But some defenders of government control acknowledge that rationing is the logical consequence of their ambition. They parry the objection by saying, in effect, “So we’ll have to ration. Big deal. We already have rationing—by the market.”

For example, Uwe Reinhardt, an economics professor and advocate of government-controlled medicine, writes, “In short, free markets are not an alternative to rationing. They are just one particular form of rationing. Ever since the Fall from Grace, human beings have had to ration everything not available in unlimited quantities, and market forces do most of the rationing.”

Sadly, interventionist economists are not the only economists who talk this way. Most free-market economists would agree that where there is scarcity there must be rationing and that the most efficient way to ration is by price—that is, through the market.

This is factually wrong and strategically ill-advised. As we’ll see, markets do not ration. Thus the health care debate is not about which method of rationing—State or market—is superior.

Let me be clear: I am not denying that economic goods are by definition scarce and that at any given time we in the aggregate must settle for less of them than we want. I am also not denying that the marketplace is relevant in determining who gets how much of those scarce goods.

I am denying that this is appropriately called “rationing.”

Markets Don’t Do Anything

To see that the market does not ration one need only see that “the market” doesn’t do anything. To talk as if it does things is to reify the market. Worse, it is to anthropomorphize the market, ascribing to it attributes—purposes, plans, and actions—that only individual human beings possess. We may also see this as another instance of literalizing a metaphor, which, as Thomas Szasz has so often warned, is fraught with peril.

I’m not saying that economists don’t realize this diction is a metaphor. Of course they do, and there’s no harm in using this shorthand among those who understand it as such. The problem, as I see it, is that the lay public doesn’t fully grasp the metaphorical nature of these statements. For the sake of public understanding, free-market advocates should not welcome a debate in which they begin by saying, “Our method of rationing is better than your method of rationing.”

Better to respond to the interventionists this way: The market does not ration or allocate. The market does not do anything. It has no purposes or objectives. When freed, it is simply a political-legal framework in which people pursue their own purposes with their justly acquired property and their time.

This is squarely in the Austrian conception of the market as set out by Ludwig von Mises and F. A. Hayek. The market order “has no specific purposes but will enhance for all the prospects of achieving their respective purposes,” Hayek wrote in volume two of Law, Legislation and Liberty.

The market was never set up by people to achieve a purpose. It is not a device or an invention aimed at fulfilling an intention. “Market mechanism” is a metaphor. The market—as a set of continuing transactions among people—emerged, unplanned and unintended, from exchanges, initially barter, in which the parties aimed only to improve their respective situations. Lecturing at FEE last summer, economist Israel Kirzner recalled that one of the first things Mises said to him as a graduate student was, “The market is a process,” by which he meant “a series of activities.” This is similar to what the French liberal economist Destutt de Tracy (1754–1836) wrote in A Treatise on Political Economy: “Society is purely and solely a continual series of exchanges.”

Mises, Hayek, and Tracy help us to sort out the rationing question. I submit it makes no sense to say that an undesigned series of exchanges by individuals seeking to improve their respective situations constitutes rationing. If we were to observe a free market (wouldn’t that be nice?), what would we see? Rationing? Allocation? Of course not. We would see people exchanging things—factors of production, services, and consumer goods—for money. Where would they have gotten those things? From previous exchanges or original appropriation from nature.

When a person buys five apples in a grocery store rather than ten because he wishes to use the rest of his money for other purposes, it seems entirely wrong to say the market (or even the grocer) has rationed the apples. The customer simply makes his choice on the basis of his preferences and the money available (which is the result of previous transactions).

It is true that as a result of market exchanges, goods and resources change hands and (except for land) locations. But in no sense is this rationing or allocation. The resulting arrangement of resources is simply a product of many transactions. Of course, people’s choices of what and what not to buy and sell at which prices create an arrangement of goods and resources that tends to be intelligible in terms of consumers’ subjective priorities. But that does not warrant calling the process rationing or allocation.

Those words (especially ration, which shares its root with rational) suggest conscious decision-making, as part of a plan, by an agent. In a free market there is no consciousness overseeing this “distribution”—another inappropriate word when it comes to describing the market process.

I am not saying anything that a good economist or other thoughtful person doesn’t already know. I am merely pointing out that we can be more effective in the health care debate if we are more precise in our language. We do not face a choice between methods of rationing medical services. We face a choice between rationing according to a bureaucratic plan and freedom to engage in mutually beneficial exchanges.

Both insights rely on the foundational idea that intentions and results are not the same thing. Thinking we ought to do something does not mean it will have the results that motivate the “ought.” With respect to profits we have to recognize that because someone does something to benefit himself, it does not mean the action doesn’t benefit others too. In both cases the core concept that is often overlooked is unintended consequences. Recognizing that intentions do not equal results and that we must consider the possibility of unintended consequences is what separates good social analysis from bad.

