Restrictions - by Frederick Bastiat

VII. -Restrictions

M. Prohibant (it was not I who gave him this name, but M. Charles Dupin) devoted his time and capital to converting the ore found on his land into iron. As nature had been more lavish towards the Belgians, they furnished the French with iron cheaper than M. Prohibant, which means, that all the French, or France, could obtain a given quantity of iron with less labour by buying it of the honest Flemings; therefore, guided by their own interest, they did not fail to do so, and every day there might be seen a multitude of nail-smiths, blacksmiths, cartwrights, machinists, farriers, and labourers, going themselves, or sending intermediates, to supply themselves in Belgium. This displeased M. Prohibant exceedingly. At first, it occurred to him to put an end to this abuse by his own efforts; it was the least he could do, for he was the only sufferer. “I will take my carbine,” said he; “I will put four pistols into my belt; I will fill my cartridge box; I will gird on my sword, and go thus equipped to the frontier. There, the first blacksmith, nailsmith, farrier, machinist, or locksmith, who presents himself to do his own business and not mine, I will kill, to teach him how to live.” At the moment of starting, M. Prohibant made a few reflections which calmed down his warlike ardour a little. He said to himself, “In the first place, it is not absolutely impossible that the purchasers of iron, my countrymen and enemies, should take the thing ill, and, instead of letting me kill them, should kill me instead; and then, even were I to call out all my servants, we should not be able to defend the passages. In short, this proceeding would cost me very dear; much more so than the result would be worth.”
M. Prohibant was on the point of resigning himself to his sad fate, that of being only as free as the rest of the world, when a ray of light darted across his brain. He recollected that at Paris there is a great manufactory of laws. “What is a law?” said he to himself. “It is a measure to which, when once it is decreed, be it good or bad, everybody is bound to conform. For the execution of the same a public force is organized, and to constitute the said public force, men and money are drawn from the nation. If, then, I could only get the great Parisian manufactory to pass a little law, 'Belgian iron is prohibited,' I should obtain the following results: The Government would replace the few valets that I was going to send to the frontier by 20,000 of the sons of those refractory blacksmiths, farmers, artisans, machinists, locksmiths, nailsmiths, and labourers. Then, to keep these 20,000 custom-house officers in health and good humour, it would distribute amongst them 25,000, 000 of francs, taken from these blacksmiths, nailsmiths, artisans, and labourers. They would guard the frontier much better; would cost me nothing; I should not be exposed to the brutality of the brokers, should sell the iron at my own price, and have the sweet satisfaction of seeing our great people shamefully mystified. That would teach them to proclaim themselves perpetually the harbingers and promoters of progress in Europe. Oh! it would be a capital joke, and deserves to be tried.”
So M. Prohibant went to the law manufactory. Another time, perhaps, I shall relate the story of his underhand dealings, but now I shall merely mention his visible proceedings. He brought the following consideration before the view of the legislating gentlemen:-
“Belgian iron is sold in France at ten francs, which obliges me to sell mine at the same price. I should like to sell at fifteen, but cannot do so on account of this Belgian iron, which I wish was at the bottom of the Red Sea. I beg you will make a law that no more Belgian iron shall enter France. Immediately I raise my price five francs, and these are the consequences: For every hundred-weight of iron that I shall deliver to the public, I shall receive fifteen francs instead of ten; I shall grow rich more rapidly, extend my traffic, and employ more workmen. My workmen and I shall spend much more freely to the great advantage of our tradesmen for miles around. These latter, having more custom, will furnish more employment to trade, and activity on both sides will increase in the country. This fortunate piece of money, which you will drop into my strong-box, will, like a stone thrown into a lake, give birth to an infinite number of concentric circles.”
Charmed with his discourse, delighted to learn that it is so easy to promote, by legislating, the prosperity of a people, the law-makers voted the restriction. “Talk of labour and economy,” they said, “what is the use of these painful means of increasing the national wealth, when all that is wanted for this object is a Decree?”
And, in fact, the law produced all the consequences announced by M. Prohibant; the only thing was, it produced others which he had not foreseen. To do him justice, his reasoning was not false, but only incomplete. In endeavouring to obtain a privilege, he had taken cognizance of the effects which are seen, leaving in the background those which are not seen. He had pointed out only two personages, whereas there are three concerned in the affair. It is for us to supply this involuntary or premeditated omission.
It is true, the crown-piece, thus directed by law into M. Prohibant's strong-box, is advantageous to him and to those whose labour it would encourage; and if the Act had caused the crownpiece to descend from the moon, these good effects would not have been counterbalanced by any corresponding evils. Unfortunately, the mysterious piece of money does not come from the moon, but from the pocket of a blacksmith, or a nail-smith, or a cartwright, or a farrier, or a labourer, or a shipwright; in a word, from James B., who gives it now without receiving a grain more of iron than when he was paying ten francs. Thus, we can see at a glance that this very much alters the state of the case; for it is very evident that M. Prohibant's profit is compensated by James B.'s loss, and all that M. Prohibant can do with the crown-piece, for the encouragement of national labour, James B. might have done himself. The stone has only been thrown upon one part of the lake, because the law has prevented it from being thrown upon another.
Therefore, that which is not seen supersedes that which is seen, and at this point there remains, as the residue of the operation, a piece of injustice, and, sad to say, a piece of injustice perpetrated by the law!
This is not all. I have said that there is always a third person left in the back-ground. I must now bring him forward, that he may reveal to us a second loss of five francs. Then we shall have the entire results of the transaction.
James B. is the possessor of fifteen francs, the fruit of his labour. He is now free. What does he do with his fifteen francs? He purchases some article of fashion for ten francs, and with it he pays (or the intermediate pay for him) for the hundred-weight of Belgian iron. After this he has five francs left. He does not throw them into the river, but (and this is what is not seen) he gives them to some tradesman in exchange for some enjoyment; to a bookseller, for instance, for Bossuet's “Discourse on Universal History.”
Thus, as far as national labour is concerned, it is encouraged to the amount of fifteen francs, viz.: -ten francs for the Paris article; five francs to the bookselling trade.
As to James B., he obtains for his fifteen francs two gratifications, viz.:
1st. A hundred-weight of iron.
2nd. A book.
The Decree is put in force. How does it affect the condition of James B.? How does it affect the national labour?
James B. pays every centime of his five francs to M. Prohibant, and therefore is deprived of the pleasure of a book, or of some other thing of equal value. He loses five francs. This must be admitted; it cannot fail to be admitted, that when the restriction raises the price of things, the consumer loses the difference.
But, then, it is said, national labour is the gainer.
No, it is not the gainer; for, since the Act, it is no more encouraged than it was before, to the amount of fifteen francs.
The only thing is that, since the Act, the fifteen francs of James B. go to the metal trade, while, before it was put in force, they were divided between the milliner and the bookseller.
The violence used by M. Prohibant on the frontier, or that which he causes to be used by the law, may be judged very differently in a moral point of view. Some persons consider that plunder is perfectly justifiable, if only sanctioned by law. But, for myself, I cannot imagine anything more aggravating. However it may be, the economical results are the same in both cases.
Look at the thing as you will; but if you are impartial, you will see that no good can come of legal or illegal plunder. We do not deny that it affords M. Prohibant, or his trade, or, if you will, national industry, a profit of five francs. But we affirm that it causes two losses, one to James B., who pays fifteen francs where he otherwise would have paid ten; the other to national industry, which does not receive the difference. Take your choice of these two losses, and compensate with it the profit which we allow. The other will prove not the less a dead loss. Here is the moral: To take by violence is not to produce, but to destroy. Truly, if taking by violence was producing, this country of ours would be a little richer than she is.

