Wednesday, April 24, 2013

Mises and Gorbachev: Why Socialism Still Doesn’t Work

By Tom Bethell
Last summer, the following headline appeared over a page-one story by Dusko Doder in the Washington Post:
Gorbachev’s Vigor Raises ExpectationsNew Soviet Leader Focuses on Economy
Mr. Doder proceeded to inform us that the new Soviet “leader” (what an odd word to use, by the way) had been showing an “almost breathtaking determination to make changes in the Soviet economy.”
Two weeks later Serge Schmemann of the New York Times wrote of “the depth of excitement and hope that Mr. Gorbachev seems to have tapped across the land in his first 100 days in office.”
Since Gorbachev’s accession, there have been many similar stories, conveying a ventriloquized media enthusiasm for the new “leader.” There can be no doubt that, in the opinion of many U.S. journalists, the socialist economic system of state-controlled resources and central command has not worked well lately in the Soviet Union because the men in charge have been elderly and incompetent. In other words, there is nothing wrong with the system itself—provided it is managed by a skillful, vigorous elite.
Robert Kaiser of the Washington Post put it this way in an article headlined “Now Russia Will Change.” Gorbachev, he said, is a “new kind of Soviet man.” He is “young, well-educated, vital, relaxed and by all outward appearances self-confident.” True, Kaiser conceded, there were problems in the economy—“corruption,” for example, and “inefficiency.” Also an “entrenched bureaucracy.” But all this would no doubt soon change with the vigorous Mr. G. at the helm.
Well, Mr. Kaiser (who was the Post’s correspondent in Moscow in the early 1970s) is in for a big disappointment. And so are the poor, long-suffering Russian people. Nothing is likely to change, although it is possible that Gorbachev will make things worse.
The great difficulty for Mr. Gorbachev is this: socialist economies all have a serious defect which cannot be resolved by vigor or good intentions. This defect was spelled out by Ludwig von Mises as long ago as 1920—before the evidence of socialist failure was available. His analysis amounted to a prediction that has been verified.
The problem is this: It is one thing for central planners to draw up a plan of production. It is quite another thing to carry it out. Here we encounter the famous “problem of economic calculation” formulated by Mises. How can you (the planners) know what should be produced, before you know what people want? And people cannot know what they want unless they first know the price of things. But prices themselves can only be established when people are permitted to own things and to exchange them among themselves. But people do not have these rights in centrally planned economies.
The planners can, of course, decide beforehand what goods are to be manufactured, whether or not the people really want them. But as Trygve Hoff points out in his book Economic Calculation in the Socialist Society, only the most primitive planning can proceed in this way. In real life the planners and their subordinate factory managers bump up against the central fact of economic life—scarcity. There is not enough of everything to go around. One is tempted to say that there is not enough of anything to go around—if it is both desirable and free. (Air seems to be the only exception.)
It is worth noting that when, in the 1920s and 1930s economists tried to rebut Mises, some of them went so far as to challenge the assumption of scarcity, suggesting that it was a chimera stage-managed by nefarious monopolists. But if we assume that scarcity is a reality, as we must, then we are forced to conclude that goods must be priced. And yet the central planners do not know how to price them in the absence of markets.
Prices depend for their formation on the real possibility of personal profit or loss. Try to imagine a serious game of poker played with Monopoly money. All psychological incentive is removed by the knowledge that at the end of the evening, no one playing is really going to lose or gain anything.
In The Foundations of Morality, Henry Hazlitt made one of the clearest statements of the problem of socialist pricing:
“If I am a government commissar selling something I don’t really own, and you are another government commissar buying it with money that isn’t really yours, then neither of us really cares what the price is. When, as in a socialist or communist country, the heads of mines and factories, or stores and collective farms, are mere salaried government bureaucrats, and sell their finished products to still other bureaucrats, the so-called prices at which they buy and sell are mere book-keeping fictions. Such bureaucrats are merely playing an artificial game called ‘free market.’ They cannot make a socialist system work like a free-market system merely by imitating prices while ignoring private property.”
The Polish economist Oskar Lange tried to save the day for the socialist by claiming that prices could be established by trial and error: set prices at a given level and then move it up or down depending on whether it yields a shortage or a surplus. But here the socialist run into their second great difficulty—the transmission of information to the central planning authority. How do the central planners know where things are in shortage and where they are in surplus? (This problem was first elucidated by F. A. Hayek.) The point is that it is difficult and expensive to move information to a central point.
Alternatively, one could say that only a comparatively small amount of information can be crammed into a central point. Here we may think of another analogy. How do you get a message onto President Reagan’s desk? Obviously you can’t just call him up, and if you write, your message will compete with the thousands of letters that arrive each day. A lot of money is spent in Washington trying to solve this problem. The same problem exists for Soviet commissars trying to get the attention of the people in Moscow who have decision-making authority.
In response to these various difficulties there are, I believe, three options open to the planning authority (over which Mr. Gorbachev presides). It can turn a blind eye on the various underling officials and managers as they make transactions and exchanges among themselves without getting permission from Moscow. This option—de facto decentralization—is labeled “corruption,” however, and it is very unpopular with those who think that socialism should be made to work according to the prescriptions of Lenin. Leonid Brezhnev evidently used the “blind-eye” method. But with Yuri Andropov there was a crackdown. Various officials were shot to discourage the others.
“Crackdown” is in fact the second option, and the one preferred by reformers everywhere, including, of course, American liberals. Gorbachev is Andropov’s protégé and he may well try to go this route. Apparently he already tried it in agriculture, over which he earlier presided. Grain production declined from 237 million tons in 1978 to 170 million tons in 1984. (Such declines are normally attributed to “bad weather.”) Nonetheless Gorbachev was promoted, and he may well now attempt a more general crackdown. If he does, he would provoke a more general decline in Soviet production.
The third option is for Gorbachev to attempt to decentralize the system—i.e. to legalize many of the actions previously labeled corrupt. This in effect is a movement away from socialism. It would be the best thing Gorbachev could attempt, but here he will run up against the “entrenched bureaucracy” that Robert Kaiser alluded to. Decentralizing the Soviet economy depends on issuing orders that are the functional equivalent of telling captains that they no longer need to obey majors, and corporals that they are on a par with sergeants.
The point is that it is very difficult to get such unpopular orders to pass down the chain of command. Colonels will always find ways of obstructing commands that have the effects of denying their own authority. (In the reverse direction, the Soviet economy suffers from an equally serious problem: just as unpopular orders won’t travel downhill, so unpopular information won’t travel uphill. Reports of unfulfilled plans and quotas tend to be ameliorated as they move closer to the center.)
Of the various problems associated with the Soviet economy (and all socialist economies) the “entrenched bureaucracy” is the one that U.S. journalists are beginning to appreciate and describe. For example in late May David Ignatius wrote in the Wall Street Journal:
It may prove impossible to both increase the independence of individual Soviet enterprises and retain full central control of the economy. Says Arnold Horelick, the director of the Rand-UCLA Center for the Study of Soviet International Behaviour: “I would describe Gorbachev’s reforms as trying to have his cake and eat it, too.”
Maybe China will prove me wrong. I hope so. But at present the evident suggests that communism cannot be reformed from within. My guess is that of the three options listed here, the “Brezhnev-blind-eye” is the only one that is remotely workable—not that it produces brilliant results—and Mr. Gorbachev will almost certainly resort to it if he stays in his office for any length of time.