The issue of unintended consequences is interrelated with a more general aspect of human social existence: the pervasiveness of uncertainty. The future is not available to us in the present. We cannot know the course of nature, but neither can we know the course of human choices. We are always acting based on our best guesses about what others will do and how our actions will coordinate with theirs, which we can never know with certainty. This structural uncertainty of the human condition means that we can never know all the consequences of our choices, which implies that some of those consequences will be other than what we intend. Anyone who believes the consequences of his actions will be exactly as intended is blind to the fact that his choices must interact with those of others, creating outcomes that none of the choosers designed.

Unintended consequences come in two flavors: positive and negative. The concept of negative unintended consequences is acknowledged in some social analyses and in morality, but is certainly underdeveloped in the understanding of economic policy. Positive unintended consequences are rarely recognized in “serious” conversations about public policy, even though they are at the core of modern economics.

Consider the two-by-two matrix below.

We have moral language for three of the four possible combinations of intent and outcome. Vice and virtue are easy enough, as they are our common terms for discussing the morality or desirability of our actions when the outcomes match our intentions. But what about when they don’t? We have the category of “negligence” when we cause negative outcomes we did not intend, such as failing to set the brake on a car that rolls down a hill and damages property. But we do not have a word for the unintentional doing of good! That missing box is filled in by economics and good social science as they explain how, under the right institutional framework, the pursuit of self-interest leads to unintended benefits for society as a whole.

Naming the Unintentional Good

From Adam Smith in the eighteenth century to Carl Menger in the nineteenth to Ludwig von Mises and F. A. Hayek in the twentieth, the central mission of economics has been to understand how we can produce beneficial outcomes that were not intended. Smith captured this idea with the “invisible hand” that leads the butcher, baker, and brewer to provide us with our dinner not out of altruism but “self-love.” Smith understood how exchange guided by prices and profits would harmonize (to use a term associated with Frédéric Bastiat in the nineteenth century) the self-interest of producers with the self-interest of consumers. Even if we care not at all about the people we trade with, we will nonetheless be led to satisfy their wants in our attempt to satisfy our own. Looking only at the seller’s profits without tracing out the entire chain of beneficial though unintended consequences that his self-interest produces is to take an “unscientific” approach to understanding society.

Menger put the concept of unintended consequences (and the closely related idea of “spontaneous” or “unintended” order) at the center of his conception of the social sciences. In what is often termed “the Mengerian question,” he asked: “How can it be that institutions which serve the common welfare and are extremely significant for its development come into being without a common will directed toward establishing them?” Menger recognized that many social institutions are not the product of human design, but instead emerge as people seek their own self-interest. Menger’s own classic work on the evolution of money explains how it arose this way from barter.

Mises and Hayek deepened this argument another layer as both recognized, with somewhat different emphases, the role that knowledge plays in understanding the centrality of unintended consequences in social thought. Mises provided what we might call the “microfoundations” of Smith’s invisible hand by carefully explaining how we go from people’s subjective perceptions to market-level outcomes via prices, which facilitate our calculations about the effectiveness of the use of resources. Mises also explored how profit and loss provide further signals that serve as “aids to the mind” in guiding our behavior. Entrepreneurs are led to use resources wisely, profiting for themselves but also improving the well-being of others, thanks to the signals of the marketplace.

Hayek’s work on economics, knowledge, and the problems of socialism allowed us to see the opposite side of Mises’s analysis by exploring how socialist planners would be unable to replicate the workings of entrepreneurs. Hayek argued that without market signals government planners would be unable to marshal the dispersed knowledge available to entrepreneurs through prices and other market institutions. Because of their ignorance, planners would not only be unable to generate beneficial unintended consequences in their own pursuit of self-interest, they would in fact cause harmful ones by being unable to see how their mistakes would lead to further mistakes—not to mention accumulating State power. Both Mises and Hayek saw that regardless of the socialist planners’ good intentions, their inability to make use of the knowledge of the marketplace would lead to consequences very different from those intended—in fact, as history has clearly demonstrated, consequences devastating for millions.

Institutions Against Uncertainty

The Smith-Menger-Mises-Hayek line of thought can be tied back to our earlier discussion of uncertainty. This tradition argues that we use evolved social institutions, including the market, to get more accurate expectations of the behavior of others and push back against the uncertainty that threatens to derail our plans. At the simplest level we see this with prices: The prices of particular goods or services are “aids to the mind” regarding the preferences, knowledge, and expectations of others, enabling us to better anticipate the consequences of our choices and to thereby make better ones. Institutions that emerge as a result of unhampered social evolutionary processes all perform this uncertainty-reducing function.

