How Many Economists Still Get Subjective Value Wrong

How Many Economists Still Get Subjective Value Wrong

03/14/2019Per Bylund

Subjective value is not objective. Sounds obvious, but the distinction is lost on most — scholars and practitioners alike.

People seem to think subjective value is simply a person's 'willingness to pay' a price. Well, it's not. Subjective value cannot be expressed in dollars and cents, because that would simply mean subjective value is an expression in terms of objective market purchasing power.

If value is subjective, however, that purchasing power too is subjectively valued, in terms of what subjective value it can provide (through the actual goods and services the money can purchase). And, in any market-like setting, willingness to give up purchasing power for a good only indicates that the person subjectively values that purchasing power (however it is appreciated by him/her) less than the value expected from the good that can be purchased.

Willingness to pay, expressed in the dollars and cents that in turn can command goods and services, only means the buyer expects to be better off from going through with the exchange. In terms of value theory, there may be no connection between the value of that which is forgone and that which is gained in return, other than them being valued differently (the former higher than the latter). 

Scholars should know better than to confuse these things, but they're obviously quite confused. 

Instead of thinking about the meaning of what they say, they adopt a practical shorthand used to get a dollar amount on a customer's valuation. This makes some sense from a practitioner's perspective, where a customer's willingness to pay for one's good is a rough estimate of what money price could potentially be charged for the good. 

It's not accurate, however, which is why entrepreneurship models suggest that entrepreneurs should make sure to charge a price lower than customer's stated willingness to pay (if it can at all be trusted). 

Also, the actual willingness to pay depends on offering the actual good along with the argument for why it would be valuable for the customer to have/buy it.

In a different time and place, and with different messaging, this 'willingness' changes both with how the good is subjectively appraised and with the other opportunities available to the customer. I might value a hamburger, but I value a hot dog more

Consequently, if there are hot dogs my willingness to pay for hamburgers is practically zero; if there are no hot dogs in sight, my willingness to pay for hamburgers may be significant. See how this works?

One's willingness to pay is not about the [subjective] value of the good itself (that is, the satisfaction experienced, or in any case expected), but is contingent on alternatives available. Practitioners who are careful can gain insights from willingness-to-pay estimations. But it is still a very blunt tool, since what actually matters is the subjective valuation of a good and the subjective valuation of alternative goods (the comparison/tradeoff). 

That scholars equate subjective valuation with objective money prices should be considered severe professional misconduct. For those who are in the business of thinking carefully about things, there is no place for conflating things. 

Or, as in this case, mistaking (interpreting, really) subjective value for being objective. This is inexcusable and should disqualify you from the academy.

Originally published on Twitter @PerBylund

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Marx and His Exploitation Theory

07/05/2019George Reisman

Marxists hate capitalism and want to replace it with socialism because they believe that profits are stolen from wages. They begin with the idea that originally there were workers but no capitalists and that the value of the products the workers produced and sold was all wages. But then allegedly came the capitalists, who proceeded to deduct a part of wages and claim it as profits. Adam Smith expresses this idea in paragraphs 1,2, & 5-8 of his chapter on wages in bk. I of The Wealth of Nations.

Marx took over Smith's view of profits and went on to claim that the alleged deduction of profits from wages would be so great as to leave the wage earner with nothing more than minimum subsistence, for which he would have to work unbearable hours in unbearable conditions.

I will now show that PROFIT, not wages, is the original and primary form labor income and that this follows both from the actual nature of Smith's "original state of things" and from Marx's version of it that he called "simple circulation."

In simple circulation, "C-M-C," workers produce commodities, "C," sell them for money, "M," and use the money they receive, to buy other commodities, "C." I say that the money the workers receive in exchange for the sale of their commodities is not wages but sales revenues. (To my knowledge, I am the first economist to identify this, and its implications. I was inspired by reading Henry Hazlitt's discussion of John Stuart Mill's proposition "demand for commodities is not demand for labor.") Wages are money paid in exchange for the performance of labor. Here, money is paid not in exchange for the performance of the workers' labor but for the workers' commodities. Thus, the workers have sales revenues, not wages.

However, because this is simple circulation, not "capitalistic circulation," there are NO COSTS to deduct from these sales revenues. Costs appear only in capitalistic circulation, "M-C-M," where they are the reflection of the first "M."

