Von Mises Institute and Austrian Economics Discussions - 12160 Social Network2024-03-29T00:49:29Zhttps://12160.info/group/vonmisesinstituteandaustrianeconomics/forum?feed=yes&xn_auth=noAustrian Economist Review Banksy's new Film "Exit Through the Gift Shop" As A Look at the "New Economy"tag:12160.info,2010-08-03:2649739:Topic:2180002010-08-03T01:51:22.607ZLocaltarianhttps://12160.info/profile/Awho
<h1>Exit through the Gift Shop</h1>
<a href="http://mises.org/daily/4554">http://mises.org/daily/4554</a><p><br></br></p>
<p>What applies to technology also applies to art. As books like <a href="http://mises.org/resources/4998/Literature-and-the-Economics-of-Liberty-Spontaneous-Order-in-Culture"><i>Literature and the Economics of Liberty</i></a> and <a href="http://books.google.ca/books?id=H5n4XPKkytQC"><i>Worldly Goods</i></a> have shown, the creation of many classic works of art and…</p>
<h1>Exit through the Gift Shop</h1>
<a href="http://mises.org/daily/4554">http://mises.org/daily/4554</a><p><br/></p>
<p>What applies to technology also applies to art. As books like <a href="http://mises.org/resources/4998/Literature-and-the-Economics-of-Liberty-Spontaneous-Order-in-Culture"><i>Literature and the Economics of Liberty</i></a> and <a href="http://books.google.ca/books?id=H5n4XPKkytQC"><i>Worldly Goods</i></a> have shown, the creation of many classic works of art and literature
must be understood in the context of commercial society's spontaneous<br />
order. The new documentary film <i><a href="http://www.imdb.com/title/tt1587707/">Exit Through the Gift Shop</a></i>,<br />
playing in art-house cinemas throughout the country this year, is an<br />
excellent and comedic illustration of the observation that the most<br />
successful innovations are all about marketing.</p>
<p><i>Exit Through the Gift Shop</i> is about the latest big innovation in the art world, i.e. street art — high end graffiti art best typified by <a href="http://www.banksy.co.uk/">Banksy</a>, the " scarlet pimpernel of street art" and the director of the film.
What is so intriguing about the movie is that Banksy first tried to make<br />
a documentary about the authentic origins of street art and then<br />
realized a more interesting film might be about the wildly successful<br />
commercialization of street art. You see, street art was originally an<br />
anonymous, furtive outdoor display for free; it later spawned publicly<br />
attended, organized events in vast indoor spaces for substantial<br />
monetary profit.</p>
<br />
<p>For many, this film is beyond intriguing. It is shattering and heretical to those who see art and artists as essentially divorced from
commerce. They don't see that innovation springing from the authentic<br />
interests of innovators naturally becomes commercialized as it is<br />
popularized, and that in fact innovation requires commercialization to<br />
popularize it. The common view is of the romantic artist, out of whose<br />
head that art springs fully formed.</p>
<br />
<br />
<br />
<p>Banksy is all about provocation, and this film is a provocation. Many still believe that the events the film depicts never occurred (but for
the purposes of this article, let's take it at face value). The film<br />
prankishly pulls the rug out from under many viewers.</p>
<p>The joke is on Banksy too. He knows it, he's appalled by the outcome, and he knows that it makes the joke even funnier.</p>
<p style="text-align: left;"><img src="http://images.mises.org/ExitThroughTheGiftShop.jpg"/></p>
<h2><br/></h2>
<h2>Spreading Innovation</h2>
<p>For an innovation to become popular, it must become, well, popular.</p>
<p><br/></p>
<p style="text-align: left;"><img src="http://images.mises.org/4554/Figure2b.jpg"/></p>
<p style="text-align: left;"><br/></p>
<p>When people, including the stars of the movie, started doing street art, they did it because they loved it. Other people, a small number at
first, also loved looking at it. Any communication must at some level<br />
assume a common denominator. To talk with others one must speak "a<br />
common language." Street art spoke to this small group of fans.</p>
<p>Initially, the artists themselves found each other, kept in touch, and visited
each other. Over time, intermediaries — e.g., writers of magazines, web<br />
sites, emails, blogs — came along and told other people how "cool" or<br />
"hot" this new art form was. At first it was all very underground and<br />
unknown; it was a new discovery and a new world. But word spread.</p>
<p>Eventually, public demand, and a limited supply, led to interest in the art by
people who were willing to pay for it. Any artist or innovator wishing<br />
to speak successfully to an audience will find that commercialization<br />
and popularization will inevitably come with success. Those who create<br />
something of value to others will eventually find their work popularized<br />
and commercialized, escaping the creator as it takes on a life of its<br />
own.</p>
<p>This is in fact what happens in the movie.</p>
<p><br/></p>
<h2>Illustrating Authentic Innovation</h2>
<p>The movie was at first intended to document the authenticity of street art, claiming that the
origins of street art are not in commercialism but in the creative<br />
impulse of the artists. Instead, the film ended up being billed by the<br />
creators as "the world's first street art disaster movie." It plays like<br />
a farce.</p>
<p>The movie starts out by stating that the filming began when a Frenchman, Thierry Guetta, was filming street artists and wanted
to film Banksy. As it turned out, Banksy decided that Guetta's<br />
adventures would make a much more interesting topic for a film. He was<br />
right.</p>
<h2>Street Art</h2>
<p>Street art is a hybrid form of graffiti; stencils, posters, stickers, sculpture, and mosaics are placed
out in public (and sometimes in private) without permission from the<br />
authorities or property owners. Typically, an otherwise blank surface is<br />
vandalized with a piece of art work. While this is unethical, in the<br />
scale of criminality street artists are mere rogues. They are more<br />
concerned with putting something artistic on their preferred canvas, the<br />
blank urban wall, than with putting up anything permanently defacing a<br />
home or business.</p>
<p>Here are some classic examples by Banksy. The first is a "murdered" British Telecom payphone. I hope Banksy will
litter something similar in front of my building.</p>
<p style="text-align: left;"><img src="http://images.mises.org/4554/Figure1.jpg"/></p>
<p style="text-align: left;"><br/></p>
This next image is on the wall of a sexual-health clinic. Due to popular demand, the city council allowed this image to remain.<br/><br/><p style="text-align: left;"><img src="http://images.mises.org/4554/Figure2a.jpg"/></p>
<p style="text-align: left;"><br/></p>
And it is hard for me to not love someone like Banksy, who creates a flower-throwing street fighter like this.<br/><br/><p style="text-align: left;"><img src="http://images.mises.org/4554/Figure3.jpg"/></p>
<p style="text-align: left;"><br/></p>
<br/><h2>Thierry Guetta</h2>
<p>The movie tells the story of Thierry Guetta, a Frenchman living in LA. Thierry Guetta was obsessed with filming
everything, but he would never do anything with the film. He would just<br />
record one tape after another.</p>
<p>One day his life changed. He finally found a subject to focus on. His cousin was the street artist known as <a href="http://en.wikipedia.org/wiki/Invader_%28artist%29">Invader</a>. Thierry Guetta decided to film him and then film all the different
street artists all over the world. Often Guetta would serve as an<br />
assistant and lookout as they vandalized buildings with their art.<br />
Guetta thought what they were doing was cool, and like the artists he<br />
also found evading the police and scaling walls to put up art exciting.</p>
<p>One might be wondering how Thierry Guetta could afford all of this. The
film does a good job of explaining the source of his funds. He had a<br />
business where he would buy bags of unwanted or slightly defective<br />
clothes for $50 a bag and sell the clothes for $5,000 to hipsters<br />
frequenting his hip LA clothing store. He understood sales and<br />
marketing. However, to his street-art colleagues he appeared obsessive, a<br />
bit crazy, not particularly cool, and not very bright.</p>
<p>As Thierry Guetta continued his new volunteer career of filming street
artists at work, he wanted to film the ultimate street artist — Banksy.</p>
<h2>Banksy</h2>
<p>Banksy is a charming and funny figure in the film. He's also completely
anonymous. He is always hooded and his voice is disguised.</p>
<p>Banksy is the most famous vandal of them all. He's put his own artwork up in
museums. He vandalized the wall between Israel and the West Bank. Not<br />
surprisingly, he prefers to stay as far away from the authorities as<br />
possible.</p>
<br />
<p>Banksy once created a hundred thousand fake £10 notes with Princess Diana's face on them. As it turned out, they were so good that people
thought they were real. So Banksy kept them instead of distributing them<br />
and risking a bid for counterfeiting. <br/></p>
<p><br/></p>
<p style="text-align: left;"><img src="http://images.mises.org/4554/Figure4.jpg"/></p>
<p style="text-align: left;"><br/></p>
<p style="text-align: left;"><img src="http://images.mises.org/4554/Figure6.jpg"/></p>
<p style="text-align: left;"><br/></p>
<h2>Thierry and Banksy</h2>
<p>In the movie, Banksy comes to LA, and Thierry is thrilled to meet him. Thierry proceeds to make himself as
indispensable as possible, becoming Banksy's assistant and personal<br />
cameraman. Banksy realizes that, due to the transitory nature of street<br />
art, it is a pretty good idea to have someone document it.</p>
<p>Thierry and Banksy have many adventures together, including enduring four hours
of interrogation in the Magic Kingdom. They become friends.</p>
<p>Later on, Banksy holds an art show in LA. This results in half of Hollywood
standing in a huge line around the block in some low-rent warehouse<br />
district to see his work. Banksy's work thus becomes highly salable.<br />
Rich people who collect Warhols and Lichtensteins then see Banksy as the<br />
hot new thing.</p>
<h2>The Artist Becomes the Filmmaker</h2>
<p>As the movie tells it, the street artists had always vaguely assumed Guetta was
doing something with his film. They didn't realize that he was just<br />
obsessed with the act of filming itself, and that he knew nothing about<br />
editing and production. They wondered when he would create something.</p>
<p>Faced with concerns that street art is selling out and becoming too
commercial, Banksy asks Guetta to use his footage to create a<br />
documentary about the authentic life of the street artist.</p>
<p>Guetta then creates an unwatchable film (which is shown inside the <i>Exit through the Gift Shop</i> film), the visual equivalent of a constant buzz — one multisecond clip
after another, leaving a viewer unfamiliar with the footage with no<br />
ability to find any meaning. "He was maybe just somebody with mental<br />
problems who happened to have a camera," says Banksy.</p>
<p>Then Banksy decides to take matters in to his own hands. He uses Guetta's tapes to
make his own film. Banksy said that he didn't know anything about how to<br />
make a film, but neither did Thierry Guetta, and that didn't stop him.</p>
<p>To distract Thierry Guetta, Banksy suggests Guetta go to LA and put on an
art show. This leaves Banksy alone with the tapes, while the poor sucker<br />
Thierry Guetta wastes his time on a fool's errand.</p>
<p><br/></p>
<h2>The Disaster</h2>
<p>Guetta got to work on his art show, called "Life is Beautiful." The funny thing was that he had no known artistic
experience, and certainly no years of practice. That didn't stop him.</p>
<p style="text-align: left;"><img src="http://images.mises.org/4554/Figure8.jpg"/></p>
<p style="text-align: left;"><br/></p>
<p>What he did have was years of hanging around many other artists watching them work, and a mind that sees diamonds where others see only
rocks. Remember, he made his money selling $50 bags of clothing for<br />
$5,000.</p>
<p>He renames himself "MBW," or Mr. Brainwash, and creates his own art factory. He hires people, lots of people. He tells them what
he wants and they build it or put it together in Photoshop. He ends up<br />
creating a ton of art for his show.</p>
<p>The "Life is Beautiful" event gets written up in <i>LA Weekly</i>, and MBW uses a great Banksy quote to ironically promote his own show:
"Mr. Brainwash is a force of nature, he's a phenomenon. And I don't mean<br />
that in a good way."</p>
<p>The work, as far as one can tell, ranges from pretty derivative to blatant knockoff.</p>
<br />
<br />
<br />
<p>Mr. Brainwash says he sees everything as propaganda. Indeed, remember that many reviewers of the movie think the whole thing was a hoax.</p>
<p>Everyone working at the art show thinks it is a disastrous production. "He's just kind of retarded," says one worker.</p>
<p><br/></p>
However, even before the show started, Guetta was fielding calls from buyers who hoped they could snap up his works for tens of thousands of<br />
dollars. Thus, the show is a great commercial success, tons of people<br />
come, and MBW makes a million dollars in sales. His natural flair for<br />
sales and marketing comes through, and he even gets the job of making<br />
the cover for Madonna's celebration CD.<br/><br/><h2>Conclusion</h2>
<p>In reality, the street artists were not really aloof from society — they interacted with each other from the beginning,
and they depended on spontaneous order's provision of plentiful art<br />
supplies, including copy shops, spray paint, communication tools, and<br />
blank walls.</p>
<p><br/></p>
<br/><p>The mythos of street art and, especially Banksy, was from the start wrapped in the themes of the romantic artist — apart from society, the
solitary, uncompromising, unknown, Promethean creative genius literally<br />
breaking the law for the benefit of man. So, naturally the story of<br />
Thierry Guetta, or MBW, is seen as a disaster for those who see street<br />
art as an art form that must be divorced from commerce to be authentic<br />
or meaningful.</p>
<p>However, throughout history, classics tend to be former bestsellers, as <a href="http://mises.org/resources/4998/Literature-and-the-Economics-of-Liberty-Spontaneous-Order-in-Culturef"><i>Literature and the Economics of Liberty</i></a> points out. A new invention, an innovation in art, becomes successful
only through marketing. In fact, in the case of Madonna's CD, the art is<br />
used <i>for</i> marketing.</p>
<p>Thierry Guetta is a spectacular case of selling and marketing the innovation of art. It is through the
interaction of many people in the marketplace of ideas and goods that<br />
street art, indeed any innovation, is able to reach millions.</p> Barack Obama Ensures a Long Depressiontag:12160.info,2009-12-11:2649739:Topic:1341222009-12-11T20:25:38.821ZLocaltarianhttps://12160.info/profile/Awho
<p style="text-align:left"><img src="http://mises.org/images/ObamaFDRbutton.jpg"></img></p>
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<a href="http://mises.org/daily/3907">http://mises.org/daily/3907</a><br />
<br />
Political success, as reflected in the recent gubernatorial races appears ever-more staked on the state of the economy. Official unemployment recently measured 10 percent, though the more-honest gauge (U-6) shows the nation running unemployment at a Depression-like 17.2 percent.<br />
<br />
In response to high unemployment numbers, Barack Obama has said, "I will not rest until all Americans…
<p style="text-align:left"><img src="http://mises.org/images/ObamaFDRbutton.jpg"/></p>
<br />
<a href="http://mises.org/daily/3907">http://mises.org/daily/3907</a><br />
<br />
Political success, as reflected in the recent gubernatorial races appears ever-more staked on the state of the economy. Official unemployment recently measured 10 percent, though the more-honest gauge (U-6) shows the nation running unemployment at a Depression-like 17.2 percent.<br />
<br />
In response to high unemployment numbers, Barack Obama has said, "I will not rest until all Americans who want to work can." Yet Mr. Obama's policies belie his words. In fact, what his administration is doing will ensure massive unemployment and endless economic stagnation.<br />
