Power & Market
Let interest rates rise. Better yet, let interest rates function in the marketplace, wholly independent of central bank attempts at rate-setting or targeting.
How? Not through a laughably small and slow process of Fed tapering, but through a wholesale and aggressive selloff of assets still polluting the Fed's balance sheet since it began aggressively those assets from commercial bank in 2008.
This was the critical point made by all three speakers at our event in Nashville this past weekend: interest rates need to rise before any true economic recovery can occur. The manipulation of interest rates by the Fed and other central banks causes untold distortions throughout the entire economy. Unless and until we address this problem, no fiscal or monetary policy changes will make much sense or have much salutary effect. Money and credit will continue to flow into less than optimal uses, investors will be forced to continue chasing yields in the casino equity markets, and Congress (plus other western legislatures) will continue to produce trillion dollar annual deficits without much worry about debt service.
Perhaps worst of all, the world will continue to believe a fairy tale: that the Fed effectively recapitalized US commercial banks in the 2008 crisis and through successive rounds of QE without pain or consequences. Are we really to believe the monetary base underpinning the world's reserve currency can be quadrupled in less than a decade without causing lasting damage? That gross overspending by Congress can be wished away simply by having the Fed provide a ready market for Treasury debt at miniscule interest rates? Or that interest rates should have no connection to the savings habits of society?
It all strains credulity, which is precisely why monetary policy relies so heavily on technocratic jargon and opaque processes: they want to confuse or bore us into not paying attention. And thus the can is kicked down the road, politically and policy-wise. That's how we became a high time preference society almost by stealth.
You can watch these engaging presentations by Dr. Robert Murphy, Carlos Lara, and myself here.
These excerpts from my talk attempt to remind the listener that none of this is normal, in fact quite the opposite. Not too long ago prosperous societies were based on the notion of capital accumulation, of producing more than they consumed, making the next generation better off in the process.
This is the fundamental and foundational change that has to occur. We need real, positive interest rates, meaning rates above inflation rates. We have to reward saving if we intend to have a growing or sustainable economy.
It is not exaggeration to say interest rates drive civilization.
They are the most important signals in an economy. Everything flows from them, because the cost of borrowing money effects the cost of almost everything.
This is the fundamental and inescapable starting point for building not only a real economy but a real culture. Every healthy society accumulates capital, every healthy society produces and saves more than it consumes and borrows. The human desire to leave something to future generations explains why all of us sit in splendor today, in this restaurant, enjoying conditions our great grandparents could not have imagined.
To do this you need actual real interest rates, market prices for money. Savers and borrowers, supply and demand, need to meet. We have a mechanism for this, it’s called the market. Without market prices you have socialism, the opposite of markets.
So why do so many otherwise free-market economists not object to monetary central planning?
The most important interest rate is the Federal Funds rate, the rate at which commercial banks borrow from each other overnight if they need to meet reserve requirements for their loans. The Fed controls this rate, or “targets” it, by manipulating the amount of reserves banks have in their accounts with the Fed. Banks with high reserves don’t much need to borrow from each other, so the Fed Funds rate stays low. And since 2008 commercial banks have received interest on excess reserves parked at the Fed, which encourages high balances and keeps rates low.
All commercial interest rates — e.g., the interest you pay on your mortgage — flow from the Fed Funds Rate on a cost-plus basis.
But when the Federal Reserve effectively keeps interest rates lower than they would be naturally, it creates a terrible disconnect between lenders and borrowers. And this disconnect causes unbelievable distortions throughout the economy. As David Stockman says, because of central banks there is no honest pricing of goods anywhere — we simply don’t know, for example, what a barrel of oil or a bushel of wheat or a Honda Accord should cost. The Fed has distorted the single most important price in the entire economy — the Federal Funds rate.
Tonight Mises Senior Fellow Bob Murphy is debating George Selgin of Cato's Center for Monetary and Financial Alternatives on the topic of fractional reserve banking. The host is Gene Epstein's Soho Forum, an excellent monthly debate series based in New York City.