Consider the institution of ownership. When someone says that he “owns” a particular good, we know that gives him a certain set of rights to it and imposes certain obligations, largely negative ones, on us. Knowing that the good is owned means we can form particular expectations about what the other person might and might not do with that object, and he in turn can have reliable expectations about what we will and will not do.

An irony of social institutions is that by limiting our choices they make us better able to execute our plans and anticipate their likely consequences. However, to perform that coordinative function in complex matters and help us overcome uncertainty, institutions need to emerge from people’s voluntary interactions, usually over a period long enough for them to embody the best ways of doing things. This is why markets are so good at generating positive unintended consequences and why institutions imposed by force from the top down tend to generate negative ones. Just as we are much more productive as a society when entrepreneurs and consumers have access to competitively determined prices, so in general does human action produce beneficial unintended consequences when social institutions generally are the result of unhampered evolutionary processes.

Even in less dramatic ways modern economics remains focused on unintended consequences, particularly in how economists like to make highly counterintuitive arguments. For example, a number of years ago there was a call for government to require very young children to sit in car seats rather than on their parents’ laps when flying on airplanes. This arose out of concern that in some circumstances lap children could be hurt or could hurt others. Critics, particularly economists, quickly responded that such a law would actually kill more children than it saved.

To see why, one has to explore the unintended consequences. Under the law parents would have had to buy tickets for children who formerly flew free in their laps. Faced with the additional charge, some families on the margin would switch from flying to driving. But the odds of being injured or killed in an automobile are much greater per mile than in a plane. Thankfully, that unintended consequence was anticipated before it was too late, saving many children in the process.

The idea of unintended consequences also helps us understand one process by which government has grown over the last century or two. Because even well-intentioned interventions produce consequences that political actors could not foresee and did not intend, every time government acts, it creates a new set of problems that in turn leads to calls for more government solutions.

A final observation: The neglect of unintended consequences and the focus on motives lead us to celebrate the lives and mourn the deaths of politicians, although they may have caused undesirable unintended consequences, while inventors and businesspeople who benefit humanity while pursuing their own ends go unnoticed. As my matrix on the previous page suggests, we simply don’t have a moral category for people who unintentionally benefit others in pursuit of their self-interest. And we also highly overvalue intentions as a measure of moral worth, leading to praise for those whose “hearts were in the right place” even as they have caused incalculable damage to prosperity and freedom.

A better understanding of the idea of unintended consequences will not only give us the tools we need to more accurately analyze social issues, it will also provide us with a different way of making moral judgments. After all, it is results that count, and we all know where the road paved with good intentions leads to.

Invisible Hands by Kim Phillips-Fein, professor of American history at New York University’s Gallatin School, is a well-researched and thorough account of resistance to government economic domination. It’s also a veritable Who’s Who of twentieth-century “conservatives” who have been trying, ever since FDR’s New Deal, to “propagate a new mentality.” Phillips-Fein provides an evenhanded investigation of the counterreaction, launched mainly by people in the business world, to the authoritarianism of the New Deal. While she deftly illuminates that part of the “conservative” movement, Phillips-Fein fails to note that the “conservatives” consisted not only of free-market stalwarts like Mises but also many corporate-state advocates who just thought the New Deal went too far.

Franklin D. Roosevelt took office after criticizing his predecessor for expanding government and increasing public spending. Yet once in office FDR embarked on new programs that increased spending, centralized power, and imposed many regulations and taxes. Roosevelt won over public opinion, but many Americans were alarmed by his programs and philosophy.

The book describes the founding of the American Liberty League by a group of businessmen who wanted to preserve “private enterprise” (but were no fans of laissez faire). The National Association of Manufacturers joined in the struggle and even claimed by 1940 that it was winning the battle against the New Deal. Then came World War II, and it became “unpatriotic” to criticize federal controls and regulations. Only at war’s end were the varied “conservatives” able to resume the struggle to limit government power.

Phillips-Fein maintains that the decline of the “liberal” New Deal regime “lay not only in its inner tensions . . . but also in the slow preparation of an alternative agenda by its business opponents.” She acknowledges the crucial role of economists such as Ludwig von Mises and Friedrich Hayek in guiding that agenda. Also influential were the ideas of Leonard E. Read, founder of FEE, and the international Mont Pelerin Society of free-market advocates.

Invisible Hands also covers religious groups that were formed to promote the freedom philosophy and oppose communism.

Some of the success of these groups came through the publishing of books and magazines to promote the free market and attack socialism. Chambers of commerce supported entrepreneurship and argued against interventionist government. Business groups introduced free-market materials in the schools and a few universities created courses in entrepreneurship.

