Long a fan of They Might Be Giants, I decided to buy some of their children’s albums. They are great! One of my favorite tracks from their album No! (buy, listen) is “Where Do They Make Balloons?”

This song’s lyrics celebrate the international division of labor and trade, kid-style. Selected lyrics:

Marmalade’s from Scotland, Rugs from Pakistan
Mexico has jumping beans and cars are from Japan
Clowns are from the circus, barking comes from dogs
Eggs come from a chicken and log cabins come from logs

Spaghetti is from China but Italians make it best
Ants can make an anthill and monkeys make a mess
Hungary isn’t hungry
And French fries aren’t from France
Turkeys aren’t from Turkey – they can’t fly but they can dance

But where…?
Where do they make balloons?

This is part 3 of an ongoing live blog of The Ethics of Money Production (book, webbed)]

Chapter 4: Utilitarian Considerations on the Production of Money

Having described the workings of a commodity money on a free market, and its ethics; Hülsmann takes up some of the utilitarian arguments against commodity money and in favor of paper money that have been suggested by many writers.The main ethical consideration against paper money is this:

At no time in history has paper money been produced in a competitive market setting. Whenever and wherever it came into being, it existed only because the courts and the police suppressed the natural alternatives.

But the utilitarian arguments must also be addressed, to see whether there are “advantages that might compensate for [paper money schemes'] severe moral shortcomings.” It is interesting that before the time that paper money came into existence, no philosopher of money ever criticized commodity monies on utilitarian grounds. But as paper money became to be used, apologies for its use began to appear, as did the rejoinders to these writings. There are centuries worth of these writings, and it would take many books to fully address all relevant fallacies.

In lieu of a full exposition, Hülsmann briefly demolishes 7 common false doctrines that purport to explain the deficiencies of commodity money and advantages of paper money.

Economic Growth. Some claim that economic growth is possible only to the extent that the money supply grows. This is incorrect, since any quantity of goods can be exchanged with virtually any quantity of money.

Hoarding. Unlike other authors, Hülsmann concedes that there is indeed a moral category of “hoarding” which can be distinguished from merely “holding” money. Hoarding is a pathological behavior which harms the hoarder, and must be dealt with by persuasion. But neither holding nor hoarding have negative consequences on society at large, for increases in the amount of money held merely changes the demand for money, causing a rise in the purchasing power of money. Hülsmann does not point out the virtues of this as Rothbard does, but explains that even in the extreme case of mass holding, market participants can switch to another money.

Fighting deflation. The supposedly harmful character of deflation is a modern sacred dogma vociferously propounded by Federal Reserve Chairmen and Governors. The core claim is that a drop in the purchasing power of money will cause consumers to wait and wait, withholding their spending and thereby causing a decrease in economic activity, which will then spiral into a depression. Hülsmann points out that there are two constraints to countervail this tendency. The first is the “constraint of the stomach” — that households must eat, and pursue entertainment, and service their cars to go to work, etc. The second is the time preference of individuals: at some point, a consumer is willing to buy, say, a plasma TV now at a higher price than in 3 months at a lower price, so that he can enjoy the good during the 3 months that he would’ve waited.

Another argument: if the purchasing power of money drops, especially unexpectedly, widespread bankruptcy might result. This would be especially true for those who carry debt. This is bad from the point of view of those who go bankrupt, but is it bad for society at large? After all, the factors of production are not destroyed. They merely change hands, and can be once again profitably employed. Hülsmann states, “The net impact on production is likely to be zero.” Now, I am not initially persuaded by this, since it is clear that bankruptcies and business interruptions have real costs; but Hülsmann provides some insight about where his text is going that points us in an interesting direction:

Deflation certainly has much disruptive potential. However…it threatens institutions that are responsible for inflationary increases of the money supply. It reduces the wealth of fractional-reserve banks, and their customers — debt-ridden governments, entrepreneurs, and consumers.

This is a very important point, I think. And not just because I value thrift.

Sticky Prices. As Keynes famously argued, if labor unions, with their government-granted privileges, succeed in forcing and keeping nominal wage rates up, and these wage rates cause institutional unemployment, then central bankers should be able to return the workers to full employment by expanding the money supply, driving the purchasing power of money down making the union-set wage rates once again market wage rates at which entrepreneurs can make money. But, as Hülsmann points out, this argument rests on a very dubious proposition: “that the managers of the printing press can again and again surprise the labor-union leaders”. Nonetheless, this has been the policy of many central banks for many years. The outcome?

The labor unions were not fooled. Faced with the reality of expansionist monetary policy, they eventually increased their wage demands to compensate for the declining purchasing power of money. The result was stagflation — high unemployment plus inflation — a phenomenon that in the past thirty years has come to plague countries with strong labor unions such as France and Germany.

Cheap Money. Related to the first fallacy above, some have claimed that if cheap credit were liberally offered (in the form of paper money), then entrepreneurs would have the chance to start many worthwhile endeavors, and this would result in economic growth that is faster than otherwise could be obtained. But this is clearly false. The available factors of production — real things — are the true limit to economic growth, and all that the artificial explosion of paper money accomplishes is an increase in the number of entrepreneurial projects launched, and therefore a decrease in the percentage of entrepreneurial projects that can be successfully completed.

