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Interview with Jeffrey M. Herbener
The Austrian Economics Newsletter

Fall 1997
Volume 17, Number 3

Jeffrey M. Herbener

Building the Edifice

An Interview with Jeffrey M. Herbener

Jeffrey M. Herbener, a senior fellow of the Ludwig von Mises Institute, has taught economics at Washington and Jefferson College and is now professor of economics at Grove City College. Author of many articles on the microeconomic foundations of Austrian theory, he is associate editor of The Quarterly Journal of Austrian Economics, director of the Austrian Scholars Conference, and a lecturer at the Mises University, during which he was interviewed for the AEN.

AEN: Congratulations on your new teaching position at Grove City College in Pennsylvania.

HERBENER: It's a great honor. Grove City not only has a beautiful campus; it also has very high admissions standards, so its student population is top quality. It takes no government money, and never will--not even in the form of federal loans to students. So it is able to maintain its freedom from federal control. It is spared government mandates to waste students' tuition payments on sports programs no one wants, and remedial programs no one here needs. The curriculum reflects that independence. It's tough and comprehensive the way a liberal arts program should be.

Grove City fought for its right to independence all the way to the Supreme Court. It was worth the administration's investment of time and energy. The court case that bears our college's name established a precedent so other colleges that shun federal money can also enjoy independence from government control. Taking that case to court was a real public service. I'm also proud that Grove City granted Ludwig von Mises an honorary doctorate in 1957, one of the few honors he received.

AEN: There is a treasure-trove in the Grove City library.

HERBENER: That would be the Mises papers. It's a breathtaking collection. It includes 119 library boxes with a total of 1,785 files covering the period 1900 to 1974, and fully documenting his time in America from 1940. So it includes papers he brought with him from Geneva and Vienna; at least those he managed to leave with. Later this summer, Mises biographer Jörg Guido Hülsmann will be with us to examine them, and I expect many of my students will be doing the same over the coming years. Grove City is very fortunate to have benefited from Margit von Mises's generosity. It's like having Locke's or Hume's papers.

Leaving Austria was traumatic for Mises. Together with the political and economic trends of the late 1930s, it could have meant the end of the Austrian School. But he came to the United States, and despite having been denied the social and academic status he deserved, he worked tirelessly to spread his ideas. There are few joys greater than coming to the Mises University and seeing droves of highly intelligent young students reading his books and discussing his ideas.  

I notice that the 1997 Mises University t-shirt this year features the famous quotation from Virgil that Mises, when a high-school student, chose as his lifetime motto: Tu ne cede malis sed contra audentior ito: Do not give in to evil, but proceed ever more boldly against it. Mises took that charge seriously, which distinguishes him from most intellectuals in this century.

AEN: Are you similarly encouraged by the Austrian Scholars Conference, of which you are the director?  

HERBENER: I'm honored to have that position. All of history's great intellectual movements had a secure institutional backing, a reliable outlet for publication, and a regular place to meet for serious exchange of ideas. We've got the Mises Institute, and The Review of Austrian Economics is the ideal scholarly print medium. But until two years ago, we didn't have a regular academic conference. Now we have it and its accomplishments have been impressive.

Originally, I thought we'd run one panel at a time. But quickly that proved unfeasible, given the number of quality papers that people wanted to present. So we stepped it up to two panels at a time, and then finally three. The trouble, of course, is that attendees have to pick and choose, and miss two-thirds of the papers. But we make the best of them available in the Mises Institute's Working Papers Series.

AEN: Many of these papers go beyond economic theory.

HERBENER: The decision was made early on that the conference should be broader than economics, because the Austrian School has always spanned a wide range of disciplines. So we have panels and debates on history, philosophy, politics, the arts, and literature. This past year, we even had several papers on the political economy of geography.

It's also crucial to have an international presence. Of course, America is now the center of the Austrian School, just as in the past it has centered in Spain, France, Austria, Switzerland, and England. But today the movement is truly international, so it would be a profound error for American Austrians to become too parochial, and conceive of the Austrian School only in terms of people they know.

