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Herb Kelleher and the Free-Market Fight for Southwest

It is manifestly contrary to the interest of the consumers to prevent the most efficient entrepreneurs from expanding the sphere of their activities up to the limit to which the public approves of their conduct of business by buying their products.

~Ludwig von Mises

This month, Southwest Airlines lost one of their founders, the legendary Herb Kelleher. Thanks to Mr. Kelleher’s brilliance and tenacity, this idea for a small, intrastate Texas airline survived the first four years of legal battles to become one of the dominant airlines in the US and the world. While I am thankful for all the travel I’ve been able to complete due to their low-cost fares, what I’m particularly grateful for is Mr. Kelleher’s determination and fortitude to continue to push through all the legal blockades his competition forced through the courts — particular in the early years that kept Southwest Airlines from being allowed to fly.

In order to more accurately frame those legal battles, let’s first start with a brief history of the founding of Southwest. The idea for Southwest came from a business model that had already proven to be effective and profitable in California. Due to the airline regulations at the time, one way to start a lucrative new airline was have it solely based in one state with cities large enough to support airline traffic and far enough apart to justify flying versus driving. By limiting their airlines to just one state, they would not fall under the regulations and pricing of the now defunct Civil Aeronautics Board (CAB).

The founders of Southwest, Mr. Kelleher and Mr. Rollin King, decided the idea would work in Texas so they incorporated the company (then known as Air Southwest Co) on March 15, 1967. For the next eight months, they raised almost $500,000 to start their airline. On November 27, 1967, Mr. Kelleher filed an application with the Texas Aeronautics Commission (TAC) for a license to fly commuter flights between Houston, Dallas, and San Antonio. The following March TAC voted unanimously to grant Air Southwest a certificate of public convenience and necessity. Immediately the following day, the two large carriers who currently dominated that market, Braniff and Trans Texas (later Texas International) obtained a temporary restraining order from Travis County District Court prohibiting TAC from allowing Southwest to operate.1 Thus began four and a half years of legal battles for Mr. Kelleher and Southwest before they would be allowed to start operations on June 18, 1971.

The start-up airline did not have enough money to fight these airline giants, so in 1969 Mr. Kelleher (who was a lawyer) told the Southwest board that he would take the case for free and pay court costs. Not only was he already working full-time as a lawyer but he also had four children and a wife at home. When asked why he continued to fight for Southwest, he responded:

I was idealistic about it because I figured if they can prevent Southwest Airlines from introducing what Southwest Airlines proposes to provide to the consumer, then that is a sign that the free enterprise system is failing. And one of the things that motivated me was to, in effect, validate the free enterprise system.

 

When asked about these airlines’ reasoning for the legal action, Mr. Kelleher said that they wanted to “apply their incumbency and their financial strength to bleed Southwest Airlines to death before it could ever fly.” These legacy carriers had no public safety or public benefit reasons for keeping Southwest grounded, but only their desire to maintain their government-sanctioned monopoly and their high prices. Mr Kelleher goes on to say that: “the arguments that they made in court were actually all kind of specious. This is one illustration of where people attempt to use, to manipulate the government to prevent competition.” So instead of the government or the courts protecting the rights of Southwest to exist, they allowed these airlines to try to prohibit Southwest from ever becoming a competitor.

Southwest did take flight in 1971, and all Mr. Kelleher’s dedication and perseverance paid off as Southwest continued to grow despite all the legal battles competitors continued to jab them with. His desire to “validate the free market” by providing an airlines that customers wanted was fulfilled. What about those airline giants that tried to keep Southwest grounded? The Airline Deregulation Act in 1978 started the downfall of the two main legal agitators (Braniff and Texas International), who ceased operations in 1982. Unlike its legal challengers, the deregulation allowed Southwest to expand out of Texas and it has since become one of the largest airlines in the world.

Southwest grew due to its innovations and cost savings methods as well as the airline deregulation. Both of which have disrupted the airline industry and transformed how people fly. Since its first flight in 1971 consumers have continued to benefit from the work of Mr. Kelleher in his fight for his airline’s right to exist. Mr. Kelleher is a great example of an entrepreneur who would not let anything but the demands of the consumers dictate the direction of his company. Luckily for him and for Southwest, he had the professional skills and the abundant energy to continue struggling in the trenches for those four years. This was no small feat, since, as Murray Rothbard noted in Making Economic Sense, markets and consumers can be unpredictable, and competition fierce:

One fascinating aspect of deregulation was the failure of experts to predict the actual operations of the free market. No transportation economist predicted the swift rise of the hub-and-spoke system. But the general workings of the market conformed to the insights of free-market economics: competition intensified, fares declined, the number of customers increased, and a variety of almost bewildering discounts and deals pervaded the airline market. Almost weekly, new airlines entered the field, old and inefficient lines went bankrupt, and mergers occurred as the airline market moved swiftly toward efficient service of consumer needs after decades of stultifying government cartelization.

While Mr. Kelleher’s story is one of a successful breakthrough of a startup against the entrenched companies, it is interesting to consider all the other companies and innovations that could be in the marketplace but don’t exist due to competition using governmental monopolies and crony capitalism as a barrier to entry. These barriers to entry will continue to exist as long as the government has the regulatory power to manipulate the market. However, the story of Southwest and the airline deregulation is a wonderful example of how the free market provides the most efficient product for the consumers and not a governmental organization.

Stories like Mr. Kelleher’s and Southwest’s inspire other entrepreneurs to continue to fight to bring their business ideas to the market despite the often unfair struggles they may have, and demonstrate the power of the market in providing the best products and services to consumers.

  • 1. Some sources list Continental Airlines (now United Airlines) has another airline that tried to block Southwest.
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What Austrians Can Teach “Law and Economics” Scholars

[From The Quarterly Journal of Austrian Economics 21, no. 2 (Summer 2018). For the full issue, click here.]

Few scholars disagree that Austrian economists and their fellow travelers have made significant contributions to law and economics. Anyone familiar with the works of Carl Menger, Friedrich Hayek, Ludwig von Mises, Murray Rothbard, and Israel Kirzner recognizes their undeniable additions to law and economics, particularly in analyzing institutions, monopoly and antitrust laws, and regulations and their (unintended) consequences. The contributions in the Research Handbook on Austrian Law and Economics build on and expand the work of these great Austrian economists by applying what editors Todd Zywicki and Peter Boettke (2017, p. 21) call the “propositions that are the defining substantive position of the contemporary Austrian school of economics” to a large variety of areas in law and economics. Such areas include property rights and conflict resolution in the absence of formal rules (Krause), criminal constitutions (Skarbek), the efficiency of the common law (Zywicki and Stringham), family law (Horwitz), and rule reform (Coyne).

Because many of these contributions build on the work of the great Austrian economists, they share common themes that are not necessarily emphasized in mainstream law and economics:

1) The institutions that define the rules of the game, particularly property rights, matter. They “have been devised by human beings to create order and reduce uncertainty in exchange” (North 1991, p. 97).

2) Competition is not a state of affairs but a market “process of entrepreneurial discovery” (Zywicki and Boettke, 2017, p. 21).

3) Utility and costs are subjective.

4) Individuals, including those working in government and the courts, face a knowledge problem and operate under uncertainty.

5) Formal institutions are not necessarily superior or better-performing than informal institutions if those formal institutions are not being recognized as beneficial by the members of the group or society operating under those (competing) institutions.

The third and fourth themes are important because they lead Austrian economists to conclude that government usually cannot do a better job than markets. The fifth theme lies at the core of chapter 2, “Property Rights, the Coase Theorem and Informality” (Krause, 2017), and chapter 8, “Self-Governance, Property Rights, and Illicit Commerce” (Skarbek, 2017). Krause (2017, p. 31) shows that people living in slums in poor and developing countries, despite lacking a formal definition of private property rights or a formal justice system, have recourse to voluntary solutions as well as informal mediation services to resolve disputes between neighbors. He provides several examples showing that people have incentives to negotiate an outcome that benefits both parties, as predicted by Coase (1960), even when property rights are not formally defined. Even when there is a formal justice system, Krause (2017, p. 35) shows that, in the case of Peru, the overburdened administrative authorities eventually accepted the decisions of the informal organizations in the slums.