The use of cheap money puts the entire economy in the same position as the man who did not properly plan for his tower. The discussion in this section reminded me of the great powerpoint presentations on this topic by Roger Garrison.

Monetary Stability. There are two ways that “monetary stability” could be defined. The first way stresses the stability of the physical integrity of a commodity money (weight, fineness, etc.). The second way suggests that money be a “standard of value”.

The “standard of value” is not necessary for the entrepreneur. As long as he anticipates changes in the purchasing power of money, he will be well positioned to make a profit and economically calculate to compare different projects.

But even if the need were conceded, it is clear that paper money is no stable money. While Europe was using commodity money, the famous gold and silver inflation that occurred over a period of ~150 years resulted in ~0.3-3 percent inflation per annum. Compare this to the “conservative” monetary policies of the US and the European Union in just the last 5 years, which have varied between 5 and 10 percent per annum!

The Costs of Commodity Money. A claim by the advocates of paper money has been that the exchange services of money could be had at a much lower cost to society by using paper money, obviating the expenses of mining and minting. But this claim misses much. Firstly, the commodity underlying the commodity money is a built-in insurance policy that keeps the money from becoming worthless. I’m sure Zimbabweans wish their money had been gold, for now they are resorting directly to the panning of gold just for bread.

But paper money, too, has its costs, as we know from the Federal Reserve bureaucracy, numbering ~23,000 in 2004. And, of course, the entire Fed-watching industry that has arisen to interpret and forecast the actions of the Fed must also be considered a cost.

Not only all this, but Hülsmann points out that the industries of mining and minting are still with us, though paper money has been embraced by virtually all governments in the world. To put the last nails in the coffin of this fallacy, Hülsmann makes these brilliant points:

There is of course nothing wrong with experimenting with cheaper alternatives to gold and silver coins…All we can say is that in the past all such experiments have lamentably failed. And the advocates of paper money therefore hardly ever seriously considered establishing their pet scheme on a competitive basis. Ricardo and his followers advocate the coercive replacement of a more costly good by a cheaper one…We do not impose rags and hovels on people who prefer clothes and houses. Neither is there a reason to impose paper money on those who prefer the monies of the ages.

This now puts us at the end of Part 1 of Hülsmann’s book, having covered The Natural Production of Money. Part 2 on Inflation has much more to say. I am so happy to have bought this book. As a commenter has remarked, this book may be a bit advanced for those who have not yet read much in economics and ethics. A good sequence for reading may be:

What Has Government Done to Our Money (book, webbed)

The Ethics of Liberty (book, webbed)

The Ethics of Money Production (the book being live-blogged here)

Happy reading!

[This is part 2 of an ongoing live blog of The Ethics of Money Production (book, webbed)]

Chapter 3: Money within the Market Process

The law of marginal utility applies to all goods, including money. A man who produces additional units of money can allocate the money to an end which is not currently satisfied. This results in higher money prices being paid for goods; that is, an increase in the money supply will, exchange by exchange, cause some prices to rise. A general rise in prices is also called a decrease in the purchasing power of money.In a free market of the production of money, additional production of money will proceed, with the purchasing power of money falling, until the rate of interest earned on the production of money falls to that of other lines of production. However, it must be emphasized that in most places at most times in the history of Western Europe, silver, gold, and copper all circulated. The parallel production and use of more than one money is an expected feature of a free market in money.

As money is produced and distributed, one might think that the general fall in the purchasing power of money systematically favors debtors over creditors. But this is not the case. Interest rates on loans are comprised of pure, originary interest; a compensation for the rate of change in the purchasing power of money; and a residual representing an entrepreneurial profit or loss, according to the successful or unsuccessful estimate of the other categories. To the extent that a person successfully anticipates the changes in the purchasing power of money, he will not be favored or disfavored, whether debtor or creditor.

As money is produced and spent, this changes the distribution of goods other than money. These changes, called Cantillon effects, redistribute real income from later to earlier owners of the new money. These effects cannot be neutralized by improved expectations.

A proper observation of ethics requires that money be produced as distinct from other money produced in the market, and that what they contain be clearly marked: fineness of metal, weight. But weight should not be the unit of account, for a good 1-oz coin of silver is not merely 1 oz of silver: it is the value of the silver plus the built-in certification of the silver. As Hülsmann states: “the value difference between coins and bullion of equal weight is not a perversion of human judgment that could be overcome with a moral postulate, but a fact that lies in the very nature of things.” Historically, coinage has sometimes been named for the unit of weight: the pound, the mark. But the unit of account should be related to specific moneys: for example, Krugerrands, Eagles, or Maple Leafs. Hülsmann also seems to suggest that the etymology of “ecu” includes a reference to a weight of some sort, but my references do not indicate this.

On the use of money, Hülsmann invokes the Parable of the Talents to legitimate the making of money as an ethical endeavor; but concedes that the Christian doctrine of usury produces ethical challenges, and the interpretation of the doctrine has varied considerably. He embraces the views of Conrad Summenhardt and Bernard Dempsey, holding that virtually no interest payment that market participants voluntarily agree upon could be considered usury, and that interest payments deriving from fractional reserve banking are tantamount to “institutional usury”. This latter view seems only to logically agree with the previous if the fractional reserve banking is maintained through violations of rights via legal tender laws or other privileges or prohibitions.

Thus concludes Chapter 3.