Original Source: The Browser, Writing Worth Reading



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Peter Boettke on Austrian Economics

                     The professor of economics discusses the contributions made by the Austrian School. He introduces recent books by Austrians, explains what we can learn from Mises and Hayek, and argues that economics is the sexiest subject

What is Austrian economics? How does it differ from standard economics?
Like a lot of things in economics, it’s the opponents that give the labels to people. The people who were practising economics at the University of Vienna thought they were just doing economics. It’s the critics who said, “Oh! That’s those Austrian economists.” It’s a label that gets to be associated with a set of propositions, both analytical – about the way you study economics, its methodology – and about the policy conclusions of economics. Representatives of that tradition came out of Vienna in the late 19th and early part of the 20th century. They then migrated to the London School of Economics, and to Switzerland, and eventually to the United States, where they held positions at places like Harvard, Princeton and Chicago. They coalesced around New York University, which became a hub of teaching Austrian economics.
So where are most Austrian economists now? Are they in the US?
It’s a worldwide movement, but I would say the place that has the strongest concentration of Austrian economists in the US is George Mason University. Outside the US, it’s probably Madrid, at King Juan Carlos University, and there is also Universidad Francisco Marroquin in Guatemala. Then there are a lot of people sprinkled here and there. It’s not necessarily full-blown Austrian economics. Here at George Mason as well, it becomes a mix and match of different ideas in economics that people find interesting.
Analytically, the biggest difference between the Austrians and their mainstream brethren is a focus on processes of adjustment and changing conditions, as opposed to static or equilibrium states of affairs. In a supply and demand curve, a standard economist would focus on the price and quantity vector that would clear the market. The Austrians want to talk about all the exchanges and activity that take place that results in that vector being discovered and the market being cleared.
Can you give an example?
Imagine if refrigeration wasn’t an option and you had some fish to sell. You start selling them at $10 a fish, and this many people buy the fish. After a while it slows down and you still have some fish remaining. As the day wears on you’re trying to get rid of the fish because they’re going to spoil. So you adjust your price down, you sell it at $8 a fish, or $6 a fish or $5 a fish. Eventually the market clears and all the fish find a buyer. In standard economics, we talk about the price and quantity vector that would clear that market, and the formal techniques of economics – a series of simultaneous equations – would get us to that vector. The Austrians don’t disagree with that price and quantity vector. But they want to talk about all the activity, a lot of which is what we call entrepreneurship – people adjusting the price, arbitrage opportunities and so on. Eventually you get to that vector, but your focus isn’t on the vector, it’s on all the stuff that goes on before it’s discovered.
From this example, and also from the books you’ve recommended, I get the sense that it’s a lot broader than regular economics?
Yes, because Austrians want to talk about the institutional environment within which economic activity takes place. They want to talk about cultural frames of reference that form the priors that rational actors have. They want to talk about the fact that we each have different priors, because we’re diverse individuals who have different perspectives on the world. Somehow, we have to reconcile these differences through the exchange processes in the market. So, the books series that I edit at Cambridge with Timur Kuran – it’s not an Austrian series, it’s just a straight-up economics series, but its title is “Cambridge Studies in Economics, Cognition and Society”. It’s a very broad notion of social science, of which economics is a part, rather than the idea that economics is somehow separated from all the social sciences.
Is Austrian economics considered “heterodox” by the mainstream establishment?
This is complicated because on the one hand it is. If you go to the official classifications in economics, and look up Austrian economics, it will be listed under modern heterodox economics. But in most cases, when people think of heterodox economics, it’s economics that challenges the basic presumptions of economists. So if you follow the debate that has been going on at Harvard, they had the walkout on Greg Mankiw’s class [Ec10, the basic economics class that Harvard offers as part of its core curriculum for undergraduates]. What the students object to is that Greg Mankiw teaches the invisible hand, ie how through the exchange process individual interests can be reconciled in the overall public interest. People think that’s too ideological. Then Steve Marglin [who teaches a course called Economics: A Critical Approach] did his talk on heterodox economics. He talks about the fact that markets are exploitative, there’s injustice, there’s irrationalities. For heterodox economists, markets don’t satisfy, they exploit. They deny the invisible hand. The Austrians don’t.
Imagine a two-by-two matrix, in which the rows are defined by whether you are dealing with a simple problem situation, or a complex problem situation. The columns are social order or social disorder. Then you look at the individuals pursuing their individual self-interest. What’s going to result? In simple problem situations – where agents are perfectly informed, they live in large number situations and are dealing with homogeneous products – you can get social order, because no one individual can influence the effect on any other individual. But once you introduce complexities into the system, the system no longer generates the invisible hand, and you can get disorder. So in a simple problem situation with free markets everything is popcorn and candy canes, and then we move to a complicated problem situation and we get unemployment and irrational exuberance etc. This is Keynesian economics and market failure theory – all very mainstream.
What Marxists believe is that even under simple problem situations, the market can’t do its job – you get monopolies, you get exploitation. Classical economists, Austrian economists, and New Institutional economists reside in the box that starts with a complex problem situation but nevertheless gets you social order. The way you do that is not based on the behavioural assumptions of the actors, but on the institutional assumptions underlying them, ie things like the political, legal and cultural context within which individuals engage and exchange. If that context is the right context, then even in the most difficult of situations, individuals can generate social order. They can cope with their ignorance, they can take care of uncertainty. When the market goes astray, it’s not because there is something wrong with the market mechanism, it’s because the rules under which the market mechanism operates have got distorted.
Are you saying mainstream economics can’t handle the complexities of the real world?
This is why methodology of the social sciences matters. It defines not only what we consider to be good questions, but probably more importantly what we consider acceptable answers. A lot of people within mainstream economics would like to handle complexity, and we see them constantly striving to do it, but they constrain their efforts by certain methodological straitjackets. They claim they have to fit things into formalistic models, otherwise it’s not a good answer. One of my favourite books is by Richard Nelson, who teaches at Columbia, about evolutionary economics. In that, he makes a distinction between what he calls “appreciative” theory and “formal” theory. What he means is that there is a theory that all economists agree to when they talk to one another about what goes on in markets, about entrepreneurship, about innovation.
Schumpeter uses the phrase “creative destruction”. For example, you have Tower Records, it does very well, then innovation comes in and eventually Tower Records goes out. We can tell the story about how markets operate in that way, and we can develop an appreciation for it. What we can’t do is put it in a model, and our formal, official theory is the modelling exercise. So there is this disjoint between the appreciative theory we can talk about, and the formal theory which limits what we can talk about to only those things that we can formally prove in a deductive model. Austrians aren’t challenging the appreciative theory of neo-classical economics. In fact they’re very much part of the neoclassical tradition. It’s just that the Austrians want to talk about things like dispersed knowledge, heterogeneity, uncertainty – not just risk, but real uncertainty – and institutions, how institutions arise to allow us to cope with our ignorance and our uncertainty and to ameliorate the frictions that exist in the world. Rather than seeing the frictions as the thing that destroys the model we have, or prima facie evidence that the market is not very efficient, they play a positive role.

