Comments (59)

• Brad

  It's interesting to see the parallel to drugs made in this article. In explaining what I know to others (typically those blindly supporting the current policies and lay all the blame at the financial institutions involved in the meltdown) is that while the banks indeed were "pushers" to some extent, probably using the same logic that "if I don't sell it, someone down the street will, so I might as well do it". The government has been overstimulating the economy for years now, and one method was pushing more and more money into the system. If they hadn't, the banksn wouldn't have had anything to "push". So the Feds are/were the Columbian Cartel, the banks were the street pushers, and the borrowers were the addicts. And the "solution" seems to make more for the same pushers to sell, perhaps to the same addicts or hook others.

  Published: February 25, 2009 8:12 AM

• AC

  Once again Mr. Reisman hits the proverbial nail on the head. All production requires some amount of capital. The greater the production level desired, the greater the amount of capital required. Capital is always and everywhere saved prior production. The fools that spout the "paradox of thrift" argument are either ignorant or evil. I use the term "evil" because advocates of alleviating this "terrible situation" of thrift (aka a net savings of production) want to steal people's savings (via gov't taxation/inflation) in order to encourage consumption.

  Published: February 25, 2009 10:22 AM

• John

  It is amazing that Krugman and other Keynesians don't understand the role of capital in the economic system. As complex as it can be when you get down into all the details, the concepts are really quite simple, common sense.

  I'm starting to think that some of those very bright people who support Keynesian stimulus packages and inflation really do see through their own empty theories and know, deep down, that more inflation and more spending won't really solve anything, but rather will only create more booms and worse busts. But to those people, who have caught a glimpse of free-market logic and doubt the efficacy of their own ideas, it simply doesn't matter. There is just something inside them that makes them want the government to run everything. They want a total State, regardless of any theoretical or pragmatic obstacles.

  They are a dangerous combination of ignorant and evil.

  Published: February 25, 2009 11:20 AM

• Darren

  Great article, professor Reisman. I've added an update linking to your article to an article I wrote on the same subject:

  Recovery Depends on Investment and Capital Accumulation
  http://www.nolanchart.com/article5905.html
  &
  http://open.salon.com/blog/darren_wolfe/2009/01/27/recovery_depends_on_investment_and_capital_accumulation

  I've also submitted a link to http://www.opednews.com/

  Thank you for writing this article.

  Published: February 25, 2009 11:25 AM

• Andras Ludanyi

  Extraordinary article... but, although I am not even 1% of the economist professor Reisman is I can't agree with one thing in this article. I learned all the economics I know from Mises, Hayek, Rothbard, Buchanan etc. and many things from professor Reisman, and I have one little thing which isn't quite settled in a right place in all the economics stories we can read these days. The reason why people don't see this is because the whole business/capital/market story is false and we (yes even we Austrians) are defrauded to the point where we can't see all clear. Here is the problem:

  Professor Reisman said that "Accumulated savings in the economic system have fallen by several trillion dollars...", well I simply can't agree with this. First the stock market is NOT a capital market, people trade "right to a share of profit" on the stock market and not capital. The sum of all shares on the stock market is NOT an indicator of wealth, it is an indicator of expected profit, in other words it indicates how much the market value the right to profit, if nobody expect profit, the value of that right (shares) going down. For example GM has the same accumulated capital it has two years ago, and perhaps even more because there was some investments in that company during that period. Now the general problem is that GM can't sale the product at the price which will ensure to them profit today and future profit as well. The market will value present profit more than future profit, but if there is any real chances for future profit, investors which don't need present profit so much but will need future profit would invest in GM stocks. The problem is that GM can't do that, not with the current capital and probably an increased capital won't help either. If it would help, then investors would buy the GM stocks, they would put the more capital in it and all would be great. Now imagine that somehow GM is relocated to Dubai. No taxes and no other government imposed burden on the production. I bet GM will be profitable even with the not so efficient management and production process they have now. So basically we can do a few things. First to reduce the burden on production, the only way we can do that is to reduce current consumption and to reduce future consumption expectations as well. Second, we must eliminate the socialist regulations and laws and return the control of corporations to the hand of the investors instead to the hand of the management and politicians. Third we must let the market work and the competitive marketplace will increase efficiency of the people who currently manage that capital or the capital will find a more efficient manager.

  Now professor Reisman is right when he say that the dollar value of the accumulated capital is down, because a capital we can't use efficiently a capital we can't use to render products and services to the market is a much less valued capital than an effective working capital is. But we simply can't know how much that capital is worth because there is no place where people and companies trade with capital (on the stock market investors trade with the right to a share of a profit not with capital, if investor "A" sell his shares to investor "B" only rights to profit was transferred, not capital the capital owned by that corporation is still owned by that corporation), we don't have any information to know the value of current capital just as we don't know the value of out home until we try to sell it on the market.

  Anyway the most important thing is that the trillions of dollars of "capital" lost in the stock market wasn't capital, it was an illusion, the value of the right to a share of expected profit, nothing else end nothing more. No expected profit, no value. Nobody expect profit when projected future consumption is larger then projected future production, and the only way we can fix this ratio (and professor Reisman is 100% right here) is to cut current consumption and save (invest in future production), only that way will future production meet future consumption. Unfortunately the only reason why saving is so nonexistent is because policies made saving less profitable than consumption. Generally most people tend to consume more and more if they are richer so developed countries would save less and less anyway, but if public policies discourage saving and encourage consumption that will be very bad and future production won't be able to keep up with future consumption.

  BTW everything is consumption, spending for production is a long term consumption a different kind of consumption a kind of consumption where before we consume the goods, using those goods we will make more value than the value we consume. Short time consumption is when we make no value or we make less value than the consumed goods while consuming them. That is another source of misunderstanding, TIME is the very essential thing in economics in human action. So we must increase long term consumption (goods for production, education, technologies etc.) and decrease short term consumption (nonproductive consumption).

  Published: February 25, 2009 12:44 PM

• ehmoran

  Ron Paul brought Mr. Reisman's point to the forefront in today's Congressional hearing with Mr. Bernanke. Of course, Ron never received an answer.

  Published: February 25, 2009 12:56 PM

• Ken Zahringer

  Who was it the other day that was whining about Austrians never dealing with the issue of "credit money"? This is only the umpteenth article over the last year that has tied credit expansion to our current situation.

  Excellent article, as usual, Dr Reisman. There is more sound economics in this one article than an econ major in a major US university is likely to hear in an entire year.

  Published: February 25, 2009 1:24 PM

• Wolff

  Any chance of any audio version of this piece?

  Published: February 25, 2009 1:43 PM

• Kevin Hall

  "All of this represents a reduction in asset values, i.e., in the value of accumulated savings."

  I've always thought that the greatest error in defining ones individual economic standing (and it is obviously applicable to business) is the inaccurate perception of an assets value being deemed to be savings or worse, as wealth (debt/equity). A home is an asset by definition, but how can a home with $25,000 equity and $150,000 outstanding be considered savings or wealth? It would appear to me that using those numbers, the savings or wealth of the individual is actually $125,000 in the negative. This seems a pretty popular mis-representation to make in the mainstream; my favorite example was Art Laffer proclaiming 2 years ago (in a converstion with Peter Schiff) that individual wealth was at an all-time high. I assume he adheres to the debt to equity fallacy to define wealth. Laffer is a laugher!
  

  Published: February 25, 2009 4:06 PM

• pbergn

  The economic recovery requires resurrection of manufacturing base and bringing back of manufacturing and other jobs from overseas; nothing else...

  Bring our jobs back, Mr. Reisman! Why not come up with a true Austrian theory on how to bring the jobs back for a change?! What is this diatribe on saving? Of course everyone knows it is good to save - if you have any income left, that is...

  Why the author doesn't talk about the policies on how to stop the outflow of real American jobs to cheaper places? Why doesn't he point out that the only reason why Americans have fewer or negative savings in late 90's and 2000's compared to that of in 70's and 80's is because they do not have high-paying jobs anymore? So, they do what they have to do - they burn credit! Which was, until recently, abundantly made available by the banks who wanted to get more profits out of the situation - by riding the tide of cheap foreign imports and abundance of credit, while it lasted... There wouldn't have been any problem at all, if the manufacturing index stayed at the 80's level. There would have been no need for voluminous articles and trite truisms... So sad...