Tuesday, April 23, 2013

The Politics of Famine


By Murray N. Rothbard


The media focuses primarily on the horrifying shots of the starving children, and secondarily on the charges and counter-charges about which governments—the Western or the Ethiopian—are responsible for relief not getting to the starving thousands on time. In the midst of the media blitz, the important and basic questions get lost in the shuffle. For example, why does Nature seem to frown only on socialist countries? If the problem is drought, why do the rains only elude countries that are socialist or heavily statist? Why does the United States never suffer from poor climate?
The root of famine lies not in the gods or in our stars but in the actions of man. Climate is not the reason that Russia before Communism was a heavy exporter of grain, while now the Soviet Union is a grain importer. Nature is not responsible for the fact that, of all the countries of East Africa, the Marxist-Leninist nations of Ethiopia and Mozambique are now the major sufferers from mass famine and starvation. Given causes yield given effects, and it is an ineluctable law of nature and of man that if agriculture is systematically crippled and exploited, food production will collapse, and famine will be the result.
The root of the problem is the Third World, where (a) agriculture is overwhelmingly the most important industry, and (b) the people are not affluent enough, in any crisis, to purchase food from abroad. Hence, to Third World people, agriculture is the most precious activity, and it becomes particularly important that it not be hobbled or discouraged in any way. Yet, wherever there is production, there are also parasitic classes living off the producers. The Third World in our century has been the favorite arena for applied Marxism, for revolutions, coups, or domination by Marxist intellectuals. Whenever such new ruling classes have taken over, and have imposed statist or full socialist rule, the class most looted, exploited, and oppressed has been the major productive class: the farmers or peasantry. Literally tens of millions of the most productive farmers were slaughtered by the Russian and Chinese Communist regimes, and the remainder were forced off their private lands and onto cooperative or state farms, where their productivity plummeted, and food production gravely declined.
And even in those countries where land was not directly nationalized, the new burgeoning state apparatus flourished on the backs of the peasantry, by levying heavy taxes and by forcing peasants to sell grain to the state at far below market prices. The artificially cheap food was then used to subsidize foods supplies for the urban population which formed the major base of support for the new bureaucratic class. The standard paradigm in African and in Asian countries has been as follows: British, French, Portuguese, or whatever imperialism carved out artificial boundaries of what they dubbed “colonies,” and established capital cities to administer and rule over the mass of peasantry. The new class of higher and lower bureaucrats lived off the peasants by taxing them and forcing them to sell their produce artificially cheaply to the state. When the imperial powers pulled out, they turned over these new nations to the tender mercies of Marxist intellectuals, generally trained in London, Paris, or Lisbon, who imposed socialism or far greater statism, thereby aggravating the problem enormously. Furthermore, a vicious spiral was set up, similar to the one that brought the Roman Empire to its knees. The oppressed and exploited peasantry, tired of being looted for the sake of the urban sector, decided to leave the farm and go sign up in the welfare state provided in the capital city. This makes the farmer’s lot still worse, hence more of them leave the farm, despite brutal measures trying to prevent them from leaving. The result of this spiral is famine.
Thus, most African governments force farmers to sell all their crops to the state at only a half or even a third of market value. Ethiopia, as a Marxist-Leninist government, also forced the farmers onto highly inefficient state farms, and tried to keep them working there by brutal oppression.
The answer to famine in Ethiopia or elsewhere is not international food relief. Since relief is invariably under the control of the recipient government, the food generally gets diverted from the farms to line the pockets of government officials to subsidize the already well-fed urban population. The answer to famine is to liberate the peasantry of the Third World from the brutality and exploitation of the state ruling class. The answer to famine is freedom and private property.