Books and articles are coming out all the time in German, Italian, French, and Spanish. We need exposure to all these works and their authors. By inviting scholars such as Michael Prowse, Raimondo Cubeddu, Jesús Huerta de Soto, Pascal Salin, and others, the Scholars Conference provides this exposure.

AEN: What's on the plate for next year?

HERBENER: I'm expecting some 60 papers, in addition to panels on war, centering on John V. Denson's The Costs of War, and on business cycle theory looking at Tyler Cowen's forthcoming book on the subject. One featured speaker will be Henri LePage from Paris. It's the 20th anniversary of his prophetic book Tomorrow, Capitalism. Other speeches will be given by Leland Yeager of Auburn, who has a new book out from Liberty Fund and James Glassman of the Washington Post.  

This is about much more than holding a conference. It's about building a critical mass of scholars who are seriously committed to developing the Austrian position in every way. Only through lively and creative exchange can we continue moving from the periphery to the center of debate. I would estimate that nearly a hundred solid research papers have come from this conference, and probably two-thirds would not have been written in its absence. That doesn't count the spinoffs: papers and books written based on ideas presented in panels.

AEN: What was your objective in your article on welfare economics in the RAE (10:1)?

HERBENER: It was a celebration of Rothbard's contribution to welfare economics. As famous as Rothbard's 1956 article is in Austrian circles, it is underappreciated by the profession at large. His thesis--that utility can only be understood through demonstrated preference and that government can do nothing to cause social welfare, rightly understood, to demonstrably improve--is truly revolutionary. I also happen to think it is irrefutable. Yet this theory has recently come under fire.

My purpose was to restate his argument and defend it against its critics. For example, most economists never bother to give a coherent definition of the phrase social utility. Rothbard does, and defends it to the hilt. Moreover, he does it within the confines of the Pareto rule. He says that if at some place on their preference rankings, some are made better off and no one made worse off, the change must be judged an improvement socially.  

AEN: How can we account for the fact that Rothbard's theory lacks broader acceptance?

HERBENER: Rothbard spelled out all the reasons why it is impossible for economists to come up with some way of measuring utility. As scientists, Rothbard said, economists can say little more than that exchange is mutually beneficial. People just feel that is not enough. Economists like to make unwarranted assumptions in order to justify their craft.

Also, within Austrian circles, there have been recent attempts to build a welfare theory based on the contributions of Kirzner and Hayek. The idea is to expand the notion of plan coordination into a full-blown welfare theory. But I'm not sure that works. By trying to do welfare theory as an outcome of the market process and entrepreneurial discovery, they remove themselves from the traditional terrain of welfare theory, which is supposed to focus on Paretian conditions.

AEN: What are the advantages of accepting the Pareto rule instead of offering a different standard?

HERBENER: The advantage is that it is logical and understood by everyone working in the field. Welfare theory must be grounded directly in ordinal preference rankings and not in the monetary calculations of specialized entrepreneurs. Let's remember, however, that the Pareto rule is not the same as Pareto optimality, which always implies general equilibrium and comparison of subjective utilities. Under the Pareto rule, you are merely looking for improvements in welfare based on demonstrated preference.

One apparent problem with the Pareto rule seems to be that it would block arguments for repealing an intervention. For example, if you repeal a regulation, some producers are harmed because they face increased competition and others are benefited because they are allowed to compete. The answer to that objection is that you must have a starting point for adopting that Pareto rule. Hans Hoppe argues that should be self-ownership. Step by step, you can then fortify Rothbard's original position by arguing that the market does maximize, as it were, social welfare.

AEN: Given the limits of Austrian welfare economics, can we really say the free market maximizes social welfare?

HERBENER: I think we can, but we must admit two points. First, this notion of social welfare includes only demonstrated preference. One can certainly argue--extra-economically--that something besides preference should count in our assessments of whether something is good or bad.

Second, it doesn't preclude the possibility that welfare could increase with government intervention; it merely says that we cannot know if it does. In either case, someone might say: scientifically all this holds up, but there is a good deal more to social welfare than science. There is also goodness, beauty, and happiness. True enough, but beside the point for economic theory.