(Costs in business are the prior expenditures of money for the purpose of bringing in the sales revenues. If there are no such expenditures, there are no costs to deduct. Simple circulation is characterized precisely by the fact that there are no such expenditures.) (For the benefit of those unfamiliar with Marx, capitalistic circulation means the outlay of money, "M," for the purpose of producing commodities, "C," which are to be sold for a further sum of money, "M," [or "M'," to indicate a larger sum of money].)

As I say, given the absence of capitalistic circulation and its first "M," there are no costs to deduct from the sales revenues and thus the entire amounts of the sales revenue is profit. In addition, because there is no first "M," there is no monetary capital. The workers of simple circulation have not spent anything for tools or materials, let alone the labor of other workers. Thus, the amount of capital on their books is zero. It follows that in simple circulation profits are both 100% of sales and an infinite percentage of capital invested, which capital is zero.

As I've shown, the workers of simple circulation are not wage earners. Because they sell their commodities rather than their labor, they are more correctly described as small businessmen. They are small businessmen without costs and without capital. Simple circulation morphs into capitalistic circulation as and when some of these worker/businessmen begin to save and productively expend a portion of their sales revenues and profits rather than consume them all. These worker/businessmen are now worker/businessmen/capitalists

Their productive expenditure (i.e., their expenditure for the purpose of making subsequent sales) is the first "M" in capitalistic circulation. It buys capital goods and labor and has the following further major consequences: it brings into existence costs of production in the income statements of business and capital with a monetary value on their balance sheets. Thus, it reduces both the percentage of sales revenues that is profit and, doubly, the percentage that profit bears to capital invested.

I say that the rate of profit on capital is doubly reduced because, per dollar of sales revenue, not only is the amount of profit reduced but also the amount of capital on the books is increased. Marx's sequence for capitalistic circulation can be used to provide a simple formula for measuring the economic degree of capitalism, namely, the higher is the ratio of "M" to "M'," the more economically capitalistic is the economic system.

Using this formula, "simple circulation" represents a zero economic degree of capitalism. As the economic degree of capitalism rises, not only do profit margins and the rate of profit fall, but wage payments come into being and then rise both absolutely and relative to profits. Thus, so far are capitalists from stealing wages as the source of their profits, that the truth is the exact opposite. The starting point is not 100% wages and zero profits, but 100% profits and zero wages. Capitalists then raise wages and reduce profits!
 
The higher is the economic degree of capitalism, the more is this the case. The fall in profits does not imply a loss to capitalists. It's far more than offset by the increase in production and consequent rise in buying power that accompanies it (and also raises real wages).
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The Bionic Mosquito On Rothbard and Ethics

07/05/2019David Gordon

In a characteristically excellent post, the Bionic Mosquito calls attention to Murray Rothbard’s ethical “absolutism”. In this view, human beings can grasp what is objectively case in ethics. If, for example, stealing is wrong, its being wrong is not just an expression of individual or group preference. Rothbard held that an adequate defense of libertarianism depends on objective values and that political freedom was not the only such objective value needed for this defense. Moreover, this position does not contradict the subjectivity of preference in Austrian economics.

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Don't Trust the Government with the Environment

07/04/2019Gor Mkrtchian

The state is often assumed to be nature’s default, benevolent caretaker. Government agencies are free from the short-sighted profit motive, we are told, and can steward land for the long term. If only this were true. In fact, in a myriad of ways, governments are among the worst polluters in the world, and even the agencies of the state specifically devoted to environmental stewardship have themselves helped cause environmental disasters.

Land Use Planning and Subsidies

For environmental and aesthetic reasons, many believe that mass transit options like railways, as well as pedestrian routes, aren’t widespread enough in the U.S., and that Americans are too reliant on smog-emitting cars. They may be surprised to find one major culprit hidden in plain view. The state has long used tax dollars to build and maintain approximately 2.8 million miles of paved roads and highways in the U.S., subsidizing urban sprawl and automobile use, and hence undermining the market viability of substitutes like mass transit and walking.

Without tax-funded provision of roads and highways, had private enterprise had to consciously pay for each new mile of road — not to mention the sewer, gas, water, and electricity lines that suburbs require — land resources and transport would be markedly different. Cities may have instead been more compact, leaving more wilderness untrammeled. Public transportation may have been more widespread. Cities may have also been connected to one another to a greater degree by (privately-owned) trains rather than by today’s interstate highway system.

It’s impossible to know what the counterfactual world would have looked like, but it’s reasonable to assume that had the state not used tax money to fund 2.8 million miles of a particular form of transportation (paved roads and highways), then competing forms (railways, pedestrian routes), which have been subsidized to a lesser extent, would have been more prevalent.