In a talk at the Second Amendment Town Hall in Batavia, New York, James Ostrowski discusses how the long-used efforts to preserve gun rights are doomed to failure. Shouting "the second amendment is enough for me!" is a failed tactic:
We are losing the fight for the Second Amendment. We are losing it in the courts. We are losing it in the legislatures. We are losing it in the media, in the schools and with young people. The approach we have been using to protect the Second Amendment for many years has failed, is failing and will continue to fail. That approach has basically focused on lobbying, elections, voting and using the litigation process without any serious attempt to change the philosophical or ideological bent of the country or to change the ideological trajectory of the country to the left which in the last five years has been accelerating, and without any attempt to change the basic progressive mindset which has dominated American politics for many decades. The tactics we have used are archaic, dated, spent, don’t work and there has been no attempt to use bold new innovative tactics and unless that changes, we are going to lose this fight.
We are close to losing a right that has been recognized in the West for many, many centuries. It’s an ancient right that great minds had to first do the philosophical work to identify, then define, then do the hard political work to have this right recognized by governments and by government law. We are on the verge of losing this ancient right in these times and perhaps very soon because of our own failure to properly defend it with good arguments and good strategy and tactics and the efficient execution of those strategies and tactics.
- A Development of the Theory of the Ricardo Effect by Philip Ruys Is Garrison's Notion of "Secular Growth" Compatible With the Solow Growth Literature? by Robert P. Murphy
- Secular Growth in Garrison's Model: A Comment by Nicolás Cachanosky
- A Note on Block-Hoppe Debate on Indifference by Igor Wysocki
- Freedom, Counterfactuals and Economic Laws: Further Comments on Machaj and Hülsmann by Michaël Bauwens
- A Comparison of Investment and Cash Building of Savings: A Rejoinder by Alexandru Pătruți
Scandinavian Unexceptionalism: Culture, Markets, and the Failure of Third-Way Socialism by Nima Sanandaji. Reviewed by Per L. Bylund
Public Policy, Productive and Unproductive Entrepreneurship: The Impact of Public Policy on Entrepreneurial Outcomesby Gregory M. Randolph, Michael T. Tasto, and Robert F. Salvino Jr., eds. Reviewed by Per L. Bylund
The Captured Economy: How the Powerful Enrich Themselves, Slow Economic Growth, and Increase Inequality by Brink Lindsey and Steven M. Teles. Reviewed by David Gordon
In October 1962, I was given a lifetime advantage: a copy of Murray Rothbard’s Man, Economy, and State. In the language of journalism, it was hot off the presses. It had just been published. I was sent a copy by F. A. Harper, known as Baldy, who was not bald. At the time, he ran the Institute for Humane Studies. Until early that year, he had managed the William Voker Fund. The Volker Fund had put up the money that subsidized the publication of Rothbard’s book. It was published by Van Nostrand, a small but respectable mainstream publishing house located in Princeton, New Jersey. Van Nostrand was also the publisher of a series of books that had been financed by the Volker Fund over the previous two years.
I was in my final year of college as an undergraduate. I had written to Harper the previous year about some questions I had about Ludwig von Mises’ Human Action (Yale University Press, 1949). Harper responded in a letter. I still have the fragments of that letter. For some unknown reason, I cut off the introduction to the letter, which would have had the date on it. I suspect this was in the summer of 1961.
By 1962, Harper was serving as my part-time mentor. I did not fully understand this at the time. In November 1961, he paid for me to fly to Burlingame, California, in order to spend a few hours with him. This was one of the turning points in my life, although I did not know this at the time. He gave me a copy of Israel Kirzner’s book, The Economic Point of View, which had been published by Van Nostrand in 1960. I wrote this on the front page: “presented by F. A. Harper November, 1961.” He was recruiting me. I have been grateful for this ever since. When he sent me Man, Economy and State, he was still in the process of recruiting me.
Within a few months after my visit, Harper was fired by the man who controlled the Volker Fund, Harold Luhnow, the nephew of William Volker, who died in 1947. Luhnow took over the management of the Fund in 1947. He shifted its focus from charitable activities in Kansas City, Missouri to financing the remnants of classical liberalism. In early 1962, he replaced Harper with Ivan Bierly, who had received his Ph.D. under Harper at Cornell years before. The Volcker Fund was renamed “The Center for American Studies.” That shift turned out to be crucial in my career. Bierly hired a new staff. One of the people he hired was R. J. Rushdoony. I wrote to him in the spring of 1962. I met him when he lectured for two weeks at a summer seminar sponsored by the Intercollegiate Society of Individualists. Rushdoony continued to recruit me in my senior year. He brought me to work for the Center as a summer intern in 1963, and I lived at his home. I spent the whole summer reading the basic texts of Austrian School economics, including Man, Economy, and State.
