This time it happened on p. 31, where Bastiat writes, “Socialists look upon people as raw material to be formed into social combinations. This is so true that, if by chance, the socialists have any doubts about the success of these combinations, they will demand that a small portion of mankind be set aside to experiment upon. . . . And one socialist leader has been known seriously to demand that the Constituent Assembly give him a small district with all its inhabitants, to try his experiments upon.”

Two things occurred to me as I read this. First, you don’t have to be socialist to believe that people are raw material to be experimented upon. And second, in modern America, doubts or no doubts about success, experiments can be run on the entire country at once. No need to try things out first on a small district.

As for point one, I have in mind the current administration. The word “socialist” (as well as “fascist”) is thrown around too glibly today, and everyone ought to be more careful. Lots of bad things are being proposed that would interfere with the market process, but no one in power is proposing to replace the market with central planning. Ludwig von Mises called the philosophy behind the mixed economy “interventionism,” and we ought to be working to make that word the pejorative we know it deserves to be.

Point two, of course, refers to the Obama administration’s experiments on the health-insurance, financial, and energy industries. Without getting into details here, I want to emphasize the sheer presumptuousness of those experiments. Those are our lives they are fooling with.

Bastiat brimmed with controlled outrage at the French politicians and writers who so blithely presumed that other people’s lives were theirs to dispose of in grand experiment. He dissected the classical notion, popular among the pundits of his day and ours, that individuals are inert until a wise leader comes along and invests them with a principle of motion—“They assume that people are susceptible to being shaped by the will and hand of another person—into an infinite variety of forms, more or less symmetrical, artistic, and perfected,” he wrote.

This superior attitude is palpable throughout the Obama administration. One sees it in the words and tone of the President, Geithner, Summers, Emanuel, Sebelius, Clinton, and their allies in Congress. In a profound way, they are the anti-egalitarians. They know better than we. They exercise powers that we mere individuals outside of government can never possess. They dictate to us, but we can’t dictate to them. They get to determine our lives in important ways—which means that in those respects we don’t.

Yes, they claim to represent us. It’s a baseless claim! They are not our representatives. They do not know us, and they cannot really care about us. They are our rulers, gratifying their ambitions to “make a difference”—whether we want it made on our lives or not. If we don’t comply, they can take our liberty, our property, even our lives.

Depriving them of that power is a long and arduous educational process requiring a philosophical sea change. In the meantime, those of us who know that we, and not they, own our lives, need a battle cry. In dedication to Bastiat, I propose this:

We shall not be experimented upon!

* * *

When President Obama intervened in the bankruptcies of GM and Chrysler, longstanding financial-legal precedents went by the wayside. What consequences will this have for the future? Richard Epstein ponders this question.

The numbers are in on Cash for Clunkers. Despite the program sponsors’ and participants’ euphoria, it was a bad deal all around. Bruce Yandle has details.

New Nobel laureate Elinor Ostrom explained how people voluntarily coordinate to solve problems. Peter Boettke says every freedom-lover should rejoice in her prize.

When it opened its doors in 1914 the Federal Reserve System was supposed to bring stability to the U.S. economy. It didn’t quite work out that way. Chidem Kurdas explains why.

Why don’t we ever hear older people reminisce about how tough life was during the depression of 1920–21? Maybe it’s because that one, unlike the Great Depression, was what W. S. Gilbert might have called a short sharp shock. Robert Murphy describes the depression history forgot.

Mexico’s violent drug trade has spilled across the border, creating concern throughout the United States. There’s an easy way to stop it, Paul Armentano writes: End the war.

Belief in manmade climate change once led to large-scale economic and personal dislocation. That was in the nineteenth century. Will it happen again? Tyler Watts reminds us that we can learn from history.
Here’s what’s been on our columnists’ minds lately: Lawrence Reed recalls the influence that a movie had on him long ago. Thomas Szasz remembers those whom the criminal justice system has forgotten. Robert Higgs looks at the case for slavery. John Stossel finds it curious that big pharmaceutical and big insurance companies like Obama’s healthcare plans. Charles Baird analyzes the latest papal encyclical on labor unions. And Art Carden, confronting the claim that profit has no place in the healthcare system, responds, “It Just Ain’t So!”

Our reviewers test-drive books on the effect of higher taxes, the bloated presidency, the dollar, and Paul Krugman’s view of the economy.

It’s December, which means the issue wraps up with the year-end index, prepared by Managing Editor Michael Nolan.

Related posts:

1. Bastiat and Unionism
2. Bastiat, Socialism, and the Blank Slate
3. Bastiat, Liberty, and The Law

On November 9, 1989, the Berlin Wall effectively ceased to exist. Remember the sequence: Communist Hungary started letting people pass into Austria and to freedom. Captives of the Soviet bloc left in droves. East Germans, too—thousands of them. The Hungarian government tried to stanch the flow, but the dam had been breached. With one dictator having resigned, a panicky East German regime began making concessions, hoping to mollify the people. They would not be placated. Thousands—and in one case, a million—took to the streets, shouting, “We want out!” Things were getting out of hand. So, on November 9, the government fumblingly announced it would lift travel restrictions to West Berlin and West Germany. It was all over but the demolition.

I don’t know why it seems so much longer ago that we saw those inspiring celebrations, when East Berliners, joined by their countrymen from the western side, danced on the wall while others whacked at it with axes and sledge hammers. The crowds, the singing, the joyful cries of “Freedom!”, the sections of wall toppling—I remember watching the scenes on television with my then-six-year-old, Jennifer. If you can watch them on YouTube today without tearing up, I don’t know what to say.

It’s hard to believe that today’s 19-year-olds were born into a world without a Berlin Wall and 17-year-olds were born into a world without the Soviet Union. When my generation was growing up, the Iron Curtain and USSR seemed like permanent fixtures of life.