The Military as Prime Polluter

The military provides another outlet through which the state corrodes the environment. According to Alexander Nazaryan:

The U.S. Department of Defense is one of the world's worst polluters. Its footprint dwarfs that of any corporation: 4,127 installations spread across 19 million acres of American soil. Maureen Sullivan, who heads the Pentagon's environmental programmes, says her office contends with 39,000 contaminated sites.

The purpose of the military, of course, is not to steward natural resources. So how do agencies which are dedicated to husbandry fare?

Mis-Managing Natural Resources

The four largest federal land management agencies in the U.S. are the Bureau of Land Management, Fish and Wildlife Service, National Park Service, and Forest Service. For the 2018 fiscal year, their total maintenance project backlog was an estimated $19.38 billion. The National Park Service was responsible for the bulk of this figure with $11.92 billion of delayed projects, compared to a 2016 annual budget of about $3 billion.

In addition to the inability to implement planned maintenance on schedule, federal land management has suffered from failure to formulate adequate policies to begin with. Over 1.2 million acres of California burned in wildfires in 2017, followed by over 1.8 million acres in 2018. National Forest Service policy had a direct role in the contributing to the problem. According to Robert Nelson:

Nineteen million acres of California forests—almost 20 percent of the state’s total land area—are owned and managed by the federal government. The fires are in significant part the product of past federal forest mismanagement.

The Forest Service policy of total fire suppression, in place for most of the 20th century, meant California's national forests contained large volumes of kindling-like small trees and underbrush. Before the Forest Service embarked on its crusade to suppress them, frequent but much smaller fires routinely removed these "excess fuels" while leaving the larger trees little affected.1

After helping set the stage for the fires, bureaucratic impotence failed to contain them:

Federal land management agencies remain mired in gridlock and dysfunction. This past summer, the Forest Service itself acknowledged that "catastrophic wildfires and the corresponding loss of lives, homes, and natural resources have continued to grow, partly because our treatments have been uncoordinated and not at the right scale."2

It’s difficult to imagine a private land conservation trust or forestry company being so inept as to allow millions of dollars of its own assets burn to the ground year after year, let alone in a way that resulted in the destruction of other people’s lives and property. This is true, in part, because private owners are legally and financially responsible for their actions. Employees of the National Forest Service, meanwhile, lose nothing as a result of decades of a ruinous total fire suppression policy. The taxpayers paid for the bureaucrats' mistakes — and also paid their salaries.

Communist Disasters

Given that we're often told government-planned economies are better for the environment, sure the centrally-planned Soviet Union preserved a pristine paradise within its borders? Unfortunately, the Soviets had a cartoonishly bad environmental record. To name just one example: the Aral Sea used to be the fourth largest lake in the world. Then, Stalin diverted its two major contributing rivers for crop irrigation, and now the Aral Sea — and all its surrounding ecosystems are now almost totally dried up and destroyed.

And then there are the rivers. In the 1971 New York Times article “Why Does the Volga Catch Fire?” Marshall I. Goldman comments on the five-year plan for 1971-1975, “Nothing is said about reducing the oil content of the Iset and Volga Rivers which have a tendency to catch fire so, that periodically fire men are called ‘to put out the river.’3 Most famously, the Soviet Chernobyl nuclear power plant meltdown resulted in a 1,000 square mile radioactive exclusion zone.

Why is the government such a terrible steward of the environment? Why not? When a government agency fails, it is declared to be “underfunded” and the outcry is for the agency in question to be trusted with more money and responsibility, not less. It hard to see why governments would have any incentive to change the status quo.

  • 1. Robert Nelson, “The Case Against the Case for Federal Land Management,” Reason, reason.com, 2019.
  • 2. Ibid.
  • 3. Marshall I. Goldman, “Why Does the Volga Catch Fire?” The New York Times, 1971.
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Trump's "Salute to America" Is a Salute to Government Employees

07/03/2019Ryan McMaken

If there's anything I hate, it's a taxpayer-funded, pro-government party. I hate state dinners, I hate inauguration galas , and I hate the president's proposed "Salute to America."

The July 4 event, will feature military tanks lined up on the National Mall, war plane flyovers and a televised national address by the president. There will also be two firework displays.