Krause (2017, p. 31) also draws another lesson from these natural experiments: “informal solutions of disputes among neighbours follow a ‘rights’ approach and do not intentionally look for efficiency, although this may be an unintended or secondary result of allocating rights.” According to Krause (2017, p. 39), “this speaks against a cost/benefit analysis on such decisions since making the allocation of property rights dependent on a judge’s evaluation of a net result would bring instability back.”1 Krause’s discussion of dispute resolutions in slums represents another piece of empirical evidence supporting the idea that people have incentives to voluntarily resolve their disputes outside the government authority. His work also complements Williamson and Kerekes (2011), who, among others, show that formal institutions are not necessarily superior to informal institutions when it comes to securing property.

Skarbek (2017, p. 178) “challenges the legal centrism hypothesis by examining the internal governance institutions of prison gangs, arguing that order and property rights can emerge without the state” or, more accurately, despite the state. His chapter discusses how one of the largest prison gangs in Northern California, Nuestra Familia (NF), which operates outside the law both in and out of prison, has developed “effective self-enforcement internal governance mechanisms to limit opportunistic and shirking behavior” (Skarbek, 2017, p. 178). As Skarbek discusses (2017, p. 181), NF recruits members primarily in prison, and one of its main revenue sources is drug trafficking behind bars. Skarbek’s analysis of the internal organization of NF is consistent with the idea that prison gangs operate like a profit-maximizing enterprise that seeks to reduce shirking, opportunism, and turnover when it comes to retaining its best employees.

NF recruits its members and associates by offering them protection against predatory inmates and rival gang members. In exchange, recruits swear lifetime allegiance to the Familia and work for the Familia while in prison and after release (Skarbek, 2017, p. 183). In addition, NF has rules that its members and associates must follow and punishments for breaking those rules. NF has also established rules that govern interactions outside the gang. Those rules are just as important as the rules governing interactions within the gang, because intergang violence diverts resources away from NF’s main source of profit: drug trafficking. All these rules have been codified in a written constitution that, similarly to what corporate culture does, sets workable principles and routines that create shared expectations for group members (Kreps, 1996).

Much of Skarbek’s work on the prison gangs’ internal organization echoes Peter Leeson’s work on the internal governance institutions of pirate ships (Leeson, 2009). Whether pirate ships or prison gangs, it is in the interest of these criminal organizations to develop self-governance mechanisms to mitigate moral hazard and adverse selection so as to maximize their profits. They cannot use the government to enforce contracts or to arbitrate conflicts.

These two chapters by Martin Krause and David Skarbek undoubtedly represent important contributions to the law and economics literature, particularly as it relates to the development of self-governance institutions to coordinate human interactions in the absence of government or, in the case of criminal organizations, in spite of government. However, it is unclear what makes these two contributions uniquely Austrian. Challenging the legal centrist assumption that without government, there are no property rights, does not make one’s contribution uniquely Austrian.

When it comes to the economic analysis of the law and particularly property rights, Austrian economists have long disagreed with mainstream scholars on efficiency. Building on the Austrian literature, Zywicki and Stringham (2017, p. 193), in their chapter “Austrian Law and Economics and Efficiency in the Common Law,” are highly critical of Posner and his followers who argue that “the common law is efficient (Kaldor-Hicks efficient) because judges view wealth maximization as a normative ideal.” Zywicki and Stringham (2017, p. 195) acknowledge not all mainstream economists agree that the common law maximizes wealth. The problem is these economists who argue in favor of changes to make the common law more efficient ignore that judges suffer from the same problems that public choice scholars identify with legislatures: interest-group pressures, rent-seeking, and rent-dissipating (Zywicki and Stringham, 2017, p. 196).

Since costs and benefits are subjective, judges cannot predict how specific decisions will affect litigants’ willingness to pay. Willingness to pay might make sense in markets where willingness to pay changes as market conditions change, but within the context of the courtroom, judges face the same challenge as those “of a Soviet-style economic central planner” (Zywicki and Stringham, 2017, p. 197). In light of this conclusion, Zywicki and Stringham (2017, p. 198) argue that “the primary purpose of the law is not to try to impose rules that bring about the wealth maximizing ‘outcome,’ but instead to provide a stable institutional framework that will enable individuals to plan and coordinate their affairs in a world of constant dynamism.” If the rules that individuals operate within are constantly changing, it will indeed be much more difficult for individuals to coordinate their plans, and we should expect much more judicial intervention. Higgs’s (1997, 2012) concept of “regime uncertainty” defined as “a pervasive lack of confidence among investors in their ability to foresee the extent to which future government actions will alter their private-property rights” illustrates the point made by Zywicki and Stringham when applied to explain why the Great Depression lasted so long.2

Zywicki and Stringham (2017, p. 198) also believe, like other Austrians such as Block, Kirzner, and Rothbard, that the law should be evaluated “using extra-economic means,” that is, “society-wide shared ethical perspectives” (Kirzner, 2000, p. 85). They argue that “Austrian economics is a positive discipline that does not say what any given policy or any given law should or should not be” (Zywicki and Stringham, 2017, p. 198). This argument echoes Mises, Kirzner, and Rothbard’s position about economics being “a value-free science” that cannot tell us anything about whether a policy or a law should be passed or repealed. At best, economics might be able to tell us whether some goals are incoherent (Rothbard, 2006, p. 251).

Zywicki and Stringham (2017, p. 202) take their argument further and argue that Hayek ought to be praised for his analysis of the common law. However, his belief that “ultimately judges must be subservient to the legislature which can step in to alter the law when common law reaches a ‘dead end’ through adherence to precedent or when the law develops in ways that are inconsistent with the market economy” runs into the same problems that judges would face if they were to maximize Kaldor-Hicks efficiency when deciding cases (Zywicki and Stringham, 2017, p. 202). Instead of relying on the government to “improve the law,” Zywicki and Stringham (2017, pp. 203–204) argue that we should allow for competition in law in the same way that we allow for competition in the market process, which enables entrepreneurs to discover unexploited profit opportunities to better satisfy consumers.

We can find precedent in the Middles Ages, when litigants sought out private judges for their expertise, judges who competed de facto with each other since part of their pay came from litigants’ filing fees. Competition made judges more efficient in adjucating cases and also resulted in better laws and procedures to meet parties’ needs (Zywicki and Stringham, 2017, p. 204). As the authors remind us, to some extent today, “competition takes place alongside government law, as with modern arbitration, mediation, and other forms of alternative dispute resolution,” which suggests that “consumers” do not necessarily value government law since they use those alternative mechanisms of dispute resolution (Zywicki and Stringham, 2017, p. 205).

There is little doubt that competition as a discovery procedure is a better mechanism than government to sort out the rules and enforcement procedures that people actually value. But before reaching that conclusion, the authors spend two-thirds of the chapter arguing against Kaldor-Hicks efficiency—which no law and economics scholars claim is the panacea—without providing an alternative way to evaluate the law. More importantly, when Zywicki and Stringham (2017, p. 202) say that “the real test of the usefulness of a legal rule is found in the unseen effects of the rule in terms of the number accidents avoided or conflicts averted, not the seen effects of the cases that come before the judge,” they seem unaware that by writing this, they are saying that the law’s role is to minimize the costs associated with accidents or conflicts—which is another way of saying that the law’s role is to maximize wealth.

Similarly, as discussed previously, Zywicki and Stringham’s argument that the law’s role is “to provide a stable institutional framework that will enable individuals to plan and coordinate their affairs in a world of constant dynamism” (2017, p. 198) sounds a lot like the argument that the law’s role is to ensure that people can pursue their activities in an environment that fosters peaceful cooperation as opposed to plundering or, to be more accurate, to foster an environment where people are discouraged from engaging in violent wealth-extraction-type behaviors—and it is the law’s role to do this because it allows people to maximize wealth. This is why theft is illegal: if stealing were allowed, people would spend resources trying to perfect their craft in stealing other people’s property while others would spend resources attempting to protect their property. Tremendous resources would be wasted on activities that do not create wealth.