This book is exceptionally well-written. It is concise like virtually no modern work treating ethics is, but it does not hesitate to treat seriously matters that all those concerned with ethics must consider, such as the role of charity and morally proper disposition of resources. Even though I have only now read halfway through it, I consider it to be an admirable replacement for Rothbard’s What Has Government Done to Our Money. Yes, I said replacement.

Not only does The Ethics of Money Production have a much better title when considering the book as a gift, it has an open and clear ethical viewpoint — that of a Christian — which is serious and scholarly, but also fresh and accessible. He does not assume that the reader is a Christian, but engages the moral teachings and reasoning at much more than a superficial level, so that the reader is convinced that he is serious about ethics.

The dedicated libertarian should never forget that, in the end, it is a passion for justice that will win the day. This book has just the right tone: ethically serious, economically sound. I can already wholeheartedly recommend it.

Introduction and Part 1, Chapters 1 & 2

Guido Hülsmann’s newest contribution (book, webbed) is a “concise exposition of monetary theory, with special emphasis on the ethical and institutional aspects of money production” (Preface). He has a tough act to follow, for the scope of his book is similar to that of Rothbard’s What Has Government Done to Our Money (book, webbed). However, as is apparent from the beginning, Hülsmann’s book is more scholarly than Rothbard’s, in the sense that he points the reader to a vast trove of writings on money from Church fathers to modern secular economists, across many languages, with brief notes on their essential claims, merits, and flaws — all without unduly bogging down the main narrative; and, Hülsmann is more deeply concerned with ethics and exploring the economics of money with more thoroughness.

On to the summaries and reflections…Introduction

Ethics is rarely applied to the topic of money production, but it should be. It is the most important industry to have escaped such scrutiny. But, we cannot run off half-baked. To set out on useful moral criticism, we must have a thorough grasp of the economic issues.

In the West, there is a long tradition of scholarship on both the economics of, and morals of, the acquiring and using of money, mainly in the scholastic tradition, and drawn upon by the papacy. Scholarship combining ethical and economic analysis on the production of money seems to have reached its heights with Oresme’s Treatise on the Alteration of Money (book, webbed) until developments in the XXth Century, with the important ones being outside of Catholic thought. This gap in scholarship has been born at the high price of immoral, and therefore dysfunctional, monetary systems.

The XXth Century authors most responsible for rejoining natural law ethics and sound economics are Bernard Dempsey, Murray Rothbard, Friedrich Beutter, and the still-living authors Pascal Salin, George Reisman, Jesús Huerta de Soto, and Thomas Woods. Hülsmann also has praise for the work of “Christian Reconstructionists” such as Gary North.

The general thrust of all these authors’ works is to cast serious doubts upon the institutions of government-sponsored production of money and all their accoutrements: legal tender laws, redemption freezes, fractional reserve banking, central banks, etc. But why have they been in the minority of voices among economists?

The answer perhaps lies in the fact that the vast majority of economists owe their livelihood to the state and its monetary institutions. Monetary economists derive considerable prestige, and sometimes also large chunks of their income, from research conducted on behalf of monetary authorities. As Hülsmann so aptly puts it: “He who acquaints himself with the modern scientific literature on money and banking must not close his eyes to these facts.”

Part 1: The Natural Production of Money

1. Monies

In barter, the problem of divisibility (say, trying to exchange one twentieth of a chair for 10 pounds of flour) is the principal problem that gives rise to the use of indirect exchange. Not mentioned by Hülsmann is the problem of double coincidence of wants, which is also solved by indirect exchange. Historically, precious metals have been preferred as media of exchange over and above other goods, due to properties such as scarcity, durability, divisibility, distinct look and sound, etc.

When a medium of exchange becomes generally accepted, it is called a “money”. From Menger’s research and Mises’s regression theorem, we know that money must originate as a non-monetary good. Interestingly, this was known even to the scholastics, who called money a res fungibilis et primo usu (a thing that is fungible and primarily used in consumption).

Money, as it arises in a free market, is a natural phenomenon, and so we call such things “natural money”. By “free market” is meant the respect of private property, and this is morally grounded in the Judeo-Christian tradition in the 6th and 9th Commandments. In the Catholic church, the right to property has been upheld even in the face of owners who do not have the intention to pursue the common good. Aquinas championed the distinction between justice and morals (IIa-IIae, q. 66, art 2 answer), and this was also championed by the popes. For example, Hülsmann quotes Pius XI: “…they are in error who assert that ownership and its right use are limited by the same boundaries; and it is much farther still from the truth to hold that a right to property is destroyed or lost by reason of abuse or non-use.”

Having explored natural money, simpliciter, Hülsmann goes on to explain other money categories.

Credit money is simply IOUs. Ben lends Mike 10 oz. of silver for one year. In exchange, Mike gives Ben a paper note bearing a promise to repay a sum of silver. This note, if Mike is expected by others in the community to make good on his promise, can circulate as a medium of exchange. This is credit money. Historical examples include American Continentals and French assignats. A more mundane example is the market of commercial paper.

Paper money is another category. There is the wide sense of “notes” which includes credit money and paper certificates; but the sense used here is the narrow one of paper money that circulates as money, but cannot be redeemed into commodity money. Hülsmann shows that in no period of human history has paper money emerged on the free market: that is, in all known historical cases, paper money has been introduced by government-sponsored breach of contract and other property-rights violations.