And the event certainly won't be free:

According to The Washington Post , $2.5 million was diverted from the National Park Service to cover the costs associated to Trump's parade. Those funds, which were raised from entrance and recreation fees, were originally intended to help revamp parks across the country. Former Park Service deputy director Denis Galvin told the Post that the entire celebration usually costs the department around $2 million.

Trump tweeted on Wednesday morning that the parade will cost "very little compared to what it is worth." He also noted that the military already owns all of the equipment and the personnel needed to operate them, adding "all we need is the fuel."

But a finance expert told NPR that some of the planes and military weapons being used throughout the event cost thousands of dollars per hour to operate. The Boeing 747 plane used for Air Force One could be $205,000 an hour. Flying a F-35 jet can be $20,000 or more, according to Pentagon figures.

And just getting the military tanks from Fort Stewart in Georgia to Washington D.C. was costly. A White House aide told USA Today that the preliminary estimate for the transport was $870,000.

More observant readers will note, of course, that the event is not a salute to "America" at all. It is a salute to the Pentagon. According to the presdient, the purpose of the event is "showing to the American people, among other things, the strongest and most advanced Military anywhere in the World. Incredible Flyovers & biggest ever Fireworks!"

Were the event actually a salute to America, it would celebrate the private sector and all the taxpayers who are forced to pay more than $5,000 per year, per taxpayer, just to fund the Pentagon and its related agencies.1

Rather than a grotesque display of military hardware — such as the trillion-dollar boondoggle known as the F-35 — the "Salute" would line up tractor trailer trucks and commercial airliners to be admired by the people who benefit daily from the goods and services made possible by them. Meanwhile, the Salute would honor the truck drivers, airline pilots, insurance brokers, and janitors who produce all the wealth that is eventually skimmed by tax collectors to pay for — among other things — giant DC government parties.

[RELATED: "The Second Amendment's Authors Would Hate Today's Huge Federal Military"]

At the Salute, government employees would be allowed to express their admiration to these productive taxpayers, with phrases such as:

Of course, if the president and members of Congress want to pay for a fireworks display out of their own pockets to show their thanks to the people who pay the bills, that would be fine.

Stop Making Independence Day a Military Holiday

In reality, no politico in DC is going to put on any events celebrating the taxpayer, and we all know it.

But at the very least, politicians and their fanboys could have the decency to stop pretending that Independence Day is the proper day for militaristic displays of pro-government nationalism.

After all, the spirit of the Declaration of Independence is one of contempt for the coercive apparatus of government. It is, essentially, a declaration of disobedience in the face of a military display by the British state.

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

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

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

If Americans really wanted to celebrate the spirit of the Declaration, they'd demand a parade of smugglers, tax cheats, and secessionists. But then again, those people are usually busy working for a living, and it might be hard to get them to show up. Government employees, on the other hand, have plenty of spare time for yet another salute to themselves.

  • 1. This calculation is based on the fact the military budget is more than 700 billion divided among 140 million taxpayers. See also: https://mises.org/wire/what-if-every-person-paid-equal-share-military-budget
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Bovard: Fourth of July should celebrate liberty, not politicians like Trump

07/03/2019James Bovard

President Donald Trump’s plan to give an Independence Day televised address from the Lincoln Memorial has outraged manypundits and plenty of normal Americans, too. There has rarely been a shortage of political buncombe on July Fourth but Trump could, as usual, break all records.

For Trump’s extravaganza, the Pentagon is bringing out of mothballs some World War II-era Sherman tanks. Though the gun turrets look impressive, Allied soldiers nicknamed Sherman tanks “Ronsons” because they were death traps that "light first every time” in clashes with better built German tanks. But that painful fact, like many others, will be swept under the rug.

The Washington Post condemned Trump’s “gaudy display of military hardware that is more in keeping with a banana republic than the world’s oldest democracy.” Regrettably, the Post’s indignation over a few tanks does not extend to the fact that American troops are now fighting in 14 foreign nations. But the real problem is not the military relics; it's exalting government power and politicians on a day meant to celebrate individual liberty.

The Fourth of July in Washington has been going downhill ever since 9/11.

Read the full article at USA Today

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Lee Iacocca: American Crony "Capitalist"

07/03/2019Ryan McMaken

Few people who write for the news media — most of whom have only ever studied journalism or "mass communications" — know much about markets or entrepreneurship. Thus, it's not difficult to understand by people who are not entrepreneurs or capitalists get labeled at such in newspapers and on TV news shows.

