Why Socialism Is Dead

Authored by Gary North via GaryNorth.com,

Socialism was a specific philosophy of government ownership of the means of production.

The democratic welfare state was never a variety of socialism.

Marx, the most famous socialist, despised democracy. He despised all attempts at economic amelioration through legislation. He wanted a proletarian revolution. He preached -- the correct verb -- a religion of revolution. That was the thesis of my first book, Marx"s Religion of Revolution (1968). You can download it here.

He was silent about how the state would allocate resources under his system. He published nothing about the actual operations of the post-revolutionary society, socialism, and its final successor, communism. Late in his career, in his final major publication, little more than a pamphlet, he wrote this: "Between capitalist and communist society there lies the period of the revolutionary transformation of the one into the other. Corresponding to this is also a political transition period in which the state can be nothing but the revolutionary dictatorship of the proletariat." (Critique of the Gotha Program, Pt. IV, 1875) This was a purely political focus. He was silent throughout his career about how the state should or will or can run the economy.

He provided some famous slogans. He offered rhetoric about the inevitable triumph of the proletarian class. But he offered no guidelines for the leaders of the victorious proletarians.

Socialists in the nineteenth century were equally silent about how the state can allocate production so as to create the good society.

In the twentieth century, there was no major detailed theoretical treatise on the economics of socialism that went into detail about the actual operations of central planning agencies in a world where the state owned the means of production. There was no equivalent of Ludwig von Mises" Human Action or Murray Rothbard"s Man, Economy, and State or George Reisman"s Capitalism.

In retrospect, this seems incredible. Here was a movement that captured the Soviet Union and China. Yet there was not a single book, let alone a shelf of books, available to Lenin in 1917 and Mao in 1949 that could serve as a guide to the kind of economic organization that they should impose. There was no treatise that could serve as a blueprint for the socialist New World Order, whether non-revolutionary socialism or Marxist communism. Yet Marx said that his was scientific socialism -- not utopian socialism, like the works of his critics.

Utopia meant "nowhere." They were all utopian socialists, including Marx.

Socialism has always been a movement based mostly on rhetoric. There was never any logic to it. There were endless promises about how politics or class revolution could bring in a socialist paradise, but there was nothing written about how this paradise would operate.

Marx offered his famous ten steps in The Communist Manifesto (1848), but they were mere slogans. The fact that he included a central bank (#5) is indicative of how confused he was about the transition from capitalism to socialism to communism. He never went into any further detail. He had plenty of time to offer details. He died in 1883.

Here is what defenders of socialism refuse to face: there is no theory of socialist economic planning.

Socialist economic theory has always been missing in action. There is also no practical treatise that has served as a guide for socialist economic planners after their national revolutions. Socialist economic planning has been chaotic. No theory of socialist planning ever emerged from this chaos.

When we look at the history of socialism, meaning the state ownership of the means of production, there are few examples.

The USSR and Communist China did come close, but the black markets always operated in both societies.

There have been tiny Communist states: Albania, Cuba, and North Korea. None have produced a theory of socialist planning.

The Labor government of Great Britain from 1945 to 1951 nationalized coal mining and much of medical care, but it did not extend control over the capital markets of The City, the separate legal jurisdiction of the bankers in the center of London. The Bank of England maintained most of its sovereignty. Labor nationalized it in 1946, but then failed to exercise control. It remained Keynesian.

In short, there are no working models of socialism. This is fitting because there are no theoretical models of socialism. It has always been based on rhetoric, not logic. It has never been based on any system of economic causation. It has no theory of economic sanctions comparable to the sanctions in the free market of monetary profit and loss.

This was pointed out in 1920 by Mises in his classic essay, "Economic Calculation in the Socialist Commonwealth." He argued that socialism is inherently irrational in theory. It has no system of private property. It, therefore, has no capital markets. But without capital markets, there can be no prices for capital. Without prices for capital, central planners do not know how to allocate capital to serve the wants of the people. So, he argued, pure socialism cannot survive.

This argument was never successfully refuted by any socialist. Polish immigrant and University of Chicago Professor Oskar Lange wrote several articles in the late 1930"s on Mises" arguments, but they were strictly theoretical. When he went back to Communist Poland in 1945, and was later put into positions of authority in planning bureaus, nothing that he had written in his famous essays was actually implemented by the Polish government. His hypothetical socialist planning board always remained pure theory. It was based on the idea that central planners can do trial and error pricing to allocate capital. But there are no consumer-generated prices in a socialist commonwealth. More to the point, there were no economic sanctions attached to them. If there is no system of monetary profit and loss, there are no meaningful economic sanctions placed on the planners. But there are surely political sanctions, as the planners discovered under Stalin and Mao. It wasn"t that the dictators liquidated capital. It was that they liquidated political opponents and bureaucrats who lost their favor.

There have been very few Marxist economists teaching in American universities. They have had zero influence on the profession. There have hardly been many more socialist economists on the campus. There was a flurry of publicity in the late 1960"s regarding a tiny group of these people, who call themselves the Union of Radical Political Economists. It had the unfortunate acronym of URPE, which was pronounced "urpee." I studied under one of its major figures in grad school, Howard Sherman. He lectured coherently. He wrote in English. He did not use equations. He never presented the case for socialism in the classroom that I attended. If he converted anybody to socialism, it must have been in private.

The socialist professors are confined mainly to the sociology departments and the English departments. These people have never taken an economics course. They do not comprehend the logic of economic causation. Like their predecessors in the nineteenth century, they confine their comments to rhetoric.

We see crowds of undergraduates who claim to be in favor of socialism. But none of these people has ever read a book on socialist economic theory. This is understandable since there isn"t one.

They are motivated by rhetoric. Rhetoric is all they have been exposed to. They go to large mass meetings to protest this or that aspect of capitalism. But they have no agendas. They don"t have a personal agenda, and they don"t have a social agenda. In this sense, they are just like Karl Marx.

The difference is this: they are not going to find sugar daddies like Frederick Engels, who ran his family"s textile plant in Manchester and used a little of his money to put Marx on the dole for four decades.

These people are noisy, but in terms of pursuing a systematic agenda for turning the United States into a socialist commonwealth, they really are harmless.

When Deng Xiaoping inaugurated an agricultural reform in 1979 which relied heavily on private ownership, he launched the most impressive period of economic growth that any large country has ever experienced. But that ended socialist economic planning. When, on December 25, 1991, Mikhail Gorbachev announced that the Soviet Union was going out of business, that ended the lure of socialism among the intellectuals. They had always clung to socialism because they expected that their class would exercise power in a socialist regime. When it became clear that the Soviet Union was too feeble to impose its will on the Russian masses, that was the end of their infatuation with Communism and socialism. It was always about power. It was never about the logic of socialism.

So, in this month, the 100th anniversary of Lenin"s Bolshevik revolution in Russia, we can rejoice in the fact that socialism is dead. From a theoretical standpoint, it was never alive. It was a corpse from day one. It was sustained by rhetoric, not logic.

If you want to visualize the future of socialism, think of Lenin"s corpse in Lenin Square. It"s all dressed up with nowhere to go.

Europe"s Secession Problems Aren"t Going Away

Authored by Ryan McMaken via The Mises Institute,

Earlier this week, The New York Times noted that movements for greater local autonomy appear to be spreading throughout Europe. In some ways, the conflict in Catalonia is just the tip of the iceberg. The Times reports: 

Coming on the heels of the Catalan vote, the Lombardy and Veneto referendums are yet another signal of the homegrown conflicts that persist in many of the European Union’s member states. Separatist movements are also simmering in Britain — where voters in Scotland rejected independence in a 2014 referendum but continue to debate the issue — as well as France, Germany, Belgium and Romania.

Like Catalonia - and unlike Scotland - the Lombardy and Veneto regions of Italy are among the wealthiest regions, and send enormous amounts of tax revenue to Rome. Italy"s southern regions, which are significantly poorer than northern Italy, have benefited from Northern wealth ever since Italians were all forced into a single nation-state in the late nineteenth century. 