Nobody denies that we can rely on noneconomic means such as ethical principles to explain why theft should be and is illegal, but certainly efficiency and wealth maximization seem to be useful tools to explain why theft should be and is illegal. It is curious that Austrian scholars who have written on the tragic consequences of alcohol and drug prohibitions would argue that we should either rely on society-wide ethical principles or, better yet, abstain from evaluating any law or policy. It is partly because of those society-wide ethical principles that most drugs remain illegal in the United States despite the obvious inefficiency of the war on drugs and its tragic consequences, intended and unintended. If Austrian scholars want mainstream economists to pay attention to their work, we should avoid telling them that economists should rely on noneconomic means to evaluate a law or a policy, and we definitely should avoid telling them that economists should abstain from evaluating a given law or policy because economics is a positive science.

Steven Horwitz’s (2017) chapter, “Family Law, Uncertainty, and the Coordination of Human Capital,” shows how Austrian economics can contribute to both the economic analysis of the law and to the economic theory of the family. His chapter updates Gary Becker’s model of the family in several ways. First, Horwitz integrates the Austrian theory of capital into his analysis to help explain how “marriage and the family can be understood as structures of human capital formed in the face of uncertainty and intended to create an ongoing enterprise of cooperation to achieve a set of goals at lower costs than feasible alternatives” (Horwitz, 2017, p. 398). To complicate matters, members of the family produce not only for the market to earn income but also for the household when engaging in childcare and other household activities. Therefore, family members have to decide how much “market human capital” and “household human capital” they will respectively invest to make the whole venture successful (Horwitz, 2017, p. 398).

With an Austrian theory of marriage and the family, a law and economics analysis of family law will then investigate to what extent “the law facilitates or complicates the coordination process by which couples form marriages and decide on questions of market and household production” (Horwitz, 2017, p. 399). Horwitz (2017, pp. 407–408), for example, shows how laws that favor granting custody to the mother can alter significantly both parties’ decisions regarding how much to invest in market human capital versus household human capital. This phenomenon also can help us understand part of the gender pay gap, since the mother will be less likely to invest in market human capital and more likely to invest in household human capital if she is more likely to end up with custody of the children.

When it comes to no-fault divorce law, its effects are more ambiguous. On the one hand, no-fault divorce law somewhat increases the uncertainty about how long the marriage will last compared with fault divorce law, thus decreasing incentives for both parties “to invest in the sorts of relationship-specific forms of human capital that are necessary to sustain the marriage and the large family that might result” (Horwitz, 2017, p. 411). On the other hand, “no-fault divorce can be seen as an effective institutional adaptation” to reduce the costs of exiting a bad marriage when one or both parties realize that they are not a good match and the probability of having a successful marriage and family is low (Horwitz, 2017, p. 413). Horwitz’s analysis of family law as it applies to custody and no-fault divorce is further evidence that rules matter when it comes to coordinating human action, whether in a market or a nonmarket environment.

One thing Horwitz does not address (maybe because it is beyond the chapter’s scope) is the impact of low-skilled immigration on women’s incentives to invest in market human capital while still attempting to have a family. There is evidence not only that increased low-skilled immigration allows women to increase their labor supply, but also that increased low-skilled immigration that provides affordable household services leads to increased fertility among college-educated women (Furtado and Hock, 2010; Cortés and Tessada, 2011). Therefore, when it comes to analyzing marriage and the family, such empirical evidence shows that other laws, such as immigration law, can indirectly impact women’s human capital investment decisions.

Christopher Coyne’s (2017) “The Law and Economics of Rule Reform” represents the best chapter in this volume and should be recognized as an important Austrian contribution to which mainstream law and economics scholars should pay attention. In this chapter, Coyne (2017, p. 92) combines the tools of mainstream law and economics with those of Austrian economics to explain why some rule reforms succeed and others fail. His work builds on North’s work on institutions as well as the works of Mises and Hayek and their intellectual heirs analyzing why central planning is bound to fail. As Coyne (2017, p. 92) explains, the goal of rule reform is to make “changes to existing rules in order to achieve a preferable state of affairs from the standpoint of the reformer.” When analyzing rule reform, mainstream law and economics scholars tend to focus on how to generate the proper incentives such that the “relevant players” prefer those new rules to the old ones.

Certainly, incentives are a necessary but not sufficient condition for success in rule reforms. As Coyne (2017, p. 93) points out, a vast empirical literature shows that failures in economic, political, or social rule reforms attempting “to improve the human condition” abound. The major reason for these failures is what Austrian economists call the “knowledge problem,” which “emphasizes that planners lack the context-specific knowledge to effectively achieve their ends through rational planning” (Coyne, 2017, p. 93). As Coyne (2017, p. 93) tells us, “determining the appropriate incentives is a difficult task given that the perceptions of citizens in other societies are grounded in a cultural context that often cannot be understood by outsiders in a manner that can be effectively incorporated into policies.” For Coyne (2017, p. 93), the core of the problem with determining the appropriate incentives so that rule reform will succeed resides in “the distance between the local knowledge and the knowledge possessed by those designing the rules.” The greater the “knowledge distance” between the rule reformers and “the locus of knowledge associated with the problem they seek to address,” the more likely the rule reform is to fail (Coyne, 2017, p. 93).

Similar to how Buchanan argues that Hayek was warning us not only against “rational constructivism” but also against “‘romantic constructivism’ which attempts to design rules while ignoring ‘culturally evolved rules for human behavior that constrain the set of institutional alternatives,’” Coyne warns us against “romantic rule reform” (Coyne, 2017, pp. 103–104). The more disconnected reforms are from “the underlying realities of the society in which they are imposed”—the less rule reform appreciates people’s underlying beliefs and attitudes and the informal rules they operate under—the more likely such intervention will fail, regardless of how well intended the reformers are (Coyne, 2017, pp. 103–104). The overarching implication of Coyne’s work is that rule reformers are significantly constrained in what they can do and, therefore, sometimes the status quo is the least bad option.

Other chapters in the Handbook deserve attention, also. But—though this is not necessarily a bad thing—too many of those chapters read like a literature review of what Austrians have said on a particular law and economics topic rather than novel contributions. As mentioned at the beginning of this review, there is little doubt that Austrian economists have made significant contributions to law and economics, and the Research Handbook on Austrian Law and Economics is additional evidence of that.

When it comes to catching the attention of mainstream scholars, a problem Austrians face is that mainstream law and economics journals, with a few exceptions, tend to publish papers on narrow topics relying on advanced statistical analysis. One problem for mainstream law and economics is that the research question has become subservient to the methodology. Austrians, by contrast, agree that the research question should dictate the methodology used to answer that question; therefore, they are more able to tackle a larger variety of questions using whatever methodology is necessary. Some of the chapters reviewed, particularly Krause, Skarbek, Horwitz, and Coyne, are evidence of how much more versatile Austrians are when it comes to tackling some interesting law and economics questions. Those chapters also answer partially some of the three questions Zywicki and Boettke (2017, p. 426) think “demand our attention in the field of law and economics,” questions about the emergence and evolution of norms and the dichotomy between market and government in creating law.

Finally, it is also this reviewer’s viewpoint that Austrian scholars should not shy away from engaging mainstream law and economics scholars, even using their preferred methodology when appropriate, but also scholars in other fields. Many topics covered in this volume certainly are of interest not only to law and economics scholars, but also to scholars in political science, criminal justice, management, finance, sociology, and other subjects. Austrian economics can shed new light on questions that scholars in those other fields are interested in answering, questions that mainstream law and economics scholars might sometimes refrain from tackling because they cannot be addressed using their preferred methodology.

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The Decline of the Scholar and the Decline of Academia

The academic scholar, along with the great teacher, is vanishing from the faculties of the universities. Specialists occupy the places that they leave. The first victims of this process are the students. When the professorial specialists hold a lecture, they have little else to teach that goes beyond their tiny field of expertise. About the areas other than the field of specialization, the one-dimensional expert is as ignorant as the students. When the experts teach their specialization, the content is too advanced for the students to understand and should the experts go into the wider area of the discipline, their discourse becomes amateurish. The decline of wisdom in academia that has happened over the past decades results from this change.