<br />
To understand why I make such a sweeping assertion, it is necessary to comprehend how our economy ended up in this predicament in the first place. For this, I must give a cursory explanation of the Austrian theory of the business cycle.<br />
<br />
The interest rate is a price signal, no different from the price tag on any good. In a free market (which the United States most certainly does not have), the interest rate is determined by the supply of and demand for capital. Individuals choose to consume or invest, and this dictates the amount of loanable funds, which businesses will use to undertake projects to bring goods to market for future consumption.<br />
<br />
However, when a central bank like the Federal Reserve prints money, artificially lowering the interest rate and expanding the loanable pool of funds, producers are left with a false price signal. The interest rate will tell producers that consumers want them to undertake long-term projects to bring goods to market. This artificially lowered rate will also induce consumers to save less and spend and borrow more.<br />
<br />
The conflicting actions of consumers and producers in response to the government-distorted price signal of the interest rate cause the mass misallocation of resources. This leads to the bust manifested, for example, in the empty houses and office buildings throughout the country.<br />
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Logically, one might think that the best way to fix this mess would be to liquidate the malinvestments of businesses, pay down our debts and start fresh; in other words, allow for the market to correct the imbalances and distortions created during the artificial boom.<br />
<br />
But the enlightened Barack Obama and his team of trusty economic advisers, along with the ever-compliant Messrs Bernanke and Geithner, have other ideas. Practically every single policy they have enacted is intended to stop the market from clearing out the wastes and excesses of the boom.<br />
<br />
The government has undertaken programs to keep people in homes and cars that they cannot afford, fictitiously propping up GDP numbers. It has bailed out failing enterprises; abrogated contractual obligations; created make-work, politically oriented, and naturally often fraudulent and wasteful public-works projects; and increased the money supply at an unprecedented rate, easing the Federal Reserve–controlled interest rate to a ridiculous 0 percent. Our representatives have done all of this while vastly expanding a national debt that was already egregious.<br />
"The interest rate is a price signal, no different from the price tag on any good."<br />
<br />
All of these policies prevent any sort of recovery. They are designed to stop markets from reflecting reality, and to continue the distortions already created by government tinkering. History seems to be repeating itself, with Obama following Hoover and FDR's favorite anti-Depression prescriptions.Download PDF<br />
<br />
There are major costs to these programs. Government has (and continues to) prolong the downturn by effectively jamming the gears of the markets. It has also created a major moral hazard by bailing out failed companies, hurting those successful companies who have been forced to subsidize the failed ones, and preventing entrepreneurs from putting the assets (now being tied up in unprofitable businesses) to better use.<br />
<br />
This forced subsidization of failed enterprises has been perhaps most notorious in the mortgage-lending market, where banks, not individuals in many cases, have had to take responsibility for underwater mortgages, absolving debtors from discipline, and discouraging banks from extending mortgages in the future. The government has also completely misled businesses and their investors by running roughshod over contracts in the cases of the AIG bonuses and the GM-creditor boondoggle.<br />
<br />
Government has extended largess to purportedly "save or create 600,000 jobs," a figure that I say is purported because we know it is downright fallacious. As Frederic Bastiat told us, the good economist examines not only what is seen, but also the unseen. This arbitrary number of 600,000 hides the fact that government make-work projects and supports for unsound ventures stop new and more profitable industries from springing up, because of the diversion of land, labor, and capital into projects that would otherwise not exist.<br />
<br />
This diversion prevents new job opportunities from being created, and also prevents workers from learning new skills to become viable employees in new and profitable businesses. At best, if there was no politicization, corruption, or waste, and the government was able to build things both solid and aesthetically pleasing, the government could merely divert resources. However, it would still not be meeting any consumer demand (like a private enterprise would) because government lacks the price mechanism of the market, which would show profits or losses. Government responds to the demands of political interests.<br />
<br />
Put more succinctly, we don't know how many jobs have been lost because of the ones that have theoretically been saved or created. The resources used to save or create these jobs (and for all of the other bailouts and programs enacted by the government) have to come from somewhere, and they do: from bilking the taxpayer and future generations of taxpayers.<br />
<br />
In addition, low interest rates have not only kept alive banks that would have failed, but allowed them to generate profits on the taxpayers' dime by borrowing money from the government at 0 percent and either lending it back to the Federal Reserve or pumping it into the financial markets, where we see the results of continued monetary inflation in the increase in stock, bond, and commodity prices.<br />
"We don't know how many jobs have been lost because of the ones that have theoretically been saved or created."<br />
<br />
The banks have no incentive whatsoever to gamble their free money by lending it to risky borrowers like the overleveraged American people. What this represents is a massive wealth transfer from the public to the financiers, who prop up the government itself by underwriting and making markets in its debt.<br />
<br />
Most important of all, in keeping interest rates artificially low, the government continues its distortion of the price-signaling mechanism, which caused the whole crisis in the first place.<br />
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There are also major costs due to the debt that the government issues to finance their intervention. First, an increase in the national debt represents a levering up of the public balance sheet, counteracting the positive effects of the necessary delevering of the balance sheets of businesses and households. Second, the massive increase in our debt undermines the creditworthiness of the country, which will ultimately lead to an increase in interest rates as people lose faith in our government and in the ability of our economy to pay down the debts.<br />
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The only way for the government to service these debts (since they cannot do it honestly by direct taxation) is through the indirect tax of inflation. And again, inflation will continue the price-signal distortion.<br />
<br />
So, just to review, the government is creating wasteful public-works projects, preventing markets from adjusting, preventing businesses from going belly-up and their assets from being put to better uses by more competent businesspeople, and all the while debauching the dollar and ruining the nation's creditworthiness.<br />
<br />
There is a final point that must be made. Just as during FDR's presidency, market entrepreneurs (as opposed to the political ones, who profit from government swindling) are now genuinely afraid of this administration. People in business do not know how arbitrary or onerous future government regulations will be.<br />
<br />
As the government runs from one whimsical plan to another, all that market participants can be sure of is that there will be more regulation and intervention, and that the people will be soaked by taxes either direct or indirect. Since businesses are unsure of the economic environment, but rightfully anticipating (though, in my opinion, underestimating) an increase in outright socialism, this uncertainty will surely quell economic growth.<br />
<br />
<br />
<br />
Thus, we see that Obama's policies are not only misguided but also incredibly destructive. If instead of letting the economy liquidate, painful as it may be, we try to continue the illusory boom, we will be doomed to years of unemployment, stagnation, and ultimately the "crack-up boom" of the economy. And this isn't even to mention the threats posed to our economy by national healthcare, cap-and-tax, and, even scarier, Mr. Obama's foreign policy.<br />
<br />
Each and every one of these policies retards the necessary adjustment, depriving businesses of valuable assets that can be put to more profitable lines of work and depriving consumers of the products they seek at true fair-market value. The only way to create jobs and fix a broken economic model is to release the entrepreneurial forces of America. Unfortunately, it appears that President Obama does not care for this solution, preferring to ensure a prolonged depression to serve his political ends. CREDITtag:12160.info,2009-12-08:2649739:Topic:1333162009-12-08T19:57:03.317ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3807">http://mises.org/daily/3807</a><br />
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<p style="text-align:left"><img src="http://mises.org/images/BastiatExpress.jpg"></img></p>
"When a farmer borrows fifty francs to buy a plow, it is not, in reality, the fifty francs which are lent to him, but the plow; and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house. Money only appears for the sake of facilitating the arrangements between the parties."<br />
<br />
<br />
In all times, but more especially of late years,…
<a href="http://mises.org/daily/3807">http://mises.org/daily/3807</a><br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/BastiatExpress.jpg"/></p>
"When a farmer borrows fifty francs to buy a plow, it is not, in reality, the fifty francs which are lent to him, but the plow; and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house. Money only appears for the sake of facilitating the arrangements between the parties."<br />
<br />
<br />
In all times, but more especially of late years, attempts have been made to extend wealth by the extension of credit.<br />
<br />
I believe it is no exaggeration to say, that since the revolution of February, the Parisian presses have issued more than 10,000 pamphlets, crying up this solution of the social problem.<br />
<br />
The only basis, alas, of this solution, is an optical delusion — if, indeed, an optical delusion can be called a basis at all.<br />
<br />
The first thing done is to confuse cash with produce, then paper money with cash; and from these two confusions it is pretended that a reality can be drawn.<br />
<br />
It is absolutely necessary in this question to forget money, coin, bills, and the other instruments by means of which productions pass from hand to hand. Our business is with the productions themselves, which are the real objects of the loan; for when a farmer borrows fifty francs to buy a plow, it is not, in reality, the fifty francs which are lent to him, but the plow; and when a merchant borrows 20,000 francs to purchase a house, it is not the 20,000 francs which he owes, but the house. Money only appears for the sake of facilitating the arrangements between the parties.<br />
<br />
Peter may not be disposed to lend his plow, but James may be willing to lend his money. What does William do in this case? He borrows money of James, and with this money he buys the plow of Peter.<br />
<br />
But, in point of fact, no one borrows money for the sake of the money itself; money is only the medium by which to obtain possession of productions. Now, it is impossible in any country to transmit from one person to another more productions than that country contains.<br />
<br />
Whatever may be the amount of cash and of paper which is in circulation, the whole of the borrowers cannot receive more plows, houses, tools, and supplies of raw material, than the lenders altogether can furnish; for we must take care not to forget that every borrower supposes a lender, and that what is once borrowed implies a loan.<br />
<br />
This granted, what advantage is there in institutions of credit? It is that they facilitate, between borrowers and lenders, the means of finding and treating with each other; but it is not in their power to cause an instantaneous increase of the things to be borrowed and lent. And yet they ought to be able to do so, if the aim of the reformers is to be attained, since they aspire to nothing less than to place plows, houses, tools, and provisions in the hands of all those who desire them.<br />
<br />
And how do they intend to effect this?<br />
<br />
By making the state security for the loan.<br />
<br />
Let us try and fathom the subject, for it contains something which is seen, and alsosomething which is not seen. We must endeavor to look at both.<br />
<br />
We will suppose that there is but one plow in the world, and that two farmers apply for it.<br />
<br />
Peter is the possessor of the only plow which is to be had in France; John and James wish to borrow it. John, by his honesty, his property, and good reputation, offers security. He inspires confidence; he has credit. James inspires little or no confidence. It naturally happens that Peter lends his plow to John.<br />
<br />
But now, according to the Socialist plan, the state interferes, and says to Peter, "Lend your plow to James, I will be security for its return, and this security will be better than that of John, for he has no one to be responsible for him but himself; and I, although it is true that I have nothing, dispose of the fortune of the taxpayers, and it is with their money that, in case of need, I shall pay you the principal and interest." Consequently, Peter lends his plow to James: this is what is seen.<br />
<br />
And the socialists rub their hands, and say, "See how well our plan has answered. Thanks to the intervention of the state, poor James has a plow. He will no longer be obliged to dig the ground; he is on the road to make a fortune. It is a good thing for him, and an advantage to the nation as a whole."<br />
<br />
Indeed, it is no such thing; it is no advantage to the nation, for there is something behind which is not seen.<br />
<br />
It is not seen, that the plow is in the hands of James, only because it is not in those of John.<br />
<br />
It is not seen, that if James farms instead of digging, John will be reduced to the necessity of digging instead of farming.<br />
<br />
That, consequently, what was considered an increase of loan, is nothing but a displacement of loan. Besides, it is not seen that this displacement implies two acts of deep injustice.<br />
<br />
It is an injustice to John, who, after having deserved and obtained credit by his honesty and activity, sees himself robbed of it.<br />
<br />
It is an injustice to the taxpayers, who are made to pay a debt which is no concern of theirs.<br />
<br />
Will anyone say, that government offers the same facilities to John as it does to James? But as there is only one plow to be had, two cannot be lent. The argument always maintains that, thanks to the intervention of the state, more will be borrowed than there are things to be lent; for the plow represents here the bulk of available capitals.<br />
<br />
<br />
<br />
It is true, I have reduced the operation to the most simple expression of it, but if you submit the most complicated government institutions of credit to the same test, you will be convinced that they can have but one result; viz., to displace credit, not to augment it. In one country, and in a given time, there is only a certain amount of capital available, and all are employed. In guaranteeing the nonpayers, the state may, indeed, increase the number of borrowers, and thus raise the rate of interest (always to the prejudice of the taxpayer), but it has no power to increase the number of lenders, and the importance of the total of the loans.<br />