  Published: February 25, 2009 4:25 PM

• fundamentalist

  Very well done! Thanks!

  Pbergn: “Bring our jobs back, Mr. Reisman!”

  US manufacturing in things like airplanes and bulldozers has been doing well. It’s primarily manufacturing of consumer items that has disappeared. High taxes and massive regulations are the main reason that those jobs go overseas. US manufacturing can’t compete on the world market because of these. Although labor productivity is lower overseas, the low wages, taxes and regulations make up for it and pays for transportation of goods half-way around the world. Labor costs in the US are a small part of the total costs in manufacturing. Overhead is usually 4 to 5 times labor costs and includes armies of lawyers and accountants to deal with regulations. Our corporate tax rate is the 2nd highest in the world. Get rid of taxes and regulations and US manufacturers of consumer goods will return.
  

  Published: February 25, 2009 4:59 PM

• Andy

  pbergn:

  How about those people with earnings over 100k we read about these days on CNN? They crying like a baby and asking for financial help... I suppose many years earning 100k+ wasn't enough for them to save a dime or two. Pathetic. If you spend like crazy usually money you don't have on things you don't need (like many people do) and buy even small stuff with high interest credit cards, you never going to have any income left.

  About jobs overseas... well you should know that if someone can find a more efficient way to achieve the same result he should use that way, ask yourself why it is that some work can be done more efficiently oversea? Why the government put such a high burden on US jobs? Do you ever even remotely tried to understand that the saving made by those corporations actually create more job in the US then it export oversea? The only different is that those are different kind of jobs, kind of jobs Americans are more efficient then people oversea. Trust me if those jobs did not goes oversea we would have an economic crisis so much bigger than this that it is hard to imagine. The problem is that US production doesn't meet US consumption even with the more efficient jobs, imagine how short it would be if the old jobs stay in the US and if all those production go with a less efficient labor. Things are more complicated then a person could see without thinking trough.

  Published: February 25, 2009 5:03 PM

• mnoaz1

  pbergn:

  Being productive is a more noble goal than 'bringing our jobs back' from elsewhere. I would state that the thesis is not trite; it is simply that entrepreneurial effort is stifled and limited if there is not a savings base to provide capital to promote production. Production is the noble goal, not 'bringing jobs back' from elsewhere. The jobs, to any extent that they are elsewhere, are elsewhere because the production costs are lower elsewhere. So, either companies find a way to compete (i.e., lower production costs) or choose to take advantage of the production of other areas which are more efficient and concentrate energy and capital in areas where they can be competitive. High paying jobs can only be had when a company produces value at low cost and delivers products competitively. And, it helps when monetary policy doesn't devalue the earnings, but that is a different part of the story.

  Published: February 25, 2009 5:09 PM

• pbergn

  Amen, fundamentalist! Let there be jobs...

  I am all for cutting the corporate tax, don't get me wrong.

  I just got irritated by the fact that nobody addresses the root cause - the demise of income sources for American public due to, as you have rightfully stated, higher labor costs... But even if you do cut the taxes, I suspect it will take a while before the prices of everyday items in the US come down to the levels that US worker can compete on the basis of the cost of labor against their less fortunate counterparts... It looks like we have to tighten our belts, after all...

  Damn it! The party is over, indeed (and I was just getting started)! Oh, how I wish to bring back my American Dream!!! It was soooooooo sweet...

  Published: February 25, 2009 6:23 PM

• pbergn

  To: Andy

  Andy writes: "How about those people with earnings over 100k we read about these days on CNN? They crying like a baby and asking for financial help..."

  Not true. Those 100+K earners lost all they had because they have foolishly either invested in equities or in real estate... I know a lot of folks who were making 100+K (including myself) who are now on the ropes... Non of them "overspent" to the best of my knowledge. We were living our simple American Dream - bought a house, leased a decent car, took my wife to dine out every other Friday, went for movies, and fed our 401K. Our mistake was to by a lot of company stock...

  For some reason people have a perverse notion of upper middle class... I know a couple of millionaires in their lower millions, that have suffered a lot because of this downturn. They are normal decent people - they don't have a yacht or golden toilet sits... Everything was so normal and felt so good...

  Published: February 25, 2009 6:34 PM

• pbergn

  TO: mnoaz1

  I agree with you, mnoaz1 - 100%. I know exactly what you are talking about...

  But all this theory is good when it happens to somebody else.. Alas, understanding of the market fundamentals will not bring my job back... I have to learn to live with it, I guess (am I turning into one of those 100+K whiners or what?!)...

  Published: February 25, 2009 6:49 PM

• Nad

  A must-read article with outstanding lucidity! Thanks, Dr. Reisman.

  Published: February 25, 2009 7:40 PM

• André Dorais

  A great article indeed! Rich in insights. The comment from Andras Ludanyi is also interesting.

  Published: February 25, 2009 9:09 PM

• Dmitry Chernikov

  Andras, well, what's a corporation but materially a collection of capital goods and formally a group that guides the employment of the factors of production, including those capital goods, i.e., a set of {the shareholders, the board of directors, and the senior management}? A share price represents both your share of the capital stock and the anticipated result of the "human action" of the guides. The more capital is invested, the higher the share price. The better the entrepreneurs directing the company (or the better they are perceived by investors), the higher the share price, because, given good direction, a company is expected to grow in the capital goods possessed and employed in its production processes. Or, at least, to pay dividends, if there is no intention to grow the company.

  Published: February 25, 2009 11:03 PM

• Dmitry Chernikov

  It's probably better to say that the share price reflects discounted future profitability, while future profitability can only increase with the increase of the capital invested, all other things being equal.

  Published: February 25, 2009 11:34 PM

• Andras Ludanyi

  Dritry:

  The capital is owned by the corporation. When you put capital in a corporation (a corporation rise capital) you exchange your capital for a right to share of the profit. You don't own any capital the corporation does. The fallacy is that a corporation has an owner or owners or that the stockholders own a corporation. Nobody own a corporation a corporation is an organization a legal person, people own only shares which are nothing more than a right to a share of profit and (not always because there are non/voting shares too) a right to vote.

  Shareholders can sell their rights, shareholders can vote and to appoint the board of directors. Today the problem with the corporation is the same as the problem with the general election, the shareholder has no choice, he has to vote on the lesser evil, the managers and politicians with socialist laws managed to erase any real control from the voter from the shareholder, the only difference is that a shareholder can sell his shares and utilize the money in some other corporation which render to him better profit. The problem is when no corporation can do that (like now) so you can wait and hope that shares will recover or you can try to sell your shares in a superbear market. BTW the price of a share tells us only one thing: for how much was the last share sold. There is no guarantee that the next one will be sold at the same price, jet alone that all the shares will, so multiply the number of shares outstanding with the price of the last sold shares is nothing but an utter nonsense and a fruitless action.

  Published: February 26, 2009 2:47 AM

• Andy

  To:pbergn:

  OK so some of them "saved" but isn't spending money on high risk assets are nothing else than consumption? Of course some financial wisdom is also needed, at least 10-20% of your savings you should hold in cash (in the bank) and some of it should be invested in blue chip shares. (I know those going down too but you didn't lost anything you still have the shares, financial wisdom also tells us not to sell when prices are low but to buy and sell when prices go up) so if yo save 20% of your income (from 100k that's a piece of cake) for say 5 years that's 100k in saving let say 20% is in cash, that's 20k in cash enough reserve to get by for a couple of month if you lose you job, and in that period you must find some solution to earn some money. And wait for the next bull market and your shares will recover. Anyway investing without knowing how financial stuff works, how the whole monetary and financial system works is like flying without knowing how the airplane works. If you don't know how and where to invest your savings, hire a REAL financial adviser, but better read some real books not the "how to get rich in 100 days", read the Theory of Money and Credit from Mises and Prices and Production from Hayek and you will know from the distance of the moon that investing your hard earned money in high return stock has sense only if you sell before prices starting to go down, well I can tell you one thing many people sold their shares when Dow was 12000 and they have a nice pile of cash right now, and when the market hit bottom (I predict Dow in the neighborhood of 5000) they will buy shares of healthy corporations and wait to recover. In the meantime they hold cash and they don't need any financial help from the government.