Collective bargaining, as required by the National Labor Relations Act, led to conflict and strikes. Companies often gave way to union demands, but some fought back, and the book details the personalities and events. The Kohler Company withstood a long strike in 1954, operating with non-union workers. General Electric’s Lemuel Boulware stood up to the unions, publicizing GE’s best offer and saying, “Take it or leave it.” Unfortunately, the courts declared his approach illegal.

The genial, articulate former movie actor Ronald Reagan proved an effective spokesman for GE and free enterprise. He had the common touch and spoke of providing jobs instead of encouraging capital formation. His attitude toward business? He was, the author writes, “the candidate of the entrepreneur, the farmer, the small businessman, the independent.”

Phillips-Fein looks on Reagan’s capture of the presidency in 1980 as a victory for “conservativism” and the anti-New Dealers she describes. “A great transformation of American politics began during the years that Ronald Reagan was in the White House,” she writes. Reagan fired and replaced 11,000 air traffic controllers after their illegal strike in 1981. Strikes and union membership declined. The labor movement dwindled, and the left’s statist agenda was held in check.

The author recognizes that Reagan failed to eliminate the welfare state or to shrink government bureaucracies. Still, she says, “the political cause for which they [market enthusiasts and business conservatives] labored has in large part been triumphant: the New Deal has been turned back.”

But that conclusion is unwarranted. The New Deal mentality is still alive and well. The government is growing rapidly in scope and power. Advocates of limited government and free enterprise now face a new and perhaps even more daunting challenge in Barack Obama’s “new New Deal.”

Invisible Hands is a carefully researched history of the struggle to “propagate a new mentality” to replace statist thinking. The history is sound even if the writer’s conclusions aren’t always solid.

Lewis poses excellent questions and gives fairly good answers. His questions include: Should prices in general be stable, fall, or rise? and Should the stock of money grow continuously, never, or sometimes? He conducts a dialog with himself over these questions, first defending a “yes” answer, then a “no,” and then offering additional replies and counter-replies. His sympathies lie with what he describes as “the Austrian, laissez-faire, or free-market point of view,” but he endeavors to represent the alternative Keynesian view fairly.

Lewis is to be applauded for presenting the case for letting prices fall in a growing economy. Unfortunately he appears to have overlooked some of the strongest previous presentations of that case. We must distinguish between a harmless deflation, where technological progress or other sources of improved productivity lower costs and thereby gently draw prices down, and a harmful deflation, where shrinkage in the stock of money or its velocity brings unsold inventories and thereby painfully forces prices down. Lewis recognizes a distinction between gentle and painful, but oddly claims that, in the view of its defenders, “deflation is always good,” even when “quite painful.” Claiming that deflation is always good is absurd because there is no benefit from deliberately creating a deflation by shrinking the money stock. Auric Goldfinger’s plan, in the James Bond story, to nuke the gold in Fort Knox, thereby raising the purchasing power of his own gold, was the plan of a villain not a hero. Just as a central-bank-engineered monetary expansion disrupts the economy and causes misallocation of resources—something Lewis recognizes—so too does a central-bank-engineered monetary contraction.

To his credit Lewis identifies the error of monetary expansionism: “If you have four apples and a dollar, the dollar may help you price and trade the apples. But adding another dollar will not increase wealth; it will simply raise the price of the apples.” Unfortunately, he fails to identify the corollary error of deliberate contractionism.

In the second half of the book, Lewis discusses what he calls “the problem of banks,” meaning the question of fractional-reserve banking. Here Lewis—following and citing Murray Rothbard’s The Case Against the Fed—offers the view that fractional-reserve banking is prone to runs, “inherently destabilizing” for the broader economy, and should be outlawed as fraudulent. Uncharacteristically, he neglects to consider the other side: the historical studies indicating that free banking with fractional reserves is not run-prone but robust, the theoretical arguments for the efficiency and economically stabilizing character of free banking, and the jurisprudential arguments for the legitimacy of voluntary fractional-reserve arrangements based on freedom of contract.

Defenders of fractional-reserve free banking (the present reviewer included) would reject the claim that, like a central bank, “a fractional reserve bank can also ‘print’ new money” arbitrarily. Any bank in a competitive system issuing gold-redeemable notes and deposits is tightly constrained, unlike a monopoly central bank. Contra Lewis, the money supply in a fractional-reserve free banking system is neither “over elastic” nor “generally expanding.” Lewis might have consulted Mises’s The Theory of Money and Credit and Human Action more closely on these points.