AEN: Given that Austrian economics doesn't necessarily prescribe particular policy conclusions, why are most all Austrians also free-market economists?

HERBENER: Most neoclassical economists I know see it as their job to do economics and nothing else. They are like specialized management experts or accountants. They don't look at the broader implications. Austrians, on the other hand, see economics as a branch of knowledge they are attempting to elaborate on. That means they take economics much more seriously as a scientific investigation into finding the truth. It also means that Austrians think more about normative questions. Their economics leads them to understand how free markets work scientifically, but also how they are the best system for ordering the material needs of society.

AEN: How did you come across the Austrian School?

HERBENER: I was trained entirely in the mathematical­neoclassical tradition at Oklahoma State. Economics attracted me because it seemed to deal with fundamental and interesting questions. In this, it was unlike political science, which seemed to me to be steeped in irrelevant questions like, "what does the public think about this or that," and superficial techniques like surveys. Even bad economics is leagues above that in sophistication. But my professors were all conventional economists, would-be planners working from one or another Keynesian paradigm. I wrote a highly mathematical dissertation on money demand that used all the latest econometric techniques. I did what everyone else was doing, and my only goal was to do it better.

I didn't know enough to be dissatisfied with the neoclassical paradigm. I knew nothing about the Austrian School except for a brief exposure to the Böhm-Bawerkian structure of production in a class on capital theory. At the same time, I retained my interest in larger problems and deeper questions, which I owe to my father's own philosophical turn of mind.

After getting out of graduate school, I took my first teaching position at Pittsburg State University. I began to read Hayek, and moved on to Mises and Rothbard and the rest of the tradition. They offered a much more satisfying and coherent way of looking at economic questions. This research has occupied me since.

More and more economists sense that their techniques and studies are merely arcane or even trivial. This realization provides an opening for the Austrian School. I'm surprised when I'm at mainstream conferences, or read American Economist. Many more people are showing interest in alternative ways of doing economics. If our work is good, we'll eventually win these people over, and win the battle of ideas.

AEN: It's clear that you share Rothbard's optimism.

HERBENER: I was deeply honored to have had a warm friendship with him for many years. I'll always treasure that. His personality and output were a constant inspiration to me, as my memories of him continue to be. He can never be replaced. But I'm gratified to know that the Austrian School is proceeding in a direction, and at a pace, that would greatly please him.

AEN: You've done some interesting work on that great diversion, the Phillips Curve.

HERBENER: A professor of mine used to say that the Phillips Curve is a fact in search of a theory. But he had it backwards. It never was a fact. The theory was that there was a trade-off between unemployment and inflation. But if you go back to the original article by Phillips, he never demonstrates that such a thing exists in the real world. He manipulated and maneuvered the data around to make it look as if there was one. Once his errors are swept away, and the data broken down, the Phillips Curve vanishes as any kind of long-run pattern. It didn't take stagflation to teach us that. It was always untrue.

This raises a much more interesting question. How did the idea ever come to dominate the macroeconomic literature in the first  place? Here's my theory. Recall that Keynesian theory suggests there are no downsides to manipulating aggregate demand through fiscal and monetary policy. If you created full employment, it would stay there and we'd all live happily ever after. It seems paradoxical, then, that Keynesians would embrace a theory that suggests that creating full employment risks generating inflation. Keynes never said that, but people like Paul Samuelson did.

AEN: So the Phillips Curve gave them an out.

HERBENER: Exactly. It became fairly well recognized, even in the 1950s, that there could be such things as inflationary recessions. That put orthodox Keynesians in big trouble. In order to cover themselves, Samuelson and Solow adopted the Phillips Curve as a model. It served as the means to save themselves from the realization that Keynesianism was fundamentally flawed.

When inflation and unemployment increase, they don't have to throw in the towel on Keynesian theory; they merely claim that the Phillips Curve has shifted outwards. They are saved--until of course the outward and inward shifts of the whole curve dominate movement along the curve. That means the supposed trade-off itself has disappeared. That's exactly what happened. Many people see that the curve is now discredited. But in fact, it never did stand up. It was an escape hatch built by Keynesians that no longer allows them an escape.