Yes, we really did have air-raid drills in school. (Looking back, I can see they were insidious, ridiculous propaganda stunts.) Some of us wished, at most, for what was called peaceful coexistence. Others thought “we” could roll “them” back. War—which a few, amazingly, actually welcomed—would have been catastrophic beyond imagination. We dared not hope for a bloodless dissolution of totalitarianism. Yet that, more or less, is what we got.

Those of us who believe in full individual liberty have been dismayed to learn that revulsion with dictatorship does not equate to a wholehearted embrace of freedom. None of the former Soviet-bloc countries has thoroughly foresworn state-capitalist welfarism, and some have traveled only a short distance along the road from serfdom. Central planning is dead as an ideal, but the regulatory state lives, as does what Thomas Szasz calls the Therapeutic State. This is disappointing, but it would be difficult for a resident of the United States to criticize others for failing to resist overbearing government. The longing for security, combined with the absurd notion that only ignorant and force-wielding bureaucrats can provide it, dies hard.

The fall of the Iron Curtain has been heralded as the failure of socialism, but this is a more complicated matter. Strictly speaking, there has been much less socialism in the world than it might appear since Lenin gave it up for the New Economic Policy in 1921. Remember, Marx envisioned the abolition of the market, including money and exchange. The economy was to be centrally planned—literally. But when the Bolsheviks tried it, they ended up, as Trotsky said, “staring into the abyss.” Lenin was savvy enough to back away from oblivion and reintroduce aspects of the market, including a gold ruble. What followed for the next seven decades was a heavily bureaucratized, de facto quasi-market economy, existing in a world of prices in which The Plan was adjusted ex post to reflect reality and black-market “corruption” kept things going. Ludwig von Mises could not have been surprised.

Such an economy was doomed to fail, but perhaps with a little less intervention and a dollop of political freedom, it might have muddled through a bit longer. The market can put up with a lot of harassment, which means people can resourcefully get around a lot of government obstacles when they want to. Look at the U.S. economy.

* * *

The late summer and early fall were dominated by what is prejudicially called healthcare “reform.” Statist analysts dominated the public discussion. A rare exception was Arnold Kling, who in this issue explains that our problems are caused by government’s creation of perverse incentives up and down the line.

The government owns large shares of Chrysler and General Motors, which is a sign of how things are going these days. Michael Heberling analyzes this venture into socialist ownership of the means of production. Christopher Westley follows up with the story of Cash for Clunkers, or how the government won friends by sticking it to the poor.

Most people—and politicians—have no idea what hedge funds do, but they are sure the government should control them. Warren Gibson guides us through the thick of high finance.

So you think the government can create jobs? Then Houdini must have been able to exit a locked trunk without trickery. William Allen and William Dickneider have their doubts.

If the government could shut you away without having to justify its conduct, no enumerated right would be worth a thing. That’s why habeas corpus is called the Great Writ, as Wendy McElroy explains.

Government was big on January 19, but it’s growing bigger still—in ways most people don’t even realize. Murray Weidenbaum is keeping score.

Composer Quincy Jones thinks there should be a cabinet department to promote the arts. Don’t bet against it. Bruce Edward Walker discusses this urgent “necessity.”

Our columnists have found some interesting things to tell you about. Lawrence Reed traces the end of child labor in Britain. Donald Boudreaux thinks about Star Trek. Burton Folsom pays some attention to President Rutherford B. Hayes. John Stossel shows healthcare “reform” won’t produce competition. Walter Williams explores the rule of law. And Richard Fulmer, incessantly running into the assertion that World War II ended the Great Depression, retorts, “It Just Ain’t So!”

Reviewers assay volumes on money, a neglected Antifederalist, education, and libertarian political philosophy.

—Sheldon Richman

srichman@fee.org

Related posts:

1. The Rise and Fall of England: 17. The Fall of England (Conclusion)
2. The Rise and Fall of England: 16. The Fall of England (Part I)
3. Berlin, August 1961: An Anniversary We Should Never Forget

The scariest word in that sentence is not something. It’s we.

The first-person plural form is not merely a convenience, as in “We’re in for a cold winter.” It indicates that decisions about “the healthcare system” should be made collectively, with one decision binding everyone.

That’s collectivism.

So why is virtually everyone a collectivist when it comes to health care? I do not exaggerate. Every prominent participant in the current debate over how to “reform” the medical industry approaches the issue in collectivist terms. They have differences at the margin–tax increases versus tax credits, a government-run “public option” versus subsidized nonprofit cooperatives–but there is no disagreement that “we” must have a policy.

But why must we do anything about health care? Why can’t you do what you want, I do what I want, and he and she do what they want? Isn’t that what’s supposed to happen in a free society? Reformers would say that costs are rising too much and some people can’t afford insurance. But that is no answer. It tells us only that possibly ameliorable conditions exist, not that collectivism is a good approach.

When we see problems in other important markets, most of us don’t expect televised presidential town-hall meetings, congressional committees, and omnibus legislation to give us the answer. We individually adjust our behavior in the marketplace and anticipate that entrepreneurs will cater to us. Solutions, with inevitable tradeoffs, are micro, marginal, and tailored to individual needs, not macro, holistic, and procrustean. Out of this arises an orderly marketplace–without a conscious overall plan. No one has found a better way to make masses of people better off.

Why is health care different? Must we collectively reinvent the industry? The social knowledge problem that F. A. Hayek spelled out should make us wary of any collective response.

The reformers’ stock answer is that this is something only we, acting through the “democratic process,” can handle. That’s an assertion. Where’s the proof? What if earlier collectivist decisions gave us rising medical and insurance costs?