Lewis does a good job of sketching the Austrian theory of the boom-bust cycle resulting from a central bank’s cheap-credit policy. And he sagely notes that when a central banker promises to inflate the economy and bail out financially troubled firms, “then it becomes more rational to speculate, to take excessive risk, and not at all rational to save, to take precautions, to be prudent. In this respect . . . so-called stabilization is actually de-stabilizing.”

The book contains three appendices, respectively concerning the Federal Reserve System and its operations, the gold standard and other international monetary arrangements and institutions, and nonmonetary cycle theories. The appendix on the Fed unfortunately gives an incorrect account of how the money multiplier and open-market operations determine the money stock.

The academic economist-reviewer cannot resist noticing some other errors. For example, no sensible view holds that a period of inflation typically or automatically leads to a period of deflation in a fiat money economy. A determined central bank can issue enough money to keep the price level rising continuously, as almost all have since the fiat era began in earnest in 1971.

Despite its shortcomings, this book is an interesting and useful introduction to the important question posed in its title.

Featuring: Kirzner, Greaves, Boettke, Leeson, Hazlitt, and more! TheFreemanOnline.org

When Austrian-school theorists have examined the dynamics of market exchange, they have stressed the importance not only of the larger political context within which such exchanges take place, but also the ways in which politics influences and molds the shape and character of those exchanges. Indeed, with regard to financial institutions in particular, they have placed the state at the center of their economic theories on money and credit.

Throughout the modern history of the system that most people call “capitalism,” banking institutions have had such a profoundly intimate relationship to the state that one can only refer to it as a “state-banking nexus.” As I point out in Total Freedom: Toward a Dialectical Libertarianism:

A nexus is, by definition, a dialectical unity of mutual implication. Aristotle . . . stresses that “the nexus must be reciprocal . . . [T]he necessary occurrence of this involves the necessary occurrence of something prior; and conversely . . . given the prior, it is also necessary for the posterior to come-to-be.” For Aristotle, this constitutes a symbiotic “circular movement.” As such, the benefits that are absorbed by the state-banking nexus are mutually reinforcing. Each institution becomes both a precondition and effect of the other.

The current state and the current banking sector require each other. They are so reciprocally intertwined that each is an extension of the other.

Remember this the next time somebody tells you, as New York Times columnist Bob Herbert did, that “free market madmen” caused the current financial crisis that is threatening to undermine the global economy. There is no free market. There is no “laissez-faire capitalism.” The government has been deeply involved in setting the parameters for market relations for eons; in fact, genuine “laissez-faire capitalism” has never existed. Yes, trade may have been less regulated in the nineteenth century, but not even the so-called Gilded Age featured “unfettered” markets.

One reason I have come to dislike the term “capitalism” is that, historically, it has never manifested fully its so-called “unknown ideals.” Real, actual, historically specific “capitalism” has always entailed the intervention of the state. And that intervention has always had a class character; that is, the actions of the state have always benefited and must always benefit some groups at the expense of others.

No Neutral Government Action

Mises understood this when he constructed his theory of money and credit. For Mises, there is no such thing as a “neutral” government action, just as surely as there is no such thing as “neutral” money. As he pointed out in The Theory of Money and Credit and other works, “Changes in the quantity of money and in the demand for money . . . never occur for all individuals at the same time and to the same degree and they therefore never affect their judgments of value to the same extent and at the same time.” He traced how, with the erosion of a gold standard, an inflation of the money supply would diffuse slowly throughout the economy, benefiting those, such as banks and certain capital-intensive industries, who were among the early recipients of the new money.

One reason the gold standard was abandoned is its incompatibility with a structural policy of inflation and with a system heavily dependent on government intervention. (It should be pointed out that a free-banking system need not necessarily entail a 100 percent reserve gold standard, but I leave this discussion for another day.) The profiteers of systematic inflation are not difficult to pinpoint. Taking their lead from Mises, Hayek, and Rothbard and such New Left revisionist historians as Gabriel Kolko and James Weistein, Walter Grinder and John Hagel III point out:

Historically, state intervention in the banking system has been one of the earliest forms of intervention in the market system. In the U.S., this intervention initially involved sporadic measures, both at the federal and state level, which generated inflationary distortion in the monetary supply and cyclical disruptions of economic activity. The disruptions which accompanied the business cycle were a major factor in the transformation of the dominant ideology in the U.S. from a general adherence to laissez-faire doctrines to an ideology of political capitalism which viewed the state as a necessary instrument for the rationalization and stabilization of an inherently unstable economic order. This transformation in ideology paved the way for the full-scale cartellization [sic] of the banking sector through the Federal Reserve System. The pressure for systematic state intervention in the banking sector originated both among the banks themselves and from certain industries which, because of capital intensive production processes and long lead-times, sought the stability necessary for the long-term planning of their investment strategies. The historical evidence confirms that the Federal Reserve legislation and other forms of state intervention in the banking sector during the first decades of the twentieth century received active support from influential banking and industrial interests. . . . [“Toward a Theory of State Capitalism: Ultimate Decision-Making and Class Structure,” Journal of Libertarian Studies, 1977.]