This has never been forgotten by Italians from Veneto, many of whom participated in a referendum in 2014 to declare Independence. Naturally, the Italian government in Rome declared the vote invalid. At the time, however, I interviewed one of the organizers Paolo Bernardini about the referendum. (See "Inside Venice"s Secession Movement.") At the time, secessionists liek Bernardini appeared to be pursuing immediate and total independence from Rome, while remaining inside the EU: 

A tiny majority of Veneto people are in favor both of the EU and of the Euro as a currency. So I envisage a little, rich state, playing a major economic and political role in the EU, a stabilizing role. It will interact naturally with other rich and similar states, Bavaria (still part of Germany), Austria, and the Netherlands. It will be a Finland in the Adriatic. 

According to the Times piece, though, supporters of Northern independence have gone back to taking small steps, and realize - probably correctly - that there are numerous steps that must be taken between the status quo and total independence. 

The new effort appears to be focused on conducting local plebescites demanding more local autonomy. This doesn"t conflict with the goal of eventual independence, of course, although it probably is an essential first step. 

Flemish Independence? 

A region taking a gradualist approach is the Flemish-speaking region of northern Belgium, also known as Flanders. The Flanders situation has been noted in a multitude of media outlets looking to find "the next Catalonia." CNBC reports: 

Political groups such as the New Flemish Alliance, a nationalist, conservative group which is dominant in the Belgian parliament, advocate a gradual secession of Flanders from Belgium. Euronews reported that the party even hung a Catalan flag outside its headquarters recently in support of the Spanish separatist region. With elections in 2019, the issue of Flemish independence is not likely to disappear soon.

The Catalonia and Scotland situations have brought secession issues to the fore in the English-language media, but there"s nothing new about Belgium"s problem. The unlikely unions of French-speaking and Flemish-speaking regions date back to 1830 when northern regions of Belgium won independence from the Netherlands. The resulting union known as Belgium has never been a totally comfortable one, as noted in a 2007 Chicago Tribune article, which compared Beligum to an unhappy and tired married couple: 

They stay together mainly out of habit, and also because it would be such a headache to break up the household and divide the communal property.

 

If you know a couple like this, then you will understand the Belgians.

 

Dutch-speaking Flanders and French-speaking Wallonia are trapped in a loveless marriage called Belgium.

 

In today"s Europe, divorce no longer carries the opprobrium it once did. The Czechoslovakians had a very amicable split in 1993. The Yugoslavs less so. Even Scotland and England are talking about a separation.

 

But in Brussels, which these days feels more the capital of the far-flung European Union than the capital of a medium-size European nation, polite Belgian politicians don"t like the D-word. They wish the whole issue would just go away.

 

It won"t. That much became clear in December when RTBF, the French-language state broadcaster, interrupted its regular programming with an urgent bulletin announcing that Flanders had declared independence.

 

Grainy footage showed King Albert II and Queen Paola heading for the airport to flee the country. There also was video of trams stopped at the new Flemish border, and live interviews with familiar politicians discussing the crisis.

 

Not until half an hour into the broadcast did the message "This is fiction" appear on the screen. Too late. Embassies in Brussels already had scrambled to seek clarification while thousands of worried callers jammed RTBF"s switchboard...

 

Belgian politicians were not amused.

Mind you, this was back in 2007 before it had become well established that the Scots could vote on their own Independence, and before the British voted for Brexit. 

These more recent developments make regionalist movements such as those in Spain, Italy, and Belgium of increasing notability. 

The question remains, however, if nation-states lacking the Anglo-Saxon deference to electoral politics will be as tolerant of election outcomes as the British appear to be. 

The Democracy Problem 

At the core of all these issues remains an unanswered question: If a majority of voters in a region vote for independence or greater autonomy, will the vote be respected by the central government?

After all, European nation-states have for decades been lecturing the rest of the world about the wonderfulness of democracy and how "the will of the people" must prevail. At the national level, it is simply assumed that "the will of the majority" is what grants a state a "right" to rule over the citizenry. 

But if a majority in a specific region votes for a divorce from the central government, is all this talk about democracy and the will of the majority to suddenly be ignored? 

Ludwig von Mises, of course, in his book Liberalism, advocated for the idea that any region, right down to the village level, be allowed to gain independence based on the outcome of a freely held plebiscite. 

In recent years, opponents of independence movements in Italy and Spain have bickered over the way these votes are being conducted, and over the extent to which a majority actually wants indepenence. 

These arguments are good at buying time, but they conveniently ignore the central problem at hand: if Catalonia held a fair-and-square election, and, say, 75 percent of eligible voters opted for independence, would the Spanish government allow independence? What about a similar situation in northern Italy? It"s a yes-or-no question, but it doesn"t seem to be one either the Spanish or Italian government is willing to answer. 

Thus, Europe"s democracy problem persists. Is democracy only allowed when it is no threat to the established status quo for nation-states? Should the central government send in the troops to beat citizens and seize ballots when people vote "the wrong way"? 

This isn"t just a problem for Europe, of course. Most of the "democratic" world, including Europe and the Americas, has a similar problem. 

Old Borders Have Outlived their Usefulness 

As time goes on, though, it"s going to be harder and harder for nation-states to defend the current configuration of their national borders. 

The current model of nation-states is based on the idea that a single metropolis, or a group of them, can control surrounding rural frontier areas for reasons of military strategy and to ensure a food supply for the metropolis. In return, the wealthy metropolis will protect frontier areas from foreign invasions, and provide some semblance of order to far-flung regions lacking the wealth and power of the metropolis. 

This system of nation-states began to take firm shape in the seventeenth century, and was finally solidified in the nineteenth. The world wars of the 20th century showed us the heights to which nation-states can reach, and the extent to which they can seize and control resources.

This old model, however, was initially based on the idea that populations would be largely agricultural and rural, and that personal, cultural, and economic networks would be focused around the nation-states themselves, and the people within them.

As time has gone on, though, urbanization, international trade, and international communications have grown far beyond what the national governments of old could have ever imagined. Capital cities in nation states no longer command the attention and economic focus of other powerful cities within their nation states, and trade with foreign populations has in many cases become more important that trade within one"s own nation-state. Agriculture is no longer a key source of wealth, which makes city-states with only small rural hinterlands increasingly viable. 

At the same time, these newly forced international connections reduce the importance of the old nation-states as "protectors" from the neighboring regions. After all, if trade with the foreigners next door is just as important as trade with one"s own countrymen, it becomes increasingly difficult to see what one"s national government is offering protection from. 

Does northern Italy really need protection from Austrian or Swiss invaders? Does Flanders need protection from the Netherlands? In an age of thorough economic integration, a war between two European states would mostly be a matter of mutually-assured economic destruction. 

Nevertheless, the force of habit is an important factor in political ideology. Many people continue to see their national borders as quasi-sacred, reacting with horror at the idea that their nation-state should be "dismembered." National governments are careful to downplay the fact that the borders of most modern nation-states barely reach back as far as the nineteenth century. Even a look at a map of Europe from 1945 should disabuse us of any notion that national boundaries are anything but temporary. 

In fact, border changes can often be measured in lengths of time similar to those of a single human lifetime. But this doesn"t stop commentators from declaring that such-and-such region or such-and-such state (i.e., California) will never secede or dramatically change its national status.

In politics, claims of "never" should always be treated as laughably naive. 100 years is quite long enough to completely change the map of the world. 

Milton Friedman & Conservatives Are Wrong In Education

Authored by Jacob Hornberger via The Future of Freedom Foundation,

Once upon a time, some conservatives used to call for the abolition of the U.S. Department of Education. Lamentably, conservatives today celebrate when a “free-market advocate” like multimillionaire Betsy DeVos is appointed U.S. Secretary of Education, and they get terribly excited when she speaks at conservative conferences.

Meanwhile, even while conservatives continue to pronounce their allegiance to their favorite mantra — “free enterprise, private property, limited government” — they continue to embrace not only public schooling itself but also their favorite public-schooling fix-it program, school vouchers.

Over the years, conservatives have developed various labels for their voucher program: a “free-market approach to education,” “free enterprise in education,” or “school choice.” They have chosen those labels to make themselves and their supporters feel good about supporting vouchers.

But the labeling has always been false and fraudulent. Vouchers are nothing more than a socialist program, no different in principle from public schooling itself.

The term “free enterprise” means a system in which a private enterprise is free of government control or interference. That’s what distinguishes it from a socialist system, which connotes government control and interference with the enterprise.