Scholars, Teachers, and the Specialists

Of the three ideal types of university professors — the scholar, the teacher, and the specialist — the scholar is the one who combines both a profound knowledge of a field of expertise with a solid knowledge of other areas of knowledge. Until the 1970s, many universities in Europe and the United States had scholars. While only a few of these scholars enjoyed the serendipity that is the realm of the genius, many of them excelled in the same way as the great masters. The scholars spread knowledge combined with wisdom because a great scholar is not only a researcher but always also a great teacher.

With the scholar, the great teacher is also vanishing from university faculties. Different from the scholar, the great teacher in its pure form does not excel in a specialization. Yet his strength is a broad and accurate knowledge of the subfields of his discipline and his ability to bring his insights to the students. The great teacher opens the doors to knowledge. He knows about the many entrances that exist and the many ways of finding one’s way through the labyrinth of knowledge.

When there were still scholars and great teachers at the faculties, not only the students would profit but also the experts. The scholars and the great teachers in the departments were the promoters of communication. They brought the faculty together in a common discussion.

In the past, the great teachers and scholars would hold the introductory lecture. They would compare their chosen academic discipline with other areas and would help the students to go on with confidence or choose another path. In the modern university, this has ended. Nowadays, most colleges relegate the introductory courses to substitute professors. These assistants and adjuncts are at the beginning of their career and cannot be scholars or good teachers and that they likewise are also not yet experts. There are signs that this erosion is most advanced at the so-called “elite” institutions where also the dread of political correctness is most present and the cuddling of the American mind most advanced.

Rise of the Specialist

Over time, the lump-sum funding of the university had to make way for getting outside financing. The benefits of scholarship and teaching counted less while the new criteria for academic advancement favored the specialist whose competence is limited to a tiny field of expertise. To get funding, the disciplines had to put on the “mantle of science.” Scholarship had to make room for scientism.

While the paper output has grown, their quality has declined. Across the whole range of the natural and the behavioral sciences the so-called “irreproducibility crisis” has thrown doubts on the reliability of even the most prominent results. Failing to reproduce published research afflicts a wide range of disciplines, ranging from medicine and psychology to the social sciences. Investigations have revealed that subsequent studies cannot reproduce established findings. The problem encompasses the improper application of statistics, biased research techniques, lack of accountability, and political groupthink. The pressure of “publish or perish” has led to a scientific culture toward delivering positive results even if they are unwarranted by the data basis.

As some authors claim, most published research findings in medicine are false. Another study finds that researchers failed to reproduce most of another scientist’s experiments, and more than half have failed to reproduce their own results. Other investigations show that outright fraud is behind the fabricated results. After the Sokol affair of years ago, new blunt hoaxes with made-up papers have revealed the political bias of some academic journals.

The more the specialists dominate in a university, the more the original purpose of a university to educate and advance knowledge will suffer. Numerical performance measurement, which is even misplaced in the business world, becomes a scourge in areas such as education that is much less fit for numerical evaluation than business. As Jerry Z. Muller explains in his Tyranny of Metrics, applying formal yardsticks to measure academic performance does little to advance knowledge but has led to gaming, cheating, and goal diversion. The cascade of rules and regulations hampers the attainment of the original purpose of the university. Misaligned incentives work in favor of the specialist, yet they drive the efforts away from the meaning of what a university should be.

In many areas, academic production has reached a stage of diminishing returns and scientific progress has become stagnant. Public trust in science is still holding up but the attraction of pseudo sciences is rising and there is only a small step from the popularity of pseudo sciences to anti-science. It is in the self-interest of the specialists who now dominate the departments that more scholars get hired.

A major step to diminish the rat race of publish or perish would come from phasing out public funding of science. It is a myth that scientific progress depends on public money. Without public funding the chance of innovative breakthrough does not diminish. On the contrary: public financing of research directs time and money not to innovation but to conventional research areas and traditional methods.

Conclusion

In many academic fields, the awareness is growing that the demise of the scholar has impoverished the intellectual life in the universities. The decline of the universities has accelerated over the past couple of decades. Driven by the encroachment of the state, the institutions of higher learning have succumbed to the government. Scientism has crowded out the scholars and the great teachers. The foremost victims of this process are the students who no longer receive a good education. Both in terms of the formation of students and of the research output that benefits do not justify the costs. The withdrawal of state intervention would be the first step to a rejuvenated academia, beginning with a cut and a stop of the public funding of research.

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The Fallacy of the “Public Sector”

[This article is excerpted from Economic Controversies, chapter 21, “The Fallacy of the ‘Public Sector'” (2011). It originally appeared in the New Individualist Review (Summer, 1961): 3–7.]

 

We have heard a great deal in recent years of the “public sector,” and solemn discussions abound through the land on whether or not the public sector should be increased vis-à-vis the “private sector.” The very terminology is redolent of pure science, and indeed it emerges from the supposedly scientific, if rather grubby, world of “national-income statistics.” But the concept is hardly wertfrei; in fact, it is fraught with grave, and questionable, implications.

In the first place, we may ask, “public sector” of what? Of something called the “national product.” But note the hidden assumptions: that the national product is something like a pie, consisting of several “sectors,” and that these sectors, public and private alike, are added to make the product of the economy as a whole. In this way, the assumption is smuggled into the analysis that the public and private sectors are equally productive, equally important, and on an equal footing altogether, and that “our” deciding on the proportions of public to private sector is about as innocuous as any individual’s decision on whether to eat cake or ice cream. The State is considered to be an amiable service agency, somewhat akin to the corner grocer, or rather to the neighborhood lodge, in which “we” get together to decide how much “our government” should do for (or to) us. Even those neoclassical economists who tend to favor the free market and free society often regard the State as a generally inefficient, but still amiable, organ of social service, mechanically registering “our” values and decisions.

One would not think it difficult for scholars and laymen alike to grasp the fact that government is not like the Rotarians or the Elks; that it differs profoundly from all other organs and institutions in society; namely, that it lives and acquires its revenues by coercion and not by voluntary payment. The late Joseph Schumpeter was never more astute than when he wrote, “The theory which construes taxes on the analogy of club dues or of the purchase of the services of, say, a doctor only proves how far removed this part of the social sciences is from scientific habits of mind.”1

Apart from the public sector, what constitutes the productivity of the “private sector” of the economy? The productivity of the private sector does not stem from the fact that people are rushing around doing “something,” anything, with their resources; it consists in the fact that they are using these resources to satisfy the needs and desires of the consumers. Businessmen and other producers direct their energies, on the free market, to producing those products that will be most rewarded by the consumers, and the sale of these products may therefore roughly “measure” the importance that the consumers place upon them. If millions of people bend their energies to producing horses-and-buggies, they will, in this day and age, not be able to sell them, and hence the productivity of their output will be virtually zero. On the other hand, if a few million dollars are spent in a given year on Product X, then statisticians may well judge that these millions constitute the productive output of the X-part of the “private sector” of the economy.

One of the most important features of our economic resources is their scarcity: land, labor, and capital-goods factors are all scarce, and may all be put to various possible uses. The free market uses them “productively” because the producers are guided, on the market, to produce what the consumers most need: automobiles, for example, rather than buggies. Therefore, while the statistics of the total output of the private sector seem to be a mere adding of numbers, or counting units of output, the measures of output actually involve the important qualitative decision of considering as “product” what the consumers are willing to buy. A million automobiles, sold on the market, are productive because the consumers so considered them; a million buggies, remaining unsold, would not have been “product” because the consumers would have passed them by.