As Grinder and Hagel explain, “[C]artellization [sic] of banking activity permits banks to inflate their asset base systematically.” This has the effect of strengthening the “ultimate decision-making authority” of banking institutions over “the activities of industrial corporations,” and, by extension, “the capital market.” These banking institutions serve as a key “intermediary between the leading economic interests and the state.”

Thus one of the major consequences of inflation is a shift of wealth and income toward banks and their beneficiaries. But this financial interventionism also sets off a process that Hayek would have dubbed a “road to serfdom,” for inflation introduces a host of distortions into the delicate structure of investment and production, setting off boom and bust and, in Grinder and Hagel’s words, “a process of retrogression from a relatively free market to a system characterized by an increasingly fascistic set of economic relationships.”

Just as the institution of central banking generates a “process of retrogression” at home, engendering additional domestic interventions that try to “correct” for the very distortions, conflicts, and contradictions it creates, so too does it make possible a structure of foreign interventions. In fact, it can be said that the very institution of central banking was born, as Rothbard argues in The Mystery of Banking, “as a crooked deal between a near bankrupt government and a corrupt clique of financial promoters” in an effort to sustain British colonialism. The reality is not much different today, but it is a bit more complex in terms of the insidious means by which government funds wars, and thereby undermines a productive economy.

So where does this leave us today?

Much has already been said about the most recent financial crisis, viewed from a radical libertarian and Austrian perspective, which helps to clarify its interventionist roots. (See, for example, Steven Horwitz’s “An Open Letter to My Friends on the Left,” and Sheldon Richman’s “Bailing Out Statism“). The seeds for this particular crisis were planted some years ago. The origins of the housing bubble can be traced to the creation of Fannie Mae and Freddie Mac, government-sponsored enterprises that extended risky loans to low-income borrowers in the hopes of expanding the “ownership society.” But the larger crisis must be understood within the wider political-economic context shaped by inflationary government and Federal Reserve policies that fueled a binge of reckless borrowing. Horwitz explains:

All of these interventions into the market created the incentive and the means for banks to profit by originating loans that never would have taken place in a genuinely free market. It is worth noting that these regulations, policies, and interventions were often gladly supported by the private interests involved. Fannie and Freddie made billions while home prices rose, and their CEOs got paid lavishly. The same was true of the various banks and other mortgage market intermediaries who helped spread and price the risk that was in play, including those who developed all kinds of fancy new financial instruments all designed to deal with the heightened risk of default the intervention brought with it. This was a wonderful game they were playing and the financial markets were happy to have Fannie and Freddie as voracious buyers of their risky loans, knowing that US taxpayer dollars were always there if needed. The history of business regulation in the US is the history of firms using regulation for their own purposes, regardless of the public interest patina over the top of them. This is precisely what happened in the housing market. And it’s also why calls for more regulation and more intervention are so misguided: they have failed before and will fail again because those with the profits on the line are the ones who have the resources and access to power to ensure that the game is rigged in their favor.

This is precisely correct; indeed, there are those of a certain political bent who might seek to place blame for the current financial crisis on the recipients of subprime mortgages, particularly those in minority communities. But if elements of the current housing bubble can be traced to Clinton administration attempts to appeal to traditional Democratic voting blocs, it’s not as if the banks were dragged kicking and screaming into lending those mortgages. This is, in a nutshell, the whole problem, the whole history, of government intervention, as Horwitz argues. Even if a case can be made that the road to this particular “housing bubble” hell was paved with the “good intentions” of those who wanted to nourish the “ownership society,” their actions necessarily generated deleterious unintended consequences. When governments have the power to set off such a feeding frenzy, government power becomes the only power worth having, as Hayek observed so long ago.

We heard a lot about “change” during the last presidential campaign, and about the necessity to end the influence of Washington lobbyists on public policy. But that influence exists because Washington has the power to dispense privilege. And privileges will always be dispensed in ways that benefit “ultimate decision-makers.” That’s the way the system is rigged. It is not simply that intervention breeds corruption; it’s that corruption is inherent in the process itself.

It is therefore no surprise that the loudest advocates for the effective nationalization of the finance industry are to be found on Wall Street; at this point, failing financiers welcome any government actions that will socialize their risks. But such actions that socialize losses while keeping profits private are a hallmark of fascist and neofascist economies. They are just another manifestation of “Horwitz’s First Law of Political Economy” (“Capitalists, Capitalism, and the Siren’s Song of Stability”): “No one hates capitalism more than capitalists.”