Monday, April 22, 2013

Protectionism and the Destruction of Prosperity

By Murray N. Rothbard

Protectionism, often refuted and seemingly abandoned, has returned, and with a vengeance. The Japanese, who bounced back from grievous losses in World War II to astound the world by producing innovative, high-quality products at low prices, are serving as the convenient butt of protectionist propaganda. Memories of wartime myths, mixed with discrete anti-Oriental racism, can prove a heady brew, as protectionists warn about this new “Japanese imperialism,” even “worse than Pearl Harbor.” This “imperialism” turns out to consist of selling Americans wonderful Sony TV sets, autos, microchips, etc. at prices more than competitive with backward and lumbering American firms.
Is this “flood” of Japanese products really a menace, to be combated by the U.S. government? Or is the new Japan a godsend to American consumers?
In taking our stand on this issue, we should recognize that all government action means coercion, so that calling upon the U.S. government to intervene means urging it to use force and violence to restrain peaceful trade. One trusts that the protectionists are not willing to pursue their logic of force to the ultimate in the form of another Hiroshima and Nagasaki.
Keep Your Eye on the Consumer
As we unravel the tangled web of protectionist argument, we should keep our eye on two essential points: 1) protectionism means force in restraint of trade; and 2) the key is what happens to the consumer. Invariably, we will find that the protectionists are out to cripple, exploit, and impose severe losses not only on foreign consumers but especially on Americans. And since each and every one of us is a consumer, this means that protectionism is out to mulct all of us for the benefit of a specially privileged, subsidized few—and an inefficient few at that: people who cannot make it in a free and unhampered market.
Take, for example, the alleged Japanese menace. All trade is mutually beneficial to both parties—in this case Japanese producers and American consumers—otherwise they would not engage in the exchange. In trying to stop this trade, protectionists are trying to stop American consumers from enjoying high living standards by buying cheap and high-quality Japanese products. Instead, we are to be forced by government to return to the inefficient, higher-priced products we have already rejected. In short, inefficient producers are trying to deprive all of us of products we desire so that we will have to turn to inefficient firms. American consumers are to be plundered.
How To Look at Tariffs and Quotas
The best way to look at tariffs or import quotas or other protectionist restraints is to forget about political boundaries. Political boundaries of nations may be important for other reasons, but they have no economic meaning whatever. Suppose, for example, that each state of the United States were a separate nation. Then we would hear a lot of protectionist bellyaching that we are now fortunately spared. Think of the howls by inefficient, high-priced New York or Rhode Island textile manufacturers who would then be complaining about the “unfair,” “cheap labor” competition from various low-type “foreigners” from Tennessee or North Carolina, or vice versa.
Fortunately, the absurdity of worrying about the balance of payments is made evident by focusing on interstate trade. For nobody worries about the balance of payments between New York and New Jersey, or, for that matter, between Manhattan and Brooklyn, because there are no customs officials recording such trade and such balances.
If we think about it, it is clear that a call by New York firms for a tariff against North Carolina is a pure ripoff of New York (as well as North Carolina) consumers, a naked grab for coerced special privilege by inefficient business firms. If the 50 states were separate nations, the protectionists would then be able to use the trappings of patriotism, and distrust of foreigners, to camouflage and get away with their looting the consumers of their own region.
Fortunately, interstate tariff’s are unconstitutional. But even with this clear barrier, and even without being able to wrap themselves in the cloak of nationalism, protectionists have been able to impose interstate tariffs in another guise. Part of the drive for continuing increases in the federal minimum wage law is to impose a protectionist device against lower-wage, lower-labor-cost competition from North Carolina and other southern states against their New England and New York competitors.
During the 1966 Congressional battle over a higher federal minimum wage, for example, the late Senator Jacob Javits (R-NY) freely admitted that one of his main reasons for supporting the bill was to cripple the southern competitors of New York textile firms. Since southern wages are generally lower than in the north, the business firms (and the workers struck by unemployment) hardest hit by an increased minimum wage will be located in the south.
Another way in which interstate trade restrictions have been imposed has been in the fashionable name of “safety.” Government-organized state milk cartels in New York, for example, have prevented importation of milk from nearby New Jersey under the patently spurious grounds that the trip across the Hudson would render New Jersey milk “unsafe.”
If tariffs and restraints on trade are good for a country, then why not indeed for a state or region? The principle is precisely the same. In America’s first great depression, the Panic of 1819, Detroit was a tiny frontier town of only a few hundred people. Yet protectionist cries arose—fortunately not fulfilled—to prohibit all “imports” from outside of Detroit, and citizens were exhorted to “buy only Detroit.” If this nonsense had been put into effect, general starvation and death would have ended all other economic problems for Detroiters.
So why not restrict and even prohibit trade, i.e. “imports,” into a city, or a neighborhood, or even on a block, or, to boil it down to its logical conclusion, to one family? Why shouldn’t the Jones family issue a decree that from now on, no member of the family can buy any goods or services produced outside the family house? Starvation would quickly wipe out this ludicrous drive for self-sufficiency.
And yet we must realize that this absurdity is inherent in the logic of protectionism. Standard protectionism is just as preposterous, but the rhetoric of nationalism and national boundaries has been able to obscure this vital fact.
The upshot is that protectionism is not only nonsense, but dangerous nonsense, destructive of all economic prosperity. We are not, if we were ever, a world of self-sufficient farmers. The market economy is one vast latticework throughout the world, in which each individual, each region, each country, produces what he or it is best at, most relatively efficient in, and exchanges that product for the goods and services of others. Without the division of labor and the trade based upon that division, the entire world would starve. Coerced restraints on trade—such as protectionism—cripple, hobble, and destroy trade, the source of life and prosperity. Protectionism is simply a plea that consumers, as well as general prosperity, be hurt so as to confer permanent special privilege upon groups of inefficient producers, at the expense of competent firms and of consumers. But it is a peculiarly destructive kind of bailout, because it permanently shackles trade under the cloak of patriotism.
The Negative Railroad
Protectionism is also peculiarly destructive because it acts as a coerced and artificial increase in the cost of transportation between regions. One of the great features of the Industrial Revolution, one of the ways in which it brought prosperity to the starving masses, was by reducing drastically the cost of transportation. The development of railroads in the early 19th century, for example, meant that for the first time in the history of the human race, goods could be transported cheaply over land. Before that, water—rivers and oceans—was the only economically viable means of transport. By making land transport accessible and cheap, railroads allowed interregional land transportation to break up expensive inefficient local monopolies. The result was an enormous improvement in living standards for all consumers. And what the protectionists want to do is lay an axe to this wonderous principle of progress.
It is no wonder that Frederic Bastiat, the great French laissez-faire economist of the mid-19th century, called a tariff a “negative railroad.” Protectionists are just as economically destructive as if they were physically chopping up railroads, or planes, or ships, and forcing us to revert to the costly transport of the past—mountain trails, rafts, or sailing ships.
“Fair” Trade
Let us now turn to some of the leading protectionist arguments. Take, for example, the standard complaint that while the protectionist “welcomes competition,” this competition must be “fair.” Whenever someone starts talking about “fair competition” or indeed, about “fairness” in general, it is time to keep a sharp eye on your wallet, for it is about to be picked. For the genuinely “fair” is simply the voluntary terms of exchange, mutually agreed upon by buyer and seller. As most of the medieval scholastics were able to figure out, there is no “just” (or “fair”) price outside of the market price.
So what could be “unfair” about the free-market price? One common protectionist charge is that it is “unfair” for an American firm to compete with, say, a Taiwanese firm which needs to pay only one-half the wages of the American competitor. The U.S. government is called upon to step in and “equalize” the wage rates by imposing an equivalent tariff upon the Taiwanese. But does this mean that consumers can never patronize low-cost firms because it is “unfair” for them to have lower costs than inefficient competitors? This is the same argument that would be used by a New York firm trying to cripple its North Carolina competitor.
What the protectionists don’t bother to explain is why U.S. wage rates are so much higher than Taiwan. They are not imposed by Providence. Wage rates are high in the U.S. because American employers have bid these rates up. Like all other prices on the market, wage rates are determined by supply and demand, and the increased demand by U.S. employers has bid wages up. What determines this demand? The “marginal productivity” of labor.
The demand for any factor of production, including labor, is constituted by the productivity of that factor, the amount of revenue that the worker, or the pound of cement or acre of land, is expected to bring to the brim. The more productive the factory, the greater the demand by employers, and the higher its price or wage rate. American labor is more costly than Taiwanese because it is far more productive. What makes it productive? To some extent, the comparative qualities of labor, skill, and education. But most of the difference is not due to the personal qualities of the laborers themselves, but to the fact that the American laborer, on the whole, is equipped with more and better capital equipment than his Taiwanese counterparts. The more and better the capital investment per worker, the greater the worker’s productivity, and therefore the higher the wage rate.
In short, if the American wage rate is twice that of the Taiwanese, it is because the American laborer is more heavily capitalized, is equipped with more and better tools, and is therefore, on the average, twice as productive. In a sense, I suppose, it is not “fair” for the American worker to make more than the Taiwanese, not because of his personal qualities, but because savers and investors have supplied him with more tools. But a wage rate is determined not just by personal quality but also by relative scarcity, and in the United States the worker is far scarcer compared to capital than he is in Taiwan.
Putting it another way, the fact that American wage rates are on the average twice that of the Taiwanese, does not make the cost of labor in the U.S. twice that of Taiwan. Since U.S. labor is twice as productive, this means that the double wage rate in the U.S. is offset by the double productivity, so that the cost of labor per unit product in the U.S. and Taiwan tends, on the average, to be the same. One of the major protectionist fallacies is to confuse the price of labor (wage rates) with its cost, which also depends on its relative productivity.
Thus, the problem faced by American employers is not really with the “cheap labor” in Taiwan, because “expensive labor” in the U.S. is precisely the result of the bidding for scarce labor by U.S. employers. The problem faced by inefficient U.S. textile or auto firms is not so much cheap labor in Taiwan or Japan, but the fact that other U.S. industries are efficient enough to afford it, because they bid wages that high in the first place.
So, by imposing protective tariffs and quotas to save, bail out, and keep in place inefficient U.S. textile or auto or microchip firms, the protectionists are injuring the American consumer. They are also harming efficient U.S. firms and industries, which are prevented from employing resources now locked into incompetent firms, and who would otherwise be able to expand and sell their efficient products at home and abroad.
“Dumping”
Another contradictory line of protectionist assault on the free market asserts that the problem is not so much the low costs enjoyed by foreign firms, as the “unfairness” of selling their products “below costs” to American consumers, and thereby engaging in the pernicious and sinful practice of “dumping.” By such dumping they are able to exert unfair advantage over American firms who presumably never engage in such practices and make sure that their prices are always high enough to cover costs. But if selling below costs is such a powerful weapon, why isn’t it ever pursued by business firms within a country?
Our first response to this charge is, once again, to keep our eye on consumers in general and on American consumers in particular. Why should it be a matter of complaint when consumers so clearly benefit? Suppose, for example, that Sony is willing to injure American competitors by selling TV sets to Americans for a penny apiece. Shouldn’t we rejoice at such an absurd policy of suffering severe losses by subsidizing us, the American consumers? And shouldn’t our response be: “Come on, Sony, subsidize us some more!” As far as consumers are concerned, the more “dumping” that takes place, the better.
But what of the poor American TV firms, whose sales will suffer so long as Sony is virtually willing to give their sets away? Well, surely, the sensible policy for RCA, Zenith, etc. would be to hold back production and sales until Sony drives itself into bankruptcy. But suppose that the worst happens, and RCA, Zenith, etc. are themselves driven into bankruptcy by the Sony price war? Well, in that case, we the consumers will still be better off, since the plants of the bankrupt firms, which would still be in existence, would be picked up for a song at auction, and the American buyers at auction would be able to enter the TV business and outcompete Sony because they now enjoy far lower capital costs.
For decades, indeed, opponents of the free market have claimed that many businesses gained their powerful status on the market by what is called “predatory price-cutting,” that is, by driving their smaller competitors into bankruptcy by selling their goods below cost, and then reaping the reward of their unfair methods by raising their prices and thereby charging “monopoly prices” to the consumers. The claim is that while consumers may gain in the short-run by price wars, “dumping,” and selling below costs, they lose in the long-run from the alleged monopoly. But, as we have seen, economic theory shows that this would be a mug’s game, losing money for the “dumping” firms, and never really achieving a monopoly price. And sure enough, historical investigation has not turned up a single case where predatory pricing, when tried, was successful, and there are actually very few cases where it has even been tried.
Another charge claims that Japanese or other foreign firms can afford to engage in dumping because their governments are willing to subsidize their losses. But again, we should still welcome such an absurd policy. If the Japanese government is really willing to waste scarce resources subsidizing American purchases of Sony’s, so much the better! Their policy would be just as self-defeating as if the losses were private.
There is yet another problem with the charge of “dumping,” even when it is made by economists or other alleged “experts” sitting on impartial tariff commissions and government bureaus, there is no way whatever that outside observers, be they economists, businessmen, or other experts, can decide what some other firm’s “costs” may be. “Costs” are not objective entities that can be gauged or measured. Costs are subjective to the businessman himself, and they vary continually, depending on the businessman’s time horizon or the stage of production or selling process he happens to be dealing with at any given time.
Suppose, for example, a fruit dealer has purchased a case of pears for $20, amounting to $1 a pound. He hopes and expects to sell those pears for $1.50 a pound. But something has happened to the pear market, and he finds it impossible to sell most of the pears at anything near that price. In fact, he finds that he must sell the pears at whatever price he can get before they become overripe. Suppose he finds that he can only sell his stock of pears at 70 cents a pound. The outside observer might say that the fruit dealer has, perhaps “unfairly,” sold his pears “below costs,” figuring that the dealer’s costs were $1 a pound.
“Infant” Industries
Economists agree on very little. But economists agree virtually unanimously on one thing: their oppostion to protectionism. Classically, they made one unfortunate exception, an exception which the specially privileged were able to use and magnify to become an enormous hole in the free-trade case. This argument held that the government should provide a temporary protective tariff to aid, or to bring into being, an “infant industry.” Then, when the industry was well established, the government would and should remove the tariff and toss the now “mature” industry into the competitive swim.
The theory was fallacious, and the policy proved disastrous in practice. For there is no more need for government to protect a new, young, industry from foreign competition than there is to protect it from domestic competition.
In the last few decades, the “infant” plastics, television, and computer industries made out very well without such protection. Any government subsidizing of a new industry will funnel too many resources into that industry as compared to older firms, and will also inaugurate distortions that may persist and render the firm or industry permanently inefficient and vulnerable to competition. As a result, “infant-industry” tariffs have tended to become permanent, regardless of the “maturity” of the industry. The proponents were carried away by a misleading biological analogy to “infants” who need adult care. But a business firm is not a person, young or old.
Older Industries
Indeed, in recent years, older industries that are notoriously inefficient have been using what might be called a “senile-industry” argument for protectionism. Steel, auto, and other outcompeted industries have been complaining that they “need a breathing space” to retool and become competitive with foreign rivals, and that this breather could be provided by several years of tariffs or import quotas. This argument is just as full of holes as the hoary infant-industry approach, except that it will be even more difficult to figure out when the “senile” industry will have become magically rejuvenated. In fact, the steel industry has been inefficient ever since its inception, and its chronological age seems to make no difference. The first protectionist movement in the U.S. was launched in 1820, headed by the Pennsylvania iron (later iron and steel) industry, artificially force-fed by the War of 1812 and already in grave danger from far more efficient foreign competitors.
The Non-Problem of the Balance of Payments
A final set of arguments, or rather alarms, centers on the mysteries of the balance of payments. Protectionists focus on the horrors of imports being greater than exports, implying that if market forces continued unchecked, Americans might wind up buying everything from abroad, while selling foreigners nothing, so that American consumers will have engorged themselves to the permanent ruin of American business firms. But if the exports really fell to somewhere near zero, where in the world would Americans still find the money to purchase foreign products? The balance of payments, as we said earlier, is a pseudo-problem created by the existence of customs statistics.
During the day of the gold standard, a deficit in the national balance of payments was a problem, but only because of the nature of the fractional-reserve banking system. If U.S. banks, spurred on by the Fed or previous forms of central banks, inflated money and credit, the American inflation would lead to higher prices in the U.S., and this would discourage exports and encourage imports. The resulting deficit had to be paid for in some way, and during the gold standard era this meant being paid for in gold, the international money. So as bank credit expanded, gold began to flow out of the country, which put the fractional-reserve banks in even shakier shape. To meet the threat to their solvency posed by the gold outflow, the banks eventually were forced to contract credit, precipitating a recession and reversing the balance of payment deficits, thus bringing gold back into the country.
But now, in the fiat-money era, balance of payments deficits are truly meaningless. For gold is no longer a “balancing item.” In effect, there is no deficit in the balance of payments. It is true that in the last few years, imports have been greater than exports by $150 billion or so per year. But no gold flowed out of the country. Neither did dollars “leak” out. The alleged “deficit” was paid for by foreigners investing the equivalent amount of money in American dollars: in real estate, capital goods, U.S. securities, and bank accounts.
In effect, in the last couple of years, foreigners have been investing enough of their own funds in dollars to keep the dollar high, enabling us to purchase cheap imports. Instead of worrying and complaining about this development, we should rejoice that foreign investors are willing to finance our cheap imports. The only problem is that this bonanza is already coming to an end, with the dollar becoming cheaper and exports more expensive.
We conclude that the sheaf of protectionist arguments, many plausible at first glance, are really a tissue of egregious fallacies. They betray a complete ignorance of the most basic economic analysis. Indeed, some of the arguments are almost embarrassing replies of the most ridiculous claims of 17th century mercantilism: for example, that it is somehow a calamitous problem that the U.S. has a balance of trade deficit, not overall, but merely with one specific country, e.g. Japan.
Must we even relearn the rebuttals of the more sophisticated mercantilists of the 18th century: namely, that balance with individual countries will cancel each other out, and therefore that we should only concern ourselves with the overall balance? (Let alone realize that the overall balance is no problem either.) But we need not reread the economic literature from Adam Smith to the present-day to realize that the impetus for protectionism comes not from preposterous theories, but from the quest for coerced special privilege and restraint of trade at the expense of efficient competitors and consumers.
In the host of special interests using the political process to repress and loot the rest of us, the protectionists are among the most venerable. It is high time that we get them, once and for all, off our backs, and treat them with the righteous indignation they so richly deserve.