<br />
There is one conclusion, however, which I would not for the world be suspected of drawing. I say, that the law ought not to favor, artificially, the power of borrowing, but I do not say that it ought not to restrain them artificially. If, in our system of mortgage, or in any other, there be obstacles to the diffusion of the application of credit, let them be got rid of; nothing can be better or more just than this. But this is all which is consistent with liberty, and it is all that any who are worthy of the name of reformers will ask. An Ideal Guide to Keynes's Dangerous and Destructive Economicstag:12160.info,2009-12-08:2649739:Topic:1329112009-12-08T01:15:15.263ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3916">http://mises.org/daily/3916</a><br />
<br />
Defenders of Keynes, such as the recent convert Bruce Bartlett, often claim that he supported capitalism. (Bartlett's The New American Economy has this as a primary theme.) His interventionist measures had as their aim not the replacement of capitalism by socialism or fascism. Rather, it is alleged, Keynes aimed to save the existing order.<br />
<br />
The unhampered market cannot by itself recover from a severe depression or at best…
<a href="http://mises.org/daily/3916">http://mises.org/daily/3916</a><br />
<br />
Defenders of Keynes, such as the recent convert Bruce Bartlett, often claim that he supported capitalism. (Bartlett's The New American Economy has this as a primary theme.) His interventionist measures had as their aim not the replacement of capitalism by socialism or fascism. Rather, it is alleged, Keynes aimed to save the existing order.<br />
<br />
The unhampered market cannot by itself recover from a severe depression or at best can do so after long years of privation and unemployment. Keynes discovered a way by which the government, through an increase in spending, can restore the economy to prosperity. Only diehard purists could spurn Keynes's gift to capitalism. Without it, would not revolutionary pressure mount in a severe depression to overturn capitalism and replace it with socialism or fascism?<br />
<br />
Hunter Lewis convincingly shows the error of this often-heard line of thought. Keynes, far from being the savior of capitalism, aimed to replace free enterprise with a state-controlled economy run by "experts" like him. His prescriptions for recovery from depression do not save capitalism: they derail the price system by which it functions. As one would expect, Keynes lacks sound arguments to support his revolutionary proposals. Quite the contrary, Keynes defied common sense and willfully resorted to paradox.<br />
<br />
Indeed, as Lewis points out, the entire Keynesian edifice rests on a central paradox: impeding the central mechanism of the free market will restore prosperity. The free market works by price adjustments. If, e.g., consumers demand more of a product than is currently available, suppliers will raise their prices so that no imbalance exists. As consumers shift their demand from product to product, businesses must adjust their production schedules to meet changing preferences. If firms fail to do so, they face extinction.<br />
<br />
If an economy is stumbling, and unemployment is high, it means that some prices are far out of balance with others…. Some companies, some industries may be doing well; others may be in desperate straits. What is needed is an adjustment of particular wages and particular prices within and between companies, within and between industries, within and between sectors. These adjustments are not a one-time event. They must be ongoing, as each such change leads to another in a vast feedback loop. (p. 232).<br />
<br />
Keynes's "remedies" for depression paralyze this process of price adjustment. In a depression, obviously, many businesses fail. When they go under, resources shift into uses that enable the demands of consumers to be satisfied better. If increases in government spending prop these failures up, consumer preferences are thwarted. This is just what Keynes proposed.<br />
"Keynes defied common sense and willfully resorted to paradox."<br />
<br />
Further, Keynes ignored the significance of a fundamental fact. The rate of interest is also a price. It reflects the preferences of consumers for present over future goods: the greater the time preference, the higher the rate of interest. Keynes's principal aim in economic policy, not only to combat depressions but more generally, was to keep the rate of interest low: ideally, it should be done away with entirely. To do so flies in the face of consumer preferences. If the rate of interest is forced below what it would have been on the unhampered market, then people are being compelled to invest more than they wish.<br />
<br />
The point holds altogether apart from the Austrian theory of the business cycle, which Lewis fully accepts. That theory tells us that forcing the rate of interest below the natural rate may lead to an unsustainable boom. But even if this theory were mistaken, interference with interest rates would still distort the economic system.<br />
<br />
Businesses depend on prices to give them the information with which to run the economy. If the price system for interest rates is broken, no part of the price system is unaffected. (p. 90)<br />
<br />
To prevent the price system from functioning hardly seems the course of wisdom: why then did Keynes recommend it? He argued that, in a depression, government action is needed to stave off disaster. If businesses are allowed to collapse, then a wave of pessimism will be set off. Entrepreneurs will anticipate yet further declines, and the economy will spiral downward into total disaster.<br />
<br />
Lewis has little difficulty in showing that this line of thought is mistaken. Why would not resources shift from collapsing businesses to others better suited to use them, without setting off a general conflagration? Keynes assumed without adequate basis that investors are driven by irrational "animal spirits." Keynes condemned what he called "casino capitalism." Investors, in his view, made irrational decisions based on what they guessed others would do. To the contrary, the free market weeds out businessmen who are unable accurately to forecast the wishes of consumers, in favor of those more skilled at this task. During a depression, there is what Rothbard calls a "cluster of entrepreneurial errors": precisely the task of an adequate business-cycle theory is to explain this phenomenon. Keynes did not do so. He appeals to a failure of his "animal spirits": investors lose confidence in massive proportions. But he does not account for the wave of pessimism.<br />
<br />
But even if Keynes does not have an account to offer of why there are swings of optimism and pessimism, does this invalidate his remedy for depression? Keynes does, after all, give a reason for not allowing prices to fall in a depression: to do so would set off a wave of further reductions, leading to a worse situation. Once more, Lewis challenges Keynes: why should lowered prices induce businessmen to expect even further reductions, in a way that sends the economy spiraling to disaster? If the argument is that lower prices, along with lower wages, will lead to expectations of decreased spending, this rests on confusion.<br />
<br />
What about the … claim that wage cuts will backfire by reducing workers' buying power, which in turn will reduce business revenue? As Henry Hazlitt noted, Keynes is confusing wage rates with wages earned … so long as prices fall faster than wages, real (price-adjusted) worker income may actually rise. (p. 228)<br />
<br />
Lewis brings out fully that Keynes had much more in mind than a cure for depressions. He thought that boom conditions could be permanently maintained by lowering the rate of interest nearly to zero. In that way, the scarcity of capital could be ended. InThe General Theory, Keynes said,<br />
<br />
The remedy for the boom is not a higher rate of interest but a lower rate of interest! For that may enable the boom to last. The right remedy for the trade cycle is not to be found in abolishing booms and thus leaving us in a semi-slump; but in abolishing slumps and thus keeping us permanently in a quasi-boom. (pp. 20–21)<br />
<br />
Is this not an incredible doctrine? The interest rate is to be lowered by an expansion of credit. But production can increase only through an increase in capital goods. Putting pieces of paper designated "money" into circulation will not by itself increase prosperity, even if all the new money is, as Keynes wished, spent and not hoarded. To think otherwise is to indulge in magical thinking.<br />
"The entire Keynesian edifice rests on a central paradox: impeding the central mechanism of the free market will restore prosperity."<br />
<br />
Keynes was not satisfied, furthermore, with recommending inflation as the key to promote prosperity. He extended his view into a full-fledged inflationist theory of history. "That the world after several millennia of steady individual saving, is so poor," Keynes claimed, "is to be explained … [by] high rates of interest" (p. 17). (Incidentally, the French literary figure Georges Bataille developed a similar theory of history. See his The Accursed Share, Volume 1: Consumption.)<br />
<br />
Keynes's program went far beyond monetary expansion. He wanted the government to take control of investment. Wise planners would do much better in guiding the economy than the speculators of "casino capitalism." He remarks in The General Theorythat he favors "a somewhat comprehensive socialization of investment" (p. 56).<br />
<br />
Does not this program pose a severe threat to liberty, in a way classically explained by Friedrich Hayek in The Road to Serfdom? How can one preserve civil liberties in a state-controlled economy? Of this danger Keynes was well aware, and he praised Hayek for having written "a grand book," with which he was "morally and philosophically" in agreement. But this did not lead him to abandon his penchant for planning. He thought that the dangers of planning could be averted if matters were left to wise experts – experts including him as a prime example. Keynes's egotism knew no bounds.<br />
<br />
In that case, spending would drive up prices, to no good effect. In responding to this objection, Lewis makes one of his most valuable points. True enough, one can find in Keynes's writings warnings against inflation. But Keynes set such stringent conditions for inflation that it would almost never exist. Specifically, so long as there is some unemployment present, as there invariably is, there is no inflation.Lewis has presented Keynes as an inflationist, but is not he vulnerable to an objection? Keynes recommended increased spending in bad conditions, but did he not also call for restraint once full employment was reached?<br />
<br />
Lewis has exposed with unmatched clarity the lineaments of Keynes's system and enabled us to see exactly its disabling defects. Keynes defied common sense, unable to sustain the brilliant paradoxes that his fertile intellect constantly devised. Lewis's book is an ideal guide to Keynes's dangerous and destructive economics. The Great Depression of the 14th Centurytag:12160.info,2009-11-25:2649739:Topic:1293252009-11-25T08:03:52.299ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3861">http://mises.org/daily/3861</a><br />
by Murray N. Rothbard<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/TriumphOfDeath.jpg"></img></p>
<br />
Most people — historians not excepted — are tempted to think of economic and cultural progress as being continuous: in every century people are better off than in the one preceding. This comforting assumption had to be given up quite early when the Dark Ages ensued after the collapse of the Roman Empire. But it was generally held that after the "renaissance" of…
<a href="http://mises.org/daily/3861">http://mises.org/daily/3861</a><br />
by Murray N. Rothbard<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/TriumphOfDeath.jpg"/></p>
<br />
Most people — historians not excepted — are tempted to think of economic and cultural progress as being continuous: in every century people are better off than in the one preceding. This comforting assumption had to be given up quite early when the Dark Ages ensued after the collapse of the Roman Empire. But it was generally held that after the "renaissance" of the 11th century, progress in western Europe was pretty well linear and continuous from that point to the present day. It took heroic efforts over many decades for economic historians like Professors Armando Sapori and Robert Sabatino Lopez to finally convince the historical profession that there was a grave secular decline in most of western Europe from approximately 1300 to the middle of the 15th century; a period which might be called the Late Middle Ages or the Early Renaissance. This secular decline, mistitled a "depression," permeated most parts of western Europe with the exception of a few Italian city-states.<br />
<br />
The economic decline was marked by a severe drop in population. Since the 11th century, economic growth and prosperity had pulled up population figures. Total population in western Europe, estimated at 24 million in the year 1000 AD, had vaulted to 54 million by the year 1340. In little over a century, from 1340 to 1450, however, the western European population fell from 54 million to 37 million, a 31 percent drop in only a century.<br />
<br />
The successful battle to establish the fact of the great decline has done little, however, to establish the cause or causes of this debacle. Focus on the devastation caused by outbreaks of the Black Death in the mid-14th century is partially correct, but superficial, for these outbreaks were themselves partly caused by an economic breakdown and fall in living standards which began earlier in the century. The causes of the great depression of western Europe can be summed up in one stark phrase: the newly imposed domination of the State. During the medieval synthesis of the High Middle Ages there was a balance between the power of Church and State, with the Church slightly more powerful. In the 14th century that balance was broken, and the nation-state came to hold sway, breaking the power of the Church, taxing, regulating, controlling and wreaking devastation through virtually continuous war for over a century (the Hundred Years' War, from 1337 to 1453).[1]<br />
<br />
The first and critically most important step in the rise in the power of the State at the expense of crippling the economy was the destruction of the fairs of Champagne. During the High Middle Ages, the fairs of Champagne were the main mart for international trade, and the hub of local and international commerce. These fairs had been carefully nurtured by being made free zones, untaxed or unregulated by the French kings or nobles, while justice was swiftly and efficiently meted out by competing private and merchants' courts. The fairs of Champagne reached their peak during the 13th century, and provided the center for land-based trade over the Alps from northern Italy, bearing goods from afar.<br />
<br />
Then, in the early 14th century, Philip IV, the Fair, king of France (1285–1314), moved to tax, plunder, and effectively destroy the vitally important fairs of Champagne. To finance his perpetual dynastic wars, Philip levied a stiff sales tax on the Champagne fairs. He also destroyed domestic capital and finance by repeated confiscatory levies on groups or organizations with money. In 1308, he destroyed the wealthy Order of the Templars, confiscating their funds for the royal treasury. Philip then turned to impose a series of crippling levies and confiscations on Jews and northern Italians ("Lombard's") prominent at the fairs: in 1306, 1311, 1315, 1320 and 1321. Furthermore, at war with the Flemings, Philip broke the long-time custom that all merchants were welcome at the fairs, and decreed the exclusion of the Flemings. The result of these measures was a rapid and permanent decline of the fairs of Champagne and of the trading route over the Alps. Desperately, the Italian city-states began to reconstitute trade routes and sail around the Straits of Gibraltar to Bruges, which began to flourish even though the rest of Flanders was in decay.<br />