A voucher system entails the government taxing people and then using the money to provide vouchers to people, which they can then redeem at government-approved private schools.

Does that sound like a system that is free from government control or interference? In reality, it’s no different in principle from food stamps, farm subsidies, Social Security, or any other welfare-state program. The government is using force to take money from Peter and giving it to Paul. That’s not “free enterprise.” That’s the opposite of free enterprise.

Conservatives say that their voucher system is based on “choice” because the voucher provides recipients with “choices.” But doesn’t the same principle apply to recipients of food stamps, farm subsidies, Social Security, and other socialist programs? Sure, the recipient of the loot has more choices because he has more money at his disposal. But let’s not forget that the person from whom the money was forcibly taken has been deprived of choices. After all, after a robber commits his dirty deed, he too has more choices with the money he has acquired. His victim, on the other hand, has been deprived of choices.

In FFF’s first year of operation, 1990, I wrote an article entitled “Letting Go of Socialism,” in which I pointed out that school vouchers were just another socialist scheme, one that was intended to make public schooling work more efficiently.

Imagine my surprise to receive a critique from none other than Milton Friedman, the Nobel Prize-winning economist who is the father of the school voucher program. Friedman leveled his critique in a speech he delivered that was entitled “Say No to Intolerance,” in which he took to task such libertarian stalwarts as Ludwig von Mises and Ayn Rand for adhering to principle.

Interesting enough, Friedman’s speech was recently reprinted in an issue of the Hoover Digest, a premier conservative publication. You can read it here.

Friedman’s critique of my article was nice enough. First pointing out that FFF was doing “good work and making an impact,” he addressed my criticism of vouchers:

But am I a statist, as I have been labeled by a number of libertarians, because some thirty years ago I suggested the use of educational vouchers as a way of easing the transition? Is that, and I quote Hornberger again, “simply a futile attempt to make socialism work more efficiently”? I don’t believe it. I don’t believe that you can simply say what the ideal is. This is what I mean by the utopian strand in libertarianism. You can-not simply describe the utopian solution, and leave it to somebody else how we get from here to there. That’s not only a practical problem. It’s a problem of the responsibilities that we have.

With all due respect to a Nobel Prize winner and a true gentleman, Milton Friedman was wrong on education then, and conservatives who continue to support vouchers are wrong today.

Notice something important, a point that conservatives have long forgotten: Friedman justified vouchers as a way to get rid of public schooling. For him, vouchers were a “transition” device — i.e., a way to get from here to there, with “there” being the end of public schooling.

That’s not what conservatives say today. They justify vouchers by saying that they will improve, not destroy, the public-schooling system. I can’t help but wonder what Friedman would say about that if he were still alive, given that his support of vouchers was based on the notion that it would serve as a way to get rid of public schooling. Would he still support vouchers if he knew that they would save public schooling and make it more efficient?

Why did conservatives end up rejecting Friedman’s justification? They came to the realization that some people would be less likely to support vouchers if they were told that their real purpose was to destroy public schooling. Therefore, to get more people to support vouchers, conservatives shifted Friedman’s justification to the exact opposite of what Friedman was saying. Conservatives began telling people that vouchers, by providing “competition,” would improve the public-schooling system. In fact, voucher proponents today, when pressed, will openly tell people that they are opposed to abolishing public schooling but only want to make it better by providing people with the means (vouchers) to leave the public-schooling system.

Almost 30 years after Friedman leveled his critique at me, there is not one instance of where his system of school vouchers have served as a “transition” to educational liberty. Time has confirmed the point I pointed out almost three decades ago — that school vouchers, no matter how they are labeled, are nothing more than a socialistic program designed to make socialism (i.e., public schooling) work more efficiently.

Friedman and conservatives have been proven wrong on education. There is only one solution to the educational morass in which Americans find themselves: Separate school and state, just as our ancestors separated church and state. Repeal all school compulsory-attendance laws and school taxes and sell off the school buildings. End all government involvement in education, including licensing of schools.

Establish a total free-market educational system.

*  *  *

For more information on this issue, see FFF’s award-winning book Separating School & State: How to Liberate America’s Families by Sheldon Richman.

Ethereum, Mises, & Why Cryptos Are Not A Bubble

Authored by Tom Luongo via TomLuongo.me,

Bitcoin satisfies Mises’ Regression Theorem as money and that’s why it’s so confusing to some many people.

So many people simply misunderstand what cryptocurrencies are and what they can be.  Even to the informed skeptic they represent a sea-change in thinking which betrays their fundamental misunderstandings about the nature of money and how it comes to be.

And because of this, and our familiarity with money since we use it everyday, that skepticism is deeply ingrained in their brains; logic be damned.

Ludwig Von Mises spent a lot of time trying to figure out what money actually is.  In the end he developed his Regression Theorem.  In short, a thing can only rise to be money if it had value as a commodity before it became money.

Mises and Latent Demand

The process of utilizing the thing as money eventually overwhelms the previous uses for the thing and its value is then determined almost purely based on its demand as a money.

This article at Mises.org does a great job of explaining why cryptocurrencies fulfill Mises’ requirement for ‘antecedent value’ far better than I’m willing to at this point.

What I figured out immediately when I saw Bitcoin back in 2010 is that, at its core, it is simply and encrypted packet of information.  And, so, by extension, if encrypted packets of information traversing the internet can have value, then Bitcoins — being an encrypted ledger of transactions themselves — have value.

I like to use the analogy that if IBM’s supply chain information is moved around the internet to communicate with subsidiaries via encrypted packets then they are a great analogue to Bitcoins.

IBM’s data has value, so therefore the packets themselves have value.  In effect, the internet itself creates the ‘antecedent value’ for Bitcoins by proxy.

Moreover, as Peter St. Onge states in his article linked above:

It’s the antecedent demand, even latent, not the previous buying and selling, which counts in importing value via the Regression Theorem.

To give an example that satisfies both liberalizations, a benefit such as anonymous wire transfers is both a money-related benefit and is also a service that didn’t previously exist. In a liberalized Regression Theorem, this benefit would count as the antecedent demand giving the spark of life to a scarce cryptocurrency.

Bingo!

This is what I’ve been telling people since 2010.

Which brings me to Ethereum.

Ethereum’s Big Trade

In truth, this blog post came from a comment thread on my latest article at Seeking Alpha where I responded to the tired criticism that ‘It’s all fake.”

If technology has value then the companies that produce the technology have value. Trading Ethereum tokens is not really that much different than trading stock… the difference is that the stock isn’t more liquid than the token.

Ethereum, or any of these IaaS tokens can function as both [tech and currency] at the same time because they’ve rolled up the transmission system, the exchange itself, into its structure.

So, they can rise in liquidity to the point of satisfying Mises’ Regression Theorem as a commodity capable of becoming a money.

They have no alternate use except as a medium of exchange, a unit of account and (potentially) a stable store of wealth. [a crucial point]

They already satisfy the first two criteria. The last one is the trickiest.

And that’s what the focus of the development is one at this point…. increasing transaction density and network performance to create real competition for existing government-issued currencies.

That’s all they need to rise to the level of money… that and the confidence of the people using it, which will ultimately be determined by the market.

And that’s what makes all of this so confusing to most people.  Our lives are proscribed by money, we use it everyday.  It is one half of nearly every meaningful decision we make, and yet, we understand how it works about as well as the non-mechanic understands a car.

Money is a tool.  Ethereum is a money that is a tool first and a money second.  But, it is its value as a tool, its network, that gives it its value which we can directly decide upon without having to go through a centrally-controlled medium of exchange, i.e. the dollar.

The Network is the Money

In other words, the collapsing of the network, the costs of maintaining that network and the technology of the network into the value of the token, be it Ethereum, ERC20s, EOS, NEO, OMG, WAVES or STEEM removes the need for paying the middle man.

Those middle men are first, the central bank issuing the credit money, and second, those that control the infrastructure itself.

Those are the guys who have been making trillions off controlling ‘The Wire” (bandwidth) when controlling the wire should be like every other first order commodity and have its cost to consumers driven down to just above its cost of production.

That’s not the case right now.  And those that profit most from that system are the cryptocurrencies ‘ biggest enemies.  The costs of maintaining control over money will rise and profits will fall. Like Mises’ Regression Theorem implies, market forces will always demand the superior money.