  One more thing: The point is NOT to cut taxes, the point is to cut government spending to cut the size of the government, and then the government won't need so much money and taxes will go down.

  Cutting taxes while increasing government spending/size is not an answer it is the worse thing one can do.The problem is that they usually cut taxes because they count that government revenue will rise because production will rise (as the result of tax cut). Government revenue should go down not up.Someone wrote an article here a few days ago about the Keynesian reasoning of tax cut (spending so they believe less taxing will be more spending so they are nothing but a Keynesian, it doesn't matter who spend the money the government or the individual, the point is if that money are spent on consumption or on production. And we all know that government almost exclusively spend on consumption. Now the individual will also spend on consumption if his possibilities in production is limited by socialist regulations and high entry thresholds. We can't force saving and force production and force innovation and force investment in efficient technologies and industries, we can only try to level the field and to build a free society where people can utilize their assets to their best knowledge and then hoping for a good result. If you put too many obstacles people won't go that way, they will spend all their money on consumption just like the government does.

  Published: February 26, 2009 3:11 AM

• newson

  to pbergn:
  having a universal fiat money system gives rise to long-lasting trade distortions and mercantilism.
  asian nations deliberately chose to resist revaluation of their currencies to promote their export sector, and the us enjoyed a very long free lunch by dint of having the world's (overvalued) reserve currency.
  this perverse game has damaged both parties.
  forex profit/losses can far exceed simple merchandising ones.

  apart from this qualifier, i'd agree with fundamentalist.

  Published: February 26, 2009 6:48 AM

• Pat

  "asian nations deliberately chose to resist revaluation of their currencies to promote their export sector"

  This economic model is not sustainable because it makes them dependent on the markets in which they sell their products. So when a crisis hits those markets, those countries are at risk. Exhibit A: the contraction of the Japanese economy.

  But then again, the Asian nations also bought foreign assets, so statistics on trade might be misleading (e.g.: holding foreign assets may not count as a trade, especially if the statistics are published on an annual basis).

  Since we are dealing with mixed economies (Yes, there aren't any countries that can claim to have a laissez-faire economic policy in absolute terms. Even relatively speaking, the difference is cosmetic), trade deficit and job outsourcing cannot be explained alone on productivity level and cost (As correctly pointed out by Fundamentalist and others). One thing I fail to understand in such conversation is the reasoning behind the advocacy for free trade inside our borders but mercantilism outside our borders. I suspect that such philosophy is behind the creation of trade bloc among countries (e.g.: EU, Mercosur, NAFTA). It isn't promote free trade per se.

  With respect to job outsourcing, allow me to be sarcastic once again. I have a long-term solution for bringing our job back. Simply colonize those countries. Or destroy their infrastructures, their educational system, and steal their wealth through war. In any case, do everything to lower, if not eliminate, their productivity potential (That might require to eliminate the population). That way, the firms won't have any place to outsource the jobs that can be performed by people outside our borders because they can do it. Not only that, but this will silence those pesky accusations that our tax and labor laws have nothing to do with outsourcing.

  But seriously, this would be going against liberalism (Not American liberalism. Liberalism is what we call libertarianism and should have stayed that way). It is simply that it would fix the problem a lot better than governmental policies about fair trade and whatnot, which sounds like mercantilism lite.

  Published: February 26, 2009 7:42 AM

• Andras Ludanyi

  Don't forget one thing, Asian economies (especially Chinese) are unable to consume their entire production because the market is not even remotely developed as the production are in that country. Now they was able to rise foreign capital for the export oriented production but they won't be able to rise foreign capital to drive their own market development. That is why they are OK with the idea that they export extreme amount of goods virtually for worthless fiat money. First they can't import nearly as much as they can export for the same reason they have to export so much (underdeveloped domestic market).

  So in fact the Chinese buy time for the goods, using foreign markets they are able to speed up domestic development (production and market as well) and they will build a strong economy and a much better standard of living in a fraction of time they would be able if they produce only as much as they domestic market can absorb. The Chinese effectively exchange goods for time/speed.

  The dollars they have is essentially worthless in this moment (not necessarily will be worthless in some other time) because they can use it only for import and they import is much less than they export, and until the Chinese market is developed so much that they will need products and services from US/EU they can use those dollars only to buy oil and some other primary resources like steel for example.

  They don't need the products and services US or EU produce because they market is not developed enough to make use of those products/services at least not in the amount needed to balance their import/export. With underdeveloped market and well developed production you will always have trade surplus, with more developed market than production (like the US for example) you will always have trade deficit.

  Published: February 26, 2009 8:26 AM

• fundamentalist

  newson: "...asian nations deliberately chose to resist revaluation of their currencies to promote their export sector..."

  Right! And they're paying for it now with much steeper declines in GDP than we are experiencing.

  Pat: "...do everything to lower, if not eliminate, their productivity potential..."

  The main reason that workers in poor countries earn lower wages is that their productivity is so much lower than that of US workers. Their wages are lower, but the total labor costs are close to those in the US because of their low productivity. Taxes a regulations make US manufacturing less competitive, not labor costs.

  Published: February 26, 2009 8:34 AM

• Andras Ludanyi

  "Taxes a regulations make US manufacturing less competitive, not labor costs."

  yep agree 100%, and additionally in industries where you can't beat the government imposed burden with the high demand low supply model (most manufacturing jobs are in this area) it not economical to use US based labor and if one corporation use it it is most probably because they get something back from government because of populist "we create jobs" politicians. Those practice however is again on the back of the US producer just it is redistributed to someone else in the game.

  Published: February 26, 2009 8:46 AM

• Andras Ludanyi

  One additional thing make some industries less competitive. If industry "A" has faster development because better capital accumulation than industry "B" (let say manufacturing machine production = A, textile industry = B) then wages in industry A will rise faster then wages in industry B (also capital return) so less and less will be invested further in industry B and more in industry A, give enough time and nobody want to work anymore in industry B because that industry can't pay as much as other industries in the area, so there will be no labor available for that industry (at least not at the price that industry is able to pay), so industry B (like textile industry in the US) will die out. But that's a natural course because textile industry was unable to keep up in rise of productivity with other US industries so it wasn't able to survive on US soil. At least not as a legitimate business.

  Published: February 26, 2009 9:07 AM

• A.Viirlaid

  I think the Federal Reserve uses an Accounting Model for at least some of its worldview. It looks at the nation and the world and sees a Balance Sheet, and sometimes an Income Statement.

  It knows that the left side of the Balance Sheet has to be equal to the right side in total. So Assets equal Liabilities plus Owner Equity or Retained Earnings.

  So the FED sees that Equity is what is left over when you subtract Liabilities from Assets. So why not try to manipulate Assets UP in value, and Liabilities DOWN in value? That should increase overall Equity, right?

  Over the last few years, much like the capital reserves of banks which have been impaired, the equity of entire nations has been diminished, not to speak of individual companies and people.

  Two sets of questions should be asked and answered before we can judge the probable efficacy of Government (taxpayer-funded) bailouts and FED (Federal Reserve / Central Bank money-printing) monetary injections.

  Namely, is the situation abnormal TODAY or was the situation abnormal PRIOR to the bursting of the bubble? Or can they both be considered abnormal? We know what Austrians think.

  Secondly, are bailouts and fiat money injections likely to help or hinder? What are the objectives of such supposedly reformative actions? What are we trying to socially-engineer our way back to, or out of? If we really know where we want to go, can we then also identify how to get the money injections to the right places to make the 'right' things happen? Is it always a simple matter of making things 'happen' with fiat money? Is it a simple matter of pushing the right buttons. Is there such a thing as A Simple Plan that will work here? We know what Austrians think.

  The equity of a nation (or company) can be hurt if the value of assets falls without a corresponding drop in its liabilities. This can lead to a lot of misery. Our Central Banks think that they have A Simple Plan to fix things.

  But first let's consider some of the things the FED has going for it in its quest to increase National Income and to increase overall Equity.