<br />
It was particularly fateful that Philip the Fair inaugurated the system of regular taxation in France. Before then, there were no regular taxes. In the medieval era, while the king was supposed to be all-powerful in his own sphere, that sphere was restricted by the sanctity of private property. The king was supposed to be an armed enforcer and upholder of the law, and his revenues were supposed to derive from rents on royal lands, feudal dues and tolls. There was nothing that we would call regular taxation. In an emergency, such as an invasion or the launching of a crusade, the prince, in addition to invoking the feudal duty of fighting on his behalf, might ask his vassals for a subsidy; but that aid would be requested rather than ordered, and be limited in duration to the emergency period.<br />
<br />
The perpetual wars of the 14th and the first half of the 15th centuries began in the 1290s, when Philip the Fair, taking advantage of King Edward I of England's war with Scotland and Wales, seized the province of Gascony from England. This launched a continuing warfare between England and Flanders on the one side, and France on the other, and led to a desperate need for funds by both the English and the French Crowns.<br />
<br />
The merchants and capitalists at the fairs of Champagne might have money, but the largest and most tempting source for royal plunder was the Catholic Church. Both the English and French monarchs proceeded to tax the Church, which brought them into a collision course with the pope. Pope Boniface VIII (1294–1303) stoutly resisted this new form of pillage, and prohibited the monarchs from taxing the Church. King Edward reacted by denying justice in the royal courts to the Church, while Philip was more militant by prohibiting the transfer of Church revenue from France to Rome. Boniface was forced to retreat and to allow the tax, but his bull Unam Sanctam (1302) insisted that temporal authority must be subordinate to the spiritual. That was enough for Philip, who boldly seized the pope in Italy and prepared to try him for heresy, a trial only cut off by the death of the aged Boniface. At this point Philip the Fair seized the papacy itself, and brought the seat of the Roman Catholic Church from Rome to Avignon, where he proceeded to designate the pope himself. For virtually the entire 14th century, the pope, in his "Babylonian captivity," was an abject tool of the French king; the pope only returned to Italy in the early 15th century.<br />
<br />
In this way, the once mighty Catholic Church, dominant power and spiritual authority during the High Middle Ages, had been brought low and made a virtual vassal of the royal plunderer of France.<br />
<br />
The decline of Church authority, then, was matched by the rise in the power of the absolute State. Not content with confiscating, plundering, taxing, crushing the fairs of Champagne, and bringing the Catholic Church under his heel, Philip the Fair also obtained revenue for his eternal wars by debasement of the coinage and thereby generated a secular inflation.<br />
<br />
The wars of the 14th century did not cause a great deal of direct devastation: armies were small and hostilities were intermittent. The main devastation came from the heavy taxes and from the monetary inflation and borrowing to finance the eternal royal adventures. The enormous increase of taxation was the most crippling aspect of the wars. The expenses of war: recruitment of the modestly sized army; payments of its wages; supplies; and fortifications — all cost from two- to fourfold the ordinary expenses of the Crown. Add to that the high costs of tax assessment and enforcement and the cost of the loans, and the crippling burden of war taxation becomes all too clear.<br />
<br />
The new taxes were everywhere. We have seen the grave effect of taxes on the Church; on a large monastic farm, they often absorbed over 40 percent of the net profits of the farm. A uniform poll tax of one shilling, levied by the English Crown in 1380, inflicted great hardship on peasants and craftsmen. The tax amounted to one month's wages for agricultural workers and one week's wages for urban laborers; moreover, since many poor workers and peasants were paid in kind rather than money, amassing the money to pay the tax was particularly difficult.<br />
<br />
Other new taxes levied were ad valorem on all transactions; taxes on wholesale and retail beverages; and levies on salt and wool. To combat evasion of the tax, the governments established monopoly markets for the sale of salt in France and "staple points" for English wool. The taxes restricted supply and raised prices, crippling the critical English wool trade. Production and trade were hampered further by massive requisitions levied by the kings, thus causing a drastic fall of income and wealth, as well as bankruptcies among the producers. In short, consumers suffered from artificially high prices and producers from low returns, with the king bleeding the economy of the differential. Government borrowing was scarcely more helpful, leading to repeated defaults by the kings and consequent heavy losses and bankruptcies among the private bankers unwise enough to lend to the government.<br />
<br />
Originating as a response to wartime "emergency," the new taxes tended to become permanent: not only because the warfare lasted for over a century, but because the State, always on the lookout for an increase in its income and power, seized upon the golden opportunity to convert wartime taxes into a permanent part of the national heritage.<br />
<br />
From the middle to the end of the 14th century, Europe was struck with the devastating pandemic of the Black Death — the bubonic plague — which in the short span of 1348–1350 wiped out fully one-third of the population. The Black Death was largely the consequence of people's lowered living standards caused by the great depression and the resulting loss of resistance to disease. The plague continued to recur, though not in such virulent form, in every decade of the century.<br />
<br />
Such are the great recuperative powers of the human race that this enormous tragedy caused virtually no lasting catastrophic social or psychological effects among the European population. In a sense, the longest-lasting ill effect from the Black Death was the response of the English Crown in imposing permanent maximum wage control and compulsory labor rationing upon English society. The sudden decline of population and consequent doubling of wage rates was met by the government's severe imposition of maximum wage control in the Ordinance of 1349 and the Statue of Labourers of 1351. Maximum wage control was established at the behest of the employing classes: large, middle, and small landlords, and master craftsmen, the former groups in particular alarmed at the rise of agricultural wage rates. The ordinance and the statute defied economic law by attempting to enforce maximum wage control at the old pre-plague levels. The inevitable result, however, was a grave shortage of labor, since at the statutory maximum wage the demand for labor was enormously greater than the newly scarce supply.<br />
<br />
Every government intervention creates new problems in the course of vain attempts to solve the old. The government is then confronted with the choice: pile on new interventions to solve the inexplicable new problems, or repeal the original intervention. Government's instinct, of course, is to maximize its wealth and power by adding new interventions. So did the English Statute of Labourers — which imposed forced labor at the old wage rates for all men in England under the age of 60, restricted the mobility of labor, declaring that the lord of a particular territory had first claim on a man's labor, and made it a criminal offence for an employer to hire a worker who had left a former master. In that way, the English government engaged in labor rationing to try to freeze laborers at their pre-plague occupations at pre-plague wages.<br />
<br />
<br />
This forced rationing of labor cut against the natural inclination of men to leave for more employment at better wages, and so the inevitable rise of black markets for labor made enforcement of the statutes difficult. The desperate English Crown tried once again, in the Cambridge Statute of 1388, to make the rationing more rigorous. Labor mobility of any sort was prohibited without written permission from local justices, and compulsory child labor was imposed in agriculture. But there was continual evasion of this compulsory buyers' cartel, especially by large employers, who were particularly eager and able to pay higher wage rates. The cumbersome English judicial machinery was totally ineffective in enforcing the legislation, although the monopolistic urban guilds (monopolies enforced by government) were able to partially enforce wage control in the cities. Can Asset-Price Bubbles Be Harmless?tag:12160.info,2009-11-25:2649739:Topic:1293242009-11-25T08:01:19.515ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3868">http://mises.org/daily/3868</a><br />
by Frank Shostak<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/MrBubbleBottle.jpg"></img></p>
<br />
There is an increasing concern among some commentators that the current, extremely loose monetary policy of the US central bank could fuel another round of asset-price bubbles. This in turn, it is held, could pose a serious danger to the US economy.<br />
<br />
Some commentators, such as John Taylor (the inventor of the Taylor rule), are urging the US central-bank policy…
<a href="http://mises.org/daily/3868">http://mises.org/daily/3868</a><br />
by Frank Shostak<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/MrBubbleBottle.jpg"/></p>
<br />
There is an increasing concern among some commentators that the current, extremely loose monetary policy of the US central bank could fuel another round of asset-price bubbles. This in turn, it is held, could pose a serious danger to the US economy.<br />
<br />
Some commentators, such as John Taylor (the inventor of the Taylor rule), are urging the US central-bank policy makers to start considering a tighter stance as soon as possible, in order to prevent a repetition of the Greenspan Fed's interest-rate policy, which kept rates at very low levels for too long. (The Fed lowered its policy rate from 6.5% in December 2000 to 1% by June 2003. The Fed kept the rate at 1% until June 2004).<br />
<br />
Taylor and others are of the view that the current financial crisis is the outcome of the Greenspan Fed's very loose monetary stance, which caused gigantic asset-price bubbles.<br />
<br />
In contrast to this way of thinking, the former Fed governor and current professor of economics at Columbia University, Frederic Mishkin, holds that the Fed should continue with its loose stance. Mishkin is known as a close confidant of Fed Chairman Ben Bernanke.<br />
<br />
In an article in the Financial Times on November 9, 2009,[1] Mishkin argues that not every asset-price bubble is dangerous for the economy. He classifies bubbles into two categories.<br />
<br />
The first and dangerous category is one I call "a credit boom bubble," in which exuberant expectations about economic prospects or structural changes in financial markets lead to a credit boom. The resulting increased demand for some assets raises their price and, in turn, encourages further lending against these assets, increasing demand, and hence their prices, even more, creating a positive feedback loop. This feedback loop involves increasing leverage, further easing of credit standards, then even higher leverage, and the cycle continues.<br />
<br />
Eventually, argues Mishkin,<br />
<br />
The bubble bursts and asset prices collapse, leading to a reversal of the feedback loop. Loans go sour, the deleveraging begins, demand for the assets declines further and prices drop even more. The resulting loan losses and declines in asset prices erode the balance sheets at financial institutions, further diminishing credit and investment across a broad range of assets. The resulting deleveraging depresses business and household spending, which weakens economic activity and increases macroeconomic risk in credit markets. Indeed, this is what the recent crisis has been all about.<br />
<br />
For Mishkin it is the first category, the credit-boom bubble, that is dangerous to the economy. The second category of bubbles, which he labels a "pure irrational exuberance bubble" is<br />
<br />
far less dangerous because it does not involve the cycle of leveraging against higher asset values. Without a credit boom, the bursting of the bubble does not cause the financial system to seize up and so does much less damage. For example, the bubble in technology stocks in the late 1990s was not fuelled by a feedback loop between bank lending and rising equity values. Indeed, the bursting of the tech-stock bubble was not accompanied by a marked deterioration in bank balance sheets. This is one of the key reasons that the bursting of the bubble was followed by a relatively mild recession. Similarly, the bubble that burst in the stock market in 1987 did not put the financial system under great stress and the economy fared well in its aftermath.<br />
<br />
According to Mishkin, since banks are currently curbing their lending, there is no danger of the emergence of a credit-boom bubble in the foreseeable future.<br />
<br />
Our problem is not a credit boom, but that the deleveraging process has not fully ended. Credit markets are still tight and are presenting a serious drag on the economy.<br />
<br />
Hence, even if the present loose monetary policy were to produce bubbles there is no need to be concerned, since they belong to the harmless bubble category, argues Mishkin.<br />
<br />
From this it follows that the Fed should keep its present easy monetary stance as long as it is required. Mishkin is of the view that a policy aimed at preventing the second category of bubbles can only damage the economy.<br />
Credit Expansion and Bubbles — What Is the Link?<br />
<br />
According to popular thinking, an asset bubble is a large, above historical average, increase in asset prices. A price of a thing is the amount of dollars paid for it. This means that a bubble is a large, above the historical average, payment of dollars for various assets.<br />
<br />
As a rule, for this to occur, there must be an increase in the pool of dollars, or the pool of money. So if one were to accept the popular definition of what a bubble is, one must also accept that without an expansion in the money pool, bubbles cannot emerge. (Observe that in his article, Mishkin never mentions money supply).<br />
<br />
Irrespective of their psychological disposition, if the pool of money is not expanding, people's ability to generate bubbles in various markets is not tenable.<br />
<br />
Recall that Mishkin holds that bubbles in the first category — the dangerous bubbles — are set in motion by exuberant expectations about economic prospects or structural changes in financial markets, which trigger a credit boom.<br />
<br />
But even if these factors are capable of triggering increases in credit, why must all this produce an expansion in the money supply? The increase in the money supply is the key for the emergence of asset bubbles.<br />
<br />
For instance, when Joe lends his $100 to Bob via his bank, this means that Joe via the intermediary lends his money to Bob. On the maturity date, Bob transfers the money to the bank, and the bank in turn (after charging a fee) transfers the $100 plus interest to Joe.<br />
<br />
Observe that here we don't have any increase in the money supply — the existing $100 was transferred from Joe to Bob. Also note that the $100 loan by Joe to Bob is fully backed up by $100.<br />
<br />
Things are however quite different when Joe keeps the $100 in the bank warehouse or demand deposit. Now, by keeping the money in a demand deposit, Joe is ready to employ the $100 in an exchange at any time he deems it is necessary.<br />
<br />
If the bank lends Bob $50 by taking it from Joe's deposit, the bank has now created $50 of unbacked credit, i.e., credit "out of thin air." There is now $150 in demand deposits backed by $100. By lending $50 to Bob, the bank creates $50 of demand deposit.<br />
<br />