In fact they did. Nearly every aspect of medicine and health insurance that the politicians say needs fixing is the result of “our”–that is, politicians’–previous attempts to fix something. Much of the escalation of prices comes from consumer demand freed from normal cost constraints thanks to third-party payers: government-privileged insurance companies, Medicare, and Medicaid. While that intervention boosts demand by eliminating cost consciousness, others constrict supply: occupational licensing, insurance mandates and barriers to entry, patents on drugs and devices, FDA regulations, certificate-of-need requirements, and more.

So let’s hear no more about what we–collectively and coercively–must do about health care. If government would get out of the way, we–individually and cooperatively–will figure out what to do. Collectivism and government planning trample freedom and foster social stupidity. Individualism and free markets respect each person’s dignity and liberty while getting the most out of the “wisdom of crowds” in the marketplace.

* * *

Why did it take a major recession to get politicians thinking about fixing the roads and bridges? Because there is glory in starting big flashy projects, but none in maintaining them. Jim Powell documents this truth.

The debate raging over the legitimacy of intellectual property rights is about more than rock bands trying to stop kids from swapping MP3 files over the Internet. It’s about whether people are free to use their human capital to compete with entrenched dinosaur corporations looking to the State for protection. Kevin Carson assesses what’s at stake.

In the future, when government retrenches and the market is finally free, people will obtain their medical care differently from how they do now. Ross Levatter speculates on how things might look.

Political leaders are always haranguing us to volunteer in our communities. So why do they make it so darn difficult? James Payne describes the mess that awaits would-be volunteers.

In every era do-gooders condemn the consumer-credit trap and propose ways to shield supposed victims from predatory lenders. It’s happening again now with credit cards. Todd Zywicki summarizes the history of consumer credit in America and the harm done by protecting people from themselves.

Curaçao was once a popular offshore financial center. Now it’s not. Andrew Morriss explains the lessons to be learned from its rise and fall.

Here’s what our columnists have brewed up this month: Lawrence Reed commemorates Poland’s break from the Soviet bloc. Donald Boudreaux contemplates working for a state-run university. Thomas Szasz recounts the psychiatric attempt to deny General Edwin Walker a criminal trial. Stephen Davies shows that true heroes are not politicians and generals. John Stossel finds healthcare reformers arrogant. David Henderson defines privilege. And Peter Lewin, contemplating the argument that free-market advocates should welcome financial regulation, protests, “It Just Ain’t So!”

Books undergoing dissection deal with slave emancipation, the current financial turmoil, the essays of a great economist, and media freedom.

–Sheldon Richman

srichman@fee.org

Related posts:

1. Book Review: Code Blue: Healthcare in Crisis by Edward R. Annis, M.D.
2. A Health-Insurance Criminal Pleads His Case
3. Medical Competition Works for Patients

Indeed.

From the setting forth of praxeology as the a priori science of human action, to the description of the market’s operation, to the explanation of the business cycle, to the proof that rational central planning is impossible, Mises’s work is nothing less than a work of art. It faithfully captures the elegant orderliness of social reality that grows out of the logic of human action. I could go on, but instead I will reprint here, slightly edited, what I wrote in these pages nine years ago. I can’t improve on it.

If I had to pick my favorite sentence in all of Mises’s Human Action (a daunting task in a 900-page book), it would be this one: “The fact that my fellow man wants shoes as I do does not make it harder for me to get shoes, but easier” (p. 673 of the Third Revised Edition). That sentence may seem rather pedestrian compared to all the sentences Mises used to establish the science of praxeology (human action) and to spin out its countless implications for economics. But it’s a perfect example of how Mises showed that untutored intuitions about social interaction are often wide of the mark.

There is an old school of thought, widely identified with the Reverend Thomas Malthus, but actually quite older, that held the opposite of Mises’s position. Beginning with the undeniable assumption of scarcity, that school believed the human race was doomed to misery. Population would grow until it strained the carrying capacity of the environment; then starvation, disease, and conflict would set in and scale back the numbers. This process was assumed to be more or less the permanent fate of mankind.

How could it not be? Growing numbers of people would be vying for limited resources. Life had to be poor, nasty, brutish, and short—though not, as Hobbes had it, solitary. Mises was surely not the first to see it otherwise, but he was second to none in spelling out why the pessimists are wrong. He first seemed to concede their point, then zeroed in on what they missed. “The characteristic mark of the ‘state of nature,’” Mises wrote, “is irreconcilable conflict. The means of subsistence are scarce and do not grant survival to all . . . . The source of conflict is always the fact that each man’s portion curtails the portions of other men.”

What saves man from the dismal existence of wild animals? The division of labor, the first topic taken up by Adam Smith in The Wealth of Nations. As Mises put it, “What makes friendly relations between human beings possible is the higher productivity of the division of labor. It removes the natural conflict of interests. For where there is division of labor, there is no longer question of the distribution of a supply not capable of enlargement.” Mises drives home the point: “Because many people or even all people want bread, clothes, shoes, and cars, large-scale production of these goods becomes feasible and reduces the costs of production to such an extent that they are accessible at low prices.”

The upshot is that because of the productivity specialization makes possible, the rest of the animal kingdom holds few lessons for mankind. Anyone who believes government’s role is to temper the market with cooperation needs to learn that lesson. The market is cooperation.

***

To celebrate the 60th anniversary of the publication of Mises’s Human Action, we’ve brought together several high-powered contributors, spanning several generations, all with a special connection to the man and the groundbreaking book: Israel Kirzner, who earned his Ph.D. under Mises at New York University and who is regarded as the dean of Austrian economics; Bettina Bien Greaves, a retired FEE staff member who was Mises’s close friend, attended his NYU seminar, and compiled a bibliography of his work; Peter Boettke, a leading member of the “third generation” of American Austrian economists and professor of economics at George Mason University, which has the most Austrian-oriented economics department in the United States; and Peter Leeson, visiting professor at the University of Chicago and one of the rising stars of Austrian economics. Finally, the Human Action tribute winds up with Henry Hazlitt’s 1949 Newsweek column about the treatise. Hazlitt had much to do with introducing Mises to American readers.