And drive the controllers out of business.

The Neoconservatives Have Declared War On The Realists

Authored by Ryan McMaken via The Mises Institute,

In recent years, I"ve increasingly suspected that when it comes to foreign policy, the realists offer some of the most sane observations. 

These suspicions were confirmed earlier this year when after the election of Donald Trump, John Mearsheimer, one of modern realism"s current standard bearers, wrote in The National Interest that Trump should "adopt a realist foreign policy" and outlines a far better foreign policy agenda that what we"ve seen coming from Washington. 

And what is this realist foreign policy? For Mearsheimer, some main tenets include:

• Accepting that the US attempt at nation building in Afghanistan, Egypt, Iraq, Libya, Syria and Yemen "has been an abject failure."


• "Washington [should] respect the sovereignty of other states even when it disagrees with their internal policies."


• "Spreading democracy, especially by force, almost always fails."


• Understanding that "America’s terrorism problem ... is fueled in part by the U.S. military presence on Arab territory as well as the endless wars the United States has waged in the greater Middle East."


• "The Trump administration should let local powers deal with ISIS."


• Recognizing that Russia poses no real threat to the United States: "Even if Russia modernizes its economy and its population grows in the years ahead — big ifs — it will still be unable to project significant military power beyond eastern Europe."


• "A Syria run by Assad poses no threat to the United States"


• "The new president should also work to improve relations with Iran. "


• "Encourage the Europeans to take responsibility for their own security, while gradually reducing the remaining U.S. troops there."

Against Liberal Hegemony

There are some specific recommendations, but in a larger context, Mearsheimer is reflecting what has been building for years among realists led by Barry Posen, Mearsheimer, Stephen Walt, and Harvey Sapolsky, among others: an opposition to so-called "liberal hegemony" 

What is liberal hegemony? It"s ably summed up by William Ruger: 

Liberal hegemony is an activist grand strategy that aims to assertively maintain U.S. dominance and the “unipolar moment” in the service of liberalism and national security. Posen explains that it has been the reigning U.S. grand strategy since the end of the Cold War and remains the consensus view of the foreign-policy establishment of both major parties — of liberal internationalists and neoconservatives alike. Yet he believes it is “unnecessary, counterproductive, costly, and wasteful,” and ultimately “self-defeating.”

The movement against liberal hegemony was crystallized somewhat in 2014 when Posen published Restraint: A New Foundation for U.S. Grand Strategy, which is a detailed condemnation of liberal hegemony, and instead suggests a policy of "restraint." Restraint, as the name implies, favors far less enthusiasm in using American military force on every political and societal problem in the world, and instead focusing on what constitutes an actual military threat to the US. The ideology of restraint assumes that peace is superior to war, and that constant foreign interventionism is unlikely to bring peace, stability, or justice.)">1

As Ruger notes, this opposition to the current foreign-policy zeitgeist in Washington centers largely around scholars within MIT"s political science program, and has few adherents among the top brass in the military or among politicians on Capitol Hill. 

The Neoconservatives Declare War 

Last week, Commentary magazine, a long-established mouthpiece for hard-line interventionist and neoconservative views issued a denunciation of these realists in a piece titled "Saving Realism from the So-Called Realists." 

For the authors, Hal Brands and Peter Feaver, today"s realists are a disaster: "Today’s most prominent self-identified realists — Stephen Walt, John Mearsheimer, Barry Posen, and Christopher Layne— advocate a thoroughgoing U.S. retrenchment from global affairs." Abandoning their traditional anti-populism, the authors go on to sneeringly denounce realism and restraint as "academic" and as "some of the most misguided doctrines of the ivory tower."

For interventionists, "retrenchment" is just another word for "isolationism," which of course is the great bogeyman of interventionist foreign policy. Realists have lost their way, we"re told, because they no longer support "forging a stable international order" by which the interventionists mean "non-stop intervention in every region on earth." 

For Brands and Feaver, what is really needed is a return to the good ol" days of "Cold-War realism" in which realists favored far greater level of interventionism in the name of countering the assumed Soviet threat. 

But even in the Cold War, many realists were far better than idealist Wilsonian regime-change advocates like President Lyndon Johnson. Realist George Kennan, for instance, denounced the Vietnam War and objected to viewing the war in terms of "fighting for freedom." 

But even among those realists who were gung ho on military intervention, many were wrong because they were laboring under a mountain of bad information about the Soviets and their economic system. As nearly all the policymakers of their day, the Cold War realists assumed — wrongly — that the communist world was an economic powerhouse, poised to overtake the US in terms of wealth and technology in the near future. They failed to read up on their Ludwig von Mises and understand that the socialist economy was doomed from the start, and would self-destruct from within. Instead, the old realist Cold Warriors accepted the CIA"s "intelligence" on the Soviet economy which vastly overstated the state of the Communist economies. 

At the same time, the Cold War realists were also influenced by hysterical ex-communists like Whittaker Chambers who published jeremiads about how the West was doomed because lazy Westerners could never compete against the communists who were not like ordinary humans. The communists — we were told — ate, slept, and breathed the idea of the communist revolution and would stop at nothing to impose their ideology on the rest of the world, even if it meant certain death for themselves. This then implied that nuclear deterrence would not work, and thus relentless intervention and foreign policy adventurism — such as that in Vietnam — was necessary to overwhelm the Soviet threat. 

Learning from the Past

Today, it may be that modern realists have learned from the mistakes of their grandparents. Contrary to claims that communists would happily throw their lives away in service to the party, it appears communists of old behaved like most everyone else. Many of them were too busy taking bribes and running black markets to busy themselves with taking over the world.  It"s now clear that authoritarian regimes — especially hard-core socialist ones — tend to undermine their own power with their backward economic systems. Experience suggests that nuclear deterrence has worked even with history"s most deranged dictators. It"s now clear that wars such as those in Vietnam and Iraq and Afghanistan have done nothing to enhance the safety of Americans. 

So, it"s hard to fault the realists for learning something from history.

For the advocates of liberal hegemony, on the other hand, there"s nothing to be learned, and it"s heresy to suggest that decades of non-stop American interventionism has not been a success. For them, all this talk of "restraint" is just the ramblings of the "ivory tower."  Instead, we must recover the fervor of the Cold War, listen to the generals, and plan for a third war, a fourth war, and more. No place on earth ought to be considered beyond the reach of American politicians. 

After all, bad things happen in the world, so the US must be forever ready for new invasions, for nation building, and for "humanitarian" efforts, no matter what side effects and opportunity costs these actions may bring. In his essay "Invade the World" Murray Rothbard mocked these ideas — which at the time were gaining currency in the wake of the Cold War. He concluded: 

We must face the fact that there is not a single country in the world that measures up to the lofty moral and social standards that are the hallmark of the U.S.A.: even Canada is delinquent and deserves a whiff of grape. There is not a single country in the world which, like the U.S., reeks of democracy and "human rights," and is free of crime and murder and hate thoughts and undemocratic deeds. Very few other countries are as Politically Correct as the U.S., or have the wit to impose a massively statist program in the name of "freedom," "free trade," "multiculturalism," and "expanding democracy."

And so, since no other countries shape up to U.S. standards in a world of Sole Superpower they must be severely chastised by the U.S., I make a Modest Proposal for the only possible consistent and coherent foreign policy: the U.S. must, very soon, Invade the Entire World! Sanctions are peanuts; we must invade every country in the world, perhaps softening them up beforehand with a wonderful high-tech missile bombing show courtesy of CNN.

Liberal Hegemony: A Program for Global Central Planning 

Fundamentally, the ideology of liberal hegemony is the ideology of total global political centralization. A global system of multiple sovereign states  — a situation far preferable to a single world state — is to be tolerated only in name. For the advocates of liberal hegemony, the de facto world order ought to be one in which a single government — the US government — is entitled to intervene anywhere in the world that it doesn"t like the local regime or doesn"t approve of another state"s internal policies. 

The realists, to their credit, understand that there are limits to this view of the world; that perhaps a single global hegemon is not, in fact, a recipe for an enduring world order. Moreover, the long-term cost of these efforts may prove crippling for US taxpayers both in terms of money and in terms of domestic freedoms.