In this sense, the lending here is without a lender as such. The intermediary, i.e., the bank, has created a mirage transaction without any proper lender. On the maturity date, once the money is repaid to the bank, this type of money disappears. The amount of money will revert back to $100.<br />
<br />
Hence an increase in the credit created out of thin air, all other things being equal, gives rise to the expansion in money supply. A fall in the credit created out of thin air, all other things being equal, results in the contraction of the money supply.<br />
<br />
What then matters for asset price bubbles is the expansion in credit out of thin air. It is this type of credit that boosts the money-supply rate of growth and hence fuels asset-price bubbles.<br />
<br />
Again, an increase in normal credit (i.e., credit that has an original lender) doesn't alter the money supply and hence has nothing to do with asset-price bubbles. (When Bob lends $100 to Joe, what we have here is an increase in lending and a transfer of an existing $100 from lender to borrower — and no change in the money supply).<br />
The Fed's Monetary Policies and Asset-Price Bubbles<br />
<br />
It must be realized that without the support from the Fed pumping money, banks will find it difficult to expand the credit out of thin air.<br />
<br />
For instance, a farmer Joe sells his saved 1kg of seeds for $100. He then deposits this $100 with Bank A. Observe that Joe is exercising his demand for money by holding his money in the demand deposits of Bank A. (Joe could also have exercised his demand for money by holding the money at home in a jar, or keeping it under the mattress).<br />
<br />
Whenever a bank takes a portion of Joe's deposited money and lends it out, it sets in motion serious trouble. Let us say that Bank A lends $50 to Bob by taking $50 out of Joe's deposit. Remember that Joe still exercises his demand for $100. What we have here is $150 that are backed by $100.<br />
"In the extreme case, if there is only one bank it can practice fractional-reserve banking without any fear of being 'caught'."<br />
<br />
Now, Joe demands money not to hold it as such but to use it as the medium of exchange. So let us say that Joe decides to use his $100 to buy goods from Sam, who banks with Bank B. On the following day, Bank B will present the check on $100 to Bank A. In short, $100 is shifted from Bank A to Bank B. (No more money is now left at Bank A).<br />
<br />
Let us say that Bob, who borrowed $50 from bank A, also buys goods from Sam (remember that Sam keeps his money with Bank B). This, however, will pose a problem to Bank A since it doesn't have the $50 to pay Bank B once the check on $50 written against Bank A is presented by Bank B. This means that Bank A is "caught" here, so to speak.<br />
<br />
As the number of banks rises and the number of clients per bank declines, the chances that clients will spend money on the goods of individuals that are banking with other banks will increase. This in turn increases the risk of a bank not being able to clear its checks once this bank practices fractional-reserve banking — i.e., lends fictitious claims or money out of thin air.<br />
<br />
Conversely, as the number of competitive banks diminishes, that is, as the number of clients per bank rises, the likelihood of being "caught" practicing fractional-reserve banking diminishes.<br />
<br />
In the extreme case, if there is only one bank it can practice fractional-reserve banking without any fear of being "caught" since it will always clear its own checks. Thus Sam, who sold goods to Bob, will deposit the check with bank A. All that will happen now is that the ownership of the deposit will be transferred from Bob to Sam. If Joe decides to spend his $100 on goods from Tom, then again we will have here a transfer of the ownership of the deposit.<br />
<br />
We can thus conclude that in a free banking environment with many competitive banks, if a particular bank tries to expand credit by practicing fractional-reserve banking, it runs the risk of being "caught." So it is quite likely that in a free-market economy the threat of bankruptcy will bring to a minimum the practice of fractional-reserve banking.<br />
<br />
From what was said so far, we can suggest that in a free-market economy the practice of fractional-reserve banking would tend to be minimal. This is, however, not so in the case of the existence of a central bank. By means of monetary policy, which is also termed the reserve management of the banking system, the central bank permits the existence of fractional-reserve banking and thus the creation of money out of thin air.<br />
<br />
If bank A is short $50, it can sell some of its assets to the central bank for cash, thereby preventing being "caught." Bank A can also secure the $50 by borrowing it from the central bank. Where does the central bank get the money? It actually generates it out of thin air.<br />
<br />
The modern banking system can be seen as one huge monopoly bank, which is guided and coordinated by the central bank. Banks in this framework can be regarded as the branches of the central bank. As we have seen, one monopoly bank can practice fractional-reserve banking without running the risk of being "caught."<br />
<br />
Through ongoing monetary management, i.e., monetary pumping, the central bank makes sure that all the banks engage jointly in the expansion of credit out of thin air.<br />
<br />
The joint expansion in turn guarantees that checks presented for redemption by banks to each other are netted out. By means of monetary injections, the central bank makes sure that the banking system is "liquid enough" so banks will not bankrupt each other.<br />
"So it is quite likely that in a free-market economy the threat of bankruptcy will bring to a minimum the practice of fractional-reserve banking."<br />
<br />
Hence without the support from the Fed's pumping, the commercial banks' creation of money out of thin air would be barely noticeable. Pay attention that without the Fed's pumping, the so-called exuberant expectations or mysterious structural changes in financial markets couldn't produce an expansion of the money supply and thus set in motion asset bubbles as Mishkin suggests.<br />
<br />
Once it is realized that the key source for asset bubbles is the monetary pumping of the Fed (i.e., central bank) it becomes clear that there is no need to categorize various bubbles.<br />
<br />
What matters is the fact that the Fed's loose monetary policy gives rise to various nonproductive (bubble) activities that undermine the process of real-wealth formation, thereby impoverishing the economy.<br />
<br />
The reversal of the Fed's pace of money pumping sets in motion the bursting of bubble activities.<br />
Bubbles and the Fed's Policies — Historical Evidence<br />
<br />
Both the plunge in technology stocks from February 2000 to September 2002 and the October 1987 stock market crash were set in motion by the boom–bust policies of the Fed.<br />
<br />
By the end of September 2002, the NASDAQ composite stock-price index closed at 1,172.06 — a fall of 75% from the high of 4,696.69 reached at the end of February 2000.<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/3868/Figure1.png"/></p>
<br />
<br />
What set this collapse in motion was a sharp fall in the growth momentum of the Fed's monetary pumping. Year-on-year, the rate of growth of the Fed's balance sheet fell from 16.9% in December 1999 (Y2K pumping) to −3% by December 2000.<br />
<br />
In response to this, the yearly rate of growth of our monetary measure AMS[2] fell from 6.7% in January 2000 to −1% by December 2000.<br />
<br />
Also note that the yearly rate of growth of commercial-bank lending fell from 13.1% in September 2000 to 1.5% by December 2001. (Given the sharp decline in the growth momentum of commercial-bank lending, it is quite likely that the growth momentum of commercial-bank lending out of thin air had also fallen).<br />
<br />
The yearly rate of growth of our measure of monetary liquidity fell from −1.1% in January 2000 to −5.3% by December 2000.<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/3868/Figure2.png"/></p>
<br />
As a result of the plunge in the pace of monetary pumping, the yearly rate of growth of industrial production fell from 5.5% in June 2000 to −5.7% by November 2001.<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/3868/Figure3.png"/></p>
<br />
<br />
Also, in the October 1987 stock-market crash, the Fed's monetary policy played a key role. By the end of October 1987 the S&P500 closed at 251.79 — a fall of 23.7% from the end of August 1987.<br />
<br />
What set in motion this plunge was the sharp fall in the yearly rate of growth of Fed's balance sheet from 17% in April 1987 to 7.5% by September of that year.<br />
<br />
In response to this, the yearly rate of growth of our monetary measure AMS fell from 17.2% in January 1987 to 10.5% by September. (Our measure of liquidity plunged from 15.1% in January to −0.3% in September).<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/3868/Figure4.png"/></p>
<br />
As a result of the decline in the Fed's monetary pumping, the yearly rate of growth of industrial production fell from 7.7% in November 1987 to −0.3% by October 1989.<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/3868/Figure5.png"/></p>
<br />
At present we are observing a repetition of the past boom–bust policies of the Fed. Thus the yearly rate of growth of the Fed's balance sheet jumped from 1.5% in February 2008 to almost 153% by December of last year.<br />
<br />
Afterwards, the yearly rate of growth has been in steep decline, closing at 0.3% by mid-November this year. It seems that notwithstanding pronouncements by various Fed officials that the US central bank will keep its easy stance intact, the Fed in fact has already drastically reduced the pace of monetary pumping.<br />
<br />
As a result of the wild fluctuations in the pace of money pumping by the Fed, the yearly rate of growth of AMS jumped from 0.8% in January last year to 33.1% by November of 2008. In early November 2009 the yearly rate of growth of AMS stood at −9.1% against −6.2% in October. In short, the Fed has already set in motion another economic bust.<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/3868/Figure6.png"/></p>
<br />
Now after settling at 2.5% in January 2006 the yearly rate of growth of industrial production fell to −13.3% in June 2009. We have seen that in the 2000–2001 recession the yearly rate of growth of production fell from 5.5% in June 2000 to −5.7% in November 2001. Furthermore, from November 1987 to October 1989, the slump in industrial production was even less severe. Recall that Mishkin is of the view that the much more severe, current economic slump is a result of the collapse in bank lending.<br />
<br />
We suggest that the main reason for the present, more-severe slump is not a fall in lending but the damage inflicted to the pool of real savings by past and current monetary and fiscal policies. A fall in bank lending only reflects the precarious state of the pool of real savings. This fall, however, is not responsible for the economic slump. As a result of the past and present loose monetary and fiscal policies, the process of real-wealth formation has likely been severely damaged. (Note that loose monetary and fiscal policies provide support for nonproductive activities by diverting real savings from wealth-generating activities).<br />
<br />
Conclusion.<br />
<br />
In his Financial Times article, the former Fed governor Mishkin argues that the possible emergence of asset-price bubbles on account of loose Fed policies shouldn't be feared. He argues that only bubbles that originate from credit expansion pose a danger to the economy. Since banks are currently curbing the expansion of credit, bubbles that emanate from loose monetary policy by itself are not harmful, argues Mishkin.<br />
<br />
On the contrary, maintains Mishkin, in the present, still-subdued economic climate, the Fed must keep its loose-money stance in place for a prolonged time. According to Mishkin, a policy that will try to counter the emergence of bubbles whilst banks are cutting their lending can only damage the economy.<br />
<br />
We suggest that what matters here are the Fed's boom–bust policies and not bubbles that emanate from credit expansion. It is the Fed's loose monetary policy that gives rise to various nonproductive bubble activities, while the reversal of the Fed's policy undermines these activities and sets in motion an economic bust. This means that it is not bubbles as such that pose a threat to the economy but the boom–bust monetary policies of the central bank. Note that bubbles are just the manifestation of loose monetary policies.<br />
<br />
So we are in perfect agreement with Mishkin, although for radically different reasons, when he says, rather unwittingly in our view,<br />
<br />
Monetary policymakers, just like doctors, need to take a Hippocratic Oath to "do no harm."<br />
<br />
<p style="text-align:left"><img src="http://mises.org/store/Assets/ProductImages/ETFCC.jpg"/></p> The Ethics of Freedom and Climate Changetag:12160.info,2009-11-25:2649739:Topic:1293232009-11-25T07:56:15.185ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3829">http://mises.org/daily/3829</a><br />
by Francisco Capella<br />
<br />
The freedom of a person to act according to his will in his property implies by symmetry that aggressions against others are ethically unacceptable. An illegitimate aggression is any sufficiently intense adverse physical interference caused by a person on another's property.<br />
<br />
A problematic and possibly important case is the alteration of environmental conditions as in a hypothetical climate change, which…
<a href="http://mises.org/daily/3829">http://mises.org/daily/3829</a><br />
by Francisco Capella<br />
<br />
The freedom of a person to act according to his will in his property implies by symmetry that aggressions against others are ethically unacceptable. An illegitimate aggression is any sufficiently intense adverse physical interference caused by a person on another's property.<br />
<br />
A problematic and possibly important case is the alteration of environmental conditions as in a hypothetical climate change, which could have both positive and negative effects depending on the subjective valuations and particular circumstances of human beings. If climate change is considered a problem, it does not follow automatically that it has to be stopped or minimized at whatever cost it takes: humans are especially good at adaptation, and government does usually more harm than good.<br />
Freedom, Property, and Aggression<br />
<br />
A normative ethics with universal, symmetric, and functional rules is based upon the fundamental principle of property rights. The ethics of freedom and property rights is the natural law, the system of norms adequate to human nature that permits harmonious and peaceful social coexistence and development by avoiding, minimizing, or solving conflicts as much as humanly possible.<br />
<br />
Property is the domain of legitimate decision by the owner, the space in which each person is free to act according to his preferences without violent interference from others, whose valuations in this regard are ethically irrelevant. All peaceful actions by the owner in his property are permitted, and no actions are obligatory (there are no natural positive duties).<br />
<br />
The right to property is a negative right of noninterference. Humans do not have natural positive rights that imply that others must do something for them, and there are no natural duties towards others (present or future). Positive rights and duties arise by means of contracts.<br />
<br />
Freedom does not mean absolute absence of restrictions: my freedom ends where the freedom of others begins; my property is finite and limited by other people's properties. Freedom and property rights are equivalent to the nonaggression axiom: the initiation of force is not legitimate; force may be used only for defense and justice. Aggression, the invasion of the property of others without their consent, is forbidden. The aggressor must repair the damages and compensate the victim.<br />
<br />