Human Action

By Ludwig von Mises

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Let’s talk about your books. The first you’re recommending is Ludwig von Mises’s Human Action: A Treatise on Economics. This is definitely a very broad book, looking at psychology, at philosophy and so on. The title of the last chapter was my favourite: “Economics and the Essential Problems of Human Existence”.
Do you believe that Michele Bachmann reads this book at the beach?
Put it this way, in the first chapter he starts off talking about “praxeology”, which is certainly a word I had to look up. And in my edition, he uses some words which aren’t just derived from Greek, but are actually in Greek. So I’m very impressed she can read it at the beach. It’s also about 1,000 pages long. I know you love this book, but I’m not sure how many people other than Michele Bachmann are going to be able to get through it, so give us some highlights.
Mises was not just some quack, he was a serious economist. He was named a distinguished fellow of the American Economics Association in 1969, and he won the highest medal for scientific achievement in his home country of Austria. There is a great article by Paul Samuelson on who would have won the Nobel Prize in economics if it had started the same year as the other Nobel Prizes, and Mises is on his list. This book was originally published by Yale University Press, and John Kenneth Galbraith wrote a review of it in The New York Times.
Mises made at least three significant contributions to economics. The first contribution is in money and business cycle theory. What Mises tried to show is how money is central to all exchanges, because in a monetary economy, goods trade for money and money trades for goods. Goods don’t trade directly with other goods. Since money is one-half of all exchanges, if you screw around with money, you’re going to screw around with all the exchanges in the economy. He postulated that when the government distorts the monetary unit, through the manipulation of money and credit, it can generate boom-and-bust cycles. So rather than the business cycle being inherent to capitalism, it’s a consequence of distortions caused by the manipulation of money and credit.
Hasn’t what just happened with the housing boom and bust proved the Austrians right then?
There’s a Wall Street Journal profile on me, in that vein. People do argue this. This is why Paul Krugman gets so incensed. You know you’re doing something right when people get really mad. There are technical issues involved here that make this more nuanced. I have an e-book called The House that Uncle Sam Built which is a short little piece directed at the general public that tries to tell this story, how the Austrian story is consistent with what we’ve seen.
Tell me about von Mises’s next contribution.
His second contribution was on the controversy over socialism, and whether it could engage in economic calculation. To put it simply, economic calculation helps you sort out – from the array of technologically feasible projects – those which are economic and those that aren’t. For example, you don’t want to build railroad tracks out of platinum, you want to build them out of steel. Platinum might well be technologically superior – smoother, longer-lasting – but it costs too much. The idea of socialism was to completely transcend the market economy, but if I don’t have prices and I don’t have exchange ratios established on the market because I have abolished commodity production, how am I going to know that I have to use steel?
Mises came in and said: Let’s assume that ends of socialism are highly desired – I’m not going to engage in a battle over ends. What is it socialists want to achieve? A burst of productivity, leading to an overcoming of the conflict between classes. What is their means to attain that goal? Collective ownership over the means of production. Rationalisation of production for direct use and not for exchange will produce this burst of productivity that will overcome scarcity and therefore the conflict between the classes. What Mises said was: Your means are in conflict with your ends, because you can’t engage in economic calculation. You’re not going to get rationalisation of production, you’re going to have endemic waste. He was the first person to demonstrate that. As the history of the Soviet system played out, including its early history from 1917-21, it seemed to play out Mises’s argument. Socialists were always making compromises with respect to their original plan, trying to jerry-rig it, and you get on this treadmill of economic reforms that characterise the entire Soviet period. Then, eventually, it unwinds in the late 1980s, and you even have people like [left-wing economist] Robert Heilbroner admitting that Mises was right.
Which is obvious with hindsight, but is worth pointing out was not necessarily clear at the time Mises was writing. The arguments that socialism was a better way of organising the economy were very persuasive at the time.
Mises makes his argument in 1920, but the socialist calculation debate really takes place, in the English language, in the 1930s, in the middle of the Great Depression. For a lot of economists, socialism is an alternative to the capitalist order, which they see falling apart in front of them. So they’re attracted to it. Then you have the 1940s, where you’re fighting a battle against Hitler. Your ally is the Soviet Union, which has gone from a peasant economy to a military contributor – an amazing transformation of an economy – and because of that is able to help defeat Hitler. After World War II, everyone understands socialism isn’t too pretty in the Soviet Union, and Stalin is not exactly a nice guy. But if only we could have democracy with it, it would be wonderful. That’s where Hayek eventually comes in and challenges this idea as well. But at the time Mises is writing, it’s not at all clear that capitalism is superior to socialism.
You’d better get on to his third contribution.
Mises’s third contribution is an argument about methodology in the social sciences. He argues that human sciences are different from the natural sciences. His methodological argument cut against the trend of the times, which was to move towards a unity of science approach – what’s right for physics is right across the board. Mises talks about methodological dualism. To communicate this simply, he used to say: “If you throw a rock into water it sinks; if you throw a stick into water it floats; if you throw a man into water he must decide whether to sink or swim.” What does that mean then for the way we approach the social sciences? If you think about economists, in the 18th and19th centuries – John Stuart Mill, David Hume, Adam Smith – they were philosophers. The way they reasoned was like a philosopher. When you get to the mid-20th century and you look at Paul Samuelson, he’s not a philosopher any more, he’s more like an engineer. His books look like engineering or chemistry books. There was a transformation of economics – it became a tool of social control.
To the Austrians, economics is not a tool of social control, it’s a framework for helping us understand humanity, its history, and our plight in the world. Hayek had a great phrase about this. He said that the curious task of economics is “to demonstrate to men how little they really know about what they imagine they can design”. Hayek’s Nobel Prize address was called “The Pretence of Knowledge”. He was going after the idea not only of socialism, but of large-scale macro models. Because in the mid-20th century, and going up through the 1970s, the economy was envisaged like a bathtub. One spigot was monetary policy and the other was fiscal policy, and an economist’s task was to turn those spigots on to make sure the water rose to the level in the bathtub that was consistent with full employment.
Mises and Hayek stood in complete opposition to that view. Even more so than Milton Friedman, because he’s arguing over which is more effective – fiscal or the monetary policy, but he’s still telling us we’re in control of the levers. What Mises and Hayek are saying is that that whole way of thinking about the economy reflects a pretence of knowledge – that we know what the full employment output level would be, that we know exactly how much water to let in, and how much to let out – whereas in reality, if we make a mistake with any of that, the water comes gushing out all over our bathroom floor, or it drains completely out and we have nothing.
The belief that social sciences should be like social physics is built on an assumption which Mises says you can’t make. Therefore you mischaracterise what the task of economics is – you send economics in a direction which is totally different from our heritage, of what we got from David Hume, Adam Smith, Jean-Baptiste Say and John Stuart Mill, and then Carl Menger, and then Mises, Hayek, and other people in the 20th century, like Jim Buchanan.
So your view is that the profession took a wrong turn with Paul Samuelson?
That would be the argument, yes.
And do you agree with it?
Personally, yes I do. But there were a lot of things going on leading to this, one of which was that Samuelson was the brightest boy on the block, and when the brightest boy on the block goes in one direction, everyone else follows him. We’re in the midst of the Great Depression and World War II and this is a promise that we can avoid these kinds of problems. Then, the profession was really becoming professionalised, in a way that previously it wasn’t. People like John Stuart Mill were gentleman scholars. It wasn’t this whole professoriate, these departments and tenure and all those battles. Keynesian economics, post-World War II, dominated the entire profession. Everyone became a Keynesian and at the graduate, elite levels, it became a totally Samuelsonian project.
Samuelson had the intellectual entrepreneurship to write both the Principles of Economics textbook – which became the standard textbook for freshmen – and the standard graduate textbook. He dominated both ends of the economics profession. It’s a phenomenal intellectual achievement, independent of what you think about the content. I think Samuelson is worthy of intellectual attention, I just think he sent us in a wrong direction.
This idea of Hayek’s that you can’t know much – is that what leads the Austrian school towards libertarianism? And isn’t this libertarian element the reason it’s embraced by the Tea Party? Though I detect from your tone, also in your email, that you don’t particularly enjoy that connection.
What the position makes you have is not libertarianism, or anything like that, but humility. The economist is nothing more than a student of society, and any economist that tries to represent themselves as a saviour of society should be subject to ridicule. Let me read to you from Adam Smith, the section with the invisible hand explanation. He’s with Mises and Hayek on this humility point, even though the book, An Inquiry into the Nature and Causes of the Wealth of Nations, is written as advice to statesmen:
“What is the species of domestic industry which his capital can employ [ie what he should invest in], and of which the produce is likely to be of the greatest value, every individual, it is evident, can, in his local situation, judge much better than any statesman or lawgiver can do for him. The statesman, who should attempt to direct private people in which manner they ought to employ their capitals, would not only load himself with a most unnecessary attention, but assume an authority which could safely be trusted, not only to no single person, but to no council or senate, and which would nowhere be so dangerous as in the hands of a man who had folly and presumption enough to fancy himself fit to exercise it.”
In The Theory of Moral Sentiments Smith calls him “the man of system” who is arrogant in his own conceit. Hayek comes back to this in an essay, “Individualism True and False”, and he tries to explain where the system goes. He writes:
“The main point about which there can be little doubt, is that Smith’s chief concern was not so much about what man can occasionally achieve when he was at his best, but that he should have as little opportunity as possible to do harm when he was at his worst. It would scarcely be too much to claim that the main merit of the individualism which he and his contemporaries advocated is that it is a system under which bad men can do least harm. It is a social system that does not depend for its functioning on our finding good men for running it, or on all men becoming better than they are now, but which makes use of men in all their given variety and complexity, sometimes good and sometimes bad, sometimes intelligent, and more often stupid. Their aim was a system under which it should be possible to grant freedom to all, instead of restricting it, as their French contemporaries wished, to ‘the good and the wise’.
“The chief concern of the great individualist writers was indeed to find a set of institutions by which man could be induced, by his own choice and from the motives which determined his ordinary conduct, to contribute as much as possible to the need of all others; and their discovery was that the system of private property did provide such inducements to a much greater extent than had yet been understood.”
That’s really the Austrian position. It doesn’t fit on a placard for a party to march with. Now we get to a situation which goes haywire for a variety of reasons. We have these big bailouts and the economy doesn’t kick back up to the extent that people thought it would, you have this big bill that’s out there in terms of the public debt. There’s an anger out there, that politics is no longer connected to the people, that it’s these special interest groups. The Tea Party aren’t just against Nancy Pelosi and Harry Reid, they’re not big fans of George W Bush, either. They want to penalise the guys on the right as well. They’re looking for people to read, and that say stuff that is somewhat similar, and they listen to Glenn Beck and they start reading Hayek. I just don’t think it’s relevant to the scholarly assessment of the ideas of Hayek to point out that Glenn Beck likes him, just like I wouldn’t look at Paul Krugman’s ideas differently because Rachel Maddow likes them.
It’s definitely the case that people have turned to Hayek and Mises as iconic figures. Mises stood against the tide of Keynesianism and animal spirits with his alternative theory about the manipulation of money and credit; he stood against the socialists. And they [the Tea Party] say, “Oh. Who was against socialism and who was against Keynesianism? Those are our theorists.” The critics of Austrian economics have used their recent popularity to try to tar and feather them. That’s why people like me get snarky in response. We shouldn’t, we should be more level-headed, and say, “OK, there’s good things about Austrian economics, there’s bad things about it, and all we’re trying to do is improve and go forward. We really just want to understand the economy.”
But to me, libertarianism is a by-product, not an assumption going in. If you look at Mises and Hayek, neither of them are natural rights thinkers. Most libertarianism – if you think about Ayn Rand or even Robert Nozick – derives from an individualist rights perspective. Mises and Hayek are all about consequentialism. If you can show them that the means of collective ownership would generate more successfully the ends of liberty, fraternity and equality, they’d say, “OK, yes, let’s have collectivism!” But because collectivist means undermine those goals, what they say is, “Maybe we ought to rethink this.”