When George Steinbrenner died, for example, he was hailed in the media as a great entrepreneur and capitalist. In reality, Steinbrenner was a con artist and a tax mooch. His "entrepreneurship" consisted mostly of fleecing working-class taxpayers to pay for his luxury stadiums.

And now, with the death of Lee Iacocca, we see a similar phenomenon. Within the many tribute articles about Iococca, he is commonly called the "savior" of the auto industry, or as Car and Driver describes him "the face of American capitalism."

In truth, it was the American taxpayer who "saved" Chrysler, not Iacooca. And thanks to Iacocca, the taxpayer did so against his will since Iacocca was an expert at leveraging the coercive power of government to make others pay for his corporate schemes.

Back in 1985, when Iacocca was being hailed as a capitalist extraordinaire, James Bovard, in typical Bovardian fashion, threw cold water on the nation's celebration of faux capitalism:

Iacocca is so popular largely because of his reputation for taking Chrysler from the brink of bankruptcy to the heights of profitability. But Chrysler is raking in the billions now not because it is making better cars, but because Iacocca and others persuaded Uncle Sam to prohibit Americans from buying more better-made Japanese autos.

Iacocca brags that the 1979 government bailout of Chrysler was a huge success, and even says federal loan guarantees are “as American as apple pie.” But since 1978, Chrysler has laid off more than a quarter of its workers and shut down 21 factories. A bailout intended to save jobs still resulted in tens of thousands of Chrysler workers losing their paychecks.

Iacocca even tried to cheat the government on the bailout deal. To cover the government’s risk in guaranteeing a $1.2 billion loan to a bankrupt corporation, Chrysler gave the Treasury Department warrants to buy 14 million shares of Chrysler stock at $14 a share. At the time of the bailout, Chrysler was trading at $7 a share; a few years later, thanks largely to the bailout and import quotas, Chrysler stock was up to $27 a share. When the Treasury announced it would cash in the warrants and collect a few hundred million dollars for taxpayers, Iacocca raised hell and tried to welch on the bargain. Iacocca whined, “That kind of profit is almost indecent….” Even though Chrysler has made billion thanks to government protection, Iacocca still tried to avoid paying Uncle Sam a single penny.

Iacocca wants the entire economy restricted, squeezed, and bled in order to benefit Chrysler. Iacocca tried to block the GM-Toyota joint effort to produce small cars in California, saying the partnership would be terrible for the auto industry. But at the same time Iacocca was doing his “Chicken Little” routine, Chrysler was already colluding with Mitsubishi, selling tens of thousands of their cars in the U.S.

Iacocca is America’s leading Jap-basher. Iacocca sweats that the Japanese “want to rape the market” and that “We’re a colony again, this time of Japan.” When Iacocca gave a speech on Dec. 7 on Japanese imports, he reminded his audience that it was a “day of infamy,” invoking Pearl Harbor and trying to stir up hatred for a valuable ally. Congressman Robert Matsui, D-Calif., derided recent Iacocca remarks as “racist.”

But it is understandable that Iacocca would seize every chance to slur Japan. Japanese car makers are still putting his company to shame.

Thanks to Iacocca, real American entrepreneurs — i.e., not welfare queens like the execs at Chrysler — had to pay much more for automobiles and auto parts, while paying taxes to bailout a huge corporation. Many also had to settle for lower-quality American cars.

But few seemed to care because then — as now — many Americans can't think through the implications of trade barriers and government bailouts. They don't notice the widespread unseen costs of protectionist trade barriers paid by consumers and entrepreneurs throughout the economy. All that really matters, in the minds of politicians and gullible taxpayers, is that Iacooca "saved Chrysler" and stuck it to those Japanese who think we're "lazy."

Of course, all that was before the 2008 financial crisis when it became the norm to bailout banks and auto companies, and when George W. Bush declared "I’ve abandoned free market principles to save the free market system."

Iacocca could have easily uttered those words himself. He was well versed in destroying competition, limiting choice, and sticking it to the taxpayer in the name of American big business.

There's no doubt Iacocca was a savvy businessman and a great lobbyist. But don't confuse what he was doing with entrepreneurship or capitalism.

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Calvin Coolidge on the Declaration of Independence

07/03/2019Gary Galles

On July 4th, Americans celebrate our Declaration of Independence. But we often give little thought to the uniqueness and importance of our country’s founding.