We can understand why this is the case from examination of theory. Paper money, by nature, provides only monetary services; whereas commodity money adds to this its commodity services. Because of this, paper money’s value can shrink to naught, while commodity money has a floor equal to the value of the underlying commodity. In a free market of monies, the most far-sighted and prudent traders would get rid of their paper money first and others would follow their lead. This would drive the paper money’s value to zero. Paper money must have a special privilege attached to it for it to remain a money.

Lastly, there is “electronic money” — electronic bookkeeping entries of money. As a class of paper money, it is irredeemable and the same economic analysis applies to it. Hülsmann is clear to note that this category is not the means developed to record transactions, access and transfer money. The distinction is important.

2. Money Certificates

Certification of commodity money has been done in two ways: integrated with money (coins) and physically disconnected from money.

Coinage imprints on a weight of precious metal the weight, fineness, and name of minter. This process adds to the value of the metal, and so a trustworthy minted 1-oz coin is of greater value than a poorly minted 1-oz coin, or just 1 oz of metal with no certification. This presents an interesting dynamic that even Rothbard seems to have glossed over. For, the unit of account cannot be “oz of gold” without qualifying that it be “oz of gold rendered in good coin”.

If minting is an open, competitive profession (not closed by regulation or guild), then abuse of trust will be regulated by the free market. Oresme suggested that princes did not have the right to alter coins unless they had the consent of the entire community. Hülsmann explains that this requirement is fulfilled best in a free market, where each market participant chooses which coins to use; and hence, all users of coin community A join by the voluntary act of using coins of minter A, and the ability to switch to community B is simple: trade coins A for coins B.

Certificates that are physically separated from money present special advantages and special challenges. If bullion is placed with a bank (this was common for about two centuries in the cities of Amsterdam and Hamburg), the bank can issue a certificate stating that the bearer of the note is the legal owner of X weight of fine silver on deposit at the bank. Such a certificate is called a money substitute.

There are many money substitutes: “…token coins, certificates of deposit, checking accounts, [debit] cards, and electronic bank accounts on the Internet.”

The money substitutes are with the public; the money itself (“reserves”) are held by the bank. The substitutes offer the advantages of lower costs of storage, transportation, and certification. The main disadvantage is that bankers are tempted to use the reserves for lending, turning their operations from mere warehousing into fractional-reserve banking. Hülsmann, taking the matter from a historical perspective, justly accuses the Bank of Hamburg and the London goldsmiths of the mid-1600′s as violating the property rights of their depositors.

Due to the potential for abuse of money substitutes, Hülsmann doubts that on a free market they could gain much wider circulation than they did. He points out that “Even David Ricardo, the great champion of paper currency, admitted that it was unlikely that such substitutes could withstand the competition of coins.”

And so, 42 pages in, it is clear that the basic groundwork has been laid.

While Austrians often trace out the effects that the issuance of unbacked currency has on the structure of production (the so-called Austrian Business Cycle Theory), there is also an effect upon individual households and the social mores surrounding the use of credit.

My favorite personal finance author, Dave Ramsey, writes on his website:

History also teaches us that debt wasn’t always a way of life. In fact, three of the biggest lenders today were founded by people who hated debt. Sears now makes more money on credit than on the sale of merchandise. They are not a store; they are a lender with some stuff out front. However, in 1910 the Sears catalog stated, “Buying on Credit is Folly.” J. C. Penney department stores make millions annually on their plastic, but their founder was nicknamed James “Cash” Penney because he detested the use of debt.

Henry Ford thought debt was a lazy man’s method to purchase items, and his philosophy was so ingrained in Ford Motor Company that Ford didn’t offer financing until 10 years after General Motors did. Now, of course, Ford Motor credit is one of the most profitable of Ford Motor’s operations. The old school saw the folly of debt; the new school saw the opportunity to take advantage of the consumer with debt.

This historical context makes one wonder whether this is a continuous process that has been going on since 1913, with ever-increasing “leverage” in the household budget. The Washington Post reports today that “Between 1989 and 2004, the net worth of the average American family increased by 35 percent, but household debt more than doubled as more families used debt to finance day-to-day expenses.” The graphic accompanying the story is telling:

Was it Thomas Aquinas? In his Summa Theologica he writes II-II-62-7:

…persons in authority who are bound to safeguard justice on earth, are bound to restitution, if by their neglect thieves prosper, because their salary is given to them in payment of their preserving justice…

Murphy’s latest response to Frum is excellent. There is one point that he did not meet that merits special attention. Frum says:

Gold is a commodity. Like all commodities, its price is highly volatile. A money fixed to gold must be highly volatile too. Signing up for a true gold currency would be signing up for an unending monetary roller-coaster ride.

However, it is not true that the volatility in the purchasing power of gold-as-it-is-now would be the same as gold-as-money. As Rothbard and Mises have noted, the total demand to hold the money commodity is the sum of the demand for use as a commodity and demand for use as a money. With a return to the gold standard, the demand to hold gold-as-money would increase (right now, this demand is negligible), causing its price in US dollars to increase. The volatility of the use-value component of gold will be swamped by the exchange-value component. No roller coaster there.