Individualism and Economic Order

By Friedrich Hayek

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Let’s get on to the book of essays by Friedrich Hayek that you’ve recommended, and you’ve already quoted from: Individualism and Economic Order. He won the Nobel Prize for economics in 1974, and my understanding from mainstream economists is that his big insight – particularly critical for studying financial markets – is that prices don’t just reflect supply and demand, but also information.
Yes, he has a famous essay called “The Use of Knowledge in Society”. What he tries to argue is that the price system systematically communicates dispersed information that you and I hold. If you and I go to the store, we’ll have different subjective preferences. We express those subjective preferences in trade-offs that we make when we buy some goods and not others. That gets communicated to other people via prices in the market – you don’t have to pick up the phone to find out. The subjective trade-offs that you and I make have become objective information for other people in making their trade-offs. The price system is a giant telecommunications system. It tells me about relative scarcities of goods. A classic example of this is gas prices over the last year. We don’t need to know whether there has been an increase in supply of gas or a decrease in demand.
Or what the political situation in the Middle East is.
No, all we need to know is that the price of gasoline has fallen quite a bit since the summer. Then, when I make a decision on whether to take a trip or not, because it’s a lot cheaper, I’ll likely increase my consumption of gasoline. This is all communicated through the price system without any of us having to know in detail what is going on.
But Hayek has an influence far beyond his own writings. In the recent financial crisis, the efficient market hypothesis has, it’s true, taken a beating, but you could point out that the kernel of truth in there is embedded in Hayek’s idea. The stock price gives full and complete information of what’s available on the market at that time, and that gets communicated through the system. Hayek also influenced information economics in general. There’s Leonid Hurwicz who won the Nobel Prize [in 2007] for his contribution to mechanism design theory. He was working on information processing. Hayek’s writings set off a research programme to study how it is that information gets communicated within a complex system, and a variety of different people have picked up on that, and worked with that idea and taken it in directions that even Hayek couldn’t have envisioned.
As a left-of-centre European, I was quite nervous about reading Hayek. But given the era he was writing in – the early to mid 20th century – when socialism was still considered a viable alternative to capitalism, the book seems pretty sensible. In fact there was nothing in it I particularly disagreed with.
And it’s not as if Hayek met leftist intellectuals and said, “Curse on you”. For example, Abba Lerner, a market socialist and author of The Economics of Control, wrote his doctoral dissertation [on which the book is based], under Hayek’s direction. Hayek is the antithesis of the idea of economics as control. Even those guys that went in directions different to Hayek are all trying to provide answers to him.
So he’s not right-wing?
I don’t think he considered himself on the right or on the left. He didn’t like socialism, so if socialism redefines the political landscape so that anyone who is a non-socialist is a right-winger, then Hayek is a right-winger, which is more or less the American context. We like to pick caricatures, and the debate in the US is not sophisticated. In Europe, Hayek is an old liberal, and he remains a European liberal throughout his whole life. He’s for restraint on the abuse of power by the state, he’s for the expansion of human liberties.

Calculation and Coordination

By Peter Boettke

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Let’s move to the present, and your last three books. You wanted to pick one of your own. What about The Elgar Companion to Austrian Economics?
The Elgar Companion is a big book with a lot of short essays about Austrian economics. My other books are much more about specific things, so, for example, I’ve written three books on the history and practice and collapse of socialism in the Soviet Union, and the transition from it. My book Calculation and Coordination is the last one on that, all essays in post-socialist transition. The easiest way to understand that book is that in order for us to go someplace, we have to go from here to there. If you ill-define where you started from, or where you’re going, your ride is going to be totally different. To move from socialism to capitalism, that’s a here to there idea. So we have to define, first and foremost, what the here and now is, what that system actually is like, and then where we want to go with it. Do we want to look like the US or Britain? Do we want to look like Sweden or Western Europe?
Part of what goes on in the book is trying to straighten out what socialism actually looks like at the point of its demise, because that’s our start state. What I try to show is that a lot of the mistakes that took place during the 1990s were because we didn’t define the start-state correctly. We also ill-defined the end-state, and as a consequence we got on the wrong bus for economic reforms. What I’m doing is trying to get the history right and then get the political economy analytics right, and then trying to use both of those to explain that from that original history it was logical that we ended up with the system that we ended up with, rather than the system that we wanted to end up with.
So if you ask a question which was a popular policy question at the beginning of the 2000s, which is “Who lost Russia?”, you can understand from my book that it was not because of the IMF or the World Bank. It’s because of political economy questions. That’s why the title is Calculation and Coordination, when you establish the institutions that permit economic calculation, you generate the advanced economic coordination that’s possible in a complex system. When you have institutions cutting against the ability to engage in economic calculation, don’t be surprised when people substitute out economic logic for political logic and as a result you get not economic coordination, but political interest groups that form and become dominant and control the system.
So you’ve chosen this book to demonstrate what modern Austrian economists are doing with the field?
Yes, I’m one representative. There are a whole bunch of people. Calculation and Coordination is an effort to take Austrian economics and apply it to a real world policy-relevant issue, which is the transition from communism to capitalism.

The Invisible Hook

By Peter Leeson

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You gave me two other examples as well. One was the The Invisible Hook, by Peter Leeson, which is a really fun book about pirates.
I gave you these two books because I think economics is both a deadly serious subject – ultimately it’s about life and death, whether people are living on $2 a day or if they can have longer and healthier lives – but it’s also this fascinating subject that you should read with a great smile on your face. As I tell my students, economics is the sexiest subject you will ever study.
I think The Invisible Hook does a fascinating job of communicating to people the enjoyment of just thinking through a problem like an economist. Pete takes on the organisation of pirate ships and points out how pirates represented a community in and of themselves. Even in a world of thieves, they had to respect rights in order to be able to coordinate with one another. He goes through and explains the elaborate methods by which they organised their activities on a ship. Those ships were not as small as we might think, the ventures actually required people of diverse ethnic backgrounds and sexual preferences, and yet somehow they came to work together. They signed actual constitutions among themselves. So it’s a fascinating read, it’s all about the secret economics of the pirates and how they organised their ventures, and how actually their ventures, a lot of times, were more humane than those of the Royal Navy.
Do you agree with his analysis, ultimately?
I’m persuaded by the economic logic. I don’t know enough about the history to offer an informed criticism of some of the things he might say. What carries the weight for me is the fact that he is pursuing the rational choice model and I can see the logic of what he is saying. But at some level, with this book, the people who would be the best judges of the empirical validity of what he’s arguing would be pirate historians. When I read his book, what compels me is the logic of his argument and then the history as illustrations of that logic, so I’m completely swept up in it – I find it this great story. If I knew more about pirates, I’m sure I’d have quibbles with him.
I loved his point about Blackbeard, probably the most fearsome pirate that ever lived. According to this book, Blackbeard did such a good job of looking scary and promoting his reputation for bloodthirstiness, that he never actually had to kill a single person.
Yes, there is a lot of stuff about signalling in the book – also why they show the Jolly Roger to protect their investment, the ship. Pete really makes economics come alive, to explain things that we normally wouldn’t think of as subject to economic analysis. He’s amazingly talented and he really does make economics jump off the pages for people who read him.