To revisit those issues, we might turn to Calvin Coolidge — the only president born on the 4th of July. He honored the Declaration’s commitment to life and the liberty to pursue one’s happiness, provided others’ equally inalienable rights are not violated, more than any of his successors. He also produced remarkable results without sacrificing our freedoms — substantially cutting tax rates, tax rolls and federal debt, while real economic growth averaged 7%, with 0.4% inflation and 3.3% unemployment, during his presidency.

In particular, Silent Cal’s speech commemorating Independence Day’s 150th anniversary merits reconsideration. Consider this condensed version:

We meet to celebrate the birthday of America … a service so great, which a few inspired men here rendered to humanity … the preeminent support of free government throughout the world.

The Declaration of Independence and the Constitution of the United States … those two great charters of freedom and justice remain firm and unshaken.

A new spirit had arisen on this side of the Atlantic more advanced and more developed in its regard for the rights of the individual.

The American Revolution represented the informed and mature convictions of … independent, liberty-loving, God-fearing people who knew their rights, and possessed the courage to dare to maintain them.

The Declaration of Independence was the result of the seasoned and deliberate thought of the dominant portion of the people of the Colonies … in no sense a radical movement but … resistance to illegal usurpations … to maintain their constitutional rights which from time immemorial had been guaranteed to them under the law of the land.

The Declaration of Independence … had a much broader and deeper significance than a mere secession of territory and the establishment of a new nation … because it was proposed to establish a nation on new principles.

Three very definite propositions were set out in its preamble regarding the nature of mankind and therefore of government. These were the doctrine that all men are created equal, that they are endowed with certain inalienable rights, and that therefore the source of the just powers of government must be derived from the consent of the governed.

That our Declaration of Independence containing these immortal truths was the political action of a duly authorized and constituted representative public body in its sovereign capacity, supported by the force of general opinion … makes it the most important civil document in the world … a new nation was born which was to be founded upon those principles … an incomparable event in the history of government.

All men are created equal … they are endowed with inalienable rights … governments derive their just powers from the consent of the governed. … No advance, no progress can be made beyond these propositions.

America … has remained true to the principles which were declared 150 years ago. …The rights of the individual are held sacred and protected by constitutional guaranties, which even the Government itself is bound not to violate.

The fathers made their declaration and adopted their Constitution … to establish a free government, which must not be permitted to degenerate into the unrestrained authority of a mere majority or the unbridled weight of a mere influential few. … These are our guaranties of liberty.

Very little of just criticism can attach to the theories and principles of our institutions. There is far more danger of harm than there is hope of good in any radical changes.

The Declaration of Independence … is the product of the spiritual insight of the people. We live in an age of science and of abounding accumulation of material things…Our Declaration created them. The things of the spirit come first … to maintain the great heritage which has been bequeathed to us. … We must follow the spiritual and moral leadership which they showed.

Calvin Coolidge articulated America’s founding principles, where they came from and the dangers of moving away from them. As we celebrate another Independence Day, that understanding deserves rediscovering, because it is a far cry from the spirit animating many in America today.

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IMF's Christine Lagarde Will Likely Be Next Head of the Euro Bank

07/02/2019Ryan McMaken

The current head of the International Monetary Fund, Christina Lagarde, is the likely replacement for Mario Draghi at the European Central Bank. Draghi's eight-year term ends on October 31.

In practice, this has meant negative interest rates and huge growth in the ECB's balance sheet. Via these mechanisms, the central bank has intervened to prop up demand for government debt in Europe, and bail out a financial system in desperate need of liquidity.

Under Draghi's leadership, ECB's key target rate has been negative since June of 2014, and has been -0.4 percent since March of 2016.

There had been some speculation that the EU might nominate a compromise candidate who was inclined to moderately more hawkish policy favored by some German policymakers.

With the nomination of Lagarde, it looks like that's not going to happen.

Thus, in response to Lagarde's nomination, Alasdair MacLeod averred on Twitter: "Lagarde replaces Draghi. Bundesbank will be most unhappy: goodbye euro, hello mark?"

macleod.PNG

Macleod is likely engaging in hyperbole, as in the short term it seems unlikely the Bundesbank will be looking to make an exit. However, when the next recession hits, it becomes increasingly likely Europe will continue to splinter into two camps: the productive, savings-minded, and relatively financially-sound northern bloc versus the more profligate and less financially stable southern bloc.

German savers will be left all the more yield-starved by the ECB so as to keep interest rates for government debt down and liquidity high. It will essentially be a wealth transfer from northern Europe to southern Europe.

With Legarde at the helm of the ECB, this looks to be likely, and is no departure from the current road that Europe and the ECB are already headed down.