While far from perfect, the realists have put up some barriers to the US"s non-stop drive to "invade the world." Needless to say, Commentary magazine and its friends in Washington would rather these realists all go away.  

Keynes: A Master Of Confused And Confusing Prose

[This article is a selection from Where Keynes Went Wrong]

Paul Samuelson, professor of economics at MIT after World War II and author of a best-selling economics textbook, was one of Keynes’s most ardent American disciples. Here is what he has to say about the latter"s General Theory:

It is a badly written book, poorly organized. . . . It is ar­rogant, bad-tempered, polemical, and not overly gener­ous in its acknowledgements. It abounds in mare’s nests and confusion.... 

In reading this, one recalls Keynes’s infatuation with paradox. Samuelson, the ardent disciple, is telling us that the master’s book is good because it is bad.

We do not, however, have to take Samuelson’s word about the bad writing, poor organization, and general confusion of The General Theory. Following publication in 1936, many lead­ing economists pointed to the same problems, although some of them hesitated to criticize or quarrel with Keynes and thus chose their words carefully.

Frank H. Knight, a leading American econ­omist, complained that it was “inordinately difficult to tell what the author means. . . . The direct contention of the work [also] seems to me quite unsubstantiated.”

Joseph Schumpeter noted Keynes’s “technique of skirting problems by artificial definitions which, tied up with highly specialized assumptions, produce paradoxical-looking tau­tologies. . . .”

 British economist Hubert Henderson privately stated that: “I have allowed myself to be inhibited for many years . . . by a desire not to quarrel in public with Maynard . . . . But. . . I regard Maynard’s books as a farrago of confused sophis­tication.”

French economist Etienne Mantoux added that the whole thing simply appeared to be “rationalization of a policy ... long known to be . . . dear to him."

In The General Theory itself, Keynes has a good word to say about clarity, consistency, and logic.He is quick to pounce on what he considers the errors of others. But he then leads us down a rabbit hole of convolution, needless and misleading jar­gon, mis-statement, confusion, contradiction, unfactuality, and general illogic.

It is not that Keynes is entirely opaque. It is quite feasible to make out what he seems to be saying, but it is worth taking a moment to focus on the particular rhetorical devices and obfuscations that Keynes employed.

Device One: Obscurity

A typical sentence from The General Theory:

We have full employment when output has risen to a level at which the marginal return from a representa­tive unit of the factors of production has fallen to the minimum figure at which a quantity of the factors suf­ficient to produce this output is available.

This means, in essence, that we have not reached full employ­ment until all factors of production are fully employed. We will recall that, per Keynes, only at this point do we have to worry about inflation.

Keynes took exception when other economists wrote in this convoluted way. For example, in a 1931 letter to the editor of The New Statesman and Nation, he charged Lionel Robbins with the same sin, even though Robbins was, on the whole, a very clear writer:

Professor Robbins wants “increased elasticity of local wage costs” . . . which means in plain English, I sup­pose, a reduction of average wages.

Given this stab at Robbins, can we at least assume that Keynes will avoid the term “elasticity” in The General Theory? No, not at all, he uses (and misuses) it repeatedly.

Device Two: Misuse of Technical Language

In the example above, Lionel Robbins was at least using standard economist’s jargon. Keynes liked to make up his own jargon, or worse, use standard jargon in a non standard way. This led to a scolding by economist Frank H. Knight in the review of The Gen­eral Theory that we have already cited: “Familiar terms and modes of expression seem to be shunned on principle.”

The only legitimate reason to use technical language is to make a sentence clearer, if not to the average reader, at least to the pro­fessional reader. Keynes habitually uses technical language to confuse, and as we shall shortly see, this may have been a deliber­ate strategy.

Device Three: Shifting Definitions

Keynes tells us in The General Theory that economists have not clearly defined the jargonish term “marginal efficiency of capi­tal” (which roughly means return on capital). He then proceeds throughout the book to use the term in many different ways, at least seven by Henry Hazlitt’s count. Another slippery word in The General Theory is wages, which can mean an hourly rate or total employee pay or something else. Keynes does not seem to notice the difference, which leads him into serious logical errors.

Once again, Keynes criticized the same lapse in others. In a book review early in his career, he took an author to task for

us[ing] the [same] expression some thirty times in some apparently eight different senses.

Device Four: Misuse of Common Terms

In some cases, Keynes stretches the meaning of a commonly used word beyond recognition without explicitly redefining it. For example, he tells us that for every commodity there is an implicit rate of interest, a wheat rate of interest, a copper rate of interest, a steel plant rate of interest, and so on. This confuses commodity options and futures pricing with interest rates, a clear case of mix­ing apples and bananas. We have already seen that Keynes uses the word equilibrium to describe what is actually disequilibrium.

Device Five: Reversing Cause and Effect

Keynes says that entrepreneurs calculate how much revenue they will earn from x employees. But they do not. They calculate how many employees they can afford from x revenue. Keynes says that prices are low if production is low. In actuality, it is the reverse: production is low if prices are low. Keynes seems to like these reversals, perhaps because they dress up the ordinary with a gloss of novelty, even of profundity. But it is really no more than a parlor trick, and just piles error on error.

Device Six: False Determinism

Keynesian economist Alvin H. Hansen, whose book A Guide to Keynes attempted to de-mystify the master, tells us that “Keynes’s most notable contribution was his consumption function.” The so-called marginal propen­sity to consume (consumption function) tells us that people tend to save more as their income rises. Stated as such, it is a common­place, certainly nothing new. But Keynes calls it a “fundamen­tal psychological law,” which it certainly is not. We can nei­ther predict with certainty that people will always save more as their income rises, nor can we work out a forecastable schedule of increased saving, as Keynes assumed.

In the Keynesian model, the marginal propensity to consume is also treated as an independent variable. (It is supposed to deter­mine other variables, not be determined by them.) This is clearly false. As Benjamin Anderson, economist and early Keynes critic, pointed out, “The so-called independent Keynesian variables (1. The marginal propensity to consume, 2. The schedule of the mar­ginal efficiency of capital, and, 3. The rate of interest) are all influ­enced by each other. They are interdependent, not independent. Keynes even forgets himself and admits at one point that #2 is influenced by #1.” 

Device Seven: Slipping Back and Forth between Mutually Inconsistent Categories

Keynes uses the word “wages” to mean either a wage rate or total wages. He is also prone to move back and forth between physical commodities and services and money prices for commodities and services, another case of mixing up apples and bananas.

Device Eight: Unsupported Assertion

In the entirety of The General Theory, there are only two refer­ences to statistical studies, one of which Keynes partly dismisses as improbable:

Mr. Kuznet’s method must surely lead to too low an estimate.

Even when he discusses a subject that especially lends itself to statistical analysis, such as a suggested relationship between agri­cultural harvests and the business cycle, he simply takes a posi­tion without bothering to search for relevant data.

Device Nine: Misstatement

Keynes mischaracterizes the purpose of corporate sinking funds. How could he make such an elementary error? Probably because he had said the same thing many times when speaking on his feet, and, being busy, did not take sufficient time to check his written work.

Sometimes Keynes seems too busy even to think. He says that if a lender lends money to a business owner, this doubles the risk of a business owner using his own money, which doubled risk is reflected in the interest rate. This makes no sense, as Henry Hazlitt noted. Risk is not doubled when a lender enters the pic­ture. The lender and the business owner share what is still the same risk of failure.

Device Ten: Macro or Aggregative Economics

Keynes is usually credited with “inventing” macroeconomics, which looks at economy-wide flows rather than the micro-eco­nomics of specific firms or industries. This is not entirely accu­rate. Other economists adopted an economy-wide perspective, although they often extrapolated from the firm or industry to the economy as a whole, which Keynes wrongly criticized. Ironi­cally, Keynes attacked Say’s Law which is, itself, an example of macroeconomics. It is certainly fair to say that Keynes developed his own type of macroeconomics, which his followers developed into the macroeconomics of today. It is also true that a macroeconomic viewpoint makes it easier for a skilled casuist to mislead and confuse, and that Keynes fully exploited this opening.

Device Eleven: Misuse of Math

Keynes refers to sales in one of his equations, but it is expected sales, not actual sales. Expectations by definition are not verifiable and thus do not belong in an equation.