After War

By Christopher Coyne

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The last book you’ve recommended is After War: The Political Economy of Exporting Democracy, by Christopher Coyne.
This book is amazing. Coyne took on the topic of how successful the US can be at exporting democracy and the free market in after-war situations. This became a big venture in the 20th century, when the US became much more aggressive about this idea that we could intervene to try to help make other countries better off. Part of it was for geopolitical reasons – after 9/11 we believed that one of the things we had to do was make the Middle East more conducive to free markets and democracy, because then it’s less likely to generate terrorists. So then the question is, is that an effective strategy? Coyne takes the strategy as stated by the officials, and then assesses whether the means employed are successful. He uses a very low threshold, which is, after the US intervention, after the country is supposedly settled, does it meet the standard on the Polity Index of modern day Iran? What he found was that in US-led efforts, basically somewhere between two-thirds and three-quarters of the efforts failed to meet even that minimum standard.
Yes, I’m looking down his list of 30 or so invasions that have taken place, and it’s not looking too good.
Right. Everybody points to Japan and Germany, but he points out that before the war, Japan and Germany had very high measures of civil society. In most of these other places, what you’re trying to do is create civil society, and at the point of a gun is not a very good way to do it. So I think Coyne really does show the futility of our efforts. All these efforts at war – the loss of lives, the billions of dollars spent – got us what?
If only this book had been around before the invasion of Iraq. It could have saved more than 100,000 Iraqi lives.
That’s what you think, right? In Coyne, there is not a lightness to his pen, in the same way there is with Leeson. Leeson is dealing with an entertaining topic. Coyne is dealing with a deadly serious topic. Both of them are bringing to bear the kind of economics that comes out of Mises and Hayek, to address why it is people should care about economics and why it is that their caring should not lead them to be sombre and boring, but actually fun and enjoyable, while talking about very sad subjects sometimes.
Thinking through the conclusions of After War, I’m thinking that if the US wants to invade a country successfully, France would be a good choice.
Chris’s point, if you think about what he’s saying, is that imagine you have to put two pieces of a puzzle together. You have a piece and you have to find a piece that fits exactly in it. Chris is arguing that that bedrock of institutions is there prior to our intervention. When we try to intervene and press on them puzzle pieces that don’t fit with their bedrock of institutions, we get distortions. It’s like putting a square peg into a round hole – you’d have to force it, it wouldn’t really look too good, and your puzzle wouldn’t get completed. Because of this issue of underlying institutions, Japan and Germany were able to accept the puzzle pieces. That’s why he ends by saying it’s not going to be about war and imposition, but about trade and development. That’s what’s going to allow that cultural piece, that bedrock piece, to morph into a piece accepting of other pieces. All we can do is give them the opportunity to benefit from free exchange with other individuals. If you give people the freedom to choose, they’ll move in that direction, but what you don’t have is the ability to put a gun to the back of someone’s head and make them engage in freedom.
So if you’re writing a serious book of Austrian economics, it won’t need to have equations in it?
No. Most standard economics assumes that the relationships we are trying to understand can be captured by a continuous function that’s smooth and twice differentiable. What the Austrian analytics suggests is that life is not actually a continuous and smooth function that’s twice differentiable, but instead a lumpy function, a discrete function, in which there are all kinds of difficulties in the ability for us to model them the way our standard approach does. So, instead, what we engage in is discursive reasoning. You use the logic of economic action, the logic of choice, you worry about opportunity cost and presume individuals are doing the best that they can, given their situation. But notice, even in that phrase, you have to spend a lot of time specifying what that situation is. That situation is full of historical context and institutional details. A lot of your story is made up of the specification of the context in which economics decisions are made.