I hope you enjoy the photo spread of Mises reflecting his close association with FEE.

Also in this issue, Sanford Ikeda registers his discontent with economics reporting in the newspapers, especially the way the definitions squeeze out any place for Austrian economics.

Barack Obama would have us believe he is ushering in a post-ideological age, where preconceived notions are equated with dogmatism. Mario Rizzo cautions that to throw out ideology is to throw out something important.

The last year of Fed expansion, bank nationalizations, “stimulus” spending, and bailouts has put the American economy even deeper into the arms of the State. In fact, Randall Holcombe says, these measures and precedents have fundamentally changed the U.S. economy.

Congress has decreed that tobacco will no longer go unregulated. Unregulated? Are those folks in Washington joking? Bruce Yandle relates the long history of tobacco regulation.

Here’s what our columnists have whipped up: Lawrence Reed wants to know who bailed out whom over the last year. Robert Higgs looks at big business’s role in the emergence of American statism. John Stossel imagines what would result from a truly competitive healthcare system. Charles Baird looks at the Employee Free Choice Act. And Steven Horwitz, reading claims that saving is keeping the economy in recession, responds, “It Just Ain’t So!”

This issue’s reviewers scrutinize books on the New Deal, ownership, global economics, and debt.

Readers react to past articles in Capital Letters.
—Sheldon Richman

Related posts:

1. What Human Action Has Meant to Me: Reflections of a Young Economist
2. Human Action: The Treatise in Economics
3. Human Action: The 60th Anniversary

“The view that now pervades much public policy economics implicitly presents the relevant choice as between an ideal norm and an existing ‘imperfect’ institutional arrangement. This nirvana approach differs considerably from a comparative institution approach in which the relevant choice is between alternative real institutional arrangements.”

A common form of the fallacy is rejection of the imperfect free (or freer) market in favor of (presumably) omniscient, omnipotent, and omnibenevolent government regulation. A “flawed” but achievable arrangement is set against an (alleged) ideal, though it is left unestablished whether the ideal can in fact exist. The problem here should be obvious. If the ideal is not available, then the comparison is worthless. If the rejected option were compared to other achievable—also imperfect—alternatives, it might well be judged superior.

A recent example of the Nirvana Fallacy comes from Sen. Charles Schumer of New York. Asked how the Obama administration will prevent another financial crisis, Schumer said:

“You’re gonna find a different system of regulation. . . . So like when Bear Stearns began to run into trouble, they’re gonna call the heads of Bear Stearns in and say, ‘All right fellas, you’re getting rid of those two hedge funds; you’re gonna raise more capital—even if it means you have lower profitability. . . . [Y]ou do it or we’re gonna take sanctions against you.’ . . . You need a tough, strong regulator, unified—no holes in the system— . . . who . . . sees the problem ahead of time, so they have complete transparency, they know exactly what’s going on. . . .” (emphasis added)

We see at once that Schumer assumes what he must demonstrate: namely, that the regulator can overcome the Hayekian “knowledge problem,” the limits posed by the fact that the most critical economic information is not readily obtainable statistical data but rather is diffused and often unarticulated knowledge, including know-how.

Look at what I’ve highlighted in his statement, and ask yourself what Schumer apparently has not asked himself: How will the regulators “know exactly what’s going on”? Spotting Bear Stearns’s specific hedge-fund problems “ahead of time” would have required insights and hunches that only entrepreneurs with money at risk could be expected to have—and even those might not have been enough. Fortune-telling is not a widely distributed skill. It’s not a matter of toughness or access to Bear’s books but, at the very least, of entrepreneurship (not to mention luck), which is profit driven. Bureaucratic regulators bring no such talent to their jobs. More likely, they’d be enforcing formal (possibly outdated and irrelevant) rules, looking for a repeat of the last problem, while missing the next one entirely. As Nassim Nicholas Taleb might say, it’s the next black swan, not the last one, that bites you.

Schumer’s fallacy is actually worse than the standard Nirvana Fallacy. He doesn’t compare his unrealizable regulatory vision to the free market but rather to our corporatist economy replete with government bailouts, moral hazard, easy credit, and all the other ways of disabling market forces.

The closest we can get to what Schumer says he wants is through the discipline—that is, the regulation—imposed by the unfettered market. That includes bankruptcy’s Sword of Damocles and the freedom of traders to sell short—that is, to profit by betting that a company’s stock is overvalued and communicating that information to the market early. Predictably, the government is planning to restrict short selling. Bad regulation drives out good.

* * *

Advocates of big government claim they learned lots of lessons from the New Deal. But here’s something they missed: The post-1929 economy began to rebound before FDR’s programs could have taken effect and even before he took office. Jim Powell explains.

Government spending is said to be indispensable to recovery from a recession thanks to the magic of the “multiplier.” Is there really more bang from the government-directed buck? James Ahiakpor debunks the myth.

But surely the government is good at creating productive jobs when it spends money, no? Larissa Price, applying Bastiat’s lesson, throws cold water on that hope.

By now you may have bought some of those funny-looking spirally light bulbs after hearing they use less energy and save you money—only to find that they can’t hold a candle to the old incandescent bulbs. Thanks to Congress and former President George W. Bush, though, soon you won’t have a choice. Michael Heberling has the unfortunate details.

Last spring’s G-20 economic meeting called for a crusade against tax havens, places where people can protect their wealth from greedy politicians. Daniel Mitchell comes to their defense.