Aggression is not only the narrow-sense notion of criminal violence performed by a person against another one and his possessions (murder, assault, injuries, rape, kidnapping, theft). Aggression in an abstract sense is any sufficiently intense adverse or noxious physical interference caused by a person or his possessions on another person's property.<br />
"The more actions are considered illegitimate aggressions, the more use of force is justified."<br />
<br />
Being the owner of something is not always good: property does not only imply the right to enjoy and use means of action. Property can be bad: the owner is responsible for the damages that his actions and his possessions could cause on others (intended or unintended, known or unknown, foreseen or unforeseen). All actions imply the production of undesired residuals or waste that must be taken care of by the owner so that they do not damage others.<br />
<br />
All real things are directly or indirectly interconnected by fundamental forces, so that a change in one entity causes some effect, small or big, on other entities. But ethical rules refer only to changes and effects caused by human action that can damage others and create conflicts.<br />
<br />
These interactions can involve matter (solid, liquid, gas; macroscopic or microscopic particles), energy (heat, electromagnetic waves, pressure waves) or alterations of natural environmental conditions (luminosity, pressure, temperature, winds, humidity). Effects can be strong or weak, concentrated or diffuse, direct or indirect, local or global, frequent or infrequent, cumulative or noncumulative, instantaneous or delayed, temporary or permanent.<br />
<br />
Due to the limitations of the human mind, reality is often studied in a simplified way as if it were linear and simple; but nature is in fact a complex network of entities and relationships. A cause can have multiple effects over different persons, some positive and some negative.<br />
<br />
An effect can have multiple causes, natural or artificial, from one person or from many people doing the same thing (like breathing) or complementary things (like making and driving cars, or like producing and consuming energy). In chaotic nonlinear systems, small causes can have big effects (due to amplifiers, destabilizers, or positive feedback loops), but also big causes can have small effects (due to dampers, stabilizers, or negative feedback loops).<br />
<br />
In order to be qualified as aggressions, real events must at least be physically detectable, psychologically perceptible, and relevant for human preferences. Objective real conditions do not automatically constitute problems. It is human valuations which perceive situations as opportunities or threats, benefits or damages, goods or bads. And it is the possible incompatibility of subjective human preferences that originates conflicts: what one likes another may dislike.<br />
<br />
The specific contents of the notion of aggression are open and debatable; it is not a concept with sharp boundaries, it is partially fuzzy and arbitrary. It cannot be fully determined by deduction using pure reason, it depends on customs, traditions, conventions (blocking sunlight, high-intensity lights, high-volume sounds, pollutants). Some objective criteria can be used to determine whether an event is more adequately considered an aggression or not: intensity, directness, extension, duration, accumulation.<br />
"There is no natural duty to preserve the environment, which has no intrinsic value because valuations are products of mental activity."<br />
<br />
A functional ethics of freedom needs to include responsibility principles and rules for legitimate defense. The traditional and sensible principles of justice place the burden of proof of aggression on the accuser, who must prove beyond reasonable doubt the guilt of the accused. It is not the accused who must prove his innocence (if it were so, every person should have proof of innocence for every action and moment in his life, because he could always be accused of something).<br />
<br />
Legitimate defense may be invoked by the actual or possible receiver of the effects of an action if there is clear, present and provable danger, and not just if someone cannot fully assure that there is not. Defense becomes illegitimate (it becomes aggression) if it cannot be proved that there is a danger of real damage.<br />
<br />
The precautionary principle proposed by many environmentalists demands that the initiator of an activity proves its complete harmlessness and that the government does not need to prove probable harm in order to stop it. Proving that something is absolutely innocuous is impracticable in new domains, where learning is performed by trial and error, and therefore this principle would paralyze innovation. Knowledge acquisition is costly, and full knowledge is impossible.<br />
<br />
The notion of aggression is based on the consequences or results of actions (the real effects in the world), and not on the knowledge or intentions of the agents. Instinctive moral feelings tend to excuse or diminish responsibility if there is no intentionality or if the damages are unforeseen, secondary effects: this is so partly because moral feelings evolved as genetic instincts in past times when our human ancestors had little capabilities of action.<br />
<br />
But with capital and technological accumulation, it is necessary to demand responsible use of powerful tools, and warn persons that their ignorance or lack of foresight will not excuse them for the damages they might cause. This kind of rule provides incentives for agents to fully consider all possible consequences of their actions, and not only the ones they intend to achieve, because they will be judged according to the real effects of their actions.<br />
<br />
Property rights work very well when reality is easily separable, and when the effects of actions are direct, local, concentrated, and falling mainly on the owner and nearby others easy to identify. But elements of reality are often intertwined in messy ways. Solid macroscopic objects tend to stay in their stable positions; but fluids (liquids and especially gases) tend to move, and photons and thermal energy tend to flow; these factors spread and cross legal boundaries unless stopped by some physical barrier.<br />
<br />
Externalities are effects of actions of an agent on the property of others; they can be positive (like gifts, not forbidden and not obligatory) or negative. An aggression is a negative externality. Diffuse negative externalities are problematic and difficult to regulate. Many victims could suffer a very small nuisance or loss from the actions of one agent: it might seem ridiculous to consider illegitimate actions that produce such small effects and it would be very costly for each of the victims to demand the agent to stop or to compensate them.<br />
<br />
Externalities can become important due to the cumulative and persistent effects of small actions of many agents. In a clear aggression it is possible and relatively easy to determine who is doing what to whom, who must be stopped or who must compensate whom for what. In diffuse externalities it can be very difficult to determine and connect agents, actions, effects and receivers of effects.<br />
<br />
Since aggressions imply damage, it might be naively considered that it is better to make it a very inclusive notion, so that many losses are avoided. But accepting that something is an aggression and forbidding it has consequences that might be worse than simply tolerating it. The more actions are considered illegitimate aggressions, the more use of force is justified.<br />
<br />
Costs of the system necessary to detect and punish the aggressors and compensate the victims could exceed its benefits (always bearing in mind that it is extremely problematic to perform interpersonal comparisons and additions or subtractions of utility or social cost-benefit analysis). It might be better to learn to live with some changing realities — to adapt to them — than to try to avoid them. Especially because humans are good at adaptation, by means of which they have colonized most of the planet, in very different environmental conditions.<br />
<br />
Automatically giving the State the responsibility to deal with diffuse negative externalities can be a huge mistake. The State is the monopoly of jurisdiction and violence, and it is often illegitimate (dictators, or even democratic leaders according to anarchists), very inefficient and possibly corrupt (lack of motivation or incentives and lack of knowledge or impossibility of socialism, public choice theory).<br />
<br />
What is often called market failure is often just the result of inadequate determination of property rights. Markets are never perfect because human beings are limited in their abilities; proposing that the State fixes alleged problems that individuals cannot solve freely seems to forget that the State is also made up of humans, and perhaps not the best ones (bureaucrats are not disinterested angels, and the worst might get to the top).<br />
Climate Change<br />
<br />
Ethics concerns only human beings: there is no natural duty to preserve the environment, which has no intrinsic value because valuations are products of the mental activity of cognitive emotional agents.<br />
<br />
Contamination above certain levels is usually considered an illegitimate aggression because pollutants directly damage human beings and have no beneficial effects. Climate change is related to the environment but it is very different from contamination.<br />
<br />
Anthropogenic climate change might occur due to changes in land use and emission of greenhouse gases. Changes in land use can alter the reflectivity or albedo of the surface of the planet, and it seems hard to consider them an illegitimate action.<br />
<br />
Carbon dioxide is a greenhouse gas that results from respiration and from burning fossil fuels; labeling it as a contaminant is an abuse of language, since it is necessary for photosynthesis and it is not toxic. Some human activities, like growing trees, take carbon dioxide off the atmosphere. It is extremely difficult to prove specific relationships between human carbon dioxide emissions, local climate changes, and their particular effects.<br />
<br />
Climate change, be it global warming or cooling, has multiple possible causes and effects, and the valuation of the effects can be different in different parts of the planet. Cold regions may welcome warming and lament cooling, warm regions may welcome cooling and lament warming. Climate-change alarmists seem to be climate reactionaries accepting no change.<br />
<br />
There is no optimal climate, and conflicts for the climate's determination may arise if humans achieve partial control over it. Even if humans are adapted to the present climate, this does not imply that it would be difficult to adapt to different climates if the changes are not excessive.<br />
"There is no optimal climate, and conflicts for the climate's determination may arise if humans achieve partial control over it."<br />
<br />
Climate change could happen quickly on a geological scale, but it is slow on a human scale, permitting informed adaptation and planning for the future. Climate change mitigation policies have certain, huge costs in the present and would provide uncertain, small benefits in the future. The relatively poor of today would sacrifice to help the relatively rich of tomorrow.<br />
<br />
Temperature is not the only phenomenon associated with climate change and it is possibly not the most relevant for human welfare, since humans live in wide ranges of temperature. Sea level, precipitations, and extreme weather events can be much more important.<br />
<br />
Sea level can slowly increase due to global warming, but the process is very slow, so that protections can be prepared and capital amortized if necessary; freedom of migration can help relocate people whose lands become inhabitable. Precipitation should in general increase with global warming, although its distribution might change. And the dependence of extreme weather events on temperature is complex and little known.<br />
<br />
For almost all human problems associated with global warming, the influence of climate on them is usually small if compared with other more important factors that can be more easily and efficiently dealt with. Climate change alarmists seem to ignore relatively simple solutions for the problems they raise. Humans are proactive, they do not passively submit to natural influences, and the avoidance of climate change is not necessarily the best option.<br />
<br />
Fresh water is a problem where there are no property rights, markets and prices for water. Tropical diseases depend strongly on socioeconomic conditions. Undeveloped nations are poor mostly due to inadequate social institutions, not because of environmental conditions.<br />
<br />
Heat waves can be dealt with by means of proper air conditioning (and global warming would reduce cold waves and their associated deaths). The extinction of species is mostly due to habitat destruction or invasion by humans (or direct killing, hunting or fishing).<br />
<br />
Global warming catastrophists seem to forget other more important and urgent issues which compete for the allocation of the scarce resources demanded for climate-change mitigation. It is preposterous to declare global warming the worst problem for mankind when there is war, hunger, sickness, and poverty.<br />
<br />
For some radical environmentalists and many politicians, climate change is the most important problem for human civilization, and they pretend to speak in the name of all mankind. But all problems seem to be extreme for them, because they have no notion of relative opportunity costs. Their moral language imposes duties on citizens who seem to be receiving orders about what they must do and what they must avoid no matter what.<br />
<br />
Governments are supposed to be necessary to protect their citizens against aggressions, but they are very incompetent at this task, they often perform their own institutional aggressions by prohibiting perfectly peaceful and voluntary activities; and now with climate change they seem to consider anthropogenic global warming an illegitimate undesirable action.<br />
<br />
<br />
Some radicals even try to censor and criminalize dissent from skeptics, deniers, or minimizers. But thought and speech, even if wrong or false, are never real crimes. There may be special-interest groups on both sides of the debate fighting for their favorite public policies: not only oil, coal, and nuclear companies, but also heavily subsidized renewables.<br />
<br />
While the official mainstream climate science may well be correct, its ignorance regarding economics, political philosophy, and law is huge. The most important entities for a human being are other human beings (for the good and for the bad), and not the environment. Humans can be especially damaging when organized politically and inspired by collectivism.<br />
<br />
The possible damages of climate change should be compared to the possible damages of governmental bureaucratic intervention and political oppression. Maybe the whole global-warming scare is an excuse to increase the extension of political power or a distraction from other serious problems. Social institutions matter most, and they are very wrong now: a huge improvement is possible, and freedom is the answer. The Market Can Regulate Automobilestag:12160.info,2009-11-23:2649739:Topic:1285752009-11-23T05:06:00.968ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3842">http://mises.org/daily/3842</a><br />
by Daniel Hewitt<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/DukesOfMoralHazard.jpg"></img></p>
<br />
One of the most common examples brought forward by those who oppose the abolition of governmental regulation of consumer products is that of the automobile. The rationale for the objection is that the automobile is the most expensive and complex consumer product that most will buy in a lifetime. It has so much impact on personal safety, the environment, and our…
<a href="http://mises.org/daily/3842">http://mises.org/daily/3842</a><br />
by Daniel Hewitt<br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/DukesOfMoralHazard.jpg"/></p>
<br />