Sunday, April 21, 2013

Economic Warfare Hurts Us More Than Them


By Robert Higgs and Charlotte Twight





During the past decade the United States has repeatedly waged war, not with guns, missiles, and bombs, but with economic sanctions restricting the international transactions and travel of Americans.
Economic warfare—prohibitions of travel and commercial and financial dealings imposed selectively in order to alter the behavior of other governments—has been waged at one time or another since 1979 against Iran, Libya, Nicaragua, South Africa, and Syria as well as various communist countries.
Sanctions usually fail to attain their ostensible objective: they do not alter the conduct of other governments. But they do have significant domestic consequences. Americans suffer economic losses, both short-term and long-term. In effect, sanctions impose the costs of U.S. foreign policy on Americans interested in certain international commercial and financial deals or travel to certain countries.
Sanctions imposed after the Iranians took American hostages in Tehran in 1979 illustrate the erratic and arbitrary character of this instrument of foreign policy. President Carter first blocked all Iranian property in the United States and forbade most commercial and financial dealings with Iran. Then, as part of the deal to gain freedom for the hostages, Carter rescinded the sanctions, nullified attachments of Iranian property issued by federal courts, and suspended the legal claims of Americans against Iran. An Iran-United States Claims Tribunal was established in the Netherlands, and Americans were forbidden to press their claims in U.S. courts.
This extraordinary setting-aside of the judicial system by the president was challenged in an important 1981 Supreme Court case, Dames & Moore V. Regan. The Court’s decision gave broad scope to the president’s powers under the International Emergency Economic Powers Act, sustaining his nullification of courts’ attachments of Iranian property. Moreover, the Court held that, even without explicit statutory authority, the president has constitutional power to suspend American claims in federal courts because of “a history of congressional acquiescence” in similar instances. Whatever Executive action Congress has never overtly disapproved, it has implicitly approved—a doctrine that would have astonished the Founding Fathers.
In making regulations to implement sanctions, the bureaucrats of the Treasury’s Office of Foreign Assets Control (OFAC) have extraordinary discretion—the power to act arbitrarily and capriciously. Licenses may be denied, granted, or revoked at will. OFAC is not bound by the Administrative Procedure Act with regard to notice of proposed rule making, opportunity for public participation, or delay in effective date. OFAC officials may, and sometimes do, abruptly alter the rules solely at their pleasure. They often create loopholes for privileged parties, such as wholly-owned foreign subsidiaries of American oil companies that continue business as usual with Libya, notwithstanding the president’s order that Americans cease operations in that country. Administrative officials may, as in the Iranian case, set aside the protections normally afforded private property rights by the U.S. judicial system.
Economic warfare rarely promotes the national interest effectively. Rather, it is a costly form of political theater. Only governmental officials, especially the president, normally benefit from it; and even that benefit is fleeting.
A president wages economic warfare because it enhances his popularity, if only momentarily. It diverts attention from intractable domestic problems and creates an image that he is strong, that he is “doing something” to defend or promote American interests beyond our borders.
The image has little substance. The governments of Iran, Libya, Nicaragua, South Africa, and Syria have not been visibly moved by U.S. sanctions against them. But American citizens have been hurt. Although some firms have found ways to circumvent the sanctions, important business has been lost—computer sales to South Africa, aircraft sales to Syria, all exports to Nicaragua. American reputations for reliable service have suffered in the world market, where alternative foreign suppliers are usually happy to take on the business denied Americans by their own government.
More importantly, economic warfare has shifted rights from private hands into the hands of governmental officials who are free to exercise their newly acquired powers with virtually unchecked discretion. Nothing of genuine public importance has been gained; bad political and legal precedents have become established; a little more liberty has been lost. As Ludwig von Mises pointed out in The Free and Prosperous Commonwealth: “Nationalist policies, which always begin by aiming at the ruination of one’s neighbor, must, in the final analysis, lead to the ruination of all.”