  When Argentina has debts denominated in, what are to it foreign currencies, it has to raise money in those foreign currencies, usually U.S. dollars, to pay back to its lenders. It cannot just print U.S. dollars.

  America can.

  But America usually wisely chooses not to resort to piratical money-printing.

  This may not be one of those wise times; we may be about to become exceedingly foolish.

  America is still seen as the country with a world-class reserve currency.

  So America can also (still, last time I checked) borrow in U.S. dollars by issuing bonds denominated in U.S. currency. Argentina has a hard time convincing lenders to buy its bonds when it issues them denominated in Argentinean pesos. It is forced to issue Sovereign Bonds or Foreign Bonds.

  That is why Argentina more easily defaults. It has fewer ways to recompense when it gets into trouble. It is also not as wealthy as America.

  Why bother here with a discussion about Argentina?

  If the U.S. abuses her position she can lose her currency's reserve status. That would be a mighty blow. America can then herself become more like an Argentina in regard to its currency. It would no longer be able to issue debt (bonds) in its own currency. It might have to borrow in Euros or even some day in Argentinean pesos. And accept the currency risk of trying to repay in those foreign currencies.

  But is this likely to happen?

  It might, depending on what the FED does. If the FED so debases American currency by printing too much of it, in a futile effort IMO to engineer a way to 'recovery', it conceivably runs this risk.

  But why would the FED even consider doing this?

  Well, one reason is to raise the required financing for all the buying of 'assets' from 3rd parties (banks, financial institutions, maybe auto companies even) that it is currently doing. It is becoming one big very indiscriminate pawn shop. The FED may even have to resort to money-printing to buy the Brobdingnagian issuances of government bonds gushing out of the Treasury.

  Especially if Hillary Clinton fails in her attempt to convince the Chinese to buy more of Uncle Sam's bonds. Or if, more likely, the Chinese themselves can simply no longer buy American bonds because China begins to fail to earn the huge trade surpluses of her recent past. Same goes for the other big buyers, OPEC and Japan and the other Asian 'savin' nations.

  What would be the other motivation for the Bernanke FED to print money, essentially counterfeiting it?

  Consider the recent societal loss of capital. Our collective motivation today to rebuild our capital is sound.

  The techniques that are likely to be resorted to by our authorities are what create my personal worries.

  If we all rebuild capital by saving and EARNING it, then that is great. Well, maybe not great, but at least, FINE. It will take a long time, entail sacrifice, and cause no small amount of unemployment. That is what a Great Recession is all about --- that is, REPAIRING the impaired Balance Sheets of all of us and of the U.S. and of the world.

  But the FED knows how the nation's Balance Sheet works as much, or likely much more, than I do.

  The FED looks at the Assets and Liabilities and the Equity, and sees that in a land of falling asset values, and standing-still or increasing debts, the remainder, our overall Equity is falling. That is because Equity equals Assets minus Liabilities.

  Bad news? You bet. We can agree, that this can lead to all kinds of grievous social effects.

  So what does the FED do?

  It cannot change the nominal amount of the debt owed to China or Japan or to others unless America actually defaults. But the FED can debase the currency that the debt is denominated in. (Good thing, as we mentioned, that this is in U.S. currency.) Such debasement would cause the real value of the debt to contract. That is the FED's argument ONE in favor of printing money.

  The FED can try to increase the nominal value of assets. How? By again inflating the money supply, by printing more of it. The houses, empty lots, factories, and so on, will all surely go up at least in nominal value if you debase the money sufficiently. And as mentioned above the FED can create artificial demand for financial assets by using that new money to buy those assets. It is the new Zillionaire on the block, ready to buy anything that is for sale. That is the FED's argument TWO in favor of printing money.

  There is a another 'benefit' in the FED’s eyes that its money-printing brings about. This is the prevention of price deflation, which in its perspective, is a hell to be avoided at ALL costs. (Of course, that is idiocy IMO, but hey, who am I?) That is the FED's argument THREE in favor of printing money.

  The FED also thinks it can goose the economy with monetary injections. It is the great doctor-mechanic who applies the electrodes at just the right spots to jumpstart the economy. It thinks it knows that it will not electrocute nor kill with the wrong type or size of electrical (monetary) charge. It 'knows' that its stun-gun won't discharge into the victim at the wrong moment in the heartbeat cycle. This is the FED's argument FOUR in favor of money-printing.

  There are some smart people out there. There is George Reisman. There is Bill Gross. There is James Grant. There is Doug Noland. There is Peter Schiff. There is Professor “Dr. Doom” Nouriel Roubini. There are the Chinese authorities. There are the American people. There are the Bond Vigilantes. There are people willing to buy gold to protect themselves if they see currency debasement in the FED's deck of cards.

  So it's the FED's opinion against all these other people. Will the FED succeed in its own chosen way toward a 'solution'?

  Will the Chinese continue to buy bonds when the value they get back may not even cover their invested principal? Will foreign banks and governments continue to keep American currency in their 'reserves'?

  IMO 'money' is not something that should be manipulated in so blasé a manner. It has been in recent times, and look what it has brought upon us. This was not the way that Central Banks used to treat money, nor should they today.

  And IMO simply manipulating the nation's or world's Balance Sheet via these methods will not address the problem. Certainly not by A Simple Plan that jacks up the nominal value of assets and contracts the value of liabilities in real terms. The FED has to rethink its approach.

  This approach gives us a pseudo-intellectual appraisal that says: Hey, We Can Increase our Equity, our Net Worth, auto-magically, by Money-Pulation. We'll be better off. We can be entropically in control of our environment. We can have a free lunch. Eureka, there is a thing called Perpetual Motion! We are saved.

  The bottom line for me is that we need to do some repairs. But these repairs need to be done by all of us, personally. They cannot be delivered by some Wizard of Oz from behind a curtain.

  An asset is only worth what it earns for you in real terms in the future. An earnings stream, discounted to the Present, can give you an idea of that asset's real value.

  If the assets you have are, in such real terms, valued at less than the present real value of the currently outstanding liabilities with which you financed those assets, then you are broke --- unless you have some wealth to draw upon from elsewhere, that you can use to do a real value-based reconfiguration of your economy.

  So, unless you can find a way to use those assets in a higher-return manner than they are currently employed, you will stay broke, or get more broke.

  If we let the Wizard have his way, we will end up with worthless money. We will end up with a more impaired economy, not one that is less impaired.

  The Wizard cannot reconfigure an economy with the magic of money injections. He will cause more malinvestments in the wrong places, in the wrong amounts, at the wrong times. No one can centrally plan our way out of this mess.

  It's a rat hole, like Doug Noland said in his weekly column titled SURREAL. And we had plenty of people warning us not to go down the yellow brick road, most especially those writing at this site. Our society and the FED decided to ignore those warnings.

  Published: February 26, 2009 9:13 AM

• Sally Copperwaite

  Brilliant article! I was one of those 'unwilling' victims of Keynesian economic teaching at Oxford in the late 1970's. Was Ludwig von Mises ever mentioned? Absolutely not. My economics professors were horrified when Mrs. Thatcher came to power and had the temerity to praise Hayek. This morning, I was horrified to hear the Governor of the Bank of England say that interest rates could not be used to subdue asset bubbles. He then went on to say that the Bank will embark on a programme of quantitative easing any moment now. Help!

  Published: February 26, 2009 9:27 AM

• Pat

  Fundamentalist: "The main reason that workers in poor countries earn lower wages is that their productivity is so much lower than that of US workers..."

  True. And as their productivity increases, some of those jobs might either go elsewhere or come back to the developed countries. For example, some of the software jobs outsourced to India came back to the US (Wall Street Journal mentioned about it a couple of years ago).

  I also think Andras's point is interesting and true. The Chinese domestic market is definitely changing over time. But with government control, I suspect it will lead to something that would be potentially damaging. It might even lead to the same kind of market that exists in the USA or Europe. And of course, the problems will be blamed on free market economics. Even some labor unions leaders know that free markets do not exist (Although their conclusions are definitely disappointing to say the least).

  It seems to me that a lot of comments are things we tend to take for granted but we need to make them explicit whenever we explain to other people. Reminds me of a passage in Mises's Human Action about the theory and reality.