As Henry Hazlitt has pointed out,

A mathematical statement, to be scientifically useful, must, like a verbal statement, at least be verifiable, even when it is not verified. If I say, for example (and am not merely joking), that John’s love of Alice varies in an exact and determinable relationship with Mary’s love of John, I ought to be able to prove that this is so. I do not prove my statement—in fact, I do not make it a whit more plausible or “scientific”—if I write, solemnly,

• let X equal Mary’s love of John,


• and Y equal John’s love of Alice,


• then Y = f (X)

—and go on triumphantly from there. Yet this is the kind of assertion constantly being made by mathemat­ical economists, and especially by Keynes.

Given the Alice in Wonderland quality of The General Theory, it should not surprise us that Keynes interrupts his own misuse of math to tell us that he (apparently) agrees with Hazlitt:

To say that Queen Victoria was a better queen but not a happier woman than Queen Elizabeth [is] a propo­sition not without meaning and not without interest, but unsuitable as material for the differential calculus. Our precision will be a mock precision if we try to use such partly vague and nonquantitative concepts as the basis of a quantitative analysis.28

He also warns of

symbolic pseudo-mathematical methods . . . of eco­nomic analysis.

After some of his own algebra he adds that:

I do not myself attach much value to manipulations of this kind.

It is quite typical of Keynes now to attack, now to disarm, now to shout, now to whisper, now to qualify his mathematical claims, now to ignore, even blatantly ignore, the same qualifications. On occasion, Keynes was even capable of a crude bluff. Writing a pri­vate letter to Montagu Norman, Governor of the Bank of Eng­land, he said that his theories (the same theories that would later appear in The General Theory) were a

mathematical certainty, [not] open to dispute.

Keynes certainly knew better. Some of his disciples did not. Economist Wilhelm Röpke noted in 1952 that

The [Keynesian] revolutionaries [take a stance of] . . . vehement self-assertion and barely veiled contempt, such as are habitual to the “enlightened” in dealing with those who remain in the dark. They seem to re­gard themselves as all the more superior in that they can point with obvious pride to the difficulty of their literature and to the use of mathematics, which lifts the “new economics” almost to the lofty heights of physics.

One could go on, almost indefinitely, citing Keynes’s obscuri­ties, convolutions, inconsistencies, factual or logical lapses,and so on, but it is time to ask the obvious question: why did he write The General Theory this way? Keynes could be orderly, orga­nized, consistent, relevant, clear, complete, and factual, in addi­tion to being playful and witty, when he wanted to be. This is apparent from the earlier books and many of the shorter pieces. There are some snippets from The General Theory that also reflect these characteristics. So why is most of The General Theory so different?

There are many possible answers. Historian Paul Johnson has said, unrelated to Keynes, that “In financial matters, the object of complexity is all too often to conceal the truth, to deceive.” The French economist Étienne Mantoux, reviewing The General Theory shortly after publication, quoted an earlier English econo­mist, Samuel Bailey, from 1825: “An author’s reputation for the profundity of his ideas often gains by a small admixture of the unintelligible.”

This may be part of the explanation, that Keynes intended to deceive or impress. But we must bear in mind that Keynes was a salesman. He was trying to sell a particular type of economic policy, and he was prepared to utilize any rhetorical device, from crystal clarity and wit all the way to complete unintelligibility, in order to make the sale.

Why would unintelligibility help to make the sale? Not just because it can be used to impress. Equally important, it can be used to intimidate. Keynes liked to make people feel, as his very intelligent friend Bob Brand said, like “the bottom boy in the class.”

Keynes probably developed obscurity as one of his speaking styles. He obscured, confused, and scrambled the mental “chessboard,” because he felt confident that he could always keep the position of the “chess pieces” in mind, and combine them as he saw fit for an attack in any direction, whereas his opponents could not. This is a very impressive skill indeed, especially when one is speaking extemporaneously. No wonder that Sir Josiah Stamp, a very respected economist who often partnered with Keynes on BBC broadcasts, said on the air that “I can never answer you when you are [verbally] theorizing.”

Whether this was a deliberate style on Keynes’s part, or just a habit, we cannot know. But it was natural for him to fall into the same scrambling, intimidating style when writing The Gen­eral Theory. The problem is that it does not work as well in print as in conversation or debate. When confined to print, it can be examined, and all the myriad flaws, the errors of fact or reasoning, the rhetorical tricks, the pseudo originality, may be revealed.

A few prominent economists, notably Ludwig von Mises, Friedrich Hayek, Wilhelm Röpke, Jacques Rueff, and Henry Hazlitt, among others, saw through it completely. Others per­ceived that something was wrong, but hesitated to say so out of fear of Keynes’s position and powers of retaliation. Regrettably, no major economist published an immediate book-length ref­utation, so that the influence of The General Theory spread and spread, notwithstanding its all too apparent flaws.

Today many people - economists, financiers, investors, busi­ness owners, and managers - say that Keynes is their intellectual hero. Have they actually read The General Theory? Have they read more than the few clear and witty passages so widely quoted?

How Welfare States Encourage Bad Economic Thinking

The greatest intellectual accomplishment of the laissez-faire liberal theorists was the recognition of the “hard” and “soft” institutions that are crucial prerequisites of productive accomplishment and material prosperity. The hard institutions include private property rights, market prices, and sound money. The soft institutions include those that reinforce values such as prudence, thrift, resourcefulness, innovative courage, and respect for success.

However, this accomplishment was accompanied by a proportionately great intellectual error - the belief that these institutions can be safeguarded exclusively by monopolistic apparatus of aggressive violence, commonly known as states. Since states necessarily parasitize on the productive output of market society, the belief that they are necessary for its emergence, let alone that they can remain “minimal” after its emergence, is fatally misguided. On the contrary, it appears perfectly predictable that they will grow in step with the increase in market output.

Unfortunately, this is not the end of the story. As powerful as states may be in terms of sheer physical force, their survival is ultimately rooted in favorable public opinion, and the best way to secure such opinion is to share their plunder as widely as possible. Thus, with sufficiently wealthy hosts at their disposal, states invariably turn into “welfare” states. And it is at this point that they start sawing off the branch on which they are sitting.

With productive achievement institutionally separated from consumption opportunities, the wealth-generating soft institutions start to erode particularly fast. When there is great abundance all around, but it seems that it can be enjoyed without putting in any productive effort, increasingly many of those who do not so enjoy it come to believe that abundance is a free good, and that the only reason why it is not free for them is because someone unfairly withholds it from them.

In other words, the prevalence of welfare-statist “redistribution” spells the death of economic thinking – that is, thinking in terms of resource scarcity, opportunity costs, and incentive structures. This temporarily strengthens the state even further – since at this point the state immediately steps in as an entity that is able and willing to punish the malevolent withholders – but it also further accelerates the death of the goose that lays its golden eggs.

In addition, great abundance coupled with the prevalence of statist “redistribution” encourages the overall infantilization of culture. In the absence of sound economic thinking, which explains why particular resources end up in the hands of particular members of extended social order, there appears a tendency to invent arbitrary pseudo-reasons as to why one’s position in this order is not as satisfactory as one would like it to be.

One is then encouraged to, for example, invent various contrived identities that are supposed to account for “economic discrimination” of those who are unlucky to possess them. This leads to adopting a crude, childish worldview whereby every aspect of reality is somehow linked to one’s identity and its supposed disadvantages, and whereby the whole realm of social intercourse is reduced to a zero-sum clash between identity-based classes. Needless to say, this creates a perfect environment for accelerated capital consumption.

Another aspect of the infantilization typical of an affluent society mired in welfare statism is that it replaces eudaimonism with hedonism – instead of promoting the pursuit of happiness, it promotes the demand for pleasure. Happiness is increasingly not an option, since it is accessible exclusively to the rapidly diminishing group of those who put serious intellectual, moral, and entrepreneurial effort into seeking it. Instead, the beneficiaries of the welfare state are satisfied with the dubious pleasures of hand-to-mouth existence sponsored by legal plunder, which not only rapidly impoverishes society in material terms, but also steadily erodes its intellectual and moral quality. This, in turn, makes restoring the wealth-generating soft institutions and harmonizing them with the relevant hard institutions all the more difficult.