After all, as the AP reports today, Lagarde's easy-money leaning have long been quite apparent:

Under Lagarde’s leadership, the IMF has called for the ECB to continue its monetary stimulus efforts aimed at raising inflation and supporting a recovery that appears to be losing steam. The IMF’s review of the eurozone last year warned against premature interest rate increases and urged clear forward guidance, that is, promises to keep rates low well into the future. The report echoed much of what Draghi had been saying, including his urging for governments to do more to support their economies with well-targeted spending, and to engage in pro-business reforms.

Moreover, Lagarde sang the praises of negative interest rates back in 2016:

“We see the recent introduction of negative interest rates by the ECB and Bank of Japan—though not without side effects that warrant vigilance—as net positives in current circumstances,” Ms. Lagarde said.

For the established political powers, of course, Lagarde is a sound choice. She is by training not an economist at all, but a lawyer and politician. She knows how to manipulate Europe's regimes to buy support for the EU and to keep the status quo going by any means necessary.

If that requires a near-total takeover of financial markets— as recently described here  by Thorstein Polleit, then Lagarde can be counted on to offer no resistance.

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Christine Lagarde's Move from IMF to ECB is Bad for Europe

07/02/2019Tho Bishop

Earlier today, the internet was aflutter with rumors that we were on the verge of an international crisis following schedule changes involving Russian President Vladamir Putin and Vice President Mike Pence. While it appears there two events were unrelated, a different sort of tragedy struck the international stage hours later when it was announced that Christine Lagarde had been named the new head of the European Central Bank.

Joining the ECB after a lengthy stint as head of the IMF, Lagarde certainly has the resume to be the next "great" central banker. Unfortunately, she has a record of folly which we've come to expect from such a title.

In the words of our friend Mike Shedlock, "It's rare to find someone who is consistently wrong on everything. Christine Lagarde...comes close"

A conventional policymaker that fears deflation most of all, Lagarde has been a high profile defender of the negative interest rate policies we've seen doing damage in Europe and Japan. Her selection is being widely seen as an endorsement for continuing the policies of the outgoing Mario Draghi at a time when the ECB desperately needed a hawk to help defuse their trillion-Euro time bomb.

As Daniel Lacalle put it:

Read more: The ECB Continues to Incentivize Reckless Behavior by Daniel Lacalle

Earlier this year, Alasdair Macleod outlined the damage being done by the policies Lagarde is expected to continue. 

Pumping yet more credit into the Eurozone is as effective as giving adrenalin to a dead horse. Lack of credit is not the problem. Put simply, there is a global momentum of economic contraction evolving, which any business and lending banker would be foolish to ignore. There is a developing crisis, the consequence of earlier monetary inflation in the credit cycle. Economic actors may not understand the origins of the crisis, but we can be certain they are becoming acutely aware of its looming presence. And as the crisis rapidly develops, those that require additional loans will already be insolvent. 

The signal sent by the ECB to lending-bankers is likely to be misinterpreted when credit contraction is the looming threat: if TLRTO-III is the smoke, there must be a fire, possibly out of control. Better surely to call in existing loans to businesses rather than waiting to be repaid from profits unlikely to materialise. An encouragement to lend early in the credit cycle is more effective and less likely to be misunderstood than a similar encouragement later in the credit cycle. This is why a renewed TLTRO policy will almost certainly fail. 

The inability of bureaucrats, with their heads buried in spreadsheets, to appreciate the role of human psychology is not the ECB’s only failing. Its executives do not even understand what interest rates represent, thinking it is simply the price of money. This is why it believes in keeping interest rates suppressed as a means of increasing credit. Earlier in the credit cycle, rate suppression does generate some credit expansion, mainly in financial rather than non-financial activities, because lower interest rates lead to higher prices for financial assets. That is basically a spreadsheet, almost non-human function. Large industrial corporations are opportunist, borrowing to fund buy-backs and to take over weaker rivals. Smaller and medium-sized business borrowers are usually offered credit only later in the cycle, when it is a mistake to accept it.

Consequently, in a zombie economy, such as that of the Eurozone, the only borrowers are wealth-destroying, socialising, debt-entrapped governments, taking full advantage of the Basel accords, which rates them for lending banks’ purposes as riskless borrowers.

While Lagarde's appointment could be bad news for Europe's future, it will be certainly be welcomed by some.

As Fabrizio Ferrari noted last month, the big winner of a Dovish ECB appointment is the Italian government. Perhaps that's why the Italian mafia has gone back to using the lira.