Interview by 

Sophie Roell

Published on Jan 12, 2012

Public Works - by Frederick Bastiat

V. -Public Works

Nothing is more natural than that a nation, after having assured itself that an enterprise will benefit the community, should have it executed by means of a general assessment. But I lose patience, I confess, when I hear this economic blunder advanced in support of such a project. “Besides, it will be a means of creating labour for the workmen.” The State opens a road, builds a palace, straightens a street, cuts a canal; and so gives work to certain workmen -this is what is seen: but it deprives certain other workmen of work, and this is what is not seen.
The road is begun. A thousand workmen come every morning, leave every evening, and take their wages -this is certain. If the road had not been decreed, if the supplies had not been voted, these good people would have had neither work nor salary there; this also is certain.
But is this all? does not the operation, as a whole, contain something else? At the moment when M. Dupin pronounces the emphatic words, “The Assembly has adopted,” do the millions descend miraculously on a moon-beam into the coffers of MM. Fould and Bineau? In order that the evolution may be complete, as it is said, must not the State organise the receipts as well as the expenditure? must it not set its taxgatherers and tax-payers to work, the former to gather, and the latter to pay? Study the question, now, in both its elements. While you state the destination given by the State to the millions voted, do not neglect to state also the destination which the taxpayer would have given, bat cannot now give, to the same. Then you will understand that a public enterprise is a coin with two sides. Upon one is engraved a labourer at work, with this device, that which is seen; on the other is a labourer out of work, with the device, that which is not seen.
The sophism which this work is intended to refute, is the more dangerous when applied to public works, inasmuch as it serves to justify the most wanton enterprises and extravagance. When a railroad or a bridge are of real utility, it is sufficient to mention this utility. But if it does not exist, what do they do? Recourse is had to this mystification: “We must find work for the workmen.”
Accordingly, orders are given that the drains in the Champ-de-Mars be made and unmade. The great Napoleon, it is said, thought he was doing a very philanthropic work by causing ditches to be made and then filled up. He said, therefore, “What signifies the result? All we want is to see wealth spread among the labouring classes.”
But let us go to the root of the matter. We are deceived by money. To demand the cooperation of all the citizens in a common work, in the form of money, is in reality to demand a concurrence in kind; for every one procures, by his own labour, the sum to which he is taxed. Now, if all the citizens were to be called together, and made to execute, in conjunction, a work useful to all, this would be easily understood; their reward would be found in the results of the work itself.
But after having called them together, if you force them to make roads which no one will pass through, palaces which no one will inhabit, and this under the pretext of finding them work, it would be absurd, and they would have a right to argue, “With this labour we have nothing to do; we prefer working on our own account.”
A proceeding which consists in making the citizens cooperate in giving money but not labour, does not, in any way, alter the general results. The only thing is, that the loss would react upon all parties. By the former, those whom the State employs, escape their part of the loss, by adding it to that which their fellow-citizens have already suffered.
There is an article in our constitution which says: -“Society favours and encourages the development of labour -by the establishment of public works, by the State, the departments, and the parishes, as a means of employing persons who are in want of work.”
As a temporary measure, on any emergency, during a hard winter, this interference with the tax-payers may have its use. It acts in the same way as securities. It adds nothing either to labour or to wages, but it takes labour and wages from ordinary times to give them, at a loss it is true, to times of difficulty.
As a permanent, general, systematic measure, it is nothing else than a ruinous mystification, an impossibility, which shows a little excited labour which is seen, and bides a great deal of prevented labour which is not seen.
Society is the total of the forced or voluntary services which men perform for each other; that is to say, of public services and private services.
The former, imposed and regulated by the law, which it is not always easy to change, even when it is desirable, may survive with it their own usefulness, and still preserve the name of public services, even when they are no longer services at all, but rather public annoyances. The latter belong to the sphere of the will, of individual responsibility. Every one gives and receives what he wishes, and what he can, after a debate. They have always the presumption of real utility, in exact proportion to their comparative value.
This is the reason why the former description of services so often become stationary, while the latter obey the law of progress.
While the exaggerated development of public services, by the waste of strength which it involves, fastens upon society a fatal sycophancy, it is a singular thing that several modern sects, attributing this character to free and private services, are endeavouring to transform professions into functions.
These sects violently oppose what they call intermediates. They would gladly suppress the capitalist, the banker, the speculator, the projector, the merchant, and the trader, accusing them of interposing between production and consumption, to extort from both, without giving either anything in return. Or rather, they would transfer to the State the work which they accomplish, for this work cannot be suppressed.
The sophism of the Socialists on this point is showing to the public what it pays to the intermediates in exchange for their services, and concealing from it what is necessary to be paid to the State. Here is the usual conflict between what is before our eyes, and what is perceptible to the mind only, between what is seen, and what is not seen.
It was at the time of the scarcity, in 1847, that the Socialist schools attempted and succeeded in popularizing their fatal theory. They knew very well that the most absurd notions have always a chance with people who are suffering; malisunda fames.
Therefore, by the help of the fine words, “trafficking in men by men, speculation on hunger, monopoly,” they began to blacken commerce, and to cast a veil over its benefits.
“What can be the use,” they say, “of leaving to the merchants the care of importing food from the United States and the Crimea? Why do not the State, the departments, and the towns, organize a service for provisions, and a magazine for stores? They would sell at a return price, and the people, poor things, would be exempted from the tribute which they pay to free, that is, to egotistical, individual, and anarchical commerce.”
The tribute paid by the people to commerce, is that which is seen. The tribute which the people would pay to the State, or to its agents, in the Socialist system, is what is not seen.
In what does this pretended tribute, which the people pay to commerce, consist? In this: that two men render each other a mutual service, in all freedom, and under the pressure of competition and reduced prices.
When the hungry stomach is at Paris, and corn which can satisfy it is at Odessa, the suffering cannot cease till the corn is brought into contact with the stomach. There are three means by which this contact may be effected. 1st. The famished men may go themselves and fetch the corn. 2nd. They may leave this task to those to whose trade it belongs. 3rd. They may club together, and give the office in charge to public functionaries. Which of these three methods possesses the greatest advantages? In every time, in all countries, and the more free, enlightened, and experienced they are, men have voluntarily chosen the second. I confess that this is sufficient, in my opinion, to justify this choice. I cannot believe that mankind, as a whole, is deceiving itself upon a point which touches it so nearly. But let us consider the subject.
For thirty-six millions of citizens to go and fetch the corn they want from Odessa, is a manifest impossibility. The first means, then, goes for nothing. The consumers cannot act for themselves. They must, of necessity, have recourse to intermediates, officials or agents.
But, observe, that the first of these three means would be the most natural. In reality, the hungry man has to fetch his corn. It is a task which concerns himself; a service due to himself. If another person, on whatever ground, performs this service for him, takes the task upon himself, this latter has a claim upon him for a compensation. I mean by this to say that intermediates contain in themselves the principle of remuneration.
However that may be, since we must refer to what the Socialists call a parasite, I would ask, which of the two is the most exacting parasite, the merchant or the official?
Commerce (free, of course, otherwise I could not reason upon it), commerce, I say, is led by its own interests to study the seasons, to give daily statements of the state of the crops, to receive information from every part of the globe, to foresee wants, to take precautions beforehand. It has vessels always ready, correspondents everywhere; and it is its immediate interest to buy at the lowest possible price, to economize in all the details of its operations, and to attain the greatest results by the smallest efforts. It is not the French merchants only who are occupied in procuring provisions for France in time of need, and if their interest leads them irresistibly to accomplish their task at the smallest possible cost, the competition which they create amongst each other leads them no less irresistibly to cause the consumers to partake of the profits of those realized savings. The corn arrives; it is to the interest of commerce to sell it as soon as possible, so as to avoid risks, to realize its funds, and begin again the first opportunity.
Directed by the comparison of prices, it distributes food over the whole surface of the country, beginning always at the highest price, that is, where the demand is the greatest. It is impossible to imagine an organization more completely calculated to meet the interest of those who are in want; and the beauty of this organization, unperceived as it is by the Socialists, results from the very fact that it is free. It is true, the consumer is obliged to reimburse commerce for the expenses of conveyance, freight, store-room, commission, &c.; but can any system be devised, in which he who eats corn is not obliged to defray the expenses, whatever they may be, of bringing it within his reach? The remuneration for the service performed has to be paid also: but as regards its amount, this is reduced to the small. est possible sum by competition; and as regards its justice, it would be very strange if the artisans of Paris would not work for the artisans of Marseilles, when the merchants of Marseilles work for the artisans of Paris.
If, according to the Socialist invention, the State were to stand in the stead of commerce, what would happen? I should like to be informed where' the saving would be to the public? Would it be in the price of purchase? Imagine the delegates of 40,000 parishes arriving at Odessa on a given day, and on the day of need; imagine the effect upon prices. Would the saving be in the expenses? Would fewer vessels be required, fewer sailors, fewer transports, fewer sloops, or would you be exempt from the payment of all these things? Would it be in the profits of the merchants? Would your officials go to Odessa for nothing? Would they travel and work on the principle of fraternity? Must they not live? must not they be paid for their time? And do you believe that these expenses would not exceed a thousand times the two or three per cent which the merchant gains, at the rate at which he is ready to treat?
And then consider the difficulty of levying so many taxes, and of dividing so much food. Think of the injustice, of the abuses inseparable for such an enterprise. Think of the responsibility which would weigh upon the Government.
The Socialists who have invented these follies, and who, in the days of distress, have introduced them into the minds of the masses, take to themselves literally the title of advanced men; and it is not without some danger that custom, that tyrant of tongues, authorizes the term, and the sentiment which it involves. Advanced! This supposes that these gentlemen can see further than the common people; that their only fault is, that they are too much in advance of their age, and if the time is not yet come for suppressing certain free services, pretended parasites, the fault is to be attributed to the public, which is in the rear of socialism. I say, from my soul and my conscience, the reverse is the truth; and I know not to what barbarous age we should have to go back, if we would find the level of Socialist knowledge on this subject. These modern sectarians incessantly oppose association to actual society. They overlook the fact, that society, under a free regulation, is a true association, far superior to any of those which proceed from their fertile imaginations.
Let me illustrate this by an example. Before a man, when he gets up in the morning, can put on a coat, ground must have been enclosed, broken up, drained, tilled, and sown with a particular kind of plant; flocks must have been fed, and have given their wool; this wool must have been spun, woven, dyed, and converted into cloth; this cloth must have been cut, sewed, and made into a garment. And this series of operations implies a number of others; it supposes the employment of instruments for ploughing, &c., sheepfolds, sheds, coal, machines, carriages, &e.
If society were not a perfectly real association, a person who wanted a coat would be reduced to the necessity of working in solitude; that is, of performing for himself the innumerable parts of this series, from the first stroke of the pickaxe to the last stitch which concludes the work. But, thanks to the sociability which is the distinguishing character of our race, these operations are distributed amongst a multitude of workers; and they are further subdivided, for the common good, to an extent that, as the consumption becomes more active, one single operation is able to support a new trade.
Then comes the division of the profits, which operates according to the contingent value which each has brought to the entire work. If this is not association, I should like to know what is.
Observe, that as no one of these workers has obtained the smallest particle of matter from nothingness, they are confined to performing for each other mutual services, and to helping each other in a common object, and that all may be considered, with respect to others, intermediates. If, for instance, in the course of the operation, the conveyance becomes important enough to occupy one person, the spinning another, the weaving another, why should the first be considered a parasite more than the other two? The conveyance must be made, must it not? Does not be who performs it devote to it his time and trouble? and by so doing does he not spare that of his colleagues? Do these do more or other than this for him? Are they not equally dependent for remuneration, that is, for the division of the produce, upon the law of reduced price? Is it not in all liberty, for the common good, that these arrangements are entered into? What do we want with a Socialist then, who, under pretence of organizing for us, comes despotically to break up our voluntary arrangements, to check the division of labour, to substitute isolated efforts for combined ones, and to send civilization back? Is association, as I describe it here, in itself less association, because every one enters and leaves it freely, chooses his place in it, judges and bargains for himself on his own responsibility, and brings with him the spring and warrant of personal interest? That it may deserve this name, is it necessary that a pretended reformer should come and impose upon us his plan and his will, and as it were, to concentrate mankind in himself?
The more we examine these advanced schools, the more do we become convinced that there is but one thing at the root of them: ignorance proclaiming itself infallible, and claiming despotism in the name of this infallibility.
I hope the reader will excuse this digression. It may not be altogether useless, at a time when declamations, springing from St. Simonian, Phalansterian, and Icarian books, are invoking the press and the tribune, and which seriously threaten the liberty of labour and commercial transactions.

The Fed's Incredible Rate Forecasting Hubris by James A. Dorn

The Fed's Incredible Rate Forecasting Hubris

by James A. Dorn

The Federal Reserve’s decision to provide multiyear forecasts for the federal funds rate, and to indicate when that rate might be increased is intended to improve monetary policy by making it more transparent. Currently, the Fed funds rate is close to zero and is expected to remain there until at least mid-2013.

With the Fed’s new policy, a small group of experts—the Board of Governors and the presidents of the twelve Federal Reserve Banks—will individually report their longer-run projections for the target federal funds rate they think is consistent with their dual mandate to maintain price stability and achieve full employment.

In principle, the Fed hopes the new policy will convince markets that short-term rates will stay low for the foreseeable future. That “guidance” is expected to lower longer-term rates, stimulate economic growth, and lower the unemployment rate— without igniting inflation.

The problem is that the Fed’s dual mandate is flawed and the Fed has no business manipulating interest rates, which are relative prices best set by millions of counterparties in free capital markets. There are limits to what monetary policy can accomplish and to forecasting random variables like interest rates and asset prices.

Monetary policy cannot have any permanent effect on economic growth, which is determined by real factors; but rapid growth of money and credit can cause inflation, erode the value of the dollar, and increase uncertainty. The belief that larger data sets and fancy forecasting models (such as the dynamic stochastic general equilibrium models used by the Fed) can generate better forecasting and improve the conduct of discretionary monetary policy is naïve. Adding short-run interest rate forecasts to the Fed’s summary economic projections each quarter does not guarantee sound money.