Saturday, April 20, 2013

The Myth of the Trade Deficit


By Sam Wells




Almost daily we read and hear demands from leaders of industry and demagogic politicians to increase restrictions on foreign imports because of the “unfavorable balance of trade” that America is supposed to have with other countries. Although the Reagan administration has paid lip service to free trade, it has drastically increased political obstructions to foreign imports. In 1981, approximately 25% of all goods imported into the United States were subject to some kind of U.S. government restrictions. Today, that figure has risen to 40%.
And now the president has sent to Congress legislation to stiffen restrictions on imports and pile another layer of controls on top of the bunch we already have. Since 1982 the administration has, through government-to-government negotiations and arm-twisting, secured 18 agreements that limit steel exports to the United States. Last year, the administration pressured Japan and Taiwan into agreeing to limit their exports of machine tools to the U.S. for the next five years. After failing to secure “voluntary” trade restraints from Switzerland and Germany, the administration set new quotas which rolled back exports from those countries. Also last year, it used threats to obtain agreements with South Korea, Hong Kong, and Japan that limited the growth in the quantity of textiles they could export to the U.S. to only 1% or less per year. And these are only a few examples of increasingly prevalent protectionism.
In ominous tones, we are told that the United States has incurred a “trade deficit” and that this means disaster. In late January, the government—from whom all such numbers flow—revealed that the trade deficit for 1986 had amounted to $169.8 billion, a record level. Gosh! But what does it mean? Was the president right when he referred to us as “trade patsies”? Are Americans being taken advantage of by the opportunity to buy low-priced, foreign-made products? Are the trade policies of the Japanese “cheating” us? The answer is a clear No.
The great Ludwig von Mises, writing in 1946, showed how free trade works to the benefit of all parties:
Under free trade the Swiss watchmakers would expand their sales on the American market and the sales of their American competitors would shrink. But this is only a part of the consequences of free trade. Selling and producing more, the Swiss would earn and buy more. It does not matter whether they themselves buy more of the products of other American industries or whether they increase their domestic purchases and those in other countries, for instance, in France. Whatever happens, the equivalent of the additional dollars they earned must finally go to the United States and increase the sales of some American industries. If the Swiss do not give away their products as a gift, they must spend these dollars in buying.
So, in the long run, trade can never take jobs away, but only add them to the American economy as a whole.
Moreover, artificially trying to prop up inefficient industries through protectionist trade policies hurts us all by driving up prices and holding down quality. These policies also hurt other, efficient U.S. industries by tying up resources and capital in the protected sectors, which would otherwise flow to more efficient uses and satisfy consumer needs less expensively. How many Americans have any notion of the high costs imposed by auto import restraints? Despite its laudable free-market rhetoric, the current administration pushed for “voluntary” restraints on the number of Japanese automobiles sold to Americans. This had the effect of narrowing the alternatives from which American consumers could choose—and hiked the price by nearly $2,000 per car. That’s a total cost to American consumers of more than $250,000 for each U.S. auto-industry job supposedly saved. If you multiply that example by the number of other “protected” U.S. industries and jobs, the total burden to U.S. consumers amounts to $30-40 billion. And neo-mercantilist policies invite similar measures in retaliation from foreign governments whose leaders are also deluded by mercantilist myths.
Stepped-up protectionism in the U.S. Congress just in the last two years has already resulted in some very harmful foreign reprisals. While all American (and foreign) consumers are hurt by this war between governments, the American farmer has been especially hard hit. An editorial in USA Today noted:
A typical wheat, soybean, or cotton farmer gets fifty percent of his income from foreign sales. And recent U.S. efforts to protect specialty steel, textiles, and other industries have led to heavy retaliation by other countries against our grain exports. We’ve lost farm sales worth many times what we saved in the protected industries.
When Americans choose to buy lower-cost imports, they have more money to spend or invest in other ways. This means they have more of their wants and needs satisfied for a given income.
The freedom of Americans to buy goods made in other countries gives them a wider choice, and that’s all to the good. Not only has buying Japanese products not hurt Americans, but the money earned by the Japanese from their sales to us of VCRs, cars, stereos, cameras, and computer chips has come back to us in the form of Japanese investments.
If it were not for the inflow of this foreign capital (from Europe as well as Japan and elsewhere), the “crowding out” of domestic borrowers in our credit markets by big government’s gargantuan budget deficits would have slammed us into a deep repression long before now. So, it has given us a little more precious time to put our own house in order. Instead of expressing gratitude for this salutary consequence, our demagogic politicians are trying to make the Japanese and other foreigners the scapegoats for ills which the politicos themselves created.
What about “dumping” (selling goods to Americans at prices allegedly “below the cost of production”) or the Japanese keeping out U.S. goods? Japan is actually less protectionist than is the United States. And nobody can sell his products at below-cost for long without going out of business—much less making any profit. Besides, costs can only be subjectively determined, and they cannot be aggregated between or among industries, let alone countries. If “dumping” does occur, it is a great boon to Americans who take advantage of such bargains. (Why, by the way, isn’t Safeway attacked by Giant for dumping when it sells ketchup at a nominal loss to attract customers?)
But what if the Japanese government subsidizes some of its exporting companies so they can increase their American market share by selling at below-cost prices? Since consumption is the end of production, and since consumers clearly benefit by such a good deal, why should we care? If foreigners are foolish enough to allow their governments to tax them to subsidize their exporting companies, we should take full advantage of their generosity. It won’t last forever! (The only thing that apparently lasts forever is the U.S. government’s massive subsidization of our exporting companies through the Export-Import Bank and other examples of corporate welfare.)
One of the most important notions underlying the calls for stifling foreign imports is the “balance of trade” concept and the idea that a “trade deficit” (your country imports more goods than it exports) is bad and that a “trade surplus” (your country exports more than it imports) is good. This is pure superstition and goes back to the mercantilist days of the 17th century.
The terms “deficit” and “surplus” are accounting terms that apply to budgets. But they have been misappropriated from the context in which they have meaning and used to describe international trade. A “trade surplus” means a “favorable balance of trade” (exports greater than imports), while a “trade deficit” is supposed to denote an “unfavorable balance of trade” (imports greater than exports). This is what we are told by the modern mercantilists and Keynesians. But this notion is as false as it is widespread in current discussions on international economics. Although this fallacy was refuted by the great French economist Richard Cantillon 275 years ago, many have not learned the lesson.
There is no reason why trade should “balance out” between countries at any specific moment—any more than it should balance out between individuals or companies doing business with each other. If you walk into a supermarket and buy a loaf of bread by exchanging money for it, you don’t expect that particular supermarket to turn around and buy an equal amount of goods from you. It may take the money you gave for the bread and buy goods from somebody else, like a supplier or a truck farmer; but there’s no reason that goods should balance out in trade between two parties. The buyer gives up money for goods, and the seller gives up goods for money. Both sides benefit. The same applies to people or firms living in different countries.
When Americans buy imports, they are simply accepting payment for the goods they export (sell) to foreigners. Imports pay for exports and exports pay for imports. There is no reason they should always balance. Taking a statistical snapshot of the flow of goods between countries at any single time and calling that the “balance of trade” is artificial, misleading, and irrelevant. We don’t have to be concerned about it since it has no real bearing on the status or health of the economy. Yet, judging from all the media hype, we are supposed to fear a national “trade deficit” (which isn’t even a real deficit at all) more than the very real and definitely harmful federal budget deficit!
Americans who wish to preserve and expand their liberty, and maximize their choices in the market, should work to repeal existing restrictions and taxes on imported goods, and vigorously oppose efforts in Congress to impose still more protectionist legislation. Despite what we hear from the politicians, there is no conflict between the principles of freedom and patriotism: free trade is in the best interests of Americans and America. Instead of clamoring for more political intrusions on our freedom to buy and sell, those genuinely concerned about the struggling sectors of U.S. industry should demand abolition of the taxes and controls which the U.S. government has clamped on our domestic industries. Let American consumers have the freedom to choose to buy Sony and Honda. And liberate American producers from government.