One of the most common examples brought forward by those who oppose the abolition of governmental regulation of consumer products is that of the automobile. The rationale for the objection is that the automobile is the most expensive and complex consumer product that most will buy in a lifetime. It has so much impact on personal safety, the environment, and our culture in general, that it is too important to be left to the free market to regulate.<br />
<br />
This vision of shoddily built death traps blanketing the planet in thick smoke is naïve. On the contrary, we have already seen glimpses within our current regulated system of how an unregulated one would function, as basic consumer wants transcend any government-imposed regulation.<br />
Pollution<br />
<br />
Dr. Walter Block addresses the issue of pollution in his recent book The Privatization of Roads and Highways,[1] and he quickly proves the statists' nightmare of unchecked pollution to be a false one. Owners of private roads, cognizant that they would be the most obvious targets for pollution lawsuits from surrounding property owners, would protect themselves by charging higher fees for higher-polluting vehicles, providing incentive for the automakers to design and build pollution-control equipment into their vehicles. Block's explanation is so lucid and rational that it is more meaningful to examine the failures of the current regulated system than the functioning of an unregulated one.<br />
<br />
Corporate Average Fuel Economy (CAFE), regulations enacted in the 1970's, were designed with a "federal government as savior" mentality, in reaction to the Arab Oil Embargo.[2] CAFE has since, over the decades, morphed into a means by which environmental zealots can reduce our collective "carbon footprint," regardless of the will of the individual. With a popularly elected Congress dictating fuel economy to auto manufacturers, the required miles per gallon has consistently increased with little regard for consumer desires (or lives).<br />
<br />
As the CAFE calculation is weighted for sales volume, the amount of each model sold is critical to an automaker's compliance with the requirement. Small, fuel efficient vehicles must be discounted to increase sales volumes. Conversely, prices are raised on large vehicles with higher fuel consumptions in order to decrease sales.<br />
<br />
Auto manufacturers, somewhat counterintuitively, do not always oppose stricter standards. Deals are cut with auto lobbies, as subsidies for fuel economy technology and research are traded for auto manufacturers' endorsement of CAFE requirements that they would otherwise be opposed to. Similarly, the categorization of specific models can be negotiated in order to lessen the impact on auto manufacturers. Passenger cars and trucks have different CAFE standards, and with the advent of the crossover, the lines between car and truck are intentionally being blurred (Chrysler's PT Cruiser is categorized as a truck).<br />
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The primary unintended consequence of CAFE regulation has been its negative impact on occupant safety. The effect of ever-increasing fuel economy standards has been an accelerated trend towards smaller vehicles (faster than the market would have trended if left alone). Occupants of smaller, lighter vehicles are at a greater risk in multivehicle collisions, due to a greater disparity in vehicle sizes.<br />
<br />
A 1999 USA Today analysis estimated that from 1975 to 1999, approximately 46,000 people died in crashes they would otherwise have survived had they been driving larger vehicles. That's 7,700 cumulative deaths for every mile per gallon gained.[3] Numerous other studies have been conducted — with varying conclusions, as some subjective analysis is necessary — but the general premise of size disparity increasing death rates remains inherently logical.<br />
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Lost in the public debate over fuel economy is the fact that the technology exists today for more-fuel-efficient vehicles; but the market has, for the most part, rejected it. Auto buyers have consistently eschewed manual transmissions, despite their positive impact on fuel efficiency, in favor of the more-convenient but less-efficient automatic transmission.<br />
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Buyers have also opted for traditional gasoline engines over more efficient diesel engines. Similarly, the gain in fuel efficiency from a turbocharged engine has failed to entice buyers to make the additional investment. Automakers have not been able to offset the higher cost of aluminum body panels (which reduce mass and therefore increase fuel efficiency) with a higher selling price and therefore steel remains the primary component of auto bodies.<br />
<br />
The fact that fuel economy has become a topic for public debate, rather than an individual consumer choice, is a depressing indicator of how widespread the collectivist vision of the need for a government-regulated market is. Higher auto-fuel-efficiency mandates and public funding for alternative fuels remain massively popular ideas,[4] despite that the small- and midsize-car segments comprise only 45 percent of all auto sales.[5]<br />
Quality<br />
<br />
Consumer Reports is a widely known magazine publishing consumer reviews, comparisons, tests, and buying guides of new and used automobiles. It is published by the nonprofit organization Consumers Union, and funded by subscribers. To maintain objectivity in the eyes of their subscribers, their operating code is strict: they accept no advertising from outside sources, and they purchase anonymously all the vehicles they test. Their relationship with auto manufacturers had long been a tumultuous one, as automakers have frequently criticized Consumer Reports' test methods, small sample size, etc.<br />
<br />
Over time, however, Consumer Reports became so influential, and accumulated enough respect and goodwill among auto buyers, that auto manufacturers began to work with them preemptively. Consumer Reports' practice of testing new models remained unchanged; but auto manufacturers would send preproduction vehicles to their test facility, to solicit the test engineers' feedback. The engineers' suggestions could then be worked into the design of the vehicle, and upon the start of the mass production of it (and Consumer Reports eventual random purchase and test) a better rating would be achieved.[6]<br />
<br />
In 2003, this practice became widely reported, forcing Consumer Reports to end it, because it called into question their objectivity.[7] Even the appearance of bias, whether substantiated or not, and the potential loss of revenue due to a damaged reputation, was sufficient motivation for Consumer Reports to change course. In a market economy, their customers' opinion of them was sacrosanct, as is the case with any seller of a good or service.<br />
<br />
J.D. Power & Associates, owned by the publicly traded McGraw-Hill Companies Inc., specializes in surveys of customer satisfaction. Their primary revenue source is automotive companies who purchase the data they collect. Their widely known Initial Quality Survey (IQS) has become the benchmark of product quality in the automotive industry.<br />
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Auto buyers are surveyed within 90 days of purchasing a new vehicle, and are asked to indicate Things Gone Wrong (TGW) in numerous categories. Summary data of Things Gone Wrong per 100 vehicles (TGW/100) for each model, manufacturer, segment, and assembly plant are then released to the public on annual basis.[8] Detailed data for every TGW category and model are released to J.D. Power & Associates' customers.<br />
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The IQS does have limitations: Every TGW receives an equal weight, so a hard-to-use cup holder would have the same impact as a nonfunctional engine. Also, 90 days is too short a service period to judge a model's long term quality. However, every auto manufacturer is forced to respect IQS's profound impact on customer perception, and all have adopted it as an internal measure of quality.<br />
<br />
Consumer Reports and J.D. Power & Associates play an important role in any market, regulated or not, and would certainly continue to exist and thrive should government regulations be abolished.<br />
Safety<br />
<br />
The Insurance Institute of Highway Safety (IIHS)[9] is a nonprofit organization, which receives funding from auto insurers, with the intent to reduce the number of accidents, extent of damage, and rate of personal injury. Recognizing that the state-imposed regulations of the National Highway Traffic Safety Administration (NHTSA) did not adequately reflect customers' and insurers' goals, IIHS formulated several unique safety tests.<br />
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In addition to the NHTSA mandated frontal-impact test, the frontal-offset-impact test was developed by IIHS to better represent real-life impacts. Most frontal impacts are offset, meaning the impact is borne by only a portion of the front of the automobile, and not evenly distributed over the entire front. The IIHS side-impact test also differs from NHTSA version, to simulate the more dangerous and increasingly common occurrence of a taller, sport-utility vehicle impacting the side of an automobile. In 2009, IIHS began roof crush testing sport-utility vehicles, which are prone to rollover accidents, to a stricter standard than NHTSA mandates.[10]<br />
<br />
IIHS purchases and tests new and redesigned models, with the detailed results published to the automakers and insurers, and summary reports released to the general public.[11] The net benefit to consumers is safer vehicles and lower insurance premiums, which stem from the insurers' benefit of less and lower payouts. Auto manufacturers also benefit from testing that better represents real-life conditions and thus reduces the risk of litigation.<br />
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These desires would remain in a true free market, and therefore an IIHS or competitor adding similar value would maintain its important role. Safety features with questionable value, such as airbags, would receive the close scrutiny they deserve in a true free market, and consumers would benefit from the transparency and frankness that our current system lacks.<br />
<br />
One can easily imagine that owners of private roads would impose a minimum safety standard for vehicles travelling on their roads. The level of required safety performance would likely vary from road to road. For example, a farm truck travelling only short distances on rural roads would not need to be equipped with the same safety equipment as a family sedan travelling on a city expressway.<br />
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Above the minimum threshold, auto manufacturers would cater to consumer's individual choice. Models with higher safety ratings would satisfy consumers who value lower insurance premiums and/or peace of mind. Models with lower safety ratings would satisfy consumers whose focus is on cost.<br />
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NHTSA is the issuer of the commonly known Federal Motor Vehicle Safety Standards (FMVSS). Although the industry lobby has an influence, FMVSS regulations are, at their core, government fiats. And like all government fiats, they create market distortions. Seemingly minor differences among regulations result in additional cost burdens to auto manufacturers, depriving customers of the maximum benefit from the international division of labor.<br />
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Import vehicles must be modified to comply with requirements that are unique to FMVSS, either at the source factory or a local retrofitter, driving up cost. Export vehicles are penalized in a similar manner. For example, models that are exported to Canada must be equipped with daytime running lights (DRL) and a redesigned bumper, as CMVSS (the Canadian equivalent to FMVSS) has unique provisions mandating daytime running lights and a greater impact speed for bumper damageability.<br />
Conclusion<br />
<br />
All consumers place a high value on their personal safety. The sellers of any consumer product must fulfill this desire in order to profit in a capitalist economy.<br />
<br />
<br />
Auto manufacturers, motivated by their customers' wishes to access roads at the lowest possible cost to them, and to acquire insurance at the lowest possible cost, would profit by producing safe products that meet standards established by private regulators. Private regulators, who depend on their own brand reputations and trustworthiness, would compete with each other for the opportunity to test and certify automobiles.<br />
<br />
Insurance would likely cease to be mandatory, leaving the choice up to each individual. It is conceivable that some road owners would require road users to have personal-liability insurance. Additionally, in order to protect the asset that they are financing, the underwriters of auto loans may require that the buyer purchase collision insurance.<br />
<br />
The free market possesses the means to regulate itself. Automobiles are not too important to be left to the free market to manage. They are too important to be left to government. Taxestag:12160.info,2009-11-23:2649739:Topic:1285742009-11-23T05:03:50.603ZLocaltarianhttps://12160.info/profile/Awho
by Frederic Bastiat<br />
<a href="http://mises.org/daily/3805">http://mises.org/daily/3805</a><br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/people/frederic_bastiat.jpg"></img></p>
<p style="text-align:left"><img src="http://mises.org/images4/taxation.jpg"></img></p>
<br />
Have you never chanced to hear it said, "There is no better investment than taxes. Only see what a number of families it maintains, and consider how it reacts upon industry: it is an inexhaustible stream, it is life itself."<br />
<br />
In order to combat this doctrine, I must refer to my preceding refutation. Political economy knew…
by Frederic Bastiat<br />
<a href="http://mises.org/daily/3805">http://mises.org/daily/3805</a><br />
<br />
<p style="text-align:left"><img src="http://mises.org/images/people/frederic_bastiat.jpg"/></p>
<p style="text-align:left"><img src="http://mises.org/images4/taxation.jpg"/></p>
<br />
Have you never chanced to hear it said, "There is no better investment than taxes. Only see what a number of families it maintains, and consider how it reacts upon industry: it is an inexhaustible stream, it is life itself."<br />
<br />
In order to combat this doctrine, I must refer to my preceding refutation. Political economy knew well enough that its arguments were not so amusing that it could be said of them, repetitions please. It has, therefore, turned the proverb to its own use, well convinced that, in its mouth, repetitions teach.<br />
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The advantages which officials advocate are those which are seen. The benefit which accrues to the providers is still that which is seen. This blinds all eyes.<br />
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But the disadvantages which the taxpayers have to get rid of are those which are not seen. And the injury which results from it to the providers is still that which is not seen, although this ought to be self-evident.<br />
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When an official spends for his own profit an extra hundred sous, it implies that a taxpayer spends for his profit a hundred sous less. But the expense of the official is seen, because the act is performed, while that of the taxpayer is not seen, because, alas, he is prevented from performing it.<br />
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You compare the nation, perhaps to a parched tract of land, and the tax to a fertilizing rain. Be it so. But you ought also to ask yourself where are the sources of this rain, and whether it is not the tax itself which draws away the moisture from the ground and dries it up?<br />
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Again, you ought to ask yourself whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation?<br />
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There is one thing very certain, that when James B. counts out a hundred sous for the tax gatherer, he receives nothing in return. Afterwards, when an official spends these hundred sous, and returns them to James B., it is for an equal value in corn or labor. The final result is a loss to James B. of five francs.<br />