When the Fed holds short-run interest rates at artificially low levels for a prolonged period, as it has, and forecasts that rates will continue to be low for an indefinite period, it is not necessarily binding itself to some target Fed funds rate—but it is distorting the structure of interest rates and thus affecting the allocation of investment funds that would have occurred in competitive capital markets.

The Fed’s new policy continues the financial repression that helped bring about the 2008 financial crisis. Yet, after two rounds of quantitative easing and tilting the Fed’s portfolio toward longer-term securities, unemployment remains stubbornly high while headline inflation is more than 3 percent.
The Fed’s focus on forecasting is misplaced. The real focus should be on letting markets set relative prices, including interest rates, and adopting a monetary rule to protect the long-run value of money. By drifting into the realm of fiscal policy and allocating credit, the Fed has lost credibility. And by pretending that interest-rate forecasting—without any clear monetary rule—will improve policy, the Fed is setting itself up for failure.
Sound money is not produced by better forecasts under a pure fiat money regime; it is generated by a monetary standard in which there is certainty about the future value of money. As W. Lee Hoskins, former president of the Federal Reserve Bank of Cleveland and a proponent of zero inflation, has argued, “The key to effective policy is not the accuracy of economic forecasts but rather the credibility and predictability of policy actions.” A rules-based monetary regime is superior in this sense to the present discretionary government fiat money system.
The use of the Fed to peg nominal interest rates at artificially low levels, fine tune the yield curve, incentivize risk taking, monetize government debt, and inflate selected asset prices by allocating credit are deviations from sound money and free markets. Instead of promoting financial stability, such policies foster uncertainty and politicize money and credit.
There are many types of monetary rules under a fiat money regime that could reduce uncertainty, but most rely on some degree of forecasting. Adopting a convertibility rule, however, such as existed under the classical gold standard, would result in a forecast-free monetary regime. The market (meaning millions of private traders, not a few experts at the central bank) would determine the optimal quantity of money, as well as the efficient array of interest rates that reflect consumers' time preferences and the productivity of investment.
Under a genuine gold standard, the money supply responds automatically to the demand for money, and the value of money is anchored by defining the dollar in terms of gold. The credibility of the convertibility principle/rule lent certainty to the monetary standard. Creditors had confidence in the long-run value of the currency. Thus, during the era of commodity money in England, lenders were willing to float bonds (consols) without any redemption dates, and interest rates remained relatively low and stable.
Today, in a pure fiat money regime, there is no guarantee of the dollar's future value. Indeed, since President Nixon closed the gold window in 1971, the U.S. price level has drifted upward, sometimes rapidly, eroding the purchasing power of the dollar.
The Fed's hubris that it can somehow divine the path of real economic variables, determine the optimal quantity of money, and discern the Fed funds rate that will bring about price stability and full employment cannot be taken seriously. Central banking, like central planning, cannot hope to duplicate efficient market prices and the dynamic market process. Monetary policy is not a panacea, as even Ben Bernanke admitted.
It's time to move from the elusive goal of trying to perfect macroeconomic forecasting and fine-tune monetary policy to the goal of making the transition to a forecast-free monetary regime that relies on the convertibility principle and spontaneous market order, rather than trust in discretionary fiat money.

http://www.cato.org/pub_display.php?pub_id=14004

Theatres and Fine Arts - by Frederick Bastiat

IV. -Theatres and Fine Arts

Ought the State to support the arts?

There is certainly much to be said on both sides of this question. It may be said, in favor of the system of voting supplies for this purpose, that the arts enlarge, elevate, and harmonize the soul of a nation; that they divert it from too great an absorption in material occupations, encourage in it a love for the beautiful, and thus act favourably on its manners, customs, morals, and even on its -industry. It may be asked, what would become of music in France without her Italian theatre and her Conservatoire; of the dramatic art. without her Theatre-Francais; of painting and sculpture, without our collections, galleries, and museums? It might even be asked, whether, without centralization, and consequently the support of fine arts, that exquisite taste would be developed which is the noble appendage of French labour, and which introduces its productions to the whole world? In the face of such results, would it not be the height of imprudence to renounce this moderate contribution from all her citizens, which, in fact, in the eyes of Europe, realizes their superiority and their glory? To these and many other reasons, whose force I do not dispute, arguments no less forcible may be opposed. It might, first of all, be said, that there is a question of distributive justice in it. Does the right of the legislator extend to abridging the wages of the artisan, for the sake of adding to the profits of the artist? M. Lamartine said, “If you cease to support the theatre, where will you stop? Will you not necessarily be led to withdraw your support from your colleges, your museums, your institutes, and your libraries?” It might be answered, if you desire to support everything which is good and useful, where will you stop? Will you not necessarily be led to form a civil list for agriculture, industry, commerce, benevolence, education? Then, is it certain that government aid favours the progress of art?
This question is far from being settled, and we see very well that the theatres which prosper are those which depend upon their own resources. Moreover, if we come to higher considerations, we may observe, that wants and desires arise, the one from the other, and originate in regions which are more and more refined in proportion as the public wealth allows of their being satisfied; that Government ought not to take part in this correspondence, because in a certain condition of present fortune it could not by taxation stimulate the arts of necessity, without checking those of luxury, and thus interrupting the natural course of civilization. I may observe, that these artificial transpositions of wants, tastes, labour, and population, place the people in a precarious and dangerous position, without any solid basis.
These are some of the reasons alleged by the adversaries of State intervention in what concerns the order in which citizens think their wants and desires should be satisfied, and to which, consequently, their activity should be directed. I am, I confess, one of those who think that choice and impulse ought to come from below and not from above, from the citizen and not from the legislator; and the opposite doctrine appears to me to tend to the destruction of liberty and of human dignity.
But, by a deduction as false as it is unjust, do you know what economists are accused of? It is, that when we disapprove of Government support, we are supposed to disapprove of the thing itself whose support is discussed; and to be the enemies of every kind of activity, because we desire to see those activities, on the one hand free, and on the other seeking their own reward in themselves. Thus, if we think that the State should not interfere by taxation in religious affairs, we are atheists. If we think the State ought not to interfere by taxation in education, we are hostile to knowledge. If we say that the State ought not by taxation to give a fictitious value to land, or to any particular branch of industry, we are enemies to property and labour. If we think that the State ought not to support artists, we are barbarians who look upon the arts as useless.
Against such conclusions as these I protest with all my strength. Far from entertaining the absurd idea of doing away with religion, education, property, labour, and the arts, when we say that the State ought to protect the free development of all these kinds of human activity, without helping some of them at the expense of others, -we think, on the contrary, that all these living powers of society would develop themselves more harmoniously under the influence of liberty; and that, under such an influence no one of them would, as is now the case, be a source of trouble, of abuses, of tyranny, and disorder.
Our adversaries consider, that an activity which is neither aided by supplies, nor regulated by Government, is an activity destroyed. We think just the contrary. Their faith is in the legislator, not in mankind; ours is in mankind, not in the legislator.
Thus M. Lamartine said, “Upon this principle we must abolish the public exhibitions, which are the honour and the wealth of this country.” But I would say to M. Lamartine, -According to your way of thinking, not to support is to abolish; because, setting out upon the maxim that nothing exists independently of the will of the State, you conclude that nothing lives but what the State causes to live. But I oppose to this assertion the very example which you have chosen, and beg you to remark, that the grandest and noblest of exhibitions, one which has been conceived in the most liberal and universal spirit -and I might even make use of the term humanitary, for it is no exaggeration -is the exhibition now preparing in London; the only one in which no Government is taking any part, and which is being paid for by no tax.
To return to the fine arts: -there are, I repeat, many strong reasons to be brought, both for and against the system of Government assistance. The reader must see, that the especial object of this work leads me neither to explain these reasons, nor to decide in their favour, nor against them.
But M. Lamartine has advanced one argument which I cannot pass by in silence, for it is closely connected with this economic study. “The economical question, as regards theatres, is comprised in one word -labour. It matters little what is the nature of this labour; it is as fertile, as productive a labour as any other kind of labour in the nation. The theatres in France, you know, feed and salary no less than 80,000 workmen of different kinds; painters, masons, decorators, costumers, architects, &c., which constitute the very life and movement of several parts of this capital, and on this account they ought to have your sympathies.” Your sympathies! say, rather, your money.
And further on he says: “The pleasures of Paris are the labour and the consumption of the provinces, and the luxuries of the rich are the wages and bread of 200,000 workmen of every description, who live by the manifold industry of the theatres on the surface of the republic, and who receive from these noble pleasures, which render France illustrious, the sustenance of their lives and the necessaries of their families and children. It is to them that you will give 60,000 francs.” (Very well; very well. Great applause.) For my part I am constrained to say, “Very bad! Very bad!” Confining his opinion, of course, within the bounds of the economical question which we are discussing.
Yes, it is to the workmen of the theatres that a part, at least, of these 60,000 francs will go; a few bribes, perhaps, may be abstracted on the way. Perhaps, if we were to look a little more closely into the matter, we might find that the cake had gone another way, and that these workmen were fortunate who had come in for a few crumbs. But I will allow, for the sake of argument, that the entire sum does go to the painters, decorators, &e.
This is that which is seen. But whence does it come? This is the other side of the question, and quite as important as the former. Where do these 60, francs spring from? and where would they go if a vote of the Legislature did not direct them first towards the Rue Rivoli and thence towards the Rue Grenelle? This is what is not seen. Certainly, nobody will think of maintaining that the legislative vote has caused this sum to be hatched in a ballot urn; that it is a pure addition made to the national wealth; that but for this miraculous vote these 60,000 francs would have been for ever invisible and impalpable. It must be admitted that all that the majority can do, is to decide that they shall be taken from one place to be sent to another; and if they take one direction, it is only because they have been diverted from another.
This being the case, it is clear that the taxpayer, who has contributed one franc, will no longer have this franc at his own disposal. It is clear that he will be deprived of some gratification to the amount of one franc; and that the workman, whoever he may be, who would have received it from him, will be deprived of a benefit to that amount. Let us not, therefore, be led by a childish illusion into believing that the vote of the 60,000 francs may add any thing whatever to the well-being of the country, and to the national labour. It displaces enjoyments, it transposes wages -that is all.
Will it be said that for one kind of gratification, and one kind of labour, it substitutes more urgent, more moral, more reasonable gratifications and labour? I might dispute this; I might say, by taking 60,000 francs from the tax-payers, you diminish tile wages of labourers, drainers, carpenters, blacksmiths, and increase in proportion those of the singers.
There is nothing to prove that this latter class calls for more sympathy than the former. M. Lamartine does not say that it is so. He himself says, that the labour of the theatres is as fertile, as productive as any other (not more so); and this may be doubted; for the best proof that the latter is not so fertile as the former lies in this, that the other is to be called upon to assist it.
But this comparison between the value and the intrinsic merit of different kinds of labour, forms no part of my present subject. All I have to do here is to show, that if M. Lamartine and those persons who commend his line of argument have seen on one side the salaries gained by the providers of the comedians, they ought on the other to have seen the salaries lost by the providers of the taxpayers; for want of this, they have exposed themselves to ridicule by mistaking a displacement for a gain. If they were true to their doctrine, there would be no limits to their demands for Government aid; for that which is true of one franc and of 60,000 is true, under parallel circumstances, of a hundred millions of francs.
When taxes are the subject of discussion, Gentlemen, you ought to prove their utility by reasons from the root of the matter, but not by this unlucky assertion -“The public expenses support the working classes.” This assertion disguises the important fact, that public expenses always supersede private expenses, and that therefore we bring a livelihood to one workman instead of another, but add nothing to the share of the working class as a whole. Your arguments are fashionable enough, but they are too absurd to be justified by anything like reason.