  Published: February 26, 2009 9:42 AM

• A.Viirlaid

  I have to thank George Reisman for making the effort to provide at least some modicum of education to our Keynesian economists.

  I realize now what a terrible deed the Nobel committee did in awarding its Economics Prize to Paul Krugman. I don't know if that was a worse crime than the one it did in awarding its Peace Prize to Al Gore and the IPCC. They are both pretty evil actions.

  Both prizes have given undue legitimacy to views that are bizarre.

  But it that were all, it would not matter. These views are more than bizarre or mischievous --- they are grievously harmful.

  It is the fact that our populist political leaders can now make use of such 'legitimate' views in crafting their policies that will harm us.

  We are doomed.

  George Reisman's tour de force makes it utterly clear why the Great Depression lingered on for so long. We were eating our seed corn. We were consuming our precious Capital. For heaven's sake farmers were pouring precious milk into gullies and streams.

  But will Krugman read Reisman's essay? No, and we will all be poorer for that sad fact.

  Published: February 26, 2009 11:53 AM

• billwald

  >Anyway the most important thing is that the trillions of dollars of "capital" lost in the stock market wasn't capital, it was an illusion, the value of the right to a share of expected profit, nothing else end nothing more.

  Exactly correct. And no one gains or loses until he sells the shares . . . or the company goes under.

  40 years ago my father and 60 years ago my grandfather invested in well run companies that sold a good product at a profit. Buying shares in a company that has never turned a profit or sells at more than 30 times earnings is not investing, it is shooting craps.

  Isn't part of this discussion about the moral implications of the money? Isn't money a-moral? Is "should the church accept donations from the Mafia?" morally or economically different than "Should banks and businesses accept donations (loans) from the government?" Isn't the bottom line in either case "the one who pays the piper names the tune?"

  Whether the government loans to banks, the Mafia makes deposits in banks, or a million people open savings accounts in banks (ignoring that it is less efficient to handle smaller accounts) isn't the bottom line effect on the economy the same?

  
  

  Published: February 26, 2009 12:57 PM

• Andras Ludanyi

  To: A.Viirlaid

  We are not doomed... we are on a crossroad, the truth is that our society can't go further on the foundations of Keynesianism-Marxism-Mercantilism, the MARKET simply would not allow that, if production fall (and it will and it is) the parasites can extract only less and not more, so yes we will have a major setback, but we are not doomed. Every civilization/society changed radically when reached the point of too much consumption, we are not special our society will change as well. I watched today a story on CNN about Fargo, North Dakota a town of 100k population, in Fargo there is no recession, unemployment is record low, businesses are in expansion, only 3 foreclosures out of 12000 mortgages, etc... the town has no deficit, they don't spend more then they have. I bet there is many other towns like that in the US, and people from other places will find those blooming places and they will employ their capital in those places where capital make profit, instead of the places where people spend more than they have where they consume capital.

  I believe there are some great times ahead because man kind never had so much capital so much knowledge and so much technology/ability like we have now. The only problem is that all of that resources meet too much obstacles and are burdened by a large unlimited government. That will change, the market will change that, and nobody can stop that, nobody can stop the world, nobody can stop progress. It is true sometimes some people are able to slow things down, sometimes they can even reverse the world for a moment, but human action simply won't let it to stay that way for too long, creative and productive people will find a way to overcame all those obstacles and to create and build something of value. Maybe Keynesians and Marxist rule the world right now, but they rule the world only because productive forces letting them to rule, not because they are the most capable. At one point they will fall, big-time. One thing is for sure, business as usual is not what will happen in the next period, society will change very much.

  Published: February 26, 2009 1:23 PM

• fundamentalist

  Andras, I hope you're right! I'm more pessimistic.

  I forgot to mention another reason that jobs go overseas--cost of living. Often wages, even adjusted for low levels of productivity, are still lower than in the US because the cost of living is lower. The cost of living may be lower due to lower taxes, but most likely it's due to lower rates of inflation. Inflation in the US drives up the cost of living and as a result, wages.

  In addition, inflation makes certain that depreciation can't cover the cost of purchasing new equipment. The unholy trinity of taxation, regulation and inflation are destroying our manufacturing base.

  However, a few industries, such as textiles, have not been friendly to the introduction of automation. For some reason, no machine has been found that can sew cloth together to make shirts and pants. It still must be done by hand. Industries like that will always drift toward the lowest wage countries.

  Published: February 26, 2009 1:47 PM

• Andras Ludanyi

  To: fundamentalist

  Yep cost of living is way too high in some areas, but if you really want to see high cost of living, you have to come here to Europe, the US is super cheap compared to Europe especially to some parts of Europe. I suppose socialist regulation already made much more damage here in Europe.

  Published: February 26, 2009 2:39 PM

• pbergn

  TO: fundamentalist/Pat

  Fundamentalist contends: "[...]The main reason that workers in poor countries earn lower wages is that their productivity is so much lower than that of US workers. Their wages are lower, but the total labor costs are close to those in the US because of their low productivity. Taxes a regulations make US manufacturing less competitive, not labor costs.[...]"

  Not true. The labor costs are lower in the third-world only because it is coerced labor, and NOT because of lower productivity. On the contrary - the productivity in some of third-world countries are MUCH, MUCH higher, than that of in the developed countries, and their taxes are MUCH higher as well...

  We are all reaping the frits of coerced labor, and don't even either know or want to acknowledge it!

  Published: February 26, 2009 2:58 PM

• Oil Shock

  pbergn,

  BS! I grew up in India. Overwhelming majority choose what they do. Of course, for a very long time people had very limited choices, because the government had this infatuation with fabian socialism.

  Published: February 26, 2009 3:15 PM

• Andras Ludanyi

  To: pbergn

  The logic of coerced labor is very interested because it is based on the fact that every labor is coerced in some way. Why? Because in any case it involves alternatives. Do I have any alternative offer where I am better off? If yes I will take that so I won't be coerced as much as I would if I don't have any better alternative offer. So partly you are right, labor is coerced but not only in third world but everywhere the only question is how much. The more choices I have the less I am coerced.

  But you made a fundamental error. You didn't tried to answer why is labor so coerced in the third world? It is only because they productivity is so low. And their productivity is so low because they have much less accumulated capital, much less technology and much less qualified labor force. If you have more capital you will be more productive and you can earn more and you can save more and you accumulate more capital and then you have better choices and better alternatives.

  Any person can work in order to receive better offer, firs you must develop yourself, you must learn new techniques and acquire new skills. Then you will attract better offers and you will have alternatives where you are better off. The problem is that most of the labor forces in third countries are with no or only basic qualification. Did you know that 20 million people lost their jobs in China in the last few months, imagine that number become unemployed in the US, I bet you would experience much bigger drop in production, 500+ million employees in China is unable to produce half the value 130 million does in the US. Many of those 20 million and many of those 500+ million are non-qualified very low productive people coming from villages to big cities in order to get that better offer, they migrate sometimes more than 1000 miles to get a better offer they have back in the village where they lived before. China has some significant industrial production some big manufacture industry, but it is much less productive then US and it will remain for many years. You simply can't jump and achieve in a decade what the US achieved for a century or more. It is true that they have a large number of engineering graduates, but apart of a handful of them most of them are less qualified then a US engineering graduate, and most of them has less opportunity to gain as much experience in the same period of time a US engineering graduate would. Many Chinese students come to the US because of that reason, not many if any US students goes to China for the same reason. Make no mistake China is a rising star, but it isn't near the level the US is yet.

  Other countries has similar issues, labor in them is more coerced then US and EU labor because they has much less capital and much less qualification and that is the reason they can't attract the same offers employees in the US or EU can, simply because they are not less but much less productive.

  Next time when you think about poor coerced labor oversea, ask yourself... can you offer those people something better? Do you honestly believe if US corporations does not invest capital in those countries and offer jobs to those people they would be better off? Do you honestly believe they will have better paying jobs?