Thus, it becomes clear that the welfare state is not something that can be grudgingly tolerated as merely a parasitic nuisance. It is overoptimistic to assume that the remaining vestiges of free-market entrepreneurialism will always be able to outpace its insatiable drive toward capital consumption. Nor is it prudent to believe that the hard institutions of private property rights and market prices will be able to survive, let alone do their job effectively, with their underlying cultural foundations eroded to the core. And it is evident that welfare statism strikes at the latter at least as hard, if not more so, than it does at the former.

In other words, in the context of getting rid of all traces of statist “redistribution”, there is no such thing as acting too quickly. As long as the welfare state operates unabated, the wealthier society becomes, the faster it moves toward the point of no return, beyond which the forces of capital consumption irreversibly overcome the forces of capital accumulation.

Furthermore, one has to bear in mind that in the context of stopping the former, what matters is not just formal institutional changes, but also – probably more so – far more intangible normative corrections. This is why, in addition to promoting economic knowledge in the spirit of Ludwig von Mises, we should also promote standards of moral and cultural excellence, as epitomized by the leading figures of the Austrian tradition and other individuals cognizant of the normative underpinnings of the free and prosperous commonwealth. 

How Central Banking Increased Inequality

Authored by Louis Rouanet via The Mises Institute,

Although today high levels of inequality in the United States remain a pressing concern for a large swath of the population, monetary policy and credit expansion are rarely mentioned as a likely source of rising wealth and income inequality. Focusing almost exclusively on consumer price inflation, many economists have overlooked the redistributive effects of money creation through other channels. One of these channels is asset price inflation and the growth of the financial sector.

The rise in income inequality over the past 30 years has to a significant extent been the product of monetary policies fueling a series of asset price bubbles. Whenever the market booms, the share of income going to those at the very top increases. When the boom goes bust, that share drops somewhat, but then it comes roaring back even higher with the next asset bubble.

The Cantillon Effect

The redistributive effects of money creation were called Cantillon effects by Mark Blaug after the Franco-Irish economist Richard Cantillon who experienced the effect of inflation under the paper money system of John Law at the beginning of the 18^th century. Cantillon explained that the first ones to receive the newly created money see their incomes rise whereas the last ones to receive the newly created money see their purchasing power decline as consumer price inflation comes about.

Following Cantillon and contrary to Fisher and other monetary theorists of his time, Ludwig von Mises was the first to emphasized these Cantillon effects in terms of marginal utility analysis. With an increase in the stock of money, the cash balances of the early receivers of the newly created money increase. Correspondingly, the marginal utility they give to money decreases and the individuals in question buy either investment or consumption goods, thus bidding up the prices of those goods and increasing the cash balances of their sellers. With this step by step process, the price of goods will increase only progressively and affect both the distribution of income and wealth as well as the different price ratios.

Financialization, Asset Price Inflation and Inequality

In accordance with the Cantillon effect, inflation can increase inequality depending on the channel it takes, but increasing inequality is not a necessary consequence of inflation. If it happened that the poorest in society were the first receivers of the newly created money, then inflation could very well be the cause of decreasing inequality.

Under modern central banking however, money is created and injected into the economy through the credit channel and first affects financial markets. Under this system, commercial banks and other financial institutions are not only the first receivers of the newly created money but are also the main producers of credit money. This is so because banks can grant loans unbacked by base money. In a free-banking system, this credit creation power of banks is strictly limited by competition and the clearing process. Under central banking however, the need for reserves is relaxed as banks can either sell financial assets to the central bank in open market operations, or the central bank can grant loans to banks at relatively low interest rates. In both cases, central banks remove the limits of credit expansion by determining the total reserves in the banking system. In other words, commercial banks and other financial institutions are credited with so-called base money that has not existed before. Thus, the economics of Cantillon effects tells us that financial institutions benefit disproportionately from money creation, since they can purchase more goods, services, and assets for still relatively low prices. This conclusion is backed by numerous empirical illustrations. For instance, the financial sector contributed massively to the growth of billionaire’s wealth (see table below).

We can list four main reasons why the growth of financial markets is triggered by an expansion of the money supply: (1) because financial titles are often used as collateral in debt contracts; (2) because the anticipation of price-inflation, which is a common trait among all fiat money regimes, discourages the hoarding of money thus encouraging both the demand for and the supply of financial titles; (3) because the production of money through central banks is a matter of sheer human will and is therefore prone to developing moral-hazard in the financial world. This leads to an artificially high demand for financial titles and increases the supply of such titles by the same token. And (4) because the manipulation of credit by central banks and banks, by lowering the interest rate in the short run, particularly affects the demand for capital and the capital structure during the course of the business cycle.

One of the most visible consequence of this growth of financial markets triggered by monetary expansion is asset price inflation. In a completely sound money system where credit only depends on the amount of saving rather than on fiduciary credit, there is very little room for generalized and persistent asset-price inflation as the amount of funds which can be used to purchase assets is strictly limited. In other words, the phenomenon of asset-price inflation is a child of credit inflation.

Asset price inflation in turn benefit mostly the richest in society for several reasons. First, the wealthy tend to own more financial assets than the poor in proportion to his income. Second, it is easier for the richest individuals to contract debt in order to buy shares that can be sold later at a profit. Since credit easing lowers the interest rate and therefore funding costs, the profits made by selling inflated assets bought at credit will be even greater. Finally, asset price inflation coming with the growth of financial markets will benefit the workers, managers, traders, etc. working in the financial sector. It will also benefit the CEO"s of the publicly traded companies who will be paid more as the capitalization value of their company increases. Hence, the correlation between asset prices and income inequality has been, as expected, very strong.

However, most monetary economists ignored — and continue to ignore — asset-price inflation and do not see it as a consequence of an inflated money supply. A reader of A Monetary History of the US (1963) by Friedman and Schwartz or of Allan Meltzer"s A History of the Federal Reserve (2004) will not find one mention of asset price inflation. This oversight leads to the effects of inflation on inequality to be underestimated or ignored. Periods of growing inequality and monetary inflation such as the 1920"s or the 2000"s were associated with a high rate of asset-price inflation but relatively stable consumer prices. Therefore, to focus on consumer price inflation as the only variable accounting for monetary policy leaves out most of the effects of money creation on inequality.

Since the 2008 financial crisis, the so-called unconventional monetary policies have often been justified on the ground that something must be done in the short run since, as would have said J.M. Keynes, "In the long run, we are all dead." But as our monetary system tends to increase inequality, and if the goal is to improve the standards of living of the least well-off in society, then central banking and artificial monetary creation may be more costly than usually assumed by policy-makers.

3 Things To Remember On Independence Day

It"s difficult to say what most Americans commemorate or celebrate on Independence Day nowadays. Many appear to focus on some vague notion of "America." Others even take to jingoism equating the United States government with the very notion of "freedom." 

Lost in all of this is the fact that the Declaration of Independence - the document we"re supposed to remember today - is a document that promotes secession, rebellion, and what the British at the time regarded as treason. 

On the other hand, those who do recall the radical nature of the Declaration often tend to romanticize the American Revolution in a way that is neither instructive nor helpful today. 

So, what should we remember about Independence Day, and what can it teach us? For starters, here are three things about the history and context of this holiday that should continue to inform us today and into the future. 

One: If You Can"t Secede, You"re Not Really Free

The very first sentence of the Declaration of Independence lays it out. Sometimes, "it becomes necessary for one people to dissolve the political bonds which have connected them with another..." 

The document then goes on to list in detail why 1776"s specific act of secession was justified and necessary for preserving the rights of the colonists. 

By the 19th century, this philosophy of self-determination would become a foundational element of the ideology now known internationally as liberalism — or "classical liberalism" in the United States. 

Not surprisingly, we find this idea in the later writings of liberals such as Ludwig von Mises who, writing in Vienna in 1927, concluded:

It must always be possible to shift the boundaries of the state if the will of the inhabitants of an area to attach themselves to a state other than the one to which they presently belong has made itself clearly known...

[W]henever the inhabitants of a particular territory ... make it known ... that they no longer wish to remain united to the state to which they belong at the time ... their wishes are to be respected and complied with.

Mises, like Jefferson, understood that without this right of self-determination, there is no freedom.

Nevertheless, modern opponents of self-determination and secession will claim that secession cannot be tolerated because it is not "legal."