AEN: Yet it continues to be the main lens through which most business reporters and even Federal Reserve officials view the world.

HERBENER: Just the other day, I read a piece by an economist at the American Enterprise Institute who was amazed at the mysterious fact that our economy has sustained high levels of growth while still not triggering inflation. This idea that growth "triggers" inflation is sheer Phillips-style analysis. It's hard to believe educated people still talk that way.

On the other hand, it has a superficial plausibility. It's true that if you pump money into the economy to create a boom, that can cause the unemployment rate to fall. The downside is that the new money--not the employment or growth as such--also risks creating inflation.

So here is an opening for Austrians. This phenomenon does have an explanation within the context of the Austrian business cycle theory. What's occurring is not a mechanistic trade-off, but a credit-created boom in the capital goods sector followed by its inevitable consequences. Inflation expectations don't kick in immediately, and neither is there a statistically predictable lag, as the Chicago School once claimed. Austrians can explain both the Phillips-type phenomenon, to the extent it appears, as well as its breakdown.

AEN: Is the Austrian trade cycle theory an integral part of the Austrian edifice?

HERBENER: It is. Perhaps someone can show that it is wrong. I know that both Leland Yeager and Israel Kirzner have strong doubts about its merits. But, as it stands, all of the central principles of the business cycle theory--about the structure of production, interest rates, time, money expansion--are straight from the praxeological system.

Moreover, it seems to explain much about past business cycles and even present economic realities. Economist Tyler Cowen is scheduled to release a book that is very critical of the theory. We'll see how it is received. I have my doubts that the theory is vulnerable to challenge, but it's always good to keep an open mind. We're slated to hash all this out at a panel at the Austrian Scholars Conference (Auburn University, April 3­4, 1998).

AEN: Are you doing work to reinforce these central principles?

HERBENER: For two years, I've been writing a large study of interest rates. I'm reassessing the early-20th-century debates on the subject, covering the Böhm-Bawerk/Fisher debates, and dealing with their critics. I'm arguing that the time-preference theory of interest--the observation that people prefer things sooner rather than later--has certain logical implications that haven't been brought to bear on other theories of interest. Once they are, these non-Austrian theories collapse.

AEN: Can you give an example?

HERBENER: The most famous is the case of the negative rate of interest. Can it exist? Austrians say no. Irving Fisher agreed for the most part, but for different reasons. He said it's because interest is the payment for productivity. That leads him to spell out some exceptions. One involves two swabs stranded on a desert island with a fig tree. The figs deteriorate, and since interest must be paid out of future wealth, trading present figs for future ones would result in a negative interest rate.

That example is easily refuted. Let's say there's a fixed fig stock, and figs deteriorate 25 percent per week. What prevents a high-time preference swab from striking up a contract to get 50 figs now but paying back 60 figs at the end of the week? Fisher says this can't be done because the interest must be paid out of social wealth, so there isn't enough to pay it. This is a simple mistake. The market doesn't exist in the aggregate; so long as individuals have some stock of the good, they can always make these exchanges.

This fig example has some of the properties of the famous hardtack example. Hardtack doesn't deteriorate, and it doesn't appreciate, so it must represent a good in a zero productivity world. Fisher says the rate of interest on hardtack must be zero because it is not productive and thus income in terms of hardtack always remains the same. But trading is between individuals, and so long as people prefer getting hardtack now to getting it later, the interest rate will be positive.  

AEN: It appears that interest-rate theory is packed with brainteasers.

HERBENER: Here's another one: what happens to capital values if the rate of interest becomes zero or negative? We know that as the rate of interest goes down, capital values rise. In a world with no interest, capital values would be infinite. If interest rates were negative, you would have a break point rising towards infinity and then suddenly collapsing. This seems implausible.