  Now if you think that only manufacturing is production that's another issue... it is not, every product/services demanded on the market every work which pull its own weight no matter how unnecessary it is for you or for some "authority" is production. If there is self financed demand, it is a production even if it is a ballgame. A rich and developed country like the US needs much more non-manufacturing products/services then a less developed one. It is easy to sell and employ an agricultural machine in Africa, it is hard to sell in the US because every farmer has a few already. But it is easy to sell a ballgame ticket or a nutrition advise service in the US because there is demand for it, people can afford. It is hard to sell those services in Africa, they need food and shelter not entertainment and nutrition advise. But that doesn't change the fact that both of those things are production, just it has a very different market.

  Published: February 26, 2009 3:43 PM

• fundamentalist

  pbergn: "The labor costs are lower in the third-world only because it is coerced labor, and NOT because of lower productivity."

  Some of it may be coerced, some not, but the productivity level is quite low according to IMF and World Bank calculations. Increased productivity results from having good equipment, training and organization, which most poor countries don't have. The situation is different in Mexico for auto workers, where productivity exceeds that of US workers, but in most industries in most countries, US labor productivity is much higher.

  Published: February 26, 2009 4:43 PM

• Pat

  If I might add to your point, Fundamentalist, it requires infrastructure as well to handle such equipments. Legal frameworks are also important too.

  Published: February 26, 2009 5:24 PM

• Bruce Koerber

  How laughable is the Nobel Prize of Wackonomics being awarded to Paul Krugman. What a scourge, but one to be expected in these Dark Ages for economics.

  If there was a true award for clear, valid, and precise economic theory one of the chief candidates would be George Reisman.

  Published: February 26, 2009 6:06 PM

• pbergn

  TO: Oil Shock

  You are dishonest!!!! I know a lot of people from India, who are saying that they are happy to work for westerners for almost whatever they are offered to, since their own country does not offer anything...

  If they say "no" - they will be promptly replaced by more willing and docile...

  So don't give me this... The fact that they are happy to be slaves does NOT mean that they aren't!!!!

  Published: February 26, 2009 7:52 PM

• pbergn

  TO: Andras Ludanyi

  Andras, thanks for your clarification. You almost hit the nail on the head when you started along the availability of choices path. Choices - that's the key!

  By say coerced labor or in other words exploitation I mean the phenomenon of employing labor under such the following conditions:

  1. The laborers have to accept the offered wage or face starvation, physical harm or death;
  2. The paid wages are not enough to support minimum standard of living in the given locale, i.e. is NOT enough to buy basic food, clothes and shelter...

  So if you take the above definition of coerced labor or exploitation, it will become clear that NOT all the labor is coerced...

  I categorically disagree with you that the productivity in the third world is much lower. On the contrary, it is on par or much higher...

  I have seen how the workers in less developed countries work - how much dedication, skill and effort they put, in stark contrast to their counterparts from more developed countries. And it is obvious why - the third-world workers have much, much more to loose - their physical existence is at stake, whereas the richer folks who are NOT under the threat of starvation they don't care - if fired or offered less, they can always do the same work for somebody else...

  Published: February 26, 2009 8:10 PM

• A. Viirlaid

  To: Andras Ludanyi

  Thank you Andras. I do tend to exaggerate occasionally with my hyperbole.

  I hope you are right and I do have the faith.

  I found myself asking as I read your words --- who is this person? Could it really be John Galt?

  Anyway, I wrote a little more optimistically in my response to Kitty Antonik Wakfer, which was my 3rd-last entry on the blog of Llewellyn H. Rockwell, Jr. My ‘optimistic’ response was published: February 14, 2009 5:30 PM.

  It is at http://blog.mises.org/archives/009403.asp if you are interested.

  The related article is “Obama's Wealth Destruction” by Llewellyn H. Rockwell, Jr. written on February 9, 2009 7:58 AM.

  By the way, you are a very good writer. Thank you.

  Published: February 26, 2009 8:54 PM

• Oil Shock

  Since when is it the responsibility of the "Country" offer everyone something to do. I am sure overwhelming majority of people would love to party around all day and get paid, and I am sure if you were a politician, you will promises that to everyone.

  Most people in India live a much better life than their forefathers did 50, 100, or 200 years ago.

  Nobody is putting a gun on their head and asking them to do a particular task.

  Any society, some people will be left to do jobs that most people will not - like janitorial, cleaning toilets etc. Without them a civilized society will not function. Nobody forces them to do it, they just do. India is no different. People fill up opportunities that are presented to them

  A Computer Engineer working in India is likely to earn a 10th of what a similar Engineer makes in the U.S. But the Engineer in India is likely to have domestic help at his house than the Engineer in the U.S. It is called the cost of living difference.

  Published: February 26, 2009 9:25 PM

• Andras Ludanyi

  To: Pbergn

  If you are not able to live without labor then the labor is coerced. And who is able to live without work? A few, but most people are not, most people must work in order to support himself and his family, so technically every work is coerced. The question is: do they have less or more choice. But the important question is not this, the important question is social mobility. Do I have a choice to move up and to increase my wealth by accumulating capital or not? In many countries this is denied from people or they ale very limited in this ability. Why? Almost exclusively because the political environment.

  I am not a defender of those corporations because sometimes they work with local governments in order to limit the social mobility in those countries, but the truth is that they are the only source of income for most of the people in many of those countries. But even if we know this, it won't change the fact that labor is less productive oversea. Capital is scarce everywhere, it is extremely scarce in the third world, that is why capital is much more expensive there because people are willing to pay more in order to get it. This is the reason why corporations invest in third countries, because they can "charge" more for the capital. If you have more people willing to work and less capital to employ them, you will be able to get a larger part of the production for yourself (the capital owner) and you will be able to pay less for labor. So technically you have less production with the same capital then you would have in the US, but you have a larger percentage of that production because you can pay less for the labor.

  The next question to ask is: Why would you employ your capital oversea where you have higher risk (not so stable political environment etc.), you have lower production and lower overall profit (even if the ratio of profit/production is better, 20% of 100 is less then 10% of 300) instead of employ your capital in the US? The answer is complex, but the two main block would be: 1. Because your profit is hit by high taxes in the US. 2. Because your ability to find qualified workers in the US is worse then your ability to find qualified workers oversea (and the immigration policy in Washington make this only worse). Now it seems to be a contradiction: more qualified workers oversea and less in the US while just a moment ago there was less qualified workers oversea who are less productive? Yes, but there is no contradiction. Because we are speaking about two different class of workers, employed and unemployed. Qualified workers are mostly employed in the US, they have a job and some job security. So when you want one of them you have to pay much more then the labor cost. You have to pay for the process of finding them (they simply wont rush to your ads), you have to match the job security they already have (also cost money) etc. In the third world, they will rush to you and ask you for work without imposing to you additional requirements to meet and that cost you less.

  Again why is this? Because the lack of capital oversea. Professor Reisman is very right in this article, the accumulation of capital is the only way (and Mises told us this millions of times) to make us richer, the only way to rise our wages and the only way to increase our choices, so the only way to decrease the coercion we have to accept otherwise. 100+ years ago where there was less capital accumulated in the west in the US, people has the very same situation people have now in the third world. The only difference was that the whole world was in the same situation or even in worse one, so one couldn't compare they situation with the situation of a country or a part of the world where many generations accumulated capital in order to make our life 100x less hard then they life was. In those third countries for many different and many similar reasons past generations wasn't able to do the same.

  The question is why? Because they didn't have capitalism, they didn't have more or less free market and they didn't have a limited but well functioning government. Now in our time people in the US also have difficulties to accumulate more capital in order to make the life of their children and grandchildren better, why? The answer is clear: Because the same reason the third world wasn't able until now. Unlimited government, socialist regulations, obstacles in every way possible, no free market, no capitalism. The only reason why Americans still live much better then people in the third world is because the accumulated capital they get as a gift from previous generations who was wise enough to live in a free society with more or less free markets and capitalist organization. This is what enable them better jobs, better education (at least in the past) and more choices. Now they are on the verge to throw all that away. I believe they won't that they will realize at the last moment that they are wrong.

  Published: February 27, 2009 4:53 AM

• Andras Ludanyi

  TO: A. Viirlaid

  Thanks for the link I will read it, and thanks for your encouragement, I wish I can write a little bit better but my English is self learned and it's not perfect, and I am still in the kindergarten of economics :) (By the way... I am a software engineer in a not so well European country), anyway I am glad people understand what I write.