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Don't Mess with the Swiss

07/02/2019Eric Margolis

Morgarten, Switzerland – Here, in 1315, a force of Swiss mountaineers ambushed an invading force of Austrian feudal knights who had come to reassert Hapsburg feudal rule over the rebellious Swiss.

The burly Swiss farmers and woodsmen from the forest cantons Unterwalden, Uri, and Schwytz fell upon the close-packed Austrian knights and men-at-arms, using long pikes or deadly pole axes known as halbards, and massacred them without quarter.

Two years later, a second Austrian expeditionary force was caught by the Swiss peasant infantry near Lucerne at Sempach and crushed.

These fierce battles were the first time in modern history that foot soldiers had withstood heavily armored mounted knights.  These epochal encounters marked the beginning of the end of European feudalism and the rise of infantry armies.  They also freed Switzerland’s forest cantons of Austrian rule, creating Europe’s first independent democratic state, the Swiss Confederation.

The always astute Machiavelli said of the Swiss warriors: ‘Most heavily armed, most free.’  Indeed, most free to this day.

Those who think of Switzerland as a quaint land of cuckoo clocks and chocolate are sorely mistaken.  To paraphrase Voltaire’s bon mot about Prussia, Switzerland is a giant fortress, disguised as a country.

I attended school and university in Switzerland.  Over the decades, I kept hearing about mountains opening up to disgorge warplanes, or cliffs studded with hidden artillery.  But even my Swiss friends didn’t know much about these seemingly fantastic sightings.

Fifteen years ago, I was the guest of the Swiss Fortress Guard Corps, a top-secret military outfit that operates Switzerland’s mountain fortresses.  I was one of the first non-Swiss to be shown the mountain forts that guard the heart of the nation’s ‘Alpine Redoubt.’  What I was shown astounded me – and continues to do so.

In the late 1930’s, as one European nation after another bowed down to Hitler’s demands, the Swiss military and its popular rifle clubs, banded together and decided their nation would not bend the knee as the Czechs, Dutch, Norwegians, Belgians, and then the French had done.

A feverish program of fortress construction was begun across the Alps.  Some 900,000 troops were mobilized. Orders went out from Gen. Henri Guisan: ‘leave your families behind in the lowlands.  Man our mountain forts.  We have no place or food for civilians in them.   Fight to your last cartridge; then use your bayonets. No surrender!’

Every road and bridge was mined; all mountain passes were rigged with explosives.  Particularly so the rail lines and tunnels that linked Germany to its erstwhile ally, Italy.

Hitler was furious.  He denounced the Swiss as ‘insolent herdsmen.’  Mussolini, Hitler’s ally, rightfully feared tangling with the tough Swiss mountaineers who had ravaged Italy during the Renaissance.  The Pope’s Swiss Guards are a memento of the era of ‘Furia Helvetica.’

Working 24/7, Swiss engineers created a warren of tunnels and gun positions guarding the main entry points into Switzerland at St. Maurice, Gothard, Thun and Sargans.  These forts were equipped with 75, 105, and 150mm cannons, machine guns and mortars emplaced in mountain sides and camouflaged so they are almost invisible.

Inside the forts are barracks, engine rooms, headquarters, clinics, observation posts and magazines filled with shells.  The hidden forts interlock their fire and support one another.  Unlike the less heavily gunned Maginot Line, each fort was protected by a special infantry unit on the outside, linked by telephone to the underground garrison.

In addition, Switzerland built bomb shelters for most of its people.

The Swiss only began decommissioning their forts in the 1990’s – after the collapse of the Soviet Union.  Switzerland was a prime target of the Soviet Red Army.  Advancing from Czechoslovakia, the Soviets planned to race across lightly defended Austria into eastern Switzerland.

Then, into the Swiss lowlands on a Basel-Neuchatel-Lausanne axis to Geneva.  From there, the Group of Soviet Forces powerful armored divisions would erupt into France’s Rhone Valley and drive north for the Channel ports, taking US and NATO forces in the rear and cutting their supply lines.  It would have been a replay of Germany’s brilliant Ardennes offensive in 1940.

But Swiss forts and solid Swiss citizen troops stood in the way.  The sons of the heroes of Sempach and Morgarten were on guard.

When Swiss mountaineers vote, they always carry rifles and swords as a symbol of how their freedom was attained and preserved.

Originally published at LewRockwell.com
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