Suppose now that into this idyll of free exchange enters the long arm of government. The government, for some reasons of its own, decides to ban automobiles altogether (perhaps because the many tailfins offend the aesthetic sensibilities of the rulers) and to compel the auto companies to produce the equivalent in buggies instead. Under such a strict regimen, the consumers would be, in a sense, compelled to purchase buggies because no cars would be permitted. However, in this case, the statistician would surely be purblind if he blithely and simply recorded the buggies as being just as “productive” as the previous automobiles. To call them equally productive would be a mockery; in fact, given plausible conditions, the “national product” totals might not even show a statistical decline, when they had actually fallen drastically.

And yet the highly touted “public sector” is in even worse straits than the buggies of our hypothetical example. For most of the resources consumed by the maw of government have not even been seen, much less used, by the consumers, who were at least allowed to ride in their buggies. In the private sector, a firm’s productivity is gauged by how much the consumers voluntarily spend on its product. But in the public sector, the government’s “productivity” is measured — mirabile dictu — by how much it spends! Early in their construction of national-product statistics, the statisticians were confronted with the fact that the government, unique among individuals and firms, could not have its activities gauged by the voluntary payments of the public — because there were little or none of such payments. Assuming, without any proof, that government must be as productive as anything else, they then settled upon its expenditures as a gauge of its productivity. In this way, not only are government expenditures just as useful as private, but all the government need to do in order to increase its “productivity” is to add a large chunk to its bureaucracy. Hire more bureaucrats, and see the productivity of the public sector rise! Here, indeed, is an easy and happy form of social magic for our bemused citizens.

The truth is exactly the reverse of the common assumptions. Far from adding cozily to the private sector, the public sector can only feed off the private sector; it necessarily lives parasitically upon the private economy. But this means that the productive resources of society — far from satisfying the wants of consumers — are now directed, by compulsion, away from these wants and needs. The consumers are deliberately thwarted, and the resources of the economy diverted from them to those activities desired by the parasitic bureaucracy and politicians. In many cases, the private consumers obtain nothing at all, except perhaps propaganda beamed to them at their own expense. In other cases, the consumers receive something far down on their list of priorities — like the buggies of our example. In either case, it becomes evident that the “public sector” is actually antiproductive: that it subtracts from, rather than adds to, the private sector of the economy. For the public sector lives by continuous attack on the very criterion that is used to gauge productivity: the voluntary purchases of consumers.

We may gauge the fiscal impact of government on the private sector by subtracting government expenditures from the national product. For government payments to its own bureaucracy are hardly additions to production; and government absorption of economic resources takes them out of the productive sphere. This gauge, of course, is only fiscal; it does not begin to measure the antiproductive impact of various government regulations, which cripple production and exchange in other ways than absorbing resources. It also does not dispose of numerous other fallacies of the national product statistics. But at least it removes such common myths as the idea that the productive output of the American economy increased during World War II. Subtract the government deficit instead of add it, and we see that the real productivity of the economy declined, as we would rationally expect during a war.

In another of his astute comments, Joseph Schumpeter wrote, concerning anticapitalist intellectuals, “capitalism stands its trial before judges who have the sentence of death in their pockets. They are going to pass it, whatever the defense they may hear; the only success a victorious defense can possibly produce is a change in the indictment.”2 The indictment has certainly been changing. In the 1930s, we heard that government must expand because capitalism had brought about mass poverty. Now, under the aegis of John Kenneth Galbraith, we hear that capitalism has sinned because the masses are too affluent. Where once poverty was suffered by “one-third of a nation,” we must now bewail the “starvation” of the public sector.

By what standards does Dr. Galbraith conclude that the private sector is too bloated and the public sector too anemic, and therefore that government must exercise further coercion to rectify its own malnutrition? Certainly, his standard is not historical. In 1902, for example, net national product of the United States was $22.1 billion; government expenditure (federal, state, and local) totaled $1.66 billion, or 7.1 percent of the total product. In 1957, on the other hand, net national product was $402.6 billion, and government expenditures totaled $125.5 billion, or 31.2 percent of the total product. Government’s fiscal depredation on the private product has therefore multiplied from four to five-fold over the present century. This is hardly “starvation” of the public sector. And yet, Galbraith contends that the public sector is being increasingly starved, relative to its status in the nonaffluent 19th century!

What standards, then, does Galbraith offer us to discover when the public sector will finally be at its optimum? The answer is nothing but personal whim:

There will be question as to what is the test of balance — at what point may we conclude that balance has been achieved in the satisfaction of private and public needs. The answer is that no test can be applied, for none exists.… The present imbalance is clear.… This being so, the direction in which we move to correct matters is utterly plain.3

To Galbraith, the imbalance of today is “clear.” Clear why? Because he looks around him and sees deplorable conditions wherever government operates. Schools are overcrowded, urban traffic is congested and the streets littered, rivers are polluted; he might have added that crime is increasingly rampant and the courts of justice clogged. All of these are areas of government operation and ownership. The one supposed solution for these glaring defects is to siphon more money into the government till.

But how is it that only government agencies clamor for more money and denounce the citizens for reluctance to supply more? Why do we never have the private-enterprise equivalents of traffic jams (which occur on government streets), mismanaged schools, water shortages, and so on? The reason is that private firms acquire the money that they deserve from two sources: voluntary payment for the services by consumers, and voluntary investment by investors in expectation of consumer demand. If there is an increased demand for a privately owned good, consumers pay more for the product, and investors invest more in its supply, thus “clearing the market” to everyone’s satisfaction. If there is an increased demand for a publicly owned good (water, streets, subway, and so on), all we hear is annoyance at the consumer for wasting precious resources, coupled with annoyance at the taxpayer for balking at a higher tax load. Private enterprise makes it its business to court the consumer and to satisfy his most urgent demands; government agencies denounce the consumer as a troublesome user of their resources. Only a government, for example, would look fondly upon the prohibition of private cars as a “solution” for the problem of congested streets. Government’s numerous “free” services, moreover, create permanent excess demand over supply and therefore permanent “shortages” of the product. Government, in short, acquiring its revenue by coerced confiscation rather than by voluntary investment and consumption, is not and cannot be run like a business. Its inherent gross inefficiencies, the impossibility for it to clear the market, will insure its being a mare’s nest of trouble on the economic scene.4

In former times, the inherent mismanagement of government was generally considered a good argument for keeping as many things as possible out of government hands. After all, when one has invested in a losing proposition, one tries to refrain from pouring good money after bad. And yet, Dr. Galbraith would have us redouble our determination to pour the taxpayer’s hard-earned money down the rathole of the “public sector,” and uses the very defects of government operation as his major argument!

Professor Galbraith has two supporting arrows in his bow. First, he states that, as people’s living standards rise, the added goods are not worth as much to them as the earlier ones. This is standard knowledge; but Galbraith somehow deduces from this decline that people’s private wants are now worth nothing to them. But if that is the case, then why should government “services,” which have expanded at a much faster rate, still be worth so much as to require a further shift of resources to the public sector? His final argument is that private wants are all artificially induced by business advertising, which automatically “creates” the wants that it supposedly serves. In short, people, according to Galbraith, would, if let alone, be content with nonaffluent, presumably subsistence-level living; advertising is the villain that spoils this primitive idyll.

Aside from the philosophical problem of how A can “create” B’s wants and desires without B’s having to place his own stamp of approval upon them, we are faced here with a curious view of the economy. Is everything above subsistence “artificial”? By what standard? Moreover, why in the world should a business go through the extra bother and expense of inducing a change in consumer wants, when it can profit by serving the consumer’s existing, uncreated wants? The very “marketing revolution” that business is now undergoing, its increased and almost frantic concentration on “market research,” demonstrates the reverse of Galbraith’s view. For if, by advertising, business production automatically creates its own consumer demand, there would be no need whatever for market research — and no worry about bankruptcy either. In fact, far from the consumer in an affluent society being more of a “slave” to the business firm, the truth is precisely the opposite: for as living standards rise above subsistence, the consumer gets more particular and choosy about what he buys. The businessman must pay even greater court to the consumer than he did before: hence the furious attempts of market research to find out what the consumers want to buy.