Can there be freedom when the state sees itself as Robin Hood? Carlos Rodríguez Braun shoots an arrow into the heart of that belief.

Land has been at the center of conflict from time immemorial. Even so-called capitalist countries have been blemished by land monopolies, government-sponsored speculation, and feudal-style interventions, such as property taxes. Joseph Stromberg conducts a tour of the great land question.

Our columnists again serve up an intellectual feast. Lawrence Reed writes about perseverance in the face of adversity. Thomas Szasz further documents psychiatric slavery. Burton Folsom takes a critical look at an economic interpretation of the Constitution. John Stossel examines the “fatal conceit” of interventionists. Walter Williams defends school choice. And Robert Murphy, encountering a free-market advocate’s case for government monitoring of derivatives, responds, “It Just Ain’t So!”

Our reviewers render verdicts on books about World War II, libertarianism, early globalization, and the Constitution.

Related posts:

1. Free-Marketeers Should Welcome Regulation?
2. The Fed: The Inside Story of How the World’s Most Powerful Financial Institution Drives the Markets
3. Bad Policy Drives Out Good

As Adam Smith wrote in The Wealth of Nations, 

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the publick. . . . It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary.

You’ll find no sympathy for AIG here, but let’s have no more sanctimonious pronouncements from the facilitators on Capitol Hill.

Our “leaders” say the insurance behemoth had to be saved lest another Dark Age descend on the world. When have they been right before? Other firms would have salvaged the profitable parts of the company. As for AIG’s counterparties in mortgage-related credit default swaps, they could better weather any storm from a bankruptcy if they weren’t hogtied by arbitrary capital requirements imposed by unaccountable government authorities who can’t possibly know the nuanced particulars of time and place.

On the other hand, have the bailout proponents tried calculating the consequences of the AIG rescue in terms of moral hazard? Will future counterparties exercise more or less diligence in light of this episode? 

Predictably, the leading inquisitors into the causes of the financial turmoil are themselves among the most culpable: Rep. Barney Frank, Sen. Chris Dodd, and New York Attorney General Andrew Cuomo. AIG got into trouble because it in effect wrote insurance policies (credit default swaps) against the failure of securities based on mortgages, many of which were waiting to blow up when the housing bubble burst. Who created the housing bubble?

It may be hard to tell from the news coverage, but the central government deserves the lion’s share of the blame, particularly for its government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac, which bought up and securitized a slew of bad mortgage loans, thereby encouraging lenders to write more of them. 

Enter Frank, Dodd, and Cuomo. There were no bigger boosters of Fannie and Freddie in Congress than Frank and Dodd. (The GSEs were vigorous lobbyists and generous campaign donors.) Every time someone questioned the GSEs’ fiscal integrity, these guys jumped in and assured us that everything was fine. 

And then there’s Cuomo, Bill Clinton’s last secretary of housing and urban development (HUD) and close friend of the Mortgage Bankers Association, which likes any policy that makes writing mortgages safer—for its members. According to the Village Voice in 2008, Cuomo pushed the GSEs to buy more and more dubious mortgages, while requiring them to report less and less. “In other words,” Wayne Barrett writes, “HUD wanted Fannie and Freddie to buy risky loans, but the department didn’t want to hear just how risky they were.” Cuomo also took steps “to reshape the Federal Housing Administration (FHA), which guarantees millions of mortgages. These actions, too, sought to maximize homeownership—this time by opening the FHA’s door to borrowers unable to qualify in the past, a lofty goal that has also helped spur an FHA delinquency rate that exceeds its subprime competitors. . . . Cuomo even supported down-payment and closing-cost assistance programs that allowed FHA borrowers to buy a home without spending a cent of their own money up front.” (If you want to appreciate what a sewer Washington is, read Barrett’s article.)

Are these guys pursuing AIG out of guilty consciences? Political opportunism is more likely. Will they ever have their day in the hot seat? Not likely. That’s how government works.

* * *

The change in administrations has brought no change in plans to build a fence along the southern border. Too bad, for reasons Becky Akers explains.

The budget deficit has exploded, but contrary to popular opinion, it doesn’t mean we’re spending the wealth of future generations. Roy Cordato tells why.

It’s nearly unanimous. Commentators on the left and right agree that World War II ended the Great Depression. Art Carden says they are wrong. 

Some say deregulation wrecked the economy, while others say regulation is the culprit. Both have a point, according to Sanford Ikeda. And speaking of regulations, James Payne has a few words for those who think just a few more will do the trick.

High gasoline prices once were used to justify land-use controls. Now that prices have fallen, the controllers need a new reason. Steven Greenhut shows they have had no problem finding one.

We like to think that economists make predictions in good faith on the basis of sound information. Anthony de Jasay suggests they could just be making bold career moves.

How often do “experts” say America needs more college graduates? George Leef politely responds that they don’t know what they are talking about.

Here’s what our columnists serve up: Lawrence Reed discusses the effort to make state government more transparent. Donald Boudreaux explains what’s wrong with Keynes. Stephen Davies says beware fortune tellers and planners. John Stossel notes how easy it is for government to create jobs. David Henderson answers the “government fundamentalists.” And Robert Murphy, reading the latest charge that oil prices are rigged, responds, “It Just Ain’t So!”

Books coming under examination discuss global warming, irrationality, labor, and liberty.

In Capital Letters, Mark Skousen skirmishes with David Henderson and Jeffrey Hummel over the Greenspan Fed.

Related posts:

1. Bailing Out Statism
2. Bailing Out Statism
3. Dodd Unveils Financial Regulatory Overhaul

Read’s pencil describes its family tree, beginning with the cedars grown in northern California and Oregon that provide the wooden slats. But he doesn’t really start with the trees. He notes that turning trees into pencils requires “saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding,” and those things have to be produced before a pencil can be produced.