Friday, April 19, 2013

We the People vs. the Loot Seekers


By Mark D. Hughes



We, the loot-seekers of the United States, in order to form more perfectly protected monopolies, impose injustices, insure domestic servitude, provide for our common defense against competition, promote our own welfare by securing the coercive powers of the state for ourselves and our posterity, do ordain and establish this Constitution for the United Special Interest Groups of America.”
Those were not the words penned by the Founding Fathers, but who could tell from today’s America? Over the last two centuries, we have seen our civil and economic liberties thwarted, despite the clear intent of the Founders. They sought to prevent the concentration of power in the hands of a privileged few. But regulatory legislation has enabled loot-seeking special interests to use the coercive powers of the state against the rest of us.
Ludwig von Mises called this a “caste system”:
Our age is full of serious conflicts of economic group interests. But these conflicts are not inherent in the operation of an unhampered capitalist economy. They are the necessary outcome of government policies interfering with the operation of the market. They are not conflicts of Marxian classes. They are brought about by the fact that mankind has gone back to group privileges and thereby to a new caste system. . . .
In a free-market society. . . there are neither privileged nor underprivileged. There are no castes and therefore no caste conflicts. There prevails the full harmony of the rightly understood interests of all individuals and of all groups. . . .
One example of caste privilege began in 1937 when a few large New York dairies successfully lobbied the legislature for protective licensing. Under the law, still in effect, new licenses could be issued only if they do not cause “destructive competition.”
There is, of course, no such thing as destructive competition for the consumer. Competition means lower prices, higher quality, and better service. To be sure, competition may be a nuisance for inefficient, established dairies. But it is not an annoyance to the milk-consuming public.
While the 1937 licensing law does not openly forbid the entry of new dairies into New York, that was its intent and effect. Until this January, the market was controlled by five large dairies. As a result, New York City consumers have traditionally paid a considerably higher price for milk than any other metropolitan area with a similar supply. In November 1986 the average price of a gallon of milk in New York City (except Staten Island) was $2.42. Philadelphia consumers paid $1.93.
Then in December 1985, after trying for seven years to gain access to the New York market, Farmland Dairies of Wallington, New Jersey, was reluctantly granted a license to serve Staten Island. The average price immediately dropped 40 cents per gallon and consistently remained about 30 cents cheaper than milk sold in the rest of New York City.
The New Jersey dairy spent the next year unsuccessfully trying to gain access to the rest of the city. On December 11, 1986, Agricultural Commissioner Gerace rejected Farmland’s request because “it would tend to destructive competition . . . and would not be in the public interest.”
The Commissioner’s decision immediately became the topic of angry editorials throughout the state. Even statist politicians like New York’s Mayor Ed Koch, recognizing the mood of the city’s consumers, jumped on the band wagon.
New York Governor Cuomo claimed that he would like to see increased competition among milk dealers, but said he would not intervene in the Commissioners “quasi-judicial” decision.
The Governor had received $58,700 in campaign contributions from the dairy cartel. But the dairies’ licensed overcharges have earned them more than $50 million a year, so it is not hard to understand the incentive for such donations, nor Governor Cuomo’s decision not to intervene.
Although it is a relatively small example of state intervention, the New York dairy licensing law reflects the isolationist mentality indicative of all loot-seeking interests. It is no different from those seeking tariffs on foreign automobiles, restrictions on foreign investment, or business licensing for entrepreneurs.
The economic isolationists claim that restricting entry into a market will “save jobs.” They argue that added competition from an external source will force local producers out of business and thereby cause irreparable damage to the economy of the region (whether a city, state, or nation). But clearly they know nothing of a market economy. As Henry Hazlitt wrote in his great Economics in One Lesson:
This is the persistent tendency of men to see only the immediate effects of a given policy, or its effects only on a special group, and to neglect to inquire what the long-run effects of that policy will be not only on that special group but on all groups. It is the fallacy of overlooking secondary consequences.
The secondary consequence of economic isolationism is simple—it reduces the actual and potential wealth of the community involved. By preventing competition in the New York dairy industry, the milk licensing law allows the dairy cartel to charge a higher price for milk than would exist in a free market. This is money the consuming public would spend on other goods and services in the community. It is true that added competition might force some of the inefficient dairies out of the market and some dairy workers would then be unemployed. However, contrary to what the economic isolationists claim, the story does not stop there, since more than $50 million a year of added consumer spending translates into new jobs in other businesses.
Even if the new jobs created just replace the old ones lost (probably not the case), the wealth of the community is still increased. After the price of milk is reduced, the consumer can do one of two things: 1) purchase the same amount of milk as usual for less money and spend what’s left on other goods and services, or 2) spend the same amount of money on milk and take more milk home. Regardless of the choice, the amount of goods and services consumed by the public will increase even though the amount spent by each consumer did not change.
Someone understood at least part of this, however. On January 8, 1987, Federal Judge Leonard D. Wexler held that the decision to prohibit Farmland Dairies from distributing milk in all of New York City was unconstitutional. “It is clear,” he said, “from Gerace’s report that this decision to deny Farmland’s license application was based on economic protectionism.”
Farmland started delivering milk to seven supermarkets in the city on January 9. Each immediately lowered the price it charged the consumer by 20 cents a gallon. By January 17, prices had dropped between 30 and 71 cents per gallon.
Unfortunately, Judge Wexler did not declare the law itself unconstitutional, although he did say that this “would not be without foundation.” The judge suggested this be left “to the discretion of the State Legislature.”
So, despite the court’s ruling, the New York City dairy market is still not free. New York has seen the price of milk drop, but we will never know how much more it will drop until the milk licensing law is repealed and all who want to compete are allowed to try.
The economic and civil liberty we still have in America exists not because legislators are concerned for the welfare of “We the people.” Our liberty, and the chance we have to expand it, exists only because a heroic few refuse to stand aside while special interests impose a new two-caste system—the state privileged vs. the rest of us.


Thursday, April 18, 2013

The Case for Free Trade


By Ron Paul


In 1981, the Federal Register published a declaration from President Reagan: “I determine that it is in the national interest for the Export-Import Bank of the United States to extend a credit in the amount of $120.7 million to the Socialist Republic of Romania (for) the purchase of two nuclear steam turbine generators.”
This loan carried an interest rate of 7¾% for ten years, but the first payment wasn’t due until July, 1989.
Not too long before this announcement, the administration had made public its “voluntary” restraints on the number of cars Japan can export to the United States.
These two items—subsidization of trade and its restriction—are all too typical of our present trade policy.
Although we think of ourselves as a free-trading nation, it takes more than 700 pages just to list all the tariffs on imported goods, and another 400 to inventory all the non-tariff restraints, such as quotas and “orderly marketing agreements.”
A tariff is a tax levied on a foreign good, to help a special interest at the expense of American consumers.
A trade restraint or marketing agreement—on the number of inexpensive Taiwanese sneakers than Americans can buy, for example—achieves the same goal, at the same cost, in a less forthright manner.
And all the trends are towards more subsidies for U.S. exporters, and more prohibitions and taxes on imports.
Trade is to be subsidized or restrained, not left to the voluntary actions of consumers and producers.
In 1930, Congress passed the Smoot-Hawley tariff bill, imposing heavy tariffs on imports, with the avowed motive of “protecting” U.S. companies and jobs. Within one year, our 25 major trading partners had retaliated with their own tariffs on American goods. World trade declined sharply, and the depression was made world-wide and longer-lasting.
Today the policy of protectionism is again gaining favor in Congress, and in other countries. But it must be fought with all our strength.
Not only does protectionism make everyone poorer—except certain special interests—but it also increases international tensions, and can lead to war.
“If a foreign country can supply us with a commodity cheaper than we ourselves can make it,” wrote Adam Smith in 1776, “better buy it of them with some part of the produce of our own industry employed in a way in which we have some advantage. The general industry of the country will not therefore be diminished . . . but only left to find out the way in which it can be employed to the greater advantage.”
An important economic principle is called the division of labor. It states that economic efficiency, and therefore growth, is enhanced by everyone doing what he does best.
If I had to grow my own food, make my own clothes, build my own house, and teach my own children, our family’s living standard would plummet to a subsistence, or below-subsistence, level.
But if I practice medicine, and allow others with more talent as farmers, builders or tailors to do what they do best, we are all better off. Precious capital and labor are directed to the areas of most productivity, and through voluntary trading, we all benefit.
This principle works just as effectively on a national and world-wide scale, as Adam Smith pointed out.
It may be that Japan can make cars more efficiently than Detroit, at least certain kinds of cars, and that the capital and labor in parts of the U.S. auto industry could be better employed in other areas. With quotas, however, we will never find out. We will only increase the price of those Japanese cars that do get through, and of U.S. cars as well, since competitive pressures will be taken off General Motors and Ford.
Free trade at all levels makes for more prosperity, as the Founding Fathers knew. That’s why they gave Congress power to remove barriers to interstate commerce.
During the period of the Confederation—after our independence but before the adoption of the Constitution—some of the states erected tariff barriers against imports from their neighbors. The resulting economic stagnation and antagonism threatened the unity of our country, and led to the adoption of the interstate commerce clause by the Constitutional convention. The removal of all trade barriers—and not meddling in the economy—was the purpose of the clause.
As a result, we, as Americans, are free to trade with all other Americans, so that resources are put to their most efficient use in our giant domestic market. This happy consequence is no small contributor to our wealth.
Without this constitutional prohibition, state legislatures would listen to lobbyists for special interests, and enact protection against “unfair” out-of-state competition.
Knowing how similar situations come about, we could bet that someone in Minnesota, with idle greenhouses, would lobby the state legislature, pointing out that farmers in Florida, California, and Texas have too easy a time growing oranges. To protect Minnesota farmers, and create jobs, they would call for a heavy tax on out-of-state citrus, so greenhouse growing of oranges would become economic in Minneapolis.
As a result, oranges would drastically increase in price, and the quality would be lower. Minnesotans who like orange juice would be able to afford less, and what they could get would not be as good. But some would reap windfall profits, at the expense of the consumer. And pressure in orange-growing states would grow it retaliate against Minnesota products, to the detriment of everyone in the country. And we could bet that interstate antagonisms would increase as well. International trade barriers work no differently.
But because our Constitution forbids such domestic barriers, a company in Laredo, Texas, can trade freely, easily, and profitably with a firm in Oregon, thousands of miles away. (It’s important to remember that both parties to a non-coerced, non-fraudulent trade benefit from the exchange, or hope to benefit, or the exchange would not take place.)
But let that Laredo firm seek to trade with a Mexican company only a mile away, and tremendous impediments spring up, thanks to government regulations on both sides. “The motive of all these regulations,” wrote Adam Smith, “is to extend our own manufactures, not by their own improvements, but by putting an end, as much as possible, to the troublesome competition of such disagreeable rivals.
No one worries about the balance of trade between Oregon and Texas. That between Mexico and Texas should be of no consequence either. It is a problem only to government planners.
Dr. Murray Rothbard, who lives in New York City, has said that he’s delighted the federal government doesn’t keep interborough trade statistics. “We’d have the Bronx and Brooklyn worried about balance of trade!”
“Nations,” notes Dr. Rothbard, “may be important politically and culturally, but economically they appear only as a consequence of government intervention.”
But doesn’t protection save U.S. jobs? Yes, it can save the jobs of some, but it costs jobs overall, and harms consumers.
Limiting Japanese car imports, for example, does protect the jobs of high-seniority members of the United Auto Workers, who earn twice the average U.S. industrial wage. But it takes away any incentive to correct government-caused productivity problems.
Diverting resources into uneconomic uses takes them away from other, more productive areas and costs jobs. Some jobs are lost; others are never created. The uneconomic effects of protectionism benefit a few—usually well-to-do—at the expense of the great majority, including the poor.
Protectionism cannot be justified on economic or moral grounds. As Frederic Bastiat wrote, tariffs are “legalized plunder.” The law is used to steal.
By what right does the U.S. government tell an American citizen he cannot buy a foreign product? Such action is reprehensible on every ground imaginable, and is totally incompatible with individual freedom. Also inexcusable on any ground is the vast network of U.S. trade subsidies.
The taxpayers subsidize companies through the Export-Import Bank, the Department of Commerce, and the Overseas Private Investment Corporation, to name only three.
Such programs contribute to inflation, high taxes, “crowding out” in the capital markets, higher prices, and misallocation of resources.
Exports are only useful economically when they are profitable. Otherwise they represent a net loss.
But don’t we need our own subsidies because other countries have theirs? If the government of France wishes to help impoverish their own citizens to send us cheap products, why should we impoverish ours as well? We can, and should, oppose those policies for France as well as the United States, but we have no right to take away buying opportunities from our own consumers.
Notes the Council for a Competitive Economy: we should consider what would happen if a foreign country decided to give us free cars, TVs, steel, and other products. Would this hurt the American people? To ask the question is to answer it.
Every economic intervention in trade, domestic or foreign, should be abolished, for practical and moral reasons.
Even if other countries maintain tariffs or subsidies, we would be helped, not hurt, by unilaterally ending ours.
We would improve our productivity, shift resources to those areas where we have an advantage, grow more prosperous, and make a greater variety of less-expensive goods available to our people.
And we would serve the cause of peace and set a good example for the world to emulate.
“When people and goods cross borders,” Ludwig von Mises used to quote, “armies do not.” Free and extensive trade, unsubsidized, between the peoples of the Earth lowers tensions and makes us all better off. It is, morally and economically, the only proper policy.