The sheer implausibility of it calls into question the whole Fisherian equation, where the market rate of interest is the real rate plus the expected rate of inflation. In that equation, if you had deflation sufficient to make expected negative inflation greater than the real rate, why wouldn't interest be negative? Fisher's answer is that people will hold money and capital markets will evaporate. But that is not consistent with experience.

Recently in Japan, for example, where there has been significant deflation, interest rates have gone below 1 percent. But they do not fall to zero. Why not? Because every step toward zero dramatically raises capital values. Interest rates going from 1 percent to half a percent has the same effect on capital values as an interest rate fall from 10 to 5 percent. It's a cut in half. The positive rate of interest can always be cut in half: 0.5 percent can go to 0.25, 0.125, and so on, but it will not fall to zero.  

AEN: You've been highly critical of econometric techniques.

HERBENER: Austrians agree that econometrics is not useful for testing theory. But many say it is useful in historical investigation. I have strong doubts, for the same reasons it is not useful for testing theory. You can't meet the assumptions of the statistical analysis. Regressions assume linear equations and probability density functions that are normally distributed. If it is true that the data of human action are not generated by such a mechanism, this would seem to undermine using regressions for any purpose.

Let's say you are flipping a coin. In an honestly flipped coin, there is a certain law by which the data are generated. You can rely on the mechanism based on your flips. You can then use the results for historical or even predictive purposes. The mechanism matches the quantitative data. But you can't assume anything like this in economics, because, so far as anyone can prove, there are no statistical characteristics to human behavior. It is purposeful rather than random, and changeable rather than constant.  

AEN: Yet people make plenty of money doing it, even in the private sector. Hasn't econometrics met the market test?

HERBENER: We have to distinguish market value and analytical value. If you run a regression and get results, you are accepting those results as fact. These facts may provide the entrepreneur some bit of information that he believes assists his ability to forecast. He may also bank on his hunches and his horoscopes. Who are economists to judge what he should and should not use? He assesses the worth of information in light of his own expectations about future demand.

Economists cannot use regressions the same way. We are bound by the implications of the method to bow to the results of econometrics as if they are true on their own terms and, indeed, the most valuable bit of information. Doing econometrics is not the same thing as doing real history, much less accurately predicting the future. Joe Salerno points out that after the 1987 crash, econometricians were fired from research departments right and left. That's a good indication of their market worth on the margin.

AEN: You've made some contributions to the literature on de-socialization.

HERBENER: This continues to be an interesting area of debate. Everybody accepts that you need to have capitalist entrepreneurs to bring about economic innovation. But people have not been willing to admit that these entrepreneurial activities require real private property. Many people writing in this literature look down on stock markets, disparage private ownership of factories and farms, and question the right to accumulate wealth.

The policies of former socialist countries reflect this bias against private ownership. For example, all these countries have highly progressive tax rates and even in the Czech Republic, substantial portions of the industrial sector are still in state hands. This is especially a problem in industries like education and health care.

But in truth, as Mises emphasized, it is impossible to separate entrepreneurship from private property. We must highlight the central importance of real private property. The failure to make it a priority in the reform process has led to some peculiar conclusions. In Russia, for example, where real privatization has been very limited, many academics have noticed a lack of economic innovation. They conclude that the entrepreneurial instinct is not in the Russian soul or has somehow atrophied during years of communism. That's nonsense. If you want innovation, you have to first have private ownership. The correct policy is immediate and total privatization. These skills will naturally appear.

AEN: There's also the argument that private property isn't consonant with some traditional societies, and, for them, other systems may be better.

HERBENER: This is the view, often encountered in the development literature, that adopting capitalist institutions would amount to artificially grafting on foreign ways. It would be "Coca-Colonialism," to use the new left phrase recently picked up by some conservatives. But this is wrongheaded. People best express their cultural uniqueness within the context of private property. When people have their own towns, businesses, farms, and modes of production, traditions have a chance to flourish without being overridden by the state apparatus.

