”

With a glut of college graduates flooding the job market, there is little bargaining power for millennials entering the market, outside of those with degrees in highly technical areas. In too many cases, a college degree simply does not translate into earning power sufficient enough to pay off formidable student loans. 

And that glut can in no small part be attributed to the massive sums of money flowing from government programs, a fact Reich turns a blind eye to. 

“Fourth: Millennials are finding it harder than previous generations to save for the future” 

Harder, or less beneficial?

Historically-low interest rates for the past decade, which followed decades of a mostly low-interest environment, discourages savings. Why set money aside when there is virtually no financial gain to doing so?

For most of the millennial generation’s adult lives, the paltry interest on savings has been insufficient to keep up with inflation. 

Why won’t Reich mention the Federal Reserve’s role in keeping interest rates low, thus suppressing any returns to savings?

Reich further points out that employers are “replacing pensions with essentially ‘do-it-yourself’ savings plans; and that among Fortune 500 companies, “only 81 sponsored a pension plan in 2017, that’s down from 288 twenty years ago.”

Readers are just supposed to accept this as is, with no broader context.

What could be helpful to note is that perhaps corporate pension plans are being crowded out by rising healthcare costs. 

Research by the Peterson Center on Healthcare and Kaiser Family Foundation shows that large group employer coverage costs to employers more than doubled between 2003 and 2018.

This has escalated during a time of dramatically increasing government intervention into the healthcare market.

With so many more dollars going to paying employee health benefits, there’s little wonder that companies are cutting back on pension plans. 


Without further explanation for why millennials have no money, they will be more susceptible to accepting misguided policies claiming to ease them of their financial woes. 

Unsurprisingly, Reich lists several government interventionist policies to address the generational wealth gap, including “debt relief, accessible health insurance, paid family leave, affordable housing, and a more equitable tax code for renters.”

With the goal of selling government as the key to millennials’ financial security, it is hardly surprising that he would want to conceal vital facts about how government intervention is a primary cause of their financial struggles in the first place. 

Millennials: don’t just unquestioningly accept Reich’s recommendations. Do your homework and discover the underlying causes to this “generational wealth gap.” You just might find that the solution lies in less government, not more. 

Bradley Thomas is creator of the website and is a libertarian activist who enjoys researching and writing on the freedom philosophy and Austrian economics.

Follow him on twitter: Bradley Thomas @erasestate

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