It is the government’s monetary, fiscal, and global policies that have created insurmountable debt and record budget deficits, speculative booms and bubble bursts. What is needed is genuine structural change. But the primary battle is an intellectual and cultural one. It requires that we question the fundamental basis of the current statist system.

Economist Israel Kirzner writing on Ludwig von Mises in his 2001 book on the late Austrian economist:Mises is most emphatic in laying at the door of governmentally installed central banks the ultimate responsibility for the distortions (and eventually the depressions) which arise out of the expansion of fiduciary media. He refers, in particular, to the practice of considering it the duty of central banks of issue “to shield the banks which expanded circulation credit from the consequences of their conduct,” in order to soften the economic hardships experienced during the crisis. Mises was caustic in his condemnation of such public policy attitudes. The “practice of intervening for the benefit of banks, rendered insolvent by the crisis, and of the customers of these banks, has resulted in suspending the market forces which could serve to prevent a return of the expansion. If the banks emerge from the crisis unscathed . . . what remains to restrain them from embarking once more on an attempt to reduce artificially the interest rate on loans and expand circulation credit . . .?”In “Human Action,” Mises developed the thesis that, in the absence of central bank control over the banking system, competition between private banks in the market would tend to limit credit expansion (and thus remove the source of the business cycle aberrations). “Government interference” in the banking sector is therefore held ultimately responsible for credit expansion.

We may admit that for the British and American governments in the ‘thirties no way was left other than that of currency devaluation, inflation and credit expansion, unbalanced budgets, and deficit spending. Governments cannot free themselves from the pressure of public opinion. They cannot rebel against the preponderance of generally accepted ideologies, however fallacious. But this does not excuse the officeholders who could resign rather than carry out policies disastrous for the country. Still less does it excuse authors who tried to provide a would-be scientific justification for the crudest of all popular fallacies, viz., inflationism. [Emphasis added.]

—A NEW article by Sheldon Richman

(more…)

A milestone in the world of libertarian literature has just been passed. This event was the publication of a collection of essays, a Festschrift in tribute to Ludwig von Mises. Some of the world’s most renowned economists and leading liberal thinkers contributed to this volume, On Freedom and Free Enterprise,^* edited by Mary Sennholz. Libertarians should be cheered that there are in the world many serious men—scientists and philosophers—who advocate the free market and who warn against the threat to liberty in all government intervention.

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* New York: D. Van Nostrand. xiv:333 pp. $3.50. Copies also are available through the Foundation for Economic Education, Irvington-on-Hudson, N. Y.

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This book commemorates the fiftieth anniversary of the date on which Ludwig von Mises received his doctorate at the University of Vienna. The years since then have been busy ones for him. He has gained a world-wide reputation as an uncompromising advocate of the free market. He has lectured in at least ten different countries and written numerous books and articles, which have been translated into many languages. Professor F. A. Hayek, his former student, has written: “But his [Mises'] influence reached far beyond his personal circle. For he alone has given us a conclusive treatment of all economic and social thought.”

The editor deserves credit, first of all, for her initiative in honoring Doctor Mises, and secondly, for her tireless effort in preparing the material submitted in four different languages, by nineteen individualistic authors, from six different countries, for publication in English. She also contributed a short biography of Doctor Mises.

The essays, grouped under six general headings, carry a unifying thread traceable to the philosophy which Doctor Mises has done so much to develop. They contain many thought-provoking ideas.

One, Grato Animo Beneficiique Memores, contains essays in tribute to Doctor Mises and his works. Jacques Rueff, a French professor and public servant, commends Mises for “the imperturbable intransigence of his lucid thinking.” William E. Rappard finds in his country, Switzerland, what he considers an exception to the laws of human action as described by Mises. Nevertheless, he acclaims “the revered dean of twentieth-century liberals . . . . the most outspoken and least compromising advocate of a complete policy of pure laissez-faire in the world today.” Reviews by Henry Hazlitt of two of Mises’ most important books—Socialism and Human Action—are also reprinted in this section.

Included in Part Two, On the Nature of Man and Government, there is another contribution by Mr. Hazlitt. In this essay, “The Road to Totalitarianism,” he reminds the reader that the inevitable end-product of centralization is “total control over what people do, say, and think.” The French economist and journalist, Bertrand de Jouvenel, in his essay, “Order vs. Organization,” explains why men who understand little about the science of human action so often believe governments should instigate “order” by force. “Men have a tidiness-preference . . . . It takes no great psychological acumen to observe that we enjoy passing judgments on matters of which we know very little.” In an essay, “On Democracy,” Hans F. Sennholz contrasts the totalitarian “People’s Democracies” with the “Western Democracies.” “To defend capitalism we must demonstrate the advantages of freedom and free enterprise to the people.” In “The Greatest Economic Charity,” F. A. Harper of this Foundation’s staff defines true charity and concludes: “He who would serve his fellow men by charity can best do so by saving and investing in tools.”