Rothbard’s book was a masterpiece, both conceptually and rhetorically -- the art of persuasion. He had a rigorously systematic mind. He also had a stupendous memory regarding materials he had read, which he demonstrated in the book’s footnotes. He had an unmatched ability to write clearly. I mentioned this in my article in the 1988 Festschrift for Rothbard, Man, Economy, and Liberty. In my article, “Why Murray Rothbard Will Never win the Nobel Prize,” I said that he wrote much too clearly to win it.
Mises was a clear writer. But in Human Action, he offered fewer footnotes than Man, Economy, and State. He also did not use the paraphernalia of modern economics. There are no equations and no graphs in anything Mises ever wrote. The famous supply and demand scissors are absent in his books. In terms of presentation, Rothbard in Man, Economy, and State was far closer to the mainstream academic community than Mises was. But he was not close to the mainstream community with respect to the content of what he wrote. He was an academic pariah in 1962, and he remained a pariah all his life. He shared this position with Mises.
This was not a liability in the long run. One of the important points made by Thomas Kuhn’s paradigm-shifting book, The Structure of Scientific Revolutions, also published in 1962, was this: major shifts in the worldview of intellectuals are usually generated from either the fringes of an academic guild or from outside the academic guild. If they are generated from inside, they are generated from young men who are reacting against the outlook of the guild. They are on its fringes. The other source of change in perception comes from brilliant outsiders who are in no way under the authority of a particular academic guild.
Mises was funded from outside of academia. New York University paid him no salary for a quarter of a century. He retired in 1969. He may have been the oldest professor in the nation. The money to pay his salary had been put up by rich friends of Mises, most notably Lawrence Fertig, who was on the board of New York University. He donated through the Foundation for Economic Education after its founding by Leonard E. Read in 1946. The Volker Fund also put up money for Mises and Hayek at the University of Chicago. The Volker Fund had put Rothbard on its payroll, mainly to review books, beginning in the mid-1950's. Rothbard was not on any university or academic payroll in 1962. Only after the demise of the Center for American Studies in 1964 did he get his first teaching position, which was at Brooklyn Polytechnic Institute. The school did not offer an economics major. He taught budding engineers. He was on the fringes.
Mises and Rothbard were outsiders. That was their great advantage. This was not clear to me in 1963, but after I read Kuhn’s book in 1968, I understood. The economics guild had no control over either of them. Neither of them published in professional journals. Rothbard had published a few essays, but after 1960 he never bothered again. He made a wise decision. He did not have to conform to what any editor believed.
CLARITY AS A STANDARD
I have always appreciated clarity of exposition. In 1963, as today, I was of the opinion that an author had two primary responsibilities: accuracy and clarity. Persuasion is in third place. Rothbard was tremendous at all three. In this sense, he became my literary model. To the extent that I am known for my writing, I gained this skill more from Rothbard than anybody else.
In 1966, I took a graduate seminar on the American Revolution from Douglass Adair. He had been the editor of The William and Mary Quarterly. He had personally transformed it from a journal that published regional memorabilia into the premier journal of colonial history. He told us that he always used this criterion for screening manuscripts. If an article did not stand on its own merits without the footnotes, he would not publish it. He said that the footnotes were important to validate the thesis, but if the article was heavily dependent on the footnotes to make its point, it was not worth publishing. That impressed me at the time. I see in retrospect that everything scholarly/academic that Rothbard ever wrote would have qualified for publication in terms of Adair’s rule.
Adair made another observation. He said that every scholar would benefit from a year of editing a scholarly journal in his field. Why? Because he would discover how few of his colleagues have the ability to write clearly.
Rothbard had a huge advantage over his peers. He was the master of clarity in the field of economics. He was even more clear than Hazlitt. As a friend of Hazlitt's, I guarantee you that Hazlitt would have been the first to admit this. He was a humble man. For a man who achieved so much, he was an astoundingly humble man. He had an enormous respect for Rothbard.