There is an area of our society, however, where Galbraith’s strictures on advertising may almost be said to apply — but it is in an area that he curiously never mentions. This is the enormous amount of advertising and propaganda by government. This is advertising that beams to the citizen the virtues of a product that, unlike business advertising, he never has a chance to test. If Cereal Company X prints a picture of a pretty girl declaiming that “Cereal X is yummy,” the consumer, even if doltish enough to take this seriously, has a chance to test that proposition personally. Soon his own taste determines whether he will buy or not. But if a government agency advertises its own virtues over the mass media, the citizen has no direct test to permit him to accept or reject the claims. If any wants are artificial, they are those generated by government propaganda. Furthermore, business advertising is, at least, paid for by investors, and its success depends on the voluntary acceptance of the product by the consumers. Government advertising is paid for by means of taxes extracted from the citizens, and hence can go on, year after year, without check. The hapless citizen is cajoled into applauding the merits of the very people who, by coercion, are forcing him to pay for the propaganda. This is truly adding insult to injury.

If Professor Galbraith and his followers are poor guides for dealing with the public sector, what standard does our analysis offer instead? The answer is the old Jeffersonian one: “that government is best which governs least.” Any reduction of the public sector, any shift of activities from the public to the private sphere, is a net moral and economic gain.

Most economists have two basic arguments on behalf of the public sector, which we may only consider very briefly here. One is the problem of “external benefits.” A and B often benefit, it is held, if they can force C into doing something. Much can be said in criticism of this doctrine; but suffice it to say here that any argument proclaiming the right and goodness of, say, three neighbors, who yearn to form a string quartet, forcing a fourth neighbor at bayonet point to learn and play the viola, is hardly deserving of sober comment. The second argument is more substantial; stripped of technical jargon, it states that some essential services simply cannot be supplied by the private sphere, and that therefore government supply of these services is necessary. And yet, every single one of the services supplied by government has been, in the past, successfully furnished by private enterprise. The bland assertion that private citizens cannot possibly supply these goods is never bolstered, in the works of these economists, by any proof whatever. How is it, for example, that economists, so often given to pragmatic or utilitarian solutions, do not call for social “experiments” in this direction? Why must political experiments always be in the direction of more government? Why not give the free market a county or even a state or two, and see what it can accomplish?

  • 1. In the preceding sentences, Schumpeter wrote,
    The friction of antagonism between the private and the public sphere was intensified from the first by the fact that … the state has been living on a revenue which was being produced in the private sphere for private purposes and had to be deflected from these purposes by political force. (Joseph A. Schumpeter, Capitalism, Socialism, and Democracy [New York: Harper and Bros., 1942], p. 198)
  • 2. Ibid, p. 144.
  • 3. John Kenneth Galbraith, The Affluent Society (Boston: Houghton Mifflin, 1958), pp. 320–21.
  • 4. For more on the inherent problems of government operations, see Murray N. Rothbard, “Government in Business,” in Essays on Liberty (Irvington-on-Hudson, N.Y: Foundation for Economic Education, 1958), vol. 4, pp. 183–87.
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Gilets Jaunes: French Protesters Demand Lower Taxes and More Spending

I never thought I would see the day where Antifa would protest side by side with the National Front against the French government. The day has come, and what it means for France is unclear at best.

We spent last Saturday at “Act 9” of the Gilets Jaunes protests in Paris. We marched from the Ministry of Finance to the Arc de Triomphe, growing in numbers and gathering strength as we went.

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The Gilets Jaunes movement, named after the yellow high-visibility vests worn by workers, started November 17 2018, and has rattled the French political elite ever since then. The movement has five main demands:

  • The abolition of Fuel Taxes
  • The resignation of French President Emmanuel Macron
  • Direct democratic ballot initiatives similar to Switzerland or California
  • An end to austerity
  • Measures to help the working class such as a higher minimum wage

From a libertarian perspective, the Gilets Jaunes movement is a generally positive development for France, however many specific demands made by the protesters would expand the state.

The protest movement was initially triggered by the French government’s plans to increase fuel taxes. France has a 64% tax on unleaded gasoline and a 59% tax on diesel, already the highest in the EU. Fuel taxes especially hurt the working poor who are more likely to have jobs that require them to drive vehicles. As the protests continued week after week, the demands slowly expanded to include a wide range of mutually incoherent populist reforms.

Based on my own experience at the protests from speaking with the participants, I have come out with a generally positive opinion of the movement. Many of the protestors that I met were libertarian, although there were also socialists, communists, and fascists among the crowd.

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French secessionists protesting with the flag of Flanders and Aragon.

When I first arrived at the Ministry of Finance to join the protestors, I found several protestors bearing regionalist separatist flags for Bretagne, Flanders, and Corsica. After speaking to them, I quickly found out that their positions could be described as roughly analogous to right-libertarianism: they supported regional autonomy or secession, opposed big government, opposed third world immigration, and supported free market capitalism. I ended up befriending the secessionists, and spending most of the day with them.

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Gilet Jaune with “Deus Vult” written on his vest.

Other protestors were what I would describe as more traditionally “right wing.” During the protests, many of the people I spoke to voted for Le Pen during the 2017 election. I even saw several protesters with vaguely “alt-right” signs, such as one wearing “Deus Vult” on his vest (pictured). Le Pen, despite being generally considered as being on the right, is far from libertarian. The National Front supports the welfare state for working class French people and are opposed to a globalist welfare state open to third world immigrants.

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Member of Antifa during the Gilets Jaunes protest.

There also were numerous communists, socialists, and left wing anarchists at the protest. At many times during the march, we heard large groups of Gilets Jaunes chanting “anti-capitalist action” and other leftist slogans. We also saw several protesters wearing antifa gear instead of the usual high-visibility vests (pictured). One of the antifa marchers took out a sharpie pen, and began scrawling a left wing political message on the storefront of a small business. We saw numerous signs extolling the virtues of the minimum wage, condemning the evils capitalism, and demanding an end to austerity.

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We ran into two market anarchists during the protest holding “Buy Bitcoin” and “Democracy = Blockchain” signs.

We even ran into two market anarchists holding signs that said “Buy Bitcoin” and “Democracy = Blockchain.” They were marching against the French government which they argued was too controlling, and specifically told us that they saw anarcho-capitalists as their closest allies.

We saw nearly all imaginable political factions marching in unison against the French government. I think that a broad and internally contradictory political alliance like the Gilets Jaunes is fundamentally unsustainable.

The wide variety of political views expressed during the protests will make it easy for the French elite to cherry pick the most statist of the populist measures being advocated for. Like many good protest movements, there is a significant risk that it will end up being used to reform the government for the worse.

There is also a chance that the Gilets Jaunes will scare the French political elite away from further expanding the state, at least for awhile. I met enough good people at the protest, that I will continue to support the movement for the time being.

The Gilets Jaunes are a crisis, and it remains to be seen if the French leviathan will use it to expand their powers.

All the pictures were taken by Katarina Niedermair who accompanied me during the protest : http://warfaremedia.com/.

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Why We Need Savings to Produce What We Need

Conventional wisdom says that savings is the amount of money left after monetary income was used for consumer outlays, implying that saving is synonymous with money. Hence, for a given consumer outlays an increase in money income implies more saving and thus more funding for investment. This in turn sets the platform for higher economic growth.

Following this logic, one could also establish that increases in money supply are beneficial to the entire process of capital formation and economic growth. (Note increases in money supply result in increases in monetary income and this in turn for a given consumer outlays implies an increase in savings).

The Relationship Between Saving and Money

Saving as such has nothing to do with money. It is the amount of final consumer goods produced in excess of present consumption.

The producers of final consumer goods can trade saved goods with each other or for intermediate goods such as raw materials and services. Observe that the saved goods support all the stages of production, from the producers of final consumer goods down to the producers of raw materials, services and all other intermediate stages.

Support means that these savings enable all these producers to maintain their lives and wellbeing while they are busy producing things. Also, note that if the production of final consumer goods were to rise, all other things being equal, this would expand the pool of real savings and would increase the ability to further produce a greater variety of consumer goods i.e. wealth.