  Published: February 27, 2009 5:35 AM

• Prakash

  Pbergn,

  You are very close to arriving at one of the fundamental insights that the georgists had. If land and capital are made less scarce, that automatically improves the bargaining power and hence, the wages of workers.

  In the particular example of India, one of the biggest policy measures which can make a difference is making entrepreneurship easier - reduce the sheer number of clearances required for starting enterprises. reduce the need for people to pay tribute to the bureaucrats and politicians.

  another can be a simpler tariff structure which unifies the indian market (we do have inter-state tariffs, strange, but true)

  the third can be the georgist idea - have a revenue neutral tax shift from corporate income tax and individual income tax to land value tax. this will make enterprises more attractive and reduce the speculative holding of land. cheaper land => easier to start new enterprises => more growth => lower poverty in the long run.
  

  Published: February 27, 2009 5:45 AM

• Andras Ludanyi

  TO: Prakash

  "reduce the speculative holding of land."

  Being speculative is not a crime is not harmful, the only thing harmful is to use force to get something for nothing (like the tariffs you mentioned) and to use force to denied people to work. If you hold some land and do not use it, you wait to sell it when it's market price goes up, the only thing I or anybody else have to do is to offer you enough money and you will sell the land. Everything is speculation. The problem is that people fall to the ages old fallacy of labor theory of value and that they think that if someone does not use a resource and wait to "rip off somebody" when the time is right.

  Waiting for the right market is a human action just as any other. If we accept the idea of private property we MUST accept the idea that someone will use that property much worse we would, but it is his property and he can do whatever he want with it if he does not use it to harm us. He are not obliged to use it to help us. The idea of taxation in order to limit the choices of the land owner is no less bad that the idea of putting chains on a man in order to limit his choices. If you are able to use that land more productively then the current owner, buy it. Being a part of a civilized society is about being positioned and being able to change your position without using force against other members of that society, using only your skills, knowledge and acquired capital/wealth in a 100% voluntary exchange and contract world, while 100% respecting all the other peoples position.

  Using force (government) to tax in order to enforce your wish and your idea of the world is not the answer. Even if you intentions are noble and good, the result of using force against those who does not use force is always a sure way to produce more harm than good. I would also like to say a word or two about forceful wealth redistribution:

  I believe Wicksell was the one who identified two distinct class of budget funds: 1. Allocation, 2. Redistribution. Now if we agree that we have a government we agree that the purpose we have one is to delegate some powers to that government. So we also have to allocate resources to them to be able to exercise those powers. Taxation is one of the way to allocate those resources. So taxation has to be very limited and it must NOT try to redistribute. It's sole purpose MUST be to allocate resources for a very definitive and enumerated and limited powers we delegate to the state and we expect from the state to exercise. If you tax in order to influence, you are not a good guy even if your intentions are maybe the best possible. Why? Because you use force to achieve something and remember, we create the state exactly because we wanted to denied people to use force, not to unconditionally empower the state to use force. That's why the state has the right to use force (just as we individuals have) ONLY if someone else use force against it or against any other individual. A law must act only against those who initiated the use of force against others and not to hurt those who don't use force. If I hold a land, I don't use force I just exercise the rights I have over my own private property. What if I hold a car? Does that mean a hospital should take it from me because they can use it to save lives?

  It is interesting how much the media writes today about the two "Slumdog Millionaire" kids... they have all of my sympathy and I wish they can live in a good house and have most of they needs satisfied, but what about the many hundreds of millions of other kids in the same position? Doesn't they all deserve better? Probably yes, but the fact is that nobody put them in that position. They was always there. It is an unbelievable charade and unprecedented hypocrisy to act as someone who cares and yet to do every possible to denied those people a chance to rise from that poverty, to work against the only thing capable to get them out of that poverty, to work against capital and entrepreneurship against private property, to work against productivity, to work against cheap energy, to work against the very essence of improvement, against the idea that one should (if can) pull his own weight.

  Published: February 27, 2009 6:49 AM

• mnoaz1

  Excellent exchanges here, thanks for the posts.

  pbergn: hopefully you find some good solid work to do, and soon.

  I would like to add there was an article a short while back about kids picking over trash for items of value to sell, paid the equivalent of $0.50 US/day for the efforts. I can't remember where it was that I saw it, some google searching would bring it about easily I'm sure. The point was, that these children wanted that work; they wanted to be doing what they were doing and it was the best choice for them out of an array of admittedly rough choices. But, it was the choice that offered the most reward for their effort and it was better work than some of the other choices they had. I agree with Andras that this is the key; if we can get society to enforce property rights, and stop stealing by government intervention and coercion from producers, and give those that are able a chance to pull whatever weight they are willing to sign up to try to pull, we have a great bright future to look towards. I am realistic, however, in that it is going to take some serious pain before that change comes.

  Published: February 27, 2009 4:30 PM

• Paul Marks

  Land can not be made less scarce by Henry George style tax games - see Murry Rothbard's "Man, Economy and State" for this in detail.

  Henry George correctly noted that as people came into a previously unihabited (or lightly inhabited) land the price of the land tended to go up and it became harder for poor people to buy people.

  Sadly Mr George then decided he could alter this situation for the better with tax policy.

  As for "shortage of capital" the whole point of what Dr Reisman is saying is that this must come from REAL SAVINGS.

  Not the magic wand of credit/money expansion or some other silly trick.

  On wages:

  As capital is invested wages tend to go up up - when an economist says "a worker is more productive" he does not mean "he works harder".

  As for American wages - contrary to the ravings of Pat B., taxes on imports were not the reason why American wages became the highest in the world.

  As can be seen by Britain where there were no such restrictions on imports and no new land (and where, contrary to propaganda, the Empire was a net economic loss) and wages were some of the highest in the world in manufacturing industry.

  Want a return to strong manufacturuing?

  Then radically reduce government spending and regulations - and establish a real monetary and banking system.

  On the article.

  Very good.

  Published: February 28, 2009 5:37 PM

• Walt D.

  Part of the problem is that the members of congress are stupid - check here- Nancy Pelossi has the same IQ as Mohamed Ali (and she is not the greatest!)
  http://www.kids-iq-tests.com/famous-people.html
  
  If Brittney Spears has an IQ of 105, she has a higher IQ than the average member of Congress.

  Published: February 28, 2009 10:43 PM

• Kitty Antonik Wakfer

  I have found the comment exchanges of some here to be very interesting. (And I will admit that I skipped to them before completing Reisman's meaty article.)

  However, several comments have demonstrated what I consider a serious problem for real improvement in human interaction.

  The failure to use the same definitions of words - especially ones that have high emotional content, such as "coerce" or "force" - contributes greatly to people talking past each other. A person having a choice, at a particular time, between a job cleaning toilets (at a pay less than that of, for example, serving meals to others) or remaining a beggar on the street is considered by some individuals to be a situation of "coercion". Others would not use that word "coercion" unless, for instance, the toilet cleaner's family was being held physical hostage. I would ask in the first case, who is doing the "coercing"? In the second case it is clear that the hostage-holder is the "coercer" of the toilet cleaner.

  The problem of language usage is enormous and I do not think that it is limited to English, though maybe it is worse because of so many words with ambiguous, if not outright opposing, definitions. The need for and consistent use of technical terms in regards to specific areas of human interaction is clear to me. Otherwise many words are used with a variety of meanings by some speakers/writers (typically elsewhere, but here too), often for the purpose of manipulating the target audience rather than uncovering the truth of reality. But even when a person is trying his/her (hir) best to be unambiguous, it can be difficult, and sometimes impossible, to truly communicate with another unless both have agreed to the meaning of terms. This is the reason why husband Paul Wakfer's foundational writings include some words that are specifically defined rather than leaving it to a reader to decide which vernacular meaning is appropriate. "Social Meta-Needs: A New Basis for Optimal Interaction" - http://selfsip.org/fundamentals/socialmetaneeds.html

  Published: March 1, 2009 8:32 PM

• Kitty Antonik Wakfer

  Thank you, A. Viirlaid, for mentioning your response to my comment in the http://blog.mises.org/archives/009403.asp blog - I had not checked back (extremely busy) and was therefore unaware of its existence. You made some pertinent points there and I'm mixed as to whether to respond there or here since so many people lose track of their comments like I did. (Having an option feature of response notification would be great...)