This is what Austrian economists call a structure of production. This structure is characterized by two closely related elements: multiple stages (distinguished by their “distance” from the consumer) and time. The pencil that eventually emerges at the end of the process must first proceed, in various states of incompleteness, through a series of stations at which components are transformed in ways consistent with making pencils. The stations themselves have to be prepared through earlier stages of production. Thus before trees can be cut down and turned into wooden slats, saws, trucks, rope, railroad cars, and other things must be produced first. Before steel can be used to make saws, trucks, and railroad cars, iron ore must be mined and processed. And so on. The same kind of description can be provided for each component of the pencil: the paint, the graphite, the compound that comprises the eraser, the brass ferrule that holds it.

Tracing the pencil’s genealogy back—to iron, zinc, copper, and graphite mines; hemp plants; rubber trees; castor beans; and much more—demonstrates the “roundaboutness” of production, the term of the early Austrian economist Eugen von Böhm-Bawerk. Much time and effort are spent not on making pencils but rather things that will—sooner or later—help to make pencils. Without central direction, entrepreneurs set up production this way because it produces more, better, and cheaper pencils more profitably than some more direct process.

Prices—particularly interest rates—coordinate all this production through time. A quantity of a resource cannot be used both at an early stage of production and a later stage simultaneously. A unit of iron could be devoted to making a ferrule machine or a machine for mining more iron—or many other things in between. Tradeoff is the rule, and consumer welfare depends on having things arranged appropriately. Time preference and the market for loanable funds—that is, interest rates—govern coordination to maximize consumer satisfaction.

Capital equipment wears out. Replacing machines, engines, vehicles, saw blades, and ropes requires money, which requires saving—that is, deferred consumption. Saving is also necessary to finance research and development so that better and cheaper machines, tools, and writing implements might be created. Remember this when Keynesian politicians and economists deride saving.

The stages of the capital structure consist in discrete, specific, scarce, and complementary things—buildings, machines, tools, materials—in particular places at particular times, all of which derive their value from the final goods they help produce. They were put in place as part of entrepreneurs’ plans, and in keeping with Austrian subjectivism, the plans give them meaning. A change in a plan might convert equipment that was once complementary to an operation into something of little or no value.

This description of the structure of production should raise no eyebrows. We see it all around. But anyone who has taken a standard economics course will know that capital is usually discussed as though it were a lump of colorless, timeless Play Doh. That conception of capital is amenable to mathematics, but that’s a case of the tail wagging the dog. Economics should be a way of thinking about the world we actually confront.

* * *

When people are nervous about the banking system, the time may not be propitious to ask if we’d be better off without government deposit insurance. But that doesn’t keep Jeffrey Miron from asking—and answering—the question. (read it now)

The current economic turmoil has thrown mainstream macroeconomics itself into turmoil. That should put the spotlight on Austrian macroeconomics. But is the mainstream capable of understanding it? Roger Garrison isn’t so sure. (read it now)

A good reason to oppose government support for scientific research is that the output will tend to be biased toward “crises” that, naturally, require government action. Global warming is a perfect example, writes Michael Heberling. (read it now)

The collapse of the housing bubble and its consequent financial disorder are signs of problems far deeper than most people think. They reveal a crisis not of the free market but of “capitalism.” Chris Sciabarra resolves the paradox. In a related article, a Freeman reprint, the late Clarence Carson also expresses doubts about “capitalism.” (read it now)

In discussions of public policy there is no shortage of things we are told we must do. Few people bother to ask whether they can be done. Steven Horwitz does. (read it now)

Our columnists have burning issues on their minds. Lawrence Reed wants to know what we owe each other. Thomas Szasz tells the tragic story of scientific genius Alan Turning. Robert Higgs discusses World War II price controls. John Stossel says protectionism made the so-called stimulus bill even worse. Charles Baird documents union abuse of workers who don’t want representation. And Chidem Kurdas, confronting those who say the Bernard Madoff Ponzi scheme justifies more government regulation, replies, “It Just Ain’t So!”

Coming under the reviewers’ microscopes are books on antiwar America, the bubble and the burst, and rating presidents.

Capital Letters features an exchange between Leland Yeager and Michael Giuliano over utilitarianism.

Related posts:

1. I, Pencil
2. I, Pencil
3. Human Creativity

Here’s what actually happened. During the roundtable segment of the show, Will said, “[O]ne of the ways we turned a depression into the Great Depression . . .
was that there were no rules and investors went on strike because the government was completely improvising. Net investment was negative through almost all of the ’30s because, again, people did not know the environment in which they were operating because the government had the fidgets and would not let rules and markets work.”

Krugman responded, “Well, it’s not the way I read the history. . . . No, the negative net investment was because, you know, when you have 20 percent unemployment and all the factories are standing idle, who wants to build a new one? You don’t need to invoke the government to explain that.”

Point Krugman? Wrong.

If Krugman took the Mises-Hayek capital and trade-cycle theory seriously he’d realize that the idle factories in the 1930s represented malinvestment induced by Federal Reserve credit expansion in the 1920s. By lowering the interest rate and falsely signaling an increase in saving (that is, a preference for future over present goods), this policy shifted resources from later stages of production (closer to the consumer) to earlier stages of production. Unfortunately, those who think of capital as a heap of uniform, monochrome Play-Doh aren’t sensitive to this point. Capital is capital is capital. That’s why Krugman can’t understand why someone would want to invest in new facilities when others stand idle.

When the 1920s inflationary boom ended, as it had to because it was artificially induced and there weren’t enough resources for both the early stages and the later stages (where consumers wanted them), the malinvestments had to be liquidated and scarce resources had to be redeployed. But since capital consists not of malleable Play-Doh but rather of discrete things—buildings, machines, tools, materials—with particular characteristics, many of these products of malinvestment were unsuitable for other purposes. They couldn’t simply, costlessly, and instantly be moved and employed in later stages of production. Hence the idle factories. This was wasted capital brought about by the credit expansion. This was the Depression.