Note that people do not want various means as such but rather final consumer goods. This means that in order to maintain their life and wellbeing people require an access to consumer goods. Only once there has been a sufficient increase in the pool of consumer goods, people may aim at enhancing their wellbeing by seeking other things such as entertainment and services related products – such as medical treatment etc.

Introducing Money

The introduction of money does not alter what we have said so far. When a final producer of a consumer good sells his saved goods for money to another producer, he has supplied the other producer with his saved goods.

The supplied good sustains the other producer and allows him to produce other goods. Note that the money received by the producer is fully backed by his unconsumed production. Whenever he deems it necessary, he can always exchange his money for goods.

Whenever people buy capital goods such as machinery they transfer money to the individuals who are employed in the making of the machinery, which in turn can be exchanged for consumer goods. With money, the machinery maker can choose to purchase not only final consumer goods but also various services. The services provider who receives the money could in turn acquire final consumer goods and services to support his life and well-being.

Without the medium of exchange i.e. money, no market economy and hence no division of labor could take place. Money enables the goods of one specialist to be exchanged for the goods of another specialist. This all that money can do.

By means of money, people can channel real savings i.e. unconsumed consumer goods to others, which in turn permits the widening of the process of real wealth generation.

In addition, in the world without money it will be impossible to save various final consumer goods like perishable goods for a long period. The introduction of money solves this problem.

There is however, one provision in all this: that the flow of the production of goods continues unabated. This means that whenever a holder of money decides to exchange some money for goods, these goods are there for him.

Do People save Money?

As we have seen above people do not save money but rather they exchange it for goods and services. Now, when a producer of a final consumer good exchanges his money for some other consumer good he has already paid for them with the goods he produced and saved prior to this exchange.

When a producer of final consumer goods buys an intermediate good he transfers his real savings to the seller of intermediate goods in return for the prospect that once he transforms the intermediate good into a future consumer good this will generate benefits far in excess of the cost incurred.

Once real savings are exchanged for money, it is of no consequence what the holder of the money does with it. Whether he uses it immediately in exchange for other goods or puts it under the mattress, it will not alter the given pool of real savings. How individuals decide to employ his money will only alter his demand for money, this however, has nothing to do with savings.

Individuals can exercise their demand for money either by holding it themselves or by placing it in the custody of a bank in a demand deposit or in a safe deposit box.

By lending money, individuals in fact lower their demand for money. Note that the act of lending does not alter the existing pool of real savings.

Likewise, if the owner of money decides to buy a financial asset like a bond or a stock, he simply transfers his money to the seller of financial assets – no present real savings affected because of these transactions.

Problems however, emerge whenever the central bank embarks on loose monetary policies. Since the expanded money supply was never earned, it therefore is not backed up so to speak by consumer goods. When such money is exchanged for consumer goods, it amounts to consumption that is not supported by production.

The printing of money therefore cannot result in more savings but on the contrary in the weakening of the pool of real savings. We now have more money chasing the same amount of goods.

Consequently, a holder of honest money, i.e. an individual who has produced real wealth discovers that he cannot get back the equivalent value of all the goods he previously produced and exchanged for money, all other things being equal. He discovers that his purchasing power of money has fallen.

Any so-called economic growth, in the framework of loose monetary policy can only be on account of the private sector that manages to grow the pool of real savings despite the loose monetary policy undermining this process.

Is it possible to ascertain the state of real savings? After all this is what drives economic growth? Because of the heterogeneous nature of final goods, it is not possible to quantify the size of the pool of real savings at any point in time.

All that can be established is that in a true free market economy, without the central bank printing money, the pool of real savings is less likely to be threatened.

We can thus conclude that savings is not about money as such but about final consumer goods that support various individuals that are engaged in various stages of production. It is not money that funds economic activity but the saved pool of final consumer goods. The existence of money only facilitates the flow of the real savings.

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Jeff Deist on Why Socialism Persists

This is the last Mises Weekends episode!

But don’t despair, Jeff will soon be back with a brand new format: The Human Action Podcast. The new show is not radically different, but focuses more exclusively on Austrian economics, its great books, and its great thinkers — with longer, more in-depth interviews. But don’t take our word for it, tune in next week to the first show with David Gordon!

Your RSS-fed platforms like Stitcher and SoundCloud will continue to support the new show, while Mises.org will still host both streaming and downloadable audio files. And your iTunes subscription will redirect you from Mises Weekends to The Human Action Podcast.

This week Jeff takes a hard look at socialism and why it seems to gain greater support in the US and across the West. Do people really understand socialism as Mises did, and do they really want collective ownership of industry? Or do they just want what he termed “pseudo-socialist” economic systems that redistribute wealth? What motivates socialists? And how do they reconcile their moralizing self-regard with the doctrine that socialism is inevitable and inexorable?

Mises’s Socialism: An Economic and Sociological Analysis.

Jeff Deist on why support for socialism persists.

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Decentralization Is the Solution to the Government Shutdown Problem

The partial shutdown with the federal government has helped, perhaps more than any other recent political event, to illustrate some of the biggest problems that come with centralizing an ever-larger number of government activities within a single, centralized institution.

Were the US government more decentralized, we’d not now be facing a nationwide systemic failure that has continues to cripple the private sector in many ways.

Held Hostage by a Shuttered Regulatory State

The federalization of resources and regulatory power over the past century has created a situation in which numerous industries depend on licensing and regulatory approval from federal regulators to function. And yet, thanks to the shutdown, these industries can do little when facing a federal government that imposes mandates, but won’t provide the agency “services” necessary to allow agencies to function under those mandates.

For example, As The Washington Post has reported , those areas where the federal government has a large regulatory footprint — such as Alaska — are at the mercy of politicians thousands of miles away.

Most (61 percent) of Alaska is government land managed by five different federal agencies, according to the congressional Research Service. The state’s main industries, including fishing, tourism and oil and gas, all depend on the day-to-day actions of federal workers and regulators.

The fisheries have so far avoided major disruption, despite a few close calls. Most boats are still getting by on licenses and inspections which occurred before the shutdown.

But time is running out. Major commercial boats are required to carry onboard observers to monitor their catch. But when they return from a trip, those observers must be debriefed by the National Marine Fisheries Service — and it’s not holding debriefings during the shutdown.

Alaska is an extreme example, but other states that also have sizable federal ownership of land (which includes most western US states) are also affected. Nationwide, states with coastal states that depend on the smooth-functioning of federal regulation of fisheries and natural resources affected as well.

And it doesn’t end with natural resources. With the Tax and Trade Bureau shut down , breweries can’t ship beer. That leaves an entire industry up in the air, and small craft brewers are affected the most. As the shutdown continues, more of these workers can expect their paychecks to eventually dry up due to a lack of revenue.

Meanwhile, the FTC, the SEC, and the FCC are all partially shut down .

Some anti-government activists might look at this and say, “great, we don’t need those agencies anyway!” But here’s the problem: although those agencies’ staff members may be staying home, that doesn’t mean the private sector is no longer subject to the mandates and regulations those agencies oversee. Private companies still must obtain all the usual licenses and regulatory approvals from federal agencies. It’s jsut that federal agencies are no longer available to make approvals or answer questions.

That’s hardly something to celebrate.

In short, all the usual federal roadblocks exist to stymie the private sector. Except now, there are even fewer ways to get around those roadblocks. What’s even worse is that this problem is nationwide.

Were these regulatory powers and agencies decentralized out of the hands of the federal government, of course, we wouldn’t be looking at a nationwide problem. Were a single state to experience a “shutdown” — something that is extremely rare at the state level, by the way — we wouldn’t now be facing a nationwide problem in which whole industries are facing crippling regulatory bottlenecks. Problems would be limited to single states. And those states that were prone to shutdowns or other regulatory bottlenecks would see an exodus of industry and capital.

Nor would we be facing a situation in which 800,000 federal employees — nationwide — are currently unpaid. This is a problem that has been made much larger in scope by the centralization of government power.

The Federal Government Has Too Many Issues on Its Plate

Another reason to decentralize is to end a situation in which government shutdowns are more likely due to the broad scope and complexity of the federal budget and federal responsibilities.