Wednesday, April 17, 2013

Fiat Paper Money: Tyranny’s Credit Card


By J. Tucker Alford

In the 20th century, the American dollar has a grim history. It has only about 9% of its 1913 value, because Federal Reserve inflation has caused consumer prices to increase more than eleven-fold.
During the same time, the power of the central bank has increased enormously, as has the presence of the federal government in the economy. Compared to the previous 113 years, the difference is startling. Then, prices generally fell, and prosperity was always on the rise.
The crucial difference between then and now is the quality of the dollar. Today’s dollar is created out of thin air by the U.S. government, and there is virtually no restraint on the Federal Reserve’s power. But when there is no Fed and money is a real commodity like gold, as during the 19th century, money is more likely to maintain its quality and purchasing power.
Money has not always been in the claws of the government. In fact, as Carl Menger theorized, money very likely came about through the process of the market. Ludwig von Mises went even further and proved that the free market was the only place money could develop. Government coercion never has and never will be able to impose a new institution of money on the economy.
Even so, money has been the victim of brutal attacks by the government. In the Middle Ages, monarchs found that raising taxes was a risky way to raise revenue. It often provoked violent revolution, and kings didn’t relish the risk of meeting the executioner’s ax. Instead, they found a discreet and underhanded way to extract wealth from the public: debasement of coinage. The king would call in coins for reissue, melt them down, and redistribute them with slightly less gold content, but with the same face value. The “excess” gold would pay off the kings debts, and while the value of the circulating coins would drop, the public outcry was limited.
Paper money first came into use to save the cost of physically transporting bullion. People felt uncomfortable carrying around large quantities of gold. They placed their gold with a goldsmith, and he issued a paper receipt for the deposit, guaranteeing the bearer payment of the gold on demand. The depositor could then use his receipt for the purchase of goods and services. Goldsmiths, soon called banks, began redeeming one another’s gold receipts, and paper receipts became accepted as substitutes for money.
The goldsmiths, however, quickly recognized an opportunity to make more profits. They began printing up phony gold receipts and spending them for their own use. They could even lend them out and charge interest, knowing all depositors wouldn’t call for redemption at once. This counterfeiting is today hailed as the basis of our banking system: fractional reserve banking.
Always hanging over the head of the banker-goldsmith, however, was the threat that too many of his depositors would redeem their notes for gold on the same day. His bank, like all modern banks, was inherently broke, but its bankruptcy became apparent only in the event of a bank run. If he couldn’t meet his depositors’ demands, he would likely be hanged.
Governments, of course, found paper money to their liking. In the New World, paper money was first used in Massachusetts in 1690. After several failed pillaging expeditions into Canada, the colonial government issued irredeemable paper to pay the troops. Back then, no one would accept a simple piece of paper in exchange for real goods, so the government had to promise to redeem in specie at a certain date in the future. It also promised that there would be only one such issue. But the government’s promise was as thin as its paper, and many more such issues followed when the government found itself short on money.
The people of colonial America learned to distrust paper money. During the Revolutionary War, Congress issued paper notes called Continentals, which were not backed in gold. They were issued in great quantities, and thus depreciated until they were worth next to nothing. People knew the true cause of the depreciation of the Continental. It wasn’t aliens, speculators, slackers, hoarders, or jobbers. It was the government defrauding the people with its printing presses. That’s why they wrote gold and silver into the Constitution.
Today, however, the banking and central banking system is so complex that few know why the dollar continues to lose value. The Fed doesn’t help much with its confusing array of money stock and liquid asset definitions (Ms). Much better is Professor Murray N. Rothbard’s True Money Supply (TMS). It combines selected components of the different Ms according to Austrian theory, and provides a more accurate accounting of the total outstanding medium of exchange at any given time.
The first step in the establishment of a 100% gold standard money must be to define the U.S. dollar as a weight of gold, with 100% redeemability insured. The dollar was once 1/20 an ounce of gold. It was then devalued to 1/35 an ounce of gold. What would it be now if the dollar were again tied to gold? To approximate the answer we only need to know the government’s gold stock, the current money supply, and some simple mathematics.
Using the Federal Reserve’s M1 as money (cash, checking accounts, and travelers checks), the dollar would be defined as 1/2837 of an ounce gold. This would value the government’s gold stock at $749.3 billion and enable all of Ml to be back by gold at 100%.
Using Rothbard’s broader definition of money, TMS, the most recent figures show the dollar would be defined as 1/7340 an ounce of gold. (Just think what the Fed has done: the pre-1934 dollar was 1/20 ounce!) This would allow the government’s gold to cover all of TMS. The Federal Reserve’s assets could then be sold, and the whole ugly system dismantled.
Though there are few dedicated individuals who remain champions of hard, honest money, the mainstream lambastes the gold standard advocates as archaic, reactionary, anachronistic, loony, and Neanderthal.
The record speaks for itself. Even under an imperfect gold standard, from the end of the American Civil War to World War I, the world experienced unprecedented prosperity and improvement in living standards. Since the “Progressives” destroyed the dollar in 1913, there has been worldwide inflation, the impoverishment of the developing world, the decline of Western prosperity, and a rise of totalitarianism, both right and left. It is anti-gold statists who are pointing us toward the despotism and barbarism of a new Neanderthal era.
Hard money is free money, and it goes hand in hand with liberty and democracy. Fiat paper money is tyranny’s credit card. One can only hope that circumstances need not get worse before they get better. Perhaps someday our nine-cent paper ticket will give way to a genuine, honest gold dollar.