Part three includes five studies On Scientific Method, a phase of Mises’ work which truly deserves the serious attention of economists. The authors include a German (Wilhelm Röpke), Spanish-born Mexican (Faustino Ballvé), an Italian (Carlo Antoni), and two professors of this country, Louis M. Spadaro and Austrian-born Fritz Machlup. Röpke calls the market economy “an institution which goes . . . far in translating subjective feelings into objective actions,” but he warns lest this “lure the unwary into pushing forward unduly the frontier that delimits the border territory, the zone between what is human and what is mechanical.” Ballvé points out that “economics is neither pursuit of wealth, nor the production or distribution of commodities and services, nor their consumption. These are results . . . . These actions only concern economics when they originate from the autonomous action of man exercising his elective faculty in the market.” Antoni contrasts historical knowledge, i.e., “individual facts,” with economics. “An economic law classifies the situation, renders it typical, and thus abstracts . . . . in order . . . to deduce the subsequent action of the economic factor, i.e., individual interest.” Spadaro discusses “Averages and Aggregates in Economics,” explaining that “to the extent that economic action is ultimately dependent for explanation on individual differences, the employment of averages puts us out of reach of such explanation simply by understating these differences . . . . the distortion brought into play by the use of averages cannot, ironically, itself be ‘averaged out.’” Machlup criticizes those “social scientists” who are “apparently ashamed of the one thing that really distinguishes social sciences from natural sciences, name-ly, the fact that the student of human action is himself an acting human being . . . .”

Part four concerns The Economics of Free Enterprise. L. M. Lachmann, a German-born professor now living in South Africa, discusses “The Market Economy and the Distribution of Wealth,” pointing out that “wealth . . . . passes from hand to hand as unforeseen change confers value now on this, now on that specific resource, engendering capital gains and losses.” Leonard E. Read, FEE’s president, calls attention in his essay, “Unearned Riches,” to the logical consequence of the “subjective theory of value based upon the judgments of countless individuals . . . . This means gains for all participants in the exchange process, gains which must always appear to be unearned in terms of labor expended.” W.H. Hutt, an Englishman, now a professor of economics in South Africa, reviews the literature on his topic, “The Yield from Money Held,” and concludes that “the demand for money assets is a demand for productive resources.” William H. Peterson, an associate professor at New York University, in “The Accelerator and Say’s Law,” writes that if-:Keynes had been right, “we should witness the overnight industrialization of India.” Murray N. Rothbard, in pointing “Toward a Reconstruction of Utility and Welfare Economics,” stresses that “psychological magnitudes cannot be measured since there is no objectively extensive unit—a necessary requisite of measurement . . . . We can only say that ‘social welfare’ (or better, ‘social utility’) has increased due to a change, if no individual is worse off because of the change (and at least one is better off).”

Part five deals with The Hampered Market Economy. F. A. Hayek, in his “Progressive Taxation Reconsidered,” comments, “Not only will services which before taxation receive the same reward leave very different net rewards to those who rendered them; a much larger payment for one service may indeed leave less to him who rendered it than a smaller payment to another person . . . . [Thus] progressive taxation inevitably offends against what seems to me the most basic principle of economic justice, that of ‘equal pay for equal work.’” Percy L. Greaves, Jr., asks, “Is Further Intervention a Cure for Prior Intervention?” as he analyzes the so-called “right-to-work” laws. Behind such laws is “the philosophy that production is a form of ‘class warfare’ between employers and employees . . . . the agitators for ‘right-to-work’ laws forget . . . that the problem is basically one of getting the government out of moral business transactions and not into them . . . . The economic answer is to repeal the bad intervention and not try to counterbalance it with another bad intervention.”

The last section, On Socialism, contains a single essay entitled “French Socialism,” by a Belgian-born Frenchman. Louis Baudin describes the confusion among his countrymen who call themselves “socialists.” “Thus socialism is nothing more than a label affixed to a flask whose contents vary according to the whim of the shopkeeper . . . . its greatest strength is its vagueness: everybody believes what he wants to, adding to it some of his own ideals.”

Perhaps it is fitting to close by quoting the words of one of the contributors to this volume—a book published in tribute to a great scientist:

Professor Mises’ main renown is as an economist. Yet to me he is a charitable person even more than an economist. His charity is . . . . in the form of his inspiring mind and spirit. In my opinion there can be no greater charity than this, for it endures beyond any material form of benevolence. (F. A. Harper)