  You agreed with my point of, in your words, "arguing past each other", which I have made use of in regards to the lack of precise word definition agreement in discussions (previous comment). In that earlier context, I was referring in part to the view of so many that "they" are all wrong, with the "they/them" any one not a part of their own particular group - groupism.

  You wrote also (at that other blog entry): "Such written exchanges could all potentially be exchanges of gifts --- we should always strive for that."
  I would rephrase it to replace the word "gifts" with "value" - a gift is something someone gives without any expectation of return, even though I doubt that this is actually the case in the vast majority of situations. Far better in my view for individuals to exchange value in the non-monetary aspects of their lives just as they regularly do for products and services. It is an actual waste of one's precious resource of time, for example, to spend blocks of it repeatedly trying to communicate with someone for whom one has little if any respect or if that someone has made it clear s/he holds the attempted communicator in low esteem. Of course some few initial messages are sent out "on spec" - an investment in time with the hopes of productive return, that return being a reply conveying value in content to the recipient. So for this reason, I (and husband Paul Wakfer) operate on the Value for Value principle in our lives, and encourage others to do likewise as a first step, towards a far better society.

  In regards to your pessimism expressed 2/26/09 11:53am, I think Andras Ludanyi is closer to the probable outcome: "We are not doomed... we are on a crossroad, the truth is that our society can't go further on the foundations of Keynesianism-Marxism-Mercantilism, the MARKET simply would not allow that, if production fall (and it will and it is) the parasites can extract only less and not more, so yes we will have a major setback, but we are not doomed." I will add, however, that without major initial and/or reevaluation (depending on the evaluator) of the actual social needs of human beings based on their nature as human beings, the same type problems will occur in the future.
  From the online article for the CNN program Andras refers to as an optimistic example: "Many of the immigrants who immigrated to North Dakota generations ago from Norway, Finland, and Sweden came here with a sense of financial practicality and conservatism." http://ac360.blogs.cnn.com/2009/02/25/what-recession/
  I think it quite reasonable to interpret this description of the people in Fargo as meaning that the vast majority of them are self-responsible - an important attribute currently lacking in large numbers of people elsewhere in the US and around the world, and greatly in need of return. However, I think that self-responsibility will only predominate when large numbers of people - hopefully including those who also are supposedly greatly leaned - understand that the nature of human beings does not automatically lead to the conclusion that individuals must be ruled by others in order that there be orderly interactions between them. Society, just like any other natural system can be self-regulating by means of interactions between its members, if only humans are allowed to develop the methods by which such self-regulation can be effective, rather than the social system constantly being held in an unnatural (and very unoptimal) state of balance by the operations of its rulers and other influencers.

  BTW, in reply to your mention of being Canadian, Paul is also. We are a "mixed marriage" - I visit him at his legal residence in Harcourt Park Ontario from late April to late October and he visits me at my legal residence NE of Casa Grande Arizona from late October to late April. Under the current schemes of society, this is the best arrangement for us.

  Published: March 1, 2009 8:41 PM

• Andras Ludanyi

  TO: Kitty Antonik Wakfer

  I must agree 100% with you, especially on the use of language. I also made this mistake, although it wasn't intentional and English is not my native language, I understand clearly that coercion involves force from another person and that natural limitations of choice because of a lack of capability is not coercion. Thank you for spotlighting this for me. Still I think that the main part of my response the "choice/best offer" part is true regardless of the fact that I unnecessarily used the wrong word in the case of natural limitations and obstacles.

  About the "we are not doomed" part, I agree that major reevaluation is needed, but I am not very optimistic it will be achieved, I just think we going to have some minor reevaluation and a couple of decades of more responsible policies but the very moment we reach a point when another round of irresponsible parasitic wealth extraction become possible we will go on this path over again... just like many times in history the only difference is the magnitude, the amounts but the principle stay the same. Who got the gun [power] (the government), use the gun [power] to get something for nothing. I don't believe any major reevaluation will ever change that (unfortunately).

  Of course our current political systems (majority rule democracy) is as Mises told us very much suited to drive larger and larger parts of the population from the productive to the parasite groups, that's why we don't have responsible people, because most of us get something for nothing in this society and most of us like that, demands more of that and up to the point where the projected future production meets projected future consumption we can ride that bull but when it is become clear that the expected future consumption is too much for the expected future production (like now) the whole system is collapsing and after the collapse, there will be falling illusions and people will lover not just expectations for future consumptions but present consumption as well, and we all know (at least Austrians) that we prefer present to future. This will drive the system to a lover level, but won't change it too much.

  Published: March 2, 2009 3:30 AM

• Kitty Antonik Wakfer

  Yes, Andras, poor use of language can inhibit any well-intentioned discussion and can be a major factor in leading to outright dislike between individuals. But I think that the majority of people are well-intentioned, as I wrote in the blog comment to which A. Viirlaid was referring on 2/26/09 8:54pm. Part of what I wrote there: "I have long thought that the vast majority of people supporting the concept of government have the sincere conviction that rule by others is truly necessary, for without it they are convinced that there would be chaos - a loss of society as a whole."

  I understand your limitation with English, since it is not your native language, and I commend you for making the effort to be as clear in your statements as you are - something more the practice here at mises.blog than in many other online locations. However, there is another use of language that you have made (and is done by very many others) that I and Paul consider a serious error - one that can lead to distortions in thinking, and I suggest actually does for many people. You wrote: "Of course our current political systems (majority rule democracy) is as Mises told us very much suited to drive larger and larger parts of the population from the productive to the parasite groups, that's why we don't have responsible people, because most of us get something for nothing in this society and most of us like that, demands more of that and up to the point where the projected future production meets projected future consumption we can ride that bull...and we all know (at least Austrians) that we prefer present to future."
  The use of "we", "us" and "our" is extremely problematic in writing and speech unless the group is clearly defined as to its member and the speaker/writer has the authority or is in a logical position to speak for all those in that same group. While you qualified your usage in some cases by the inclusion of "most" and therefore are aware of a problem with a simple "we/us/our", I still suggest reading, "Collectivism in Language: Its Effects on Valid Reasoning" http://selfsip.org/fundamentals/we.html

  You wrote, "I don't believe any major reevaluation will ever change that (unfortunately)."
  Perhaps, Andras, I did not make it sufficiently clear that re-evaluation (and for most it is probably an initial evaluation) of the nature of human beings is but the first step towards a better society, one in which there is no rule by others but, rather is self-regulating. The principles and general framework of this goal society is described in Paul's essay, "Social Meta-Needs: A New Basis for Optimal Interaction" - http://selfsip.org/fundamentals/socialmetaneeds.html Before movement towards a goal can reasonably begin, one must know what is that goal - where s/he is going and why it is desirable. However, I do not think that it is necessary that all people go through this process of study/understanding/agreement first before a self-orderly society comes into being. I think that once just a significant number come to understand and agree with the principles and put them into practice, the others will come to learn by, what could be simply described as, example. (Exactly what percentage is "significant", I do not know at this point.)

  Lastly, in regard to your first statement directly above, I am pleased that you agree that "coercion involves force from another person and that natural limitations of choice because of a lack of capability is not coercion." However there is the comment you made earlier (to pbergn 2/27 4:53am), and still related to the "choice/best offer" part, "Do I have a choice to move up and to increase my wealth by accumulating capital or not? In many countries this is denied from people or they ale very limited in this ability. Why? Almost exclusively because the political environment." I suggest that you consider thinking of the situation as a reduction of available choices that occurs in a society of rule by others (including democracy), in addition to the reduction/elimination of liberty. Reading the above linked essay by Paul, I think will provide more understanding on this concept.

  Thank you for responding, Andras, and for the reasoned discussion.

  Published: March 2, 2009 2:32 PM

• Accumulation Program

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  Published: March 27, 2009 4:30 AM

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  For every two new members that sign up through you, you will receive one FREE SILVER COIN EVERY MONTH for as long as they remain members.

  Published: March 27, 2009 4:32 AM