 

In the United States, the federal government’s prerogatives have expanded over the past century to include everything from old-age pensions, to highways, to health care regulation, to farming subsidies, and much more. This has all been added on top of the more traditional federal prerogatives of foreign policy. It’s only natural then that the likelihood of shutdowns would increase as the number of areas for political conflict increases.

After all, the current shutdown does not come out of only a dispute over of a border wall. It is a larger issue that stems from the fact that the Democrats want to use the wall’s potential funding for a myriad of other uses. And, the larger the federal government has grown, the possible targets for government spending has grown ever larger.

Moreover, even the issue of building border walls was not always a federal issue. Prior to the late nineteenth century, state governments were the governments that dealt with the issue of limiting migrants in-flows. Although some conservatives now create ornate legal arguments in attempts to prove immigration — a separate issue from naturalization — has always been a job of the federal government, the actual historical experience makes it clear the federalization of immigration policy is itself a later innovation.

So, we’re now left with a federal government where the president and the legislature can argue endlessly over every little thing under the sun. If it’s the federal government’s job to control and fund everything from cancer research to national parks, then it’s only matter of time until we endure a political impasse over one of the countless issues being discussed.

Nor is it just the scope of issues. The sheer size and scope of the United States is itself problematic. The US is so large, and culturally and demographically diverse, that significant disagreements over how federal prerogatives ought to be used are inevitable. A less fragile and more responsive system grows out of a decentralized political system that allows for diversity in policies that affect travel, education, poverty relief, and more. If education policy, for instance, is decided at the state level, then we can be sure we’ll never see a federal shutdown over funding of schools. It simply becomes a non-issue at the federal level.

The Solution Lies in Decentralization

The solution lies in removing from the federal government its authority over such a wide range of issues, and to allow diversity and localism in government. This naturally includes welfare programs, public lands, airport security, law enforcement, military land forces, immigration, and the regulatory state.

As it is, American governmental institutions — being so dependent on federal funding and regulatory oversight — are now fragile, bloated, unresponsive, and prone to political bottlenecks. We now see this at work. 

The problems we now encounter with the shutdown ought to placed squarely at the feet of those who have called endless for ever greater levels of federal control over state and local communities, while centralizing both financial and regulatory power under within a single institution. Not everything needs to turn into a nationwide systemic problem when the federal government encounters a political impasse. We ought to take steps now to limit the damage the feds can do.

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No, Paul Krugman, This Shutdown is Not a “Big Libertarian Experiment”

With the government shutdown now entering its fourth week, it seems that it’s left many political pundits clamoring for an excuse to wash their party’s blame from the situation. Perhaps the most glaring example came from Paul Krugman’s recent New York Times column, “Trump’s Big Libertarian Experiment.” The Nobel-prize winning economist has never been shy about his contempt towards libertarianism, and this column only demonstrates he’s come closer to full-blown lunacy. Because, as I’ll explain, no, this shutdown is not a libertarian experiment.

I know many who may be unfamiliar with libertarian philosophy like to think our only concern is hatred for the state, and that anything not inherently pro-government must be essentially libertarian-esque, but that’s not quite the case. Libertarianism, at its core, centers around the recognition of private property rights and a strict adherence to consent and the non-aggression principle (NAP). And already in Krugman’s first paragraph we begin to see his claim of tying this to libertarians unravel, as he admits that while conservatives often echo libertarian rhetoric, they’ve never actually followed through on any of their policies.

Nonetheless, now that it’s Trump who’s allowed a government shutdown (something every president has endured going back to Gerald Ford, but never mind that inconvenient fact), this somehow makes it a libertarian experiment. In other words, what we’re expected to believe is that although these politicians have ignored the advice of libertarians for decades, in most cases doing the exact opposite of what we espouse, now that people are seeing the negative side of their policies as government checks dry up, it is suddenly a libertarian’s dream. The obvious contradiction in that claim should be glaring.

It’s not unlike when we complain about silly, little things like endless wars and deficit spending; issues Democrats and Republicans can’t be bothered with, and we’re inevitably told to move to our utopia — Somalia. What Krugman is implying here is that a nation operating in complete contradiction to libertarian thought (poor regard for the protection of property rights and an inclination towards aggression against others as a political solution) can likewise come crashing down and somehow, this demonstrates it’s exactly what we’ve always wanted — or at least the negative consequences are our fault.

Not so fast though, Krugman.

Because as history shows, it wasn’t libertarians who advocated for any of this. We never lobbied for the government to expand to the point of hiring 800,000 workers that even they deem to be “non-essential.” Neither did we advocate for a massive, $4 trillion annual budget, requiring an ever-expansive debt ceiling just to keep it open, the very reason this experiment of a shutdown began in the first place.

You know who did though? Paul Krugman. With his commitment to Keynesian economics, he has rarely seen an instance of deficit spending he hasn’t liked. Unless of course Trump is in office with a Republican congress; then he’s almost downright libertarian on the deficit.

Ironically, one of the few policy agreements he actually does have with libertarians — a disdain for farm subsidies — is somehow pointed to as a strike against libertarians. Never mind that our use of the term “crony capitalism” here is the exact same as Krugman’s description in his own writing; I wouldn’t hold your breath for Krugman to share any fault now that the checks are no longer being mailed out to the farmers though. I suppose we can overlook the fact that it wasn’t even libertarians who initially enacted those subsidies back during the New Deal; a policy Krugman argues, didn’t go far enough in its spending, calling it only “modestly expansionary.” And I also suppose we ought to ignore the countless politicians who’ve fought to keep these crony policies in place, including the progressive darling, Bill Clinton, who saw to it that farm subsidies ballooned to $30 billion in 1998 by classifying it as “emergency aid.” Never mind that there weren’t any libertarians behind that. But now that people have been made dependent on subsidies and are suffering in their absence, we’re now in a libertarian utopia!

And God forbid we use these libertarian critics’ own argument against them. Who was it that derided Sears’ CEO, Eddie Lampert, for running the company into the ground while still receiving a bonus check? Calling him an “Ayn Rand devotee”? Oh, that was Paul Krugman. While laying off 30,000 people and keeping your bonus is quite immoral, should we expect the same outrage from Krugman in the face of twenty-five times as many federal employees losing their checks as his friends in the Washington elite keep the money flowing in? Of course not. “Blame the libertarians!” goes the broken record.

It’s at this point, however, that Krugman spills the beans about his true agenda all along. As it turns out, he admits that libertarian ideas aren’t a “real” force within the GOP. (who knew?!) Rather, he surmises it’s only a cover story for Republicans’ true plan to distribute wealth to their rich friends — arguably the truest statement made in the entire column.

Now, what libertarian critique would be complete without a fallacious argument about food being poisoned?

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Krugman decides to end his column with the oldest of libertarian strawmen: the insinuation that without the Food and Drug Administration working tirelessly to inspect our food, we’d succumb to the whims of greedy capitalist producers who only wish to poison us. Oddly, you’d think a Nobel economist would grasp the concept of how unlikely and unprofitable it is to intentionally kill off your customers — seeing as how we’re told relentlessly capitalism only cares about profits. What’s more likely is that in the absence of any real arguments comes an appeal to what political hacks do best: fearmongering.

So, does the prospect of contaminated food smell like freedom to us? No, not any more than your attempts to pass blame make this shutdown any sort of “big libertarian” experiment.

Originally published by Being Libertarian.

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57. Neither Fisher nor Bayes: The Limits of Statistical Inference

How do we know that a treatment works or not? Billions of healthcare dollars are at stake in the answer to that question. For decades, that answer has largely hinged on theories from a field of human inquiry that combines the precision of mathematics with the accuracy of astrology. We are talking of course, about statistics and statistical inference.

To help us understand better this mystical science, we have as our guest Dr. Michael Acree who has spent his entire career working for the University of California San Francisco as a data scientist and a teacher of statistical science, helping countless researchers make sense of the data they had obtained. Michael is now retired and is completing a book on the history and philosophy of statistical inference. He joins us to tell us the whole truth about what is sometimes referred to as the science of mendacity!

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