With regard to the demand to hold money, Mises pointed out:

Every economic agent is obliged to hold a stock of the common medium of exchange sufficient to cover his probable business and personal requirements. The amount that will be required depends upon individual circumstances. It is influenced both by the custom and habits of the individual and by the organization of the whole social apparatus of production and exchange.

This demand to hold is the dog of the monetary system, and the purchasing power of money is the tail it wags. During a recession, the demand to hold money broadly increases because many people forebear from unnecessary expenses. Against a relatively fixed supply of money, this will increase the purchasing power of money, which has the socially desirable effect of increasing the effectiveness of the money held by people in the recession. This is hardly a roller-coaster ride, either.

A roller-coaster ride is this: during a recession, the demand to hold money broadly increases because many people forebear from unnecessary expenses. The government greatly increases the supply of money to “heat up the economy”, which decreases the purchasing power of money, thwarting the intentions of people attempting to survive the recession.

More on this here, of course.

In my work as an engineering manager, I recently received a very nice letter from an instrumentation and electrical contractor that has several offices from Bakersfield, CA to Pascagoula, MS. Responding to an inquiry we had about mobilizing instrumentation and electrical craft workers to a site in the panhandle of Texas for a major revamp, he noted the following:

In September of 2004 the advent of Texas state licensing of electricians created new operating challenges in regard to trade licensing and license authentication. While this regulation was unwelcome administratively, it was not unfamiliar to [company]. As a contractor operating from Florida to California, [company] has experience maintaining and monitoring license requirements in regulated environments. We operate in multiple states requiring craft licensing and in multiple cities requiring craft licenses. The stated goals of most such regulation, safety and skills validation, are legitimate and desirable. The practical and political motivation for introducing such regulation, however, is typically fees (licensing tax collection) and trade protectionism (the establishment of technical barriers to the free migration of trade labor resources across state and municipal boundaries).

Never let it be said that businessmen don’t know what’s going on. I’d say about 80% see regulations for what they are: taxes and special-interest politicking.

On a related note, my estimator informs me that our project, because it will be employing non-unionized labor, will have 11.9% greater productivity compared to union labor, based on a very large database of completed petrochemical projects. It’s the little things that warm my heart.

In 1977, the US Department of Justice conducted an interesting auxiliary study as part of the National Crime Victimization Survey. They asked 60,000 people how severe 204 crimes were (each person rated 25 criminal events). Yes, yes, interpersonal utility alert; but let’s go on. On a scale where 10 = “a person steals a bicycle parked on the street”, here are some of the study findings:

0.6 = a person trespasses in the backyard of a private home
1.5 = a person intentionally shoves or pushes a victim. No medical treatment is required.
3.2 = a person breaks into a building and steals property worth $10 (1977)
4.9 = a person snatches a handbag containing $10 (1977) from a victim on the street
6.2 = a person beats a victim with his fists. The victim requires treatment by a doctor but not hospitalization.
6.2 = an employee embezzles $1000 (1977) from his employer.
7.9 = a person intentionally hits a victim with a lead pipe. No medical treatment is required.
9.0 = a person, armed with a lead pipe, robs a victim of $1000 (1977). No physical harm occurs.
11.8 = a person stabs a victim with a knife. No medical treatment is required.
15.5 = a person breaks into a bank at night and steals $100,000 (1977)
17.7 = an employer orders one of his employees to commit a serious crime
17.8 = a person intentionally shoots a victim with a gun. The victim is wounded slightly and does not require medical treatment.
21.2 = a person kidnaps a victim.
22.9 = a parent beats his young child with his fists. The child requires hospitalization.
27.9 = a woman stabs her husband. As a result, he dies.
32.7 = an armed person skyjacks an airplane and holds the crew and passengers hostage until a ransom is paid.
39.2 = a man stabs his wife. As a result, she dies.
47.8 = a parent beats his young child with his fists. As a result, the child dies.
52.8 = a man forcibly rapes a woman. As a result of physical injuries, she dies.
72.1 = a person plants a bomb in a public building. The bomb explodes and 20 people are killed.

There are also the malum prohibitum offenses, such as:

0.5 = a person takes part in a dice game in an alley
1.3 = two persons willingly engage in a homosexual act
1.6 = a person is a customer in a house of prostitution
3.2 = an employer illegally threatens to fire employees if they join a labor union
4.6 = a person cheats on his Federal income tax return
6.5 = a person uses heroin
8.5 = a person sells marijuana to others for resale
20.6 = a person sells heroin to others for resale
33.8 = a person runs a narcotics ring

There are all sorts of things wrong with this survey (and a few inconsistencies and methodological flaws), but at root it has a deep appeal. As Benson has queried (here, p.80), “More significant is the question of how to determine the so-called ‘punitive’ or unmeasurable damages portion of restitution reflecting the harms associated with the invasion of a person’s property rights.” This study is one possible way to assess community standards of this sort. I have elsewhere suggested that mediation case studies could form the basis for arbiters, but casework takes time to build. Surveys could provide an independent assessment of severity. But if that’s the case, why not just have, say, 12 people chosen at random to learn all the facts of the case and do an on-the-spot survey. Hmm, maybe there’s something to the jury system after all.