If the economy was to recover, new investment consistent with consumers’ actual preferences had to be undertaken. But that required time and saving—that is, deferred consumption, not the pumped-up consumer spending Krugman favors. It also required a stable political environment in which investors could be confident their property was safe from government predation. Unfortunately, thanks to tax increases, an unending stream of interventionist programs, and threatening antibusiness rhetoric, FDR’s government failed to provide that environment.

Krugman’s flip remark to Will is thus a perfect illustration of what is wrong with Keynesian economics. P.S. Will and Krugman believe it took World War II—“an enormous public works program,” in Krugman’s words—to end the depression. Both are wrong about that, as Robert Higgs documents in Depression, War, and Cold War. Ending unemployment with a military draft and boosting GNP through military contracts do not a recovery make. Living standards could hardly rise amid ration books, consumer-goods shortages, and war production.

Related posts:

1. Book Review: Capital for Profit: The Triumph of Ricardian Political Economy Over Marx And The Neoclassical by Paul Fabra
2. The Current Economic Crisis and the Austrian Theory of the Business Cycle
3. Book Review: Property Rights Edited by Ellen Frankel Paul, Fred D. Miller Jr., and Jeffrey Paul

Why, after years of being taught that Franklin Roosevelt’s economic intervention saved the country from disaster, is the general public now being told—by FDR fans, not critics—that this is not the case?

It’s the Rooseveltians’ way of helping President Obama get over any fear he has of deficit spending. Paul Krugman, the newest Nobel laureate, a Keynesian, and a New York Times columnist, is explicit about this. “[H]ow much guidance does the Roosevelt era really offer for today’s world?” Krugman asks. “The answer is, a lot. But Barack Obama should learn from F.D.R.’s failures as well as from his achievements: the truth is that the New Deal wasn’t as successful in the short run as it was in the long run. And the reason for F.D.R.’s limited short-run success, which almost undid his whole program, was the fact that his economic policies were too cautious.”

By “too cautious,” Krugman means that FDR’s deficits were too small. Roosevelt ran deficits (except for one year), but they were about the same size as those run by his predecessor, Herbert Hoover. Roosevelt’s biggest deficit, in 1936, was “only” 4.4 percent of GDP, Jim Powell points out in FDR’s Folly. Both Hoover and Roosevelt were big spenders—FDR doubled spending by 1940—but they were also big taxers, which kept the deficit from growing. This is confirmed by University of Arizona economist Price Fishback, who wrote, “Once we take into account the taxation during the 1930’s, we can see that the budget deficits of the 1930’s and one balanced budget were tiny relative to the size of the problem. . . .”

Roosevelt was quite a tax enthusiast. He levied or raised taxes on liquor, tobacco, gasoline, corporate dividends, estates, incomes (top rate 75 percent versus Hoover’s 63), “excess” profits, and undistributed profits. (The last tax was repealed in 1939.) And then there was the payroll tax that came in with Social Security. All in all, the New Deal more than tripled the tax burden from 1933 to 1940 raising it from $1.6 billion to $5.3 billion. Serious deficit-spenders don’t raise taxes. But Roosevelt did. Is it any wonder that net investment dropped $3.1 billion during the decade or that unemployment was about as high in 1939 as it was in 1932?

This raises the question of whether big-time deficit spending would have ended the Depression. Krugman and others think so. But how could it have done so? Deficits are financed either by borrowing or by creating money out of nothing. When the government borrows money, that’s money no one else can borrow and invest. Where’s the gain? Moreover, the money is put to purposes selected by politicians, not entrepreneurs trying to please consumers.

When the government creates money, three things happen. First, the new money lowers interest rates below the level justified by society’s time preference; that creates perverse incentives to invest in longer-term projects far from the consumer-goods level. Second, the money changes relative prices (rather than raising prices evenly) because particular economic interests get it earlier than everyone else. Third, prices later rise generally, reducing everyone’s purchasing power. The result is a distorted structure of production and a boom that is unsustainable because it is based not on real savings but on fiat money. When the inflation stops, the bust follows.

Since the New Deal didn’t end the Depression and a New Deal on steroids wouldn’t have done so, President Obama should pay no heed to Krugman and his Keynesian economic advisers. The way to wake up the economy is reduce the total government burden on producers and consumers by, among other things, slashing spending, taxes, and borrowing.

* * *

Years ago economist Bruce Yandle identified a phenomenon that accounts for a good deal of government intervention. Tacit alliances form between those who seek a particular intervention for moralistic reasons and those who seek it for financial advantage. Since Yandle first noticed such an alliance in efforts to outlaw Sunday liquor sales, he dubbed this phenomenon “Bootleggers and Baptists.” In this issue he applies this principle to the “affordable housing” policies that have pushed the economy into turmoil.

Government deserves the lion’s share of blame for this turmoil, but private market actors don’t escape all culpability. As Max Borders points out, many cocksure investors let themselves be blindsided by a black swan.

Is it too much of a stretch to call this the Age of the Bailout? You may not think so after reading Lawrence White’s catalog of federal largess and its likely consequences.

Of course all these bailouts are necessary because the rescued firms are “too big to fail.” Is there a more ridiculous doctrine? Michael Heberling thinks not.

Commentators frantically trying to blame the free market for the economic mess think they have found a culprit: the unregulated market for derivatives. Are they right? Robert Murphy takes up that question.

Most free-market advocates attribute the infamous housing bubble at least in part to Alan Greenspan’s easy-credit policies at the Federal Reserve. But not everyone. David Henderson and Jeffrey Rogers Hummel offer a dissenting view.