F. A. Hayek was a clear writer, but as he admitted, he was not a systematic thinker. He divided schools of thought into two groups: systematizers and puzzlers. Hayek called himself a puzzler. In economic thought, this is clearly seen in Austrian School economics from the beginning. Carl Menger and Eugen Böhm-Bawerk were systematizers. Friederich Wieser was a puzzler. Not many people have ever read Wieser. Puzzlers are harder to read than systematizers.
Hayek gained attention in the English-speaking academic world beginning in the early 1930's. Mises was not well-known in academia outside of Austria. Hayek is still the best known Austrian School economist. He won the Nobel Prize in 1974. But Hayek never wrote a treatise on economics.
Henry Hazlitt was a clear writer. He was rhetorically gifted. He had the ability to sustain long, complex arguments, as he demonstrated in his refutation of Keynes, The Failure of the “New Economics.” It was published in 1959. We never see it footnoted in any scholarly journal. There are few people who have ever read it. Hundreds of thousands of people have read his little masterpiece, Economics in One Lesson (1946), but he wrote it in just a few months, and it is not systematic in the way that treatises are supposed to be. It was not meant to be a treatise. It was meant to be a popular book that introduced people to free-market principles. It succeeded. Nothing that Hazlitt ever wrote was a comprehensive treatise.
In 1949, the world of economic theory was waiting for a clear, comprehensive, systematic treatise.
PIECES OF THE ECONOMIC PUZZLE
Most of the pieces of the economic puzzle had been lying around in an unorganized pile ever since Adam Smith's Wealth of Nations (1776). They had been refined and trimmed by Carl Menger in 1871 in his Principles of Economics. The British economist Alfred Marshall in 1890 attempted to put the pieces together in his Principles of Economics, but as is true of so many British thinkers, he was something of a puzzler, not a systematizer. The British intellectual tradition is inductivist, not deductivist. It does not begin with first principles. The pieces in his textbook did not fit together well because they were not systematically based on methodological individualism in the way that Human Action is.
I will now make an admission. It was not until just a few years ago that I recognized what should have been screamingly obvious to me and everybody else. Human Action was the first comprehensive treatise on economics. This may seem like a preposterous statement, but if you look back over the books on economics prior to Human Action, there is no book that starts at the beginning – the acting individual – and develops a comprehensive theory of all aspects of the market process in terms of just a few principles, which Mises called axioms and corollaries. No other economist called them axioms and corollaries. That was what made Mises unique.
Rothbard was an a priorist (deductivist) in epistemology, just as Mises was. In 1962, this made a grand total of two economists. In Man, Economy, and State, Rothbard laid out the chapters of the book in a systematic fashion. From Chapter 2 on, each chapter is a development of the previous chapter. This is what a prioristsare supposed to do. They start with axioms, and they develop the axioms, point by point. Mises had done the same thing in Human Action. Rothbard did it with greater precision. He also did it with greater clarity.
The first person to understand the uniqueness and comprehensive nature of Human Action was Rothbard. He saw this in 1949. This gave him an edge over all of his contemporaries. That is why Man, Economy, and State, which took him over a decade to write, was so important to my generation of budding economists. He systematized what was already a systematic introduction to economic theory. He made it easier for us to grasp the importance of what Mises had done.
Mises put together pieces of the puzzle. Rothbard took that completed puzzle and made it more palatable for younger economists who wanted to see graphs. Fortunately, he never used an equation. That would have sullied the product.
Rothbard never claimed uniqueness for his book. He fully understood that it was a derivative product. But as an introductory treatise that uses the paraphernalia of the modern economic textbook, Rothbard’s book is more serviceable than Mises’s book. In 1962, the enormous volume of his footnotes represented a survey of almost everything that had been published in the journals over the last 50 years. I have never seen anything like it. Admittedly, this dates the book. But that was inevitable, given Rothbard’s strategy. He wanted to introduce the basics of Austrian economic thought, and he wanted it within a framework of the sweep of economic opinion as of 1960 or thereabouts.