I will be in the Chat Room at 11 am CST today. Please join me for a 15-minute chat. The topic will be libertarian strategy. Some questions to start us off:

What does the wholesale revision of the Libertarian Party Platform mean?
Will the number of Misesians and Rothbardians in academia eventually result in a tipping point? Why or why not? How many will it take?
What role might libertarian businesses have in the triumph of laissez-faire? Consider not just traditional businesses, like newspapers, but also burgeoning and new fields such as mediation, arbitration, and patrol. And, what about businesses that attempt to horn in on the province of the state: education, security?
How can secession and devolution be achieved in different areas of life?

Having got back from the Mises Circle event in Houston just a couple of hours ago, I give you my brief report. I’d guess the crowd was around 150 strong. The atmosphere was great, and the food was yummy.

Lew spoke on 5 paradigms or justifications for government. Very nice. I recommend listening to the MP3 once it’s posted. In the Q&A that followed, one of my favorite perrenial questions was raised: how could a gold standard be as stable as our current monetary system? I won’t deal with Lew’s brief answer or the larger literature on the subject, but just raise a point among the many that Lew did. During the heyday of the international gold standard, each national currency was defined as a weight of gold, and therefore currencies traded at fixed exchange ratios. One of the checks on governments and central banks was their balance of accounts in bullion. But, in our modern era, as is so forcibly brought home to me in my work as a Project Engineer on large projects, currency risk plays a major role. For instance, right now I am involved in a methanol plant to be built in Egypt. The client is based in Canada, my company is based in Norway but will be executed in Houston and Mumbai, the equipment will be bought around the world, and the construction will be done by a German firm in Egypt. So, the project is a mix of Nowegian Kroners, US Dollars, Canadian Dollars, Euros, British Pounds, Egyptian Pounds, and Indian Rupees right off the bat (not counting the equipment suppliers).

During dinner, Ron Paul gave a nice speech on his recent experiences with The Maestro and other congresscritters. Very entertaining.

Lastly, James Fogal gave a brief talk on tax shelters for charitable giving. I’m glad he did, because I wasn’t aware of two of the three strategies he presented!

Throughout, it was a joy. There was a good deal of time between lectures to mingle and meet the other attendees — some familiar faces, some known only through email, many new faces. I was sorry not to see my buddy Stephan (on vacation). I also held out hope that I might see Tim and Judy Dove, or Rob Bradley, or Laura Coker-Garcia, or many of my other Houston libertarian friends: maybe next time?

Comments: If I had my way, there would have been even more time to socialize. There should have been a premium supper with Pat Barnett, James Fogal, and Lew Rockwell. I would have loved a participant list, as is often given out at conferences. I made some good contacts for dinners out with spouses — I’d like to make more!

Thanks for making it happen, Mises Institute. It was a blast! I’m already looking forward to the next one, featuring John Denson (will he come?) and Jeff Tucker.

If Tucker is on the bill, and the invitation says “dress is casual”, what will the men wear?

Davd Gelernter’s post confuses me. I think it is because he is confused.

He says “capitalism strikes me as the spoiled brat of the political and philosophical universe… Everyone knows about capitalism’s successes; we need to spare a little attention for its failures too.”

And what is an example of the failure of capitalism? Why, the highly subsidized and regulated field of education:

“Everyone knows that elite US universities occupy the wacko left of the ideological spectrum. Because they run the ed schools, they’ve gradually turned the public schools into wacko-left institutions…”

Why the supposed market failure?

“In part because humanities and social science professors are paid approximately nothing…Why shouldn’t US humanities professors hate this country and hate capitalism when their mediocre-ist students routinely get rich while their professors can’t even pay their damned bills?”

Here, we might consider a hat tip to The Anti-capitalistic Mentality by Mises. See sub-section five, “The Resentment of the Intellectuals”.

To answer Glernter’s question directly: All sorts of people hate capitalism for all sorts of bad reasons. Why should I take seriously the concerns of someone who earns less than they think they should? If a professor can’t pay his bills, then he has over-extended himself. Surely you don’t claim that professors are below the poverty line or some such. Instead, professors should realize that although teaching and learning are important, their marginal unit is not necessarily that socially valuable, and therefore their market salary is not necessarily the same as someone who applies the knowledge so taught.

Mr Gelernter then reveals his planning demon:

“Do we really think this is a clever way to run a country—to pay the people who have maximum influence on the attitudes of young people so little that they’re bound to be resentful and angry?”

Well, no, Mr Gelernter; but, many of us don’t think a country should be “run” at all.

He claims, “Nowadays, colleges that have managed their portfolios well are swimming in money and are putting up new buildings right and left.”

Oh, good point. If that’s true, I would expect a limited-government blogger to recommend reducing federal subsidies. Right? Wrong. He launches into a string of red herrings of dubious truth value:

“How much of that filters down to the faculty? Zero…And why do we want to be a nation that worships rich people anyway? Conspicuous consumption used to be bad taste. Unfortunately taste has been abolished. And students have never been so obsessed with money, and so indifferent to spiritual things.”

He sums up:

“…the next time a multi-billionaire tech bigshot tells me how wonderful capitalism is, I’m going to throw up. Obviously they think it’s wonderful. But there’s more to life.”

Oh, come on. If you mean the over-regulated, over-taxed, subsidized, quota’d, and trade-barriered capitalism we have today — then, yes: there are bigshots like Bill Gates and George Soros who think capitalism is great. But if you mean real capitalism — laissez-faire capitalism — libertarian capitalism — the capitalism of Rand, Mises, Bastiat — show me three.