Here’s what our columnists have come up with this issue: Lawrence Reed provides a timely reminder of FEE’s credo. Thomas Szasz demonstrates that psychiatry isn’t medicine but rather the medicalization of conflict. Stephen Davies counsels against auto bailouts. John Stossel warns against inflation. David Henderson traces the unintended consequences of fuel-efficiency standards. And Gerald O’Driscoll, reading that Alan Greenspan claimed to be shocked by risky lending, replies, “It Just Ain’t So!”

Books occupying our reviewers deal with the imperial presidency, free trade, the rich, and energy independence.

—Sheldon Richman
srichman@fee.org

Related posts:

1. Book Review: Facing Up: How to Rescue the Economy from Crushing Debt and Restore the American Dream by Peter G. Peterson
2. The End of Prosperity: How Higher Taxes Will Doom the Economy–If We Let it Happen
3. Good News: Textbook Macro Model Rejected!

If you are a glutton for cable news-talk shows, you know it’s been little more than a parade of “experts” declaring the absolute imperative of government bailouts. Many of these experts preface their remarks by saying how much they hate the idea of government intervention to save business from its mistakes. “I’m a free-market, small-government advocate, but. . . .” The tenor of their remarks is that the free market is great when things are going well, but this is an emergency and we don’t have the luxury of theory. Statements like this were most common during the frantic week between the House’s rejection of and reversal on the ever-changing Troubled Asset Relief Program, or TARP.

Right off the bat we can see a problem. Any bailout plan that is believed to be potentially effective must be based on a theory. If you asked a TARP advocate why the intervention is necessary, he might say that when the government borrows $700 billion in order to buy banks’ bad mortgage-backed securities or shares of stock, it will inject liquidity into the credit markets and improve the economy. But that is a theory. (It’s a bad theory, but it is a theory.) So the apparently bold thrusting aside of all theory in the name of pragmatic action is a mere pose. The move is as theory-bound as free-market opposition to the bailout is.

The debate, then, is a contest of theories. Free-market theory can explain the cause of the crisis—government intervention in the mortgage market through promotion of easy home-buying and implicit guarantees to lenders and underwriters, including its privileged creatures, Fannie Mae and Freddie Mac. Given that genesis of the problems and the general theory of markets, the solution is for government to back off—way off—and to let the economy adjust to real conditions and recover without subsidy, guarantee, or regulation. What is the alternative theory used by those who have jettisoned free-market theory in “this time of crisis”? Why should we believe that things will be fine only if the government has the discretionary power to transfer resources from those who haven’t screwed up to those who have?

Ludwig von Mises had a thing or two to say about theory. For Mises the laws of economics (more broadly, human action) are derived by spinning out the logical corollaries of the inescapable concept action, of which we have apodictic “a priori” knowledge. (This means the self-evident and universal nature of purposeful behavior is not discovered through empirical testing; empirical testing presupposes purposeful behavior. The corollaries include, among others: means and ends, value and preference, marginal utility, cost, time preference, and profit and loss). As he wrote in “Social Science and Natural Science”:

Economics therefore is not based on or derived (abstracted) from experience. It is a deductive system, starting from the insight into the principles of human reason and conduct. As a matter of fact all our experience in the field of human action is based on and conditioned by the circumstance that we have this insight in our mind. Without this a priori knowledge and the theorems derived from it we could not at all realize what is going on in human activity. Our experience of human action and social life is predicated on praxeological and economic theory.

This doesn’t mean that economic analysis is done without reference to the world. To be sure, we must first confirm that we are observing human action in an economic context (and not, say, a game, ritual, or reflexive motion), but once we do that, our a priori understanding of economics applies.

There is never a good time to throw aside theory and just act, for such a thing is impossible. The only question is whether our theory is good or bad.

* * *

Here in what Mencken called “the land of the theoretically free,” most states outlaw the sale of unpasteurized raw milk. If you know what’s good for you, don’t get caught with it, writes William Pike.

What do poker and the free market have in common? More than you might think, Robert Stewart wagers.

It’s been long enough for the American people to have gotten used to being forbidden to carry any more than three ounces of liquids and gels in a single baggie when boarding an airplane. Still, it’s interesting to see this arbitrary decree sliced and diced, compliments of Becky Akers.

Support for a free and spontaneous society can be found in some unexpected places. Gene Callahan introduces us to Michael Oakeshott.

Much is said pro and con about gun control, but seldom is economic analysis applied to the subject. Unsurprisingly, it sheds a worthwhile light, as Scott Kjar and Jason Robinson demonstrate.

Taxation is normally discussed in the rarefied jargon of public policy or the technical terms of economics. Lachlan Markay, harking back to Frédéric Bastiat, analyzes it as a form of vandalism.
People fear complete privatization of education because they fear loss of central control over their children’s curriculum. That absence of control is one of the strongest reasons to get government out of schooling, says Danny Shahar.

Here’s what our columnists have come up with. Lawrence Reed remembers a friend who knew what it’s like to live without liberty. Donald Boudreaux revisits the Austrian theory of the business cycle. Robert Higgs examines Richard Nixon’s New Economic Plan. John Stossel takes on the Wall Street bailout. Charles Baird goes after government-employee unions. And Charles Johnson, reading the argument that freedom conflicts with social cooperation, protests, “It Just Ain’t So!”

Our book reviewers dive into volumes on the middle class, immigration, economic fallacies, and the family.

—Sheldon Richman
srichman@fee.org

Related posts:

1. The Current Economic Crisis and the Austrian Theory of the Business Cycle
2. Government Intervention Is Needed to Solve the Housing Crisis? It Just Ain’t So!
3. The Subprime Crisis Shows that Government Intervenes Too Little in Financial Markets? It Just Aint So!