I don’t know if younger scholars read Man, Economy, and State before they read Human Action. In retrospect, I’m not sure whether I finished Man, Economy and State before I finished Human Action. I do know that I read quite a bit of Human Action in 1961. I wrote to Harper about the book in 1961. But I don’t remember if I read the whole book before the summer of 1963. I had finished both books by late August 1963. But there is no question in my mind that Rothbard opened the categories of economics more clearly to me than Mises had done. Rothbard’s literary style and his approach to economics was exactly what I needed in 1963. His book gave me an edge on my contemporaries. It shaped my work dramatically both in graduate school and subsequently. I even wrote a term paper for a course in apologetics – the philosophical defense of Christianity – on Rothbard’s epistemology. That was in 1964.
If someone has never read any economics, and he wants to start at the top, I recommend that he read Human Action first. But if he is in graduate school as an economics major, he probably would be wise to read Man, Economy and State first. If you like supply and demand graphs, read Rothbard’s book first. If you don’t like graphs, read Mises first.
Mark Pulliam of Misrule of Law has written a touching tribute to Sylvester Petro, one of the great labor law scholars of the 20th century.
Petro was also an a dear friend and early supporter of the Mises Institute, and we are proud to offer his book The Labor Policy of the Free Society for free in our online library. In fact, as Pulliam notes, Petro's dedication to the ideas of Austrian economics and a proper understanding of contracts and property came at a personal cost:
Why is Petro relatively unknown despite his prolific writing? Part of the explanation lies in academic politics; Petro was an unabashed libertarian, a proponent of Austrian School economics, and an unrelenting critic of the National Labor Relations Act (particularly as interpreted and enforced by the National Labor Relations Board). Petro believed that the ideal regulation of labor relations consisted of enforcing consensual contractual arrangements and prohibiting coercion and the use of force, in accordance with the common law. The NLRA squarely rejects this paradigm, substituting instead a regime of cartel-style “exclusive representation,” mandatory “collective bargaining,” significant impairment of employers’ contract and property rights, and legal privileges for certain union conduct.
Perhaps no area of law is so full of myths as labor law, and nobody was more committed to debunking those myths than Petro was. During Petro’s teaching career (1950-1978), such views–although popular in the business community–were decidedly out of the mainstream in legal academia. While Richard Epstein found greater acceptance for the libertarian point of view in the 1980s, along with the advent of the “law and economics” movement that validated application of free market principles to legal analysis, during the 1950s and 1960s Petro was unfashionably ahead of his time. Petro, out-of-style during the heyday of his career, was largely forgotten by an increasingly politicized professoriate after he retired. Later generations of labor law professors, at home with the premises of the NLRA, found it easier to ignore Petro than to respond to his withering critique. The current generation of progressive intellectuals ruling the academy scorns Petro as an “ideologically driven” scholar holding “radically anti-union views.”
Though Sylvestor Petro passed away in 2007, the influence of his work continues to this day. For example, his arguments against public sector collective bargaining were cited in the pending Janus v. AFSCME, a case that could have significant ramifications for government unions.
Breaking up the United States, a view thought dangerous and toxic way back in 2015, continues to trickle out in mainstream political conversation.
The latest example comes from Jesse Kelly at The Federalist:
This idea of breaking up the country may seem a bit outlandish now, but you won’t think so once real domestic unrest comes to your town. Our political disagreements have become a powder keg, one that already would have blown if conservatives had liberals’ emotional instability.
Nobody is expected to cheer for this split. Cheering is not a normal reaction when couples get a divorce. We cheer for old married people on their fiftieth wedding anniversary.
But life is imperfect. Life is hard. We both now agree that living under the other side’s value system is wholly unacceptable. The most peaceful solution we Americans can hope for now is to go our separate ways. So let us come together one last time and agree on one thing: Irreconcilable differences.
One of the best stories I've seen recently comes from Irving, New York, where a man has decided to build his own highway off ramp for his tobacco store. This story has it all, tax evasion, Indian tribal sovereignty, and an answer to the question "who will build the road?" The video is worth watching.
Eric White is a member of the Seneca Indian Tribe and owns the “Big Indian Smoke Shop” in Irving, New York.
He is reportedly building the ramp as part of a personal protest after losing a legal battle with the state over allegedly selling untaxed cigarettes.
Through his attorney, Mr. White is defending his move by evoking the sovereignty of tribal land, a point that the Federal Highway Administration doesn't know how to respond to.
Just another reason why tribal sovereignty is so important