No, really. Show me three billionaires who are public advocates of laissez-faire.

While I have not read Hidden Order by David Friedman, he offers up this selection today on hawk-dove equilibria. I regard it as an error for such analysis to be silent on internal motives for behavior. In particular, lots of people wish to be virtuous, and work at it; and lots of people struggle against their vices. A great number of people are religious, and regard it as a duty to God to be virtuous. There are also many non-religious people that regard virtue as end in itself — goodness is a good, go figure. The equilibrium suggested by Friedman, I think, is more of an internal struggle than an external one. This internal/external dichotomy has problems, but there is certainly a role for ideology, broadly considered — and this is what Friedman is not considering. While there is an external, non-ideological struggle that takes place, and the incentives one faces are important in molding character and specific choices, it is more appropriate to use the hawk-dove equilibrium as a rough hypothesis or starting point in further inquiry, not a deduction from economic theory.

So, while his conclusions seem strong, I think they follow from weak premises.

What a minute! Did I, an Austrian, just criticize Friedman, a neoclassical, for being too a priori / not empirical enough? I think I did.

On p.557 of Steven Landburg’s Price Theory and Applications (6th international edition), I find this:

It is widely believed that Treasury bills carry essentially no default risk and that the U.S. Treasury has never defaulted on its obligations. This is untrue. For example, the Treasury defaulted on bill #GS7-2-179-46-6606-1.

In order to purchase a Treasury bill at auction, the investor (that is, the buyer of the bond) must submit a payment equal to the full face value of the bond. Following the auction, the discount is supposed to be returned to the investor immediately. [...]

One unfortunate investor followed this procedure. His discount, approximately $1,100, was not returned. Following a series of inquiries, the Treasury took the remarkable position that although the default was entirely due to its own clerical errors, there was a strong possibility that the errors were irreparable and that the discount would never be paid. It required nearly nine months, considerable expense on the investor’s part, and the intervention of several senators and congressmen before the Treasury met its obligation. Even then, the Treasury refused to pay interest for the nine months in which it unlawfully held the funds.

The frequency of such occurences is not known. This particular investor went on to write a textbook on price theory, yielding a bit more publicity than might ordinarily be expected. [...]

Only a few pages later (p. 562), Landsburg claims that we are to be indifferent between taxation and government debt as means to government spending (not considering the object of spending) partially because “You can earn the same rate on your savings by the simple expedient of buying Treasury bills.” The cognitive dissonance is deafening.

This post is in response to Stephan’s. My objection to limited liability is actually one that he passes over quickly, and is not quite the same as van Eeghen’s. He says, “As for voluntary debts being limited to the corporation’s assets; this is no problem since the creditor knows these limitations when he loans money.”

This is a bit of legal positivism snuck in the back door. For instance, we might agree that the same sort of thing can be said for bankruptcy laws — a credit union knows that some percentage of debts will become bad, and adjusts its interest rates or origination fees accordingly. But bankruptcy laws still violate natural law.
Now, I am not particularly concerned about those who purchase the stocks of a corporation. Those are entrepreneurial investments, and rightly subject to risk. I am instead concerned about customers of and employees of corporations, who specifically trade their money for certainty, and then have their status as creditors eliminated by limited liability laws. On this trade of money against risk/certainty, see Pascal Salin’s The Firm in a Free Society: Following Bastiat’s Insights.

Just to be clear, while bankruptcy laws are usually used to nullify certain debts corporations owe to employees (such as this) or customers (such as this) or even plaintiffs (such as this), we must realize that in many cases, customers and employees prefer use of bankruptcy laws to reorganize the corporation and nullfiy some debt, since the alternative — liquidation of the corporation and limited liability of creditors to the corporation — always threatens worse outcomes. For some support to this, see here.

In many ways, the popular support for bankruptcy laws for corporations rests on the fact of limited liability laws.

So, to round out this point, let me answer Stephan’s specific challenge: how does limited liability law violate natural rights?

Imagine that customers purchase widgets with warranties from XYZ. XYZ becomes insolvent and unable to continue production of widgets, and cannot continue to honor the warranties (which may simply be cash payouts in case that the widgets cease to function within a decade of ownership). The rights of customers are violated when their warranties are not upheld.

If this firm were a sole proprietorship, then the man who invested his initial sum of money will have lost all of his investment, and under natural law, also owe an amount equal to the warranties promised.

The customer stands in the same relation to the firm regardless of the organization of the firm.

If this firm were a joint stock corporation, I suggest that each investor owes a pro-rata share. For those that specifically did not undertake this risk, I suggest that the corporation would not give full rights to its returns on investment. That is, I do not think the same applies to bondholders, or other creditors.

We might imagine a private property anarchy where people forming joint stock companies are not protected by limited liability laws. Then, there would be a clear distinction between those who invest at risk and those who do not, returns would be paid accordingly, and the risks of insolvency would not be forcibly imposed upon employees, customers, or other creditors.