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It is very true that often, perhaps very often, the official performs for James B. an equivalent service. In this case there is no loss on either side; there is merely an exchange. Therefore, my arguments do not at all apply to useful functionaries. All I say is — if you wish to create an office, prove its utility. Show that its value to James B., by the services which it performs for him, is equal to what it costs him. But, apart from this intrinsic utility, do not bring forward as an argument the benefit which it confers upon the official, his family, and his providers; do not assert that it encourages labor.<br />
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When James B. gives a hundred sous to a government officer for a really useful service, it is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes.<br />
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But when James B. gives a hundred sous to a government officer, and receives nothing for them unless it be annoyances, he might as well give them to a thief. It is nonsense to say that the government officer will spend these hundred sons to the great profit of national labor; the thief would do the same; and so would James B., if he had not been stopped on the road by the extralegal parasite, nor by the lawful sponger.<br />
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Let us accustom ourselves, then, to avoid judging of things by what is seen only, but to judge of them by that which is not seen.<br />
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Last year I was on the Committee of Finance, for under the constituency the members of the opposition were not systematically excluded from all the commissions: in that the constituency acted wisely. We have heard M. Thiers say, "I have passed my life in opposing the legitimist party and the priest party. Since the common danger has brought us together, now that I associate with them and know them, and now that we speak face to face, I have found out that they are not the monsters I used to imagine them."<br />
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Yes, distrust is exaggerated, hatred is fostered among parties who never mix; and if the majority would allow the minority to be present at the commissions, it would perhaps be discovered that the ideas of the different sides are not so far removed from each other; and, above all, that their intentions are not so perverse as is supposed. However, last year I was on the Committee of Finance. Every time that one of our colleagues spoke of fixing at a moderate figure the maintenance of the President of the Republic, that of the ministers, and of the ambassadors, it was answered,<br />
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"For the good of the service, it is necessary to surround certain offices with splendor and dignity, as a means of attracting men of merit to them. A vast number of unfortunate persons apply to the President of the Republic, and it would be placing him in a very painful position to oblige him to be constantly refusing them. A certain style in the ministerial saloons is a part of the machinery of constitutional governments."<br />
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Although such arguments may be controverted, they certainly deserve a serious examination. They are based upon the public interest, whether rightly estimated or not; and as far as I am concerned, I have much more respect for them than many of our Catos have, who are actuated by a narrow spirit of parsimony or of jealousy.<br />
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But what revolts the economical part of my conscience, and makes me blush for the intellectual resources of my country, is when this absurd relic of feudalism is brought forward, which it constantly is, and it is favorably received too:<br />
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"Besides, the luxury of great government officers encourages the arts, industry, and labor. The head of the state and his ministers cannot give banquets and soirées without causing life to circulate through all the veins of the social body. To reduce their means would starve Parisian industry and consequently that of the whole nation."<br />
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I must beg you, gentlemen, to pay some little regard to arithmetic, at least; and not to say before the National Assembly in France, lest to its shame it should agree with you, that an addition gives a different sum, according to whether it is added up from the bottom to the top, or from the top to the bottom of the column.<br />
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For instance, I want to agree with a drainer to make a trench in my field for a hundred sous. Just as we have concluded our arrangement the tax gatherer comes, takes my hundred sous, and sends them to the Minister of the Interior; my bargain is at end, but the minister will have another dish added to his table. Upon what ground will you dare to affirm that this official expense helps the national industry? Do you not see, that in this there is only a reversing of satisfaction and labor? A minister has his table better covered, it is true; but it is just as true that an agriculturist has his field worse drained. A Parisian tavern keeper has gained a hundred sous, I grant you; but then you must grant me that a drainer has been prevented from gaining five francs. It all comes to this — that the official and the tavern keeper being satisfied, is that which is seen; the field undrained, and the drainer deprived of his job, is that which is not seen. Dear me! how much trouble there is in proving that two and two make four; and if you succeed in proving it, it is said "the thing is so plain it is quite tiresome," and they vote as if you had proved nothing at all. Good Inflationtag:12160.info,2009-11-23:2649739:Topic:1285732009-11-23T05:01:02.205ZLocaltarianhttps://12160.info/profile/Awho
<a href="http://mises.org/daily/3874">http://mises.org/daily/3874</a><br />
by Joseph T. Salerno<br />
<br />
<br />
Last week a student in my MBA-level intermediate-macro seminar raised a provocative question. We were discussing the various kinds of (price) deflation and which kinds, according to Austrians, are benign and accommodate consumer preferences, and which are malignant and conflict with consumer preferences.<br />
<br />
In view of the Austrian emphasis on inflationary monetary policy as the primary cause of the…
<a href="http://mises.org/daily/3874">http://mises.org/daily/3874</a><br />
by Joseph T. Salerno<br />
<br />
<br />
Last week a student in my MBA-level intermediate-macro seminar raised a provocative question. We were discussing the various kinds of (price) deflation and which kinds, according to Austrians, are benign and accommodate consumer preferences, and which are malignant and conflict with consumer preferences.<br />
<br />
In view of the Austrian emphasis on inflationary monetary policy as the primary cause of the business cycle and the current financial crisis in particular, the student asked if Austrians considered any kind of inflation as "good" for the economy. I gave a short response in the affirmative and then thought about it more over the weekend. Here is the note on the subject that I wrote up for discussion in class tomorrow. (The last two paragraphs on free banking were not part of the original note.)<br />
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One kind of "good" inflation typically results when innovations and changes occur that permit people to economize on the amount of money they need to hold in their cash balances. For example, the introduction and increasing availability of credit cards bring about a decrease in the demand for money, which, all other things being equal, causes a general rise in prices. Credit cards operate as an alternative means of payment for many transactions and therefore reduce the amount of money people need to hold in currency and bank deposits in order to finance their anticipated exchanges at the prevailing level of prices.<br />
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These "excess" cash balances produce an increase in the demands for goods, the supplies of which have not increased. The result is that overall prices rise. But inflation here performs an important function: it reduces the buying power of the dollar to the point where money no longer is in excess supply, because people are now content to hold the total supply of money in existence in order to finance planned transactions at the new, higher level of prices. Another way of putting this is that the "real" money supply, that is, its total purchasing power in terms of goods, has been reduced to exactly the level desired by consumers.<br />
<br />
What we might call "cash-economizing" inflation tends to occur as a result of any financial innovation, including the invention of money-market mutual funds, ATM machines, PayPal accounts, and so on. It may also result from organizational or technical innovations in business that promote vertical integration of operations, where capital goods previously exchanged between two independent firms are now produced and employed within the same firm.<br />
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Note that cash-economizing inflation is benign precisely because it is an outcome of individuals striving to optimize their property holdings through the voluntary exchange process. It is also noteworthy that this kind of inflation involves a one-shot increase in prices: once the new payment method or invention becomes broadly adopted, the decline in the demand for money ceases and prices stop rising. Lastly, inflation caused by people responding to opportunities to economize on their money holdings has no systematic effect on credit markets and the interest rate and therefore does not precipitate the business cycle.<br />
"Note that cash-economizing inflation is benign precisely because it is an outcome of individuals striving to optimize their property holdings through the voluntary exchange process."<br />
<br />
A second type of good inflation is one that occurs as a result of a reduction in the supplies of goods and services caused by natural disasters, the depletion of natural resources, or increases in people's preferences for leisure (causing a decline in labor-force participation) or for present consumer goods (causing the nonreplacement or "consumption" of capital goods). All of these events bring about, sooner or later, a greater scarcity of exchangeable goods in the economy.<br />
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The reduction in the supplies of goods in the market, all other things being constant, including the stock of money, causes an excess demand for goods to emerge. Overall prices will naturally rise to restore equilibrium in goods' markets. This rise in prices both indicates the greater scarcity of available goods and ensures that they are allocated to the uses most highly valued by consumers.<br />
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Conversely, it may be said that there is a fall in the "exchange" demand for money, which is constituted by the goods offered for exchange. The decrease in the demand for money in exchange, with the supply of money unchanged, initially produces a surplus of money, because at the low prices prevailing, the supply of money offered exceeds the supplies of goods brought to market. Eventually, the buying power of the dollar adjusts downward, goods' prices are bid up, and all dollars offered are absorbed in exchange for the now-higher-priced goods.<br />
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Once again we note that, unlike the ongoing price inflation that is typically caused by central-bank expansion of the money supply, the inflation generated by diminished supplies of goods is a one-shot affair. Prices stop rising as soon as the supplies of goods and services stop decreasing and stabilize at the lower level consistent with the change in the economic data.<br />
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"Scarcity" inflation is thus socially beneficial because it facilitates economic calculation and smoothly operating markets in a situation in which people's preferences or their production opportunities have undergone a radical change. History has shown time and again — during wars, revolutions, sieges, and crop failures — that any attempt to repress scarcity inflation via price controls or centralized distribution of necessities results in calculational chaos, widespread poverty, and social disorder.<br />
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Our conclusion is, thus, that a rise in general prices driven by the demand for money always improves economic welfare as Austrians understand that term.<br />
<br />
In the interest of full disclosure, I note that most modern Austrians who support free banking, while agreeing with me on scarcity inflation, would strongly disagree with me that cash-economizing inflation is benign. Writers such as Larry White, George Selgin, and Steve Horwitz insist that any change in total spending caused by shifts in the demand for money must be promptly undone by a change in the supply of money in the same direction. Thus under our current fiat-money system, if financial innovations occur that induce people to reduce their demand for cash balances and to exchange money more rapidly, then according to "free bankers," the central bank must contract the money supply in order to prevent the increase in prices that corresponds to people's voluntary choices.<br />
"The free bankers claim to be in favor of a freely competitive monetary system, but presume to know in advance what outcome the entrepreneurs operating in this system will bring about."<br />
<br />
This is a direct implication of the free bankers' "productivity norm," according to which the central bank must actively suppress "meaningless" changes in prices. Meaningless changes in prices include those caused by shifts in what free bankers characterize — misleadingly in my opinion — as "the velocity of money." Thus, free bankers become cheerleaders for a monetary deflation engineered by the central bank as a means of stifling a pattern of freely chosen exchanges of property that expresses consumer preferences for higher prices.<br />
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The position of free bankers is not only erroneous but paradoxical as well. They accuse Austrians of the neo–Currency School, created by Mises and Rothbard, of viewing deflation and inflation asymmetrically, favoring deflation while condemning inflation. But as I tried to demonstrate above, Austrians of the neo–Currency School are perfectly consistent in their attitudes toward rising and falling prices: both "inflation" and "deflation" are benign as long as they are in accord with the voluntarily expressed preferences of consumers. Not so the free bankers, who claim to be in favor of a freely competitive monetary system, but presume to know in advance what outcome the entrepreneurs operating in this system will bring about, namely, complete stability of a particular macroeconomic variable.<br />
<br />
Thus, the real point at issue between the free bankers and their neo–Currency opponents is whether the productivity norm should be invoked to encourage the central bank to use its power to manipulate the money supply in order to stabilize "total spending," a meaningless, ex post macroaggregate. The free bankers answer, "Yes." Neo–Currency School Austrians accept Mises's dictum that rising and falling prices per se are meaningless in assessing the soundness of a monetary regime.<br />
<br />
As Mises wrote, "The notions of inflation and deflation are not praxeological concepts.… They impl[y] the popular fallacy that there is such a thing as neutral money or money of stable purchasing power and that sound money should be neutral and stable in purchasing power.…<br />
<br />
However, those applying these terms are not aware of the fact that purchasing power never remains unchanged and that consequently there is always either inflation or deflation."