Tuesday, April 16, 2013

Sound Money: Gold or Denationalized?


By Llewellyn H. Rockwell, Jr.
Hard-money advocates in American politics, from Thomas Jefferson to Ron Paul, have always favored a specie standard: that is, the dollar defined as a weight of precious metal.
In Austrian economics, the tradition has been the same. Carl Menger and Eugen von Böhm-Bawerk advocated a gold standard as politicians and as professors. (They were both cabinet ministers as well as scholars.) Ludwig von Mises, the greatest exponent of the Austrian school, was the first fully to apply Austrian theory to money. He too advocated a gold standard as well as the abolition of central banking and the establishment of 100%-reserve, non-inflationary free banking.
Building on Menger, Mises showed—in his famous regression theorem—that money must originate on the market as a useful commodity. The most liquid (i.e., the most readily acceptable) commodity becomes money. From the dawn of civilization, this has been gold, with silver playing a useful subsidiary role.
But, like many other truths, this idea is unpopular in mainstream economics, where fiat-paper money, central banking, commercial bank privilege, and inflation are considered scientific. In response to this, there is growing popularity for a monetary theory that threatens neither the academic nor the banking establishment.
That theory (and the resulting policy prescriptions) has four parts: 1) Forget gold. Keynes called it a “barbarous relic,” and so it is; 2) Ignore the Federal Reserve. It can be circumvented, and besides, it may even be a “market institution” (huh?); 3) Criticize legal-tender laws as the central problem; 4) Encourage banks to issue their own unbacked paper money, which would then outcompete the Fed’s dollars.
Point one is answered by theory and history, as shown by Mises. Point two: the Federal Reserve was created and is sustained by the government’s police power. It is perhaps the most anti-market institution in America, as well as the Politburo of our monetary enemy. Its predecessor was called the “Monster” by Andrew Jackson, and that is still a good name for this unconstitutional giant of state control and banking privilege.
Point three is irrelevant and a policy dead-end. Legal-tender laws, which require us to accept Federal Reserve Notes, are unconstitutional restraints on our freedom and should be repealed. But as Murray N. Rothbard has shown, this is not enough to allow private, non-dollar competitors to succeed. Mises’s regression theorem proves that people, having used the dollar for two centuries, will not switch to Chase Manhattan “Rockies” (or whatever the banks’ currencies would be called). Even at the height of the great German or Chinese inflations, with monetary depreciation in thousands of percent, people still clung to marks and yen.
These currencies, like the dollar, the pound, and the franc, originated on the market as useful commodities, and were then nationalized by government. Only monies that originate on the market as useful commodities can win acceptance. That’s why #4 is, as Professor Rothbard points out, an entrepreneurial scheme masquerading as theory, although he is happy to allow the market to decide its fate.
Only the denationalization of the dollar, not money generically, will end the tyranny of inflation and the business cycle, and of the transfers of wealth from the working and middle classes to the government-connected rich that go with them.
That means fixing the dollar permanently as a weight of gold: probably about 1/2,000 of an ounce, which would back the entire money supply with the gold held by the U.S. government, and the U.S. gold held by the International Monetary Fund. This gold would then be disgorged to the American people in return for their notes and deposits. Just as important, the central bank would be abolished, and banks required to adhere to the same standards of non-fraudulent behavior as other businesses. They would get no government license to inflate.
This is a very long-run cause, of course, and it is criticized as unrealistic by the would-be mainstreamers. But it is their strategy that is actually impractical.
Great change must originate in the world of ideas. But we will never bring about a monetary revolution without mobilizing the people. And great popular movements cannot be built on repealing legal tender. Gold and anti-central banking, as our own history shows, are mobilizing issues. They also have the not-inconsiderable virtue of being true.
When we do establish sound money, and gold coins circulate, Morgan Guaranty will be free to print up its irredeemable “Trilats.” Just don’t ask me to accept them.

Monday, April 15, 2013

Money Inflation and Price Inflation

By Murray N. Rothbard
In the last few months, the Reagan administration seems to have achieved the culmination of its “economic miracle” of the last several years: while the money supply has skyrocketed upward in double digits, the consumer price index has remained virtually flat. Money cheap and abundant, stock and bond markets booming, and yet prices remaining stable: what could be better than that? Has the president, by inducing Americans to feel good and stand tall, really managed to repeal economic law? Has soft soap been able to erase the need for “root-canal” economics?
In the first place, we have heard that song before. During every boom period, statesmen, economists, and financial writers manage to find reasons for proclaiming that now, this time, we are living in a new age where old-fashioned economic law has been nullified and cast into the dust bin of history. The 1920s is a particularly instructive decade, because then we had expanding money and credit, and a stock and bond market boom, while prices remained constant. As a result, all the experts as well as the politicians announced that we were living in a brand “new era,” in which new tools available to government had eliminated inflations and depressions.
What were these marvelous new tools? As Bernard M. Baruch explained in an optimistic interview in the spring of 1929, they were (a) expanded cooperation between government and business; and (b) the Federal Reserve Act, “which gave us coordinated control of our financial resources and . . . a unified banking system.” And, as a result, the country was brimming with “self-confidence.” But, also as a result of these tools, there came 1929 and the Great Depression. Unfortunately both of these mechanisms are with us today in aggravated form. And great self confidence, which persisted in the market and among the public into 1931, didn’t help one whit when the fundamental realities took over.
But the problem is not simply history. There are very goods reasons why monetary inflation cannot bring endless prosperity. In the first place, even if there were no price inflation, monetary inflation is a bad proposition. For monetary inflation is counterfeiting, plain and simple. As in counterfeiting, the creation of new money simply diverts resources from producers, who have gotten their money honestly, to the early recipients of the new money—to the counterfeiters, and to those on whom they spend their money.
Counterfeiting is a method of taxation and redistribution—from producers to counterfeiters and to those early in the chain when counterfeiters spend their money and the money gets respent. Even if prices do not increase, this does not alleviate the coercive shift in income and wealth that takes place. As a matter of fact, some economists have interpreted price inflation as a desperate method by which the public, suffering from monetary inflation, tries to recoup its command of economic resources by raising prices at least as fast, if not faster, than the government prints new money.
Secondly, if new money is created via bank loans to business, as much of it is, the money inevitably distorts the pattern of productive investments. The fundamental insight of the “Austrian,” or Misesian, theory of the business cycle is that monetary inflation via loans to business causes overinvestment in capital goods, especially in such areas as construction, long-term investments, machine tools, and industrial commodities. On the other hand, there is a relative underinvestment in consumer goods industries. And since stock prices and real estate prices are titles to capital goods, there tends as well to be an excessive boom. It is not necessary for consumer prices to go up, and therefore to register as price inflation. And this is precisely what happened in the 1920s, fooling economists and financiers unfamiliar with Austrian analysis, and lulling them into the belief that no great crash or recession would be possible. The rest is history. So, the fact that prices have remained stable recently does not mean that we will not reap the whirlwind of recession and crash.
But why didn’t prices rise in the 1920s? Because the enormous increase in productivity and the supply of goods offset the increase of money. This offset did not, however, prevent a crash from developing, even though it did avert price inflation. Our good fortune, unfortunately, is not due to increased productivity. Productivity growth has been minimal since the 1970s, and real income and the standard of living have barely increased since that time.
The offsets to price inflation in the 1980s have been very different. At first, during the Reagan administration, a severe depression developed in 1981 and continued into 1983, of course dragging down the price inflation rate. Recovery was slow at first, and in the last few years, three special factors have held down price inflation. An enormous balance of trade deficit of $150 billion was eagerly enhanced by foreign investors in American dollars, which kept the dollar unprecedentedly high, and therefore import prices low, despite the huge deficit.
Secondly, and unusually, a flood of cash dollars stayed overseas, in hyperinflating countries of Asia and Latin America, to serve as underground money in place of the increasingly worthless domestic currency. And thirdly, the well-known collapse of the OPEC cartel at last brought down oil and petroleum product prices to free-market levels. But all of these offsets are obviously one-shot, and are rapidly coming to an end. In fact, the dollar has already declined in value, compared to foreign currencies, by about 30% since last September.
We are left with the fourth offset to price inflation, the increased willingness by the public to hold money rather than spend it, as the public has become convinced that the Reagan administration has discovered the secrets to an economic miracle in which prices will never rise again. But the public has not been deeply convinced of this, because real interest rates (interest rates in money minus the inflation rate) are at the highest level in its history. And interest rates are strongly affected by people’s expectations of future price inflation; the higher the expectation, the higher the interest rate.
We may therefore expect a resumption of price inflation before long, and, as the public begins to wake up to the humbug nature of the “economic miracle,” we may expect that inflation to accelerate.