A mini-debate has ensued, starting with Michael Mandel weighing in on the chief methodological problem with game theory — its presupposition of the adoption of perfectly mutually-adjusted strategies by actors. Tyler Cowen ignores this critique by taking the somewhat dialectical position of saying that if it improves our ability to think through economic problems, then it’s useful. Russell Roberts seems to agree, but notes that the argument cuts both ways: “The problem is that game theory can organize your thinking the wrong way because it tends to cause its users to underestimate the power of competition. I assume this is a result of taking payoffs as given when in fact they are often endogenous and affected by market forces.”

All of this brings to mind the fact that long before I took a single course in economics, I had taken a course in Control Systems theory, using this book. It could be argued, as Cowen seems to suggest, that the mathematics of transfer functions could also be fruitfully applied in enhancing understanding of economic phenomena. In some ways, I think my knowledge of transfer functions has improved my understanding of economic phenomena in ways that other mathematical constructs cannot, since a fundamental property of transfer functions is that their response to a given input varies over time.

But, like virtually-useless indifference curves, I have to wonder about the opportunity cost of learning and expressing economic thoughts in game theory or any other sort of mathematics. Roberts’s anecdote certainly shows that there are some graduate student economists that have not absorbed the basic lessons that the vast literature of economics offers.

If Cowen’s defense of game theory were valid, then it would be reasonable for me to say “the strongest argument for including the mathematics of transfer functions (and the attendant mathematics of differential equations, LaPlace transforms, and Heaviside’s operational calculus) into an education in economics is simply to chat with someone who doesn’t know any”. Bad logic. Bad economist, bad!

Oh, for you non-engineers — when I say transfer functions, I mean this kind, not the econometric kind.

Today, LibertyGuys criticizes the YMCA:

When a local YMCA decides to build a state-of-the-art fitness center in affluent communities instead of providing programs for underserved individuals and families, the organization is deserting the very elements of the entire community that it is legally bound to serve. When the federal government, in particular the Internal Revenue Service (IRS), does not impose unrelated business income tax (UBIT) on such YMCAs, it forces hardworking Americans to pay more than their fair share of taxes. These YMCAs are free to compete unfairly with for-profit fitness facilities, taking away customers and driving them into financial distress.

These charges don’t stick. Firstly, YMCA’s are not legally bound to “serve the entire community”. Instead, they have goals related to the welfare and health of community members. When a board directors of a YMCA believes it will best serve those goals by building physical recreation facilities, then this is a proper use of donations and membership dues (disclosure: I have been a YMCA member continuously since 1994). This past weekend, I took my kids to the YMCA pool, and my older girl to the YMCA rock-climbing wall while the younger one had fun playing with other kids in the childwatch. We saw friends and played together — this serves the goals of healthy bodies, minds, and families.

Secondly, regardless of what IRS rules are, when the IRS does not impose a particular tax, it is true that tax revenue is reduced for that year. However, it is not true that other people’s taxes are increased for that year. Further, it is only very loosely true that this creates pressure for higher tax rates. As a “LibertyGuy”, surely you realize that calls for “closing loopholes” is really a call for higher taxes, not a level playing field.

I’m really sorry you are heavily taxed. Shouldn’t we be calling for the elimination of those taxes, not the imposition of such a burden on all?

It was as simple as this.

On Saturday evening, at 7:30 pm, I noticed that the air coming from the vents in the house was not cool. Checking outside, I found that my compressor was not working. Browsing through the yellow pages, my wife located and called an air conditioning repairman, and put me on the phone. He did a brief Q&A with me, and determined that he was indeed needed. Soon, Mr. Dillon arrived. I talked to him and watched him work in the dark of my backyard. After replacing the 9-yr-old capacitor, we went inside to enjoy the air conditioning and some water while he wrote out the bill and I wrote out a check. By then, it was about 9:30 pm.

Nothing in particular is especially miraculous about this story, to those who live in this culture, economy, and time of ours. But in the wider context of human experience, there are many layers of amazing facts in this story:

I have air conditioning.
I have central air conditioning.
I can call a man on Saturday night at 7:30 pm to repair it.
He shows up and cheerfully completes the repair within 2 hours.
The repair costs me the equivalent of about 4 hours of my work.

Wow.

Partially in response to Passey’s call for help, but partially as a heads-up to my fellow autodidacts:

New England Actuarial Seminars offers several courses online that meet the requirements of the Society of Actuaries and Casualty Actuarial Society. Available for free are syllabus; module-by-module instructions, reading assignments and homework assignments; and discussion with fellow students (see here). For about $300 per course, they will grade your homework, work with a proctor you designate and they approve to administer a final exam, and produce a transcript / certificate.

Again, for you autodidacts that would like a cheaper route to proving your mettle, consider CAS’s VEE Exams, with prices here (scroll down).

The topics are typical of a modern economics education, so most of us Austrians just have to grin and bear it as we make our way through:

Microeconomics using Landsburg, Price Theory and Applications
Macroeconomics using Barro, Macroeconomics
Corporate Finance using Brealey and Myers, Corporate Finance
Regression Analysis using Pindyck and Rubinfeld, Econometric Models and Economic Forecasts
Time Series also using Pindyck and Rubinfeld, Econometric Models and Economic Forecasts

A common rejoinder to the program of laissez-faire is that market failures require government intervention. Just what does market failure mean, and how can such claims for or against it be evaluated? Many writers who see market failure everywhere have a misplace faith in government, and have themselves failed to come to terms with the implications of the subjective theory of value. FULL ARTICLE