This is scarcely relevant. After all, the colonial uprising against the King was not "legal," and it hardly matters whether political victors consider any breakaway secession movements legal. Times and societies change, and nothing is forever or written in stone. 

For Mises, secession must be tolerated for pragmatic reasons. It is "the only feasible and effective way of preventing revolutions and civil and international wars." But For Jefferson, as for his fellow secessionists, it was a moral imperative, whether "treasonous" or not. 

Two: Independence Day Is Not a Military Holiday 

For obvious reasons, government institutions have little motivation to emphasize the Declaration of Independence or the philosophy it represents. This would amount to the government undermining itself. Consequently, many have attempted to turn the Fourth of July into a holiday that embraces vague notions of celebrating "America." 

These ahistorical interpretations notwithstanding, Independence Day recalls resistance and a withdrawal of fealty to a hostile political power. We should not twist it into a celebration of our current rulers in Washington, the federal government, or the troops that work for and represent the federal government. 

It should be a celebration against government and a reminder that Americans can once again walk away from tyranny, even if force of arms is required. 

This does not defame or insult the American troops, but rather reminds us that we are a civilian nation and the government (and its troops) is supposed to be our servant rather than our master. Slavish displays of patriotism and loyalty to the state are inimical to the real meaning of the holiday.

Three: Armed Revolt Is a Serious and Rare Event 

Among those who do wish to commemorate the true resistance offered by the revolutionaries, there is a different error: thinking that armed resistance is always right around the corner. 

In some corners of America, it"s become almost commonplace to hear claims that surely the Second American Revolution will come with just a few more outrages committed against life, liberty, or property. All it will take is a few more no-knock raids committed against peaceful families sleeping in their beds. Or perhaps the government need only seize a few more guns before the American people "wake up." Or perhaps once someone reveals the extent to which the US government spies on us all — as Edward Snowden has already done — then Americans will simply refuse to tolerate it any more.

In truth, armed resistance tends to only materialize in the midst of poverty or foreign invasion. Not surprisingly, over the past century, despite decades of immense growth in government power, rising taxes, and stifling government regulations, virtually no Americans have been taking up arms against the American state.

Some of this may stem from admirable prudence. After all, the American Revolution was an exceptionally bloody conflict, and such conflicts should not be started lightly. As noted by the Library of Congress, "[t]he Revolution ... was, after the Civil War, the costliest conflict in American history in terms of the proportion of the population killed in service. It was three times more lethal than World War II." The poverty, property destruction, and loss of life was immense given the tiny size of the American population at the time. 

Most Americans are unaware of these specifics, but most people instinctively know that armed conflict can bring with it a very high price. 

This doesn"t mean armed resistance is impossible, of course. It"s simply worth recognizing that so long as Americans enjoy some of the world"s highest standards of living few will be motivated to take up arms.

Ideas Always Matter 

It is also helpful to remember that armed conflict can be especially disastrous when motivated by the wrong ideas and the wrong ideologies. Who can say with confidence that if the US government were wiped away today, that it would not be replaced with something even worse? Under such circumstances, we must never abandon the important work of laying the foundations first for a revolution in ideas. Without a true respect for the freedoms outlined in the Declaration of Independence, political resistance is of little value. Moreover, in a society where true freedom is valued — and where a majority embraces liberal ideals — violence will prove to be totally unnecessary. And this would be the best outcome of all. 

Exposing Our Lawless Central Bank

The economic arguments against central banks are numerous to say the least. Through the writings of Ludwig von Mises and Murray Rothbard we have a wide variety of critiques that explain the many ways the central banks distort economies, cause booms and busts, punish savers, and chose winners and losers through monetary policy. 

But, even if confronted with these arguments, and one remains supportive of central banks, other non-economic arguments must still be addressed.

For example, it is becoming increasing important — in our current age of "non-traditional" monetary policy — to take note of the fact that central banks, and especially the Federal Reserve, are essentially unrestrained by law. 

Economists themselves often defend this total unmooring from legal or political accountability, saying it is necessary for the Fed to have "independence" from elected officials. 

In reality, however, this "independence" is best described as "total lack of accountability." 

Writing in today"s Dallas Morning News, Texas Tech economist Alexander William Salter writes: 

A phenomenal amount of time and money is spent trying to anticipate what the Fed will do and, afterwards, what the ramifications will be. The reason it takes so many experts to weigh in on Fed behavior is because the Fed"s actions are fundamentally unpredictable. This is a huge defect in an organization of such public importance in a nation whose founding principles include the sanctity of the rule of law.

"Rule of law" does not merely mean "according to some official procedure." In order to be truly lawful, the behaviors of government entities must adhere to a more general framework of rules, so that these behaviors are not arbitrary. The more general rules must be more or less fixed, known in advance, and — most importantly — not subject to reinterpretation by those whose hands the rule is supposed to bind. This concept of the rule of law is central to classically liberal constitutionalism and jurisprudence, which underlies the American experiment in ordered liberty.

The behavior of the Fed fails to meet any of these criteria.

Fed activities are more or less unpredictable on any given day, as indicated by the need for various financial houses to devote significant resources to Fed-watching. Congress has almost entirely abdicated its responsibility in holding the Fed accountable, so Fed"s actions are not in conformity with any general rule other than what the Fed Board of Governors thinks is expedient. This means the Fed is a judge in its own cause and a law unto itself. 

In recent years, some observers — Robert Higgs, for instance — have focused on "regime uncertainty" which is a problem arising from "a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights."

Much of the focus in this research has been on the presidency and the Congress and the courts while ignoring the central role of the Fed itself in promoting this uncertainty. 

As Salter notes, the Fed is now unpredictable, and it"s anyone"s guess what policy change might be coming down the road at any given time. Needless to say, this isn"t great for economic growth for all the reasons laid out in the regime-uncertainty research. 

Of course, the Fed has always essentially been unaccountable to any outside institutions. Nevertheless, both political ideology and prevailing views among many economists helped to restrain Fed action over the past century. Since World War II, another important factor has been the fact that the US economy has often been relatively strong, and there rarely appeared to be ample justification for the sorts of radical monetary policy now routinely being discussed among Fed policymakers. 

As a perfect example of how radical monetary thought has become might be the discussion surrounding Marvin Goodfriend, who was recently revealed to be a leading candidate for appointment by Donald Trump to the Fed"s board of governors. According to the Financial Times, Goodfriend possesses "a radical willingness to embrace deeply negative rates."

As a member of the Fed"s board, would Goodfriend push for negative rates under the "right" conditions? Who knows? 

But if he was successful in winning over a majority of voting members to such a position what could anyone do about it? More importantly, what documents, guidelines, or statutes would indicate for us ahead of time what the "right" conditions would be for implementing negative rates? 

There are none. Whether or not the "time is right" for negative rates is completely up to the whims of Board members. 

This situation is, as Salter points out, the complete opposite of "the Rule of Law" and has no place in a legal or political regime that claims to respect such a concept. 

Moreover, the situation that now prevails at the Fed is exactly the sort of thing F.A. Hayek warned about in The Road to Serfdom when Hayek outlines the incompatibility between the rule of law and an economy controlled by government planners. 

Hayek writes: 

...stripped of all its technicalities, [the rule of law] means that government in all its actions is bound by rules fixed and announced beforehand — rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances and to plan one"s individual affairs on the basis of this knowledge.

Serious problems begin to arise, Hayek continues, when "ad hoc actions" on the part of government planners prevent market actors from planning for their own economic futures. 

Unfortunately, "ad hoc" would appear to be one of the most apt phrases for describing how the Fed functions in today"s world. 

The Fed"s defenders will tell us that this unrestrained capriciousness must be tolerated or else the Fed will no longer have its precious "independence." 

Of course, applying this logic to any other political institution — and the Fed most certainly is a political institution — would be immediately denounced as absurdly authoritarian. 

And rightly so.

But the Fed"s lack of accountability continues to be sacrosanct among many in power — and it continues in spite of a decade of lackluster economic performance under the Fed"s "leadership. Salter is forced to conclude: 

But when money is governed by the arbitrary rule of central bankers, things become much more uncertain. Trade slows. The economy stagnates, jobs are hard to come by, and the gains from trade mostly accrue to politically connected financial elites. The Fed bears no small responsibility for the past 10 years of anemic economic performance.