Moreover, foreign investment is never an imposition. No foreign national can make money in a host country unless the consuming public desires the product that is being produced or genuinely wants to work for the company. People tend to disparage the cultural import of McDonalds into the developing world, but these are countries where people have little or no access to safe and inexpensive meat, bread, and vegetables. McDonalds is providing a wonderful service. To me, it seems like cultural imperialism to say these people shouldn't want to eat cheeseburgers.  

What's so terrible about the Ex-Im Bank or the Overseas Private Investment Corporation, which subsidize and guarantee foreign investments, is not that they put taxpayers' money at risk, even if that's bad enough. The real trouble is that they override the voluntary preferences of people in foreign countries, who should be the ones determining whether an investment is worthwhile or not. Ex-Im and OPIC are the culture destroyers. They, not the capitalists trying to test marketability, are the real source of cultural imposition.

AEN: You've also written that the standard view of which taxes are to be preferred is wrong.

HERBENER: When economists ask the question, which is the best tax?, they often look at it from the government's point of view; which tax raises the most revenue? Asked that way, the usual view is that income taxes are better than excise taxes. But in the standard indifference curve analysis of taxes, the individual always prefers no taxes to any taxes. This is true even before considering the destruction of economic value and property that taxes generate.  

The advantage of excise taxes is that over time you can substitute out of the taxed good into other goods, and thereby avoid paying taxes altogether. You can't legally opt out of earning income. Interestingly, this is why people say excise taxes are the least preferred type. Over time, they bring in the least revenue because people stop paying the tax. To me, that's something to be celebrated.  

AEN: What about the argument that income taxes distort production decisions less?

HERBENER: All taxes distort production, so we have to keep the focus on comparative institutions. But to make the comparison between degrees of damage requires we look at an income tax and an excise tax that produce an equal amount of revenue. However, the requisite information needed to make the mental comparison can't be met. You have to know in advance what people are going to do under different rates of taxation. The reality is that people are always shifting their patterns of working and consumption to account for the tax. Those shifts are unpredictable.

You can't know a priori, then, which is going to distort production more. What we can know a priori is that higher taxes, however they are collected, are worse than lower taxes.

AEN: Given a certain level of government spending, is it better to run a balanced budget with high taxes or a deficit with low taxes?

HERBENER: If we could compare them directly, it probably wouldn't make any difference. If anything, the deficits would be worse. They must be paid eventually, and in the short run, they crowd out private investment, keep interest rates artificially high, and necessitate different patterns of investment.

But rarely do we face this kind of instantaneous trade-off. The key political question in the United States is the transition from a deficit-laden economy to one where the government has no debt. It's a huge error to attempt to raise taxes to pay off debt. If you do, you merely substitute crowding out with outright confiscation, which helps no one. The only way to balance the budget, consistent with good economics, is through spending cuts. It is in spending where we see the real impact of government on the economy.

AEN: Is the debt problem abating right now? The deficit does seem to be falling.

HERBENER: It depends on your perspective. Year to year, less may be added to the overall national debt, but every year we are still further away from resolving the long-term problem. In fact, the debt continues to escalate. The key determinant of when the debt cries out for a political solution is when interest payments on the debt consume so much of federal revenues that it must be dealt with. The people who expect immediate subsidies eventually will not put up with revenue being doled out to rich bondholders. By the way, balancing the annual budget does nothing to address this problem. It is bogus economic thinking to say otherwise.

AEN: It appears that taxes are continually increasing in the United States, and the Fed is still manipulating interest rates, yet economic conditions seem highly favorable.

HERBENER: New Era thinking is all around us. This is the view, heard thousands of times, that the business cycle has been abolished and we've entered a new era of permanent economic growth. I find all this alarming. The favorable present economic climate isn't due to the repeal of economic law; it is due to our position in the business cycle.

There are four phases in the business cycle: expansion, crisis, bust, and recovery. We are in the recovery phase, coming after a rather severe recession from the end of the 1980s to the early 1990s, and may also be in the early stage of the boom. And in these early stages, conditions always look the best. The Fed gets away with money expansion, but without facing the inflationary effects. We also get the stimulative effect in the stock market, driven mostly by the artificial holding down of interest rates.