Taxes - by Frederick Bastiat

III - Taxes

Have you ever chanced to hear it said “There is no better investment than taxes. Only see what a number of families it maintains, and consider how it reacts on industry; it is an inexhaustible stream, it is life itself.” In order-to combat this doctrine, I must refer to my preceding refutation. Political economy knew well enough that its arguments were not so amusing that it could be said of them, repetitions please. It has, therefore, turned the proverb to its own use, well convinced that, in its mouth. repetitions teach.
The advantages which officials advocate are those which are seen. The benefit which accrues to the providers is still that which is seen. This blinds all eyes.
But the disadvantages which the tax-payers have to get rid of are those which are not seen. And the injury which results from it to the providers, is still that which is not seen, although this ought to be self-evident.
When an official spends for his own profit an extra hundred sous, it implies that a tax-payer spends for his profit a hundred sous less. But the expense of the official is seen, because the act is performed, while that of the tax-payer is not seen, because, alas! he is prevented from performing it.
You compare the nation, perhaps, to a parched tract of land, and the tax to a fertilizing rain. Be it so. But you ought also to ask yourself where are the sources of this rain and whether it is not the tax itself which draws away the moisture from the ground and dries it up?
Again, you ought to ask yourself whether it is possible that the soil can receive as much of this precious water by rain as it loses by evaporation?
There is one thing very certain, that when James B. counts out a hundred sous for the tax-gatherer, he receives nothing in return. Afterwards, when an official spends these hundred sous and returns them to James B., it is for an equal value of corn or labour. The final result is a loss to James B. of five francs.
It is very true that often, perhaps very often, the official performs for James B. an equivalent service. In this case there is no loss on either side; there is merely in exchange. Therefore, my arguments do not at all apply to useful functionaries. All I say is, -if you wish to create an office, prove its utility. Show that its value to James B., by the services which it performs for him, is equal to what it costs him. But, apart from this intrinsic utility, do not bring forward as an argument the benefit which it confers upon the official, his family, and his providers; do not assert that it encourages labour.
When James B. gives a hundred pence to a Government officer, for a really useful service, it is exactly the same as when he gives a hundred sous to a shoemaker for a pair of shoes.
But when James B. gives a hundred sous to a Government officer, and receives nothing for them unless it be annoyances, he might as well give them to a thief. It is nonsense to say that the Government officer will spend these hundred sous to the great profit of national labour; the thief would do the same; and so would James B., if he had not been stopped on the road by the extra -legal parasite, nor by the lawful sponger.
Let us accustom ourselves, then, to avoid judging of things by what is seen only, but to judge of them by that which is not seen.
Last year I was on the Committee of Finance, for under the constituency the members of the opposition were not systematically excluded from all the Commissions: in that the constituency acted wisely. We have heard M. Thiers say -“I have passed my life in opposing the legitimist party, and the priest party. Since the common danger has brought us together, now that I associate with them and know them, and now that we speak face to face, I have found out that they are not the monsters I used to imagine them.”
Yes, distrust is exaggerated, hatred is fostered among parties who never mix; and if the majority would allow the minority to be present at the Commissions, it would perhaps be discovered that the ideas of the different sides are not so far removed from each other, and, above all, that their intentions are not so perverse as is supposed. However, last year I was on the Committee -of Finance. Every time that one of our colleagues spoke of fixing at a moderate figure the maintenance of the President of the Republic, that of the ministers, and of the ambassadors, it was answered-
“For the good of the service, it is necessary to surround certain offices with splendour and dignity, as a means of attracting men of merit to them. A vast number of unfortunate persons apply to the President of the Republic, and it would be placing him in a very painful position to oblige him to be constantly refusing them. A certain style in the ministerial saloons is a part of the machinery of constitutional Governments.”
Although such arguments may be controverted, they certainly deserve a serious examination. They are based upon the public interest, whether rightly estimated or not; and as far as I am concerned, I have much more respect for them than many of our Catos have, who are actuated by a narrow spirit of parsimony or of jealousy.
But what revolts the economical part of my conscience, and makes me blush for the intellectual resources of my country, is when this absurd relic of feudalism is brought forward, which it constantly is, and it is favourably received too:-
“Besides, the luxury of great Government officers encourages the arts, industry, and labour. The head of the State and his ministers cannot give banquets and soirees without causing life to circulate through all the veins of the social body. To reduce their means, would starve Parisian industry, and consequently that of the whole nation.”
I must beg you, gentlemen, to pay some little regard to arithmetic, at least; and not to say before the National Assembly in France, lest to its shame it should agree with you, that an addition gives a different sum, according to whether it is added up from the bottom to the top, or from the top to the bottom of the column.
For instance, I want to agree with a drainer to make a trench in my field for a hundred sous. Just as we have concluded our arrangement, the tax-gatherer comes, takes my hundred sous, and sends them to the Minister of the Interior; my bargain is at end, but the Minister will have another dish added to his table. Upon what ground will you dare to affirm that this official expense helps the national industry? Do you not see, that in this there is only a reversing of satisfaction and labour? A Minister has his table better covered, it is true, but it is just as true that an agriculturist has his field worse drained. A Parisian tavern-keeper has gained a hundred sous,I grant you; but then you must grant me that a drainer has been prevented from gaining five francs. It all comes to this, -that the official and the tavern-keeper being satisfied, is that which is seen; the field undrained, and the drainer deprived of his job, is that which is not seen. Dear me! how much trouble there is in proving that two and two make four; and if you succeed in proving it, it is said, “the thing is so plain it is quite tiresome,” and they vote as if you had proved nothing at all.