This comes about both from the recovery's natural decline in the demand for loanable funds and the increased supply by the Fed. This is the best of both worlds. That's what we are seeing now. Indeed, if you look at the stock market alone, it would appear we are in the expansion phase already.

The international aspect also has to be kept in mind. Much of the Fed's monetary accommodation has been exported. Central banks around the world are holding record numbers of dollars. This has greatly assisted Fed policy. And this is why everyone's worst nightmare is a sudden unwillingness by Japan or some other country to hold dollars and debt.

AEN: Is it possible that the stock market boom reflects a more fundamental expansion taking place in the capital goods sector?

HERBENER: That's the key question. As the economy comes out of recession and goes into recovery, and the central bank begins to manipulate credit markets, it is very difficult to tell if the reduction in interest rates is a market response or whether it is artificial. It is difficult to tell historically, much less contemporaneously, which effects are dominating. How much of the current expansion is sustainable? It is impossible to say. I am skeptical that a doubling of the stock market in two years can be due mostly to real factors. We know the Fed is manipulating rates and this does have effects.

AEN: If the Fed is holding down short-term rates, why isn't the yield curve steeper?

HERBENER: It is not entirely accurate to say the Fed only holds down short-term rates. After all, it is not the Fed's pronouncements about what the funds rate should be that have the greatest effect on the economy. It is through actual credit expansion that it does damage. The shape that the yield curve takes depends on the suppliers of credit, namely banks, and the demanders, namely borrowers. If the demand for credit happens to be dispersed across different maturities, then the banks respond appropriately. New supplies of credit from the Fed can be doled out through the short term or the long term, depending on the nature of the credit demand. This, by the way, is a unique Austrian insight.

AEN: Do you think that public demand for political changes toward freer markets track the business cycle?

HERBENER: These days, it appears that the public is very resistant to any new taxes, which is a great thing. That seems to be true no matter where we are in the business cycle. Yet during the recovery phase, two key factors weigh on the people's opinions of politics. First, things appear to be getting better, and so long as that is true, people are less likely to complain. Second, they are not able to know how much better off they would be absent the huge presence of government in economic life.

AEN: Can you give an example?

HERBENER: Today, in most households with young children, both husband and wife are working. Twenty years ago, this was not the norm. There is plenty of evidence that this has less to do with increased economic opportunities for women and more with the effects of high inflation on family income. Quite simply, the Fed drafted mothers into the workforce, a situation the revenuers like since it means more paychecks from which to extract wealth. In this big government and the central bank have substantially contributed to the decline of American family life.

When these working mothers get a 5 percent payraise, they are pleased. But what about the effects they can't see, namely, that if it hadn't been for government intervention in the economy, overall family income would be sufficiently high to allow them to stop receiving a paycheck altogether? Because we are all prone to look at the short-term and tangible quality of our lives, and not compare it with long-term changes or unseen possibilities, people are inclined to adapt to lower living standards.

We must remember, however, that the sense of urgency for reform is often stirred up on the side of justice, not efficiency or material well-being. Quite simply, it is wrong for some people to live off others. This is a fundamental American proposition. And what is government but a vast conspiracy to bring about unjust transfers of wealth? By the way, there is growing awareness of the social consequences of two-income families with children. It is our responsibility to fix the blame where it belongs: on the government and its central bank.

AEN: Will the European currency unit come about?

HERBENER: I seriously doubt it. It is much easier for governments to destroy a currency than create a new one. It is theoretically possible for European governments to fix exchange rates and issue a currency defined in terms of those rates. But there are serious practical problems. In today's world of high speed capital flows, governments can't integrate their policies enough to prevent people from picking and choosing the best investment environments.

This is a major reason central banks are selling gold right now. They are building up dollar reserves so they can wheel and deal to keep their currencies in line when the pressures build up before and after monetary integration. But in the long run, the only way to keep a composite currency together is by imposing credit controls. But that would defeat the whole purpose of the integration. As Mises long ago observed, that seems to be the pattern with government policy. If we expect government's plans to go wrong, we'll never be too far off the mark.