Power & Market

The action axiom can be stated as follows (Cf. Rothbard [1962, 1970] 2004, pp. 1–2, 7–8, 19–20; Rothbard, 2011, pp. 113, 290; Mises, [1949] 1998, pp. 14–16): “Human beings engage in purposive behavior—i.e., they choose which scarce means are to be more fruitfully (or economically, or rationally) employed in order to satisfy their most preferred ends. This behavior—stemming from human free will—is what we call action. As long as means are scarce and wants are not fully satisfied, human beings will keep on intentionally (or purposefully) acting.”

Why is this an axiom? Because you cannot disprove it without either conceding its truth or incurring a self-contradiction (Cf. Rothbard 2011, pp. 6, 10; Rothbard [1982] 2002, p. 32 and 32n6). In fact, anyone trying to disprove the action axiom would indeed engage in purposive behavior—i.e., he would be employing scarce means (his time, his intellectual labor, etc.) in order to achieve a preferred end (trying to disprove the action axiom instead of, say, watching TV or reading Rothbard). Therefore, the action axiom denier would either contradict himself—claiming the untruth of a statement he is instead performatively proving to be true—or be forced to concede the truth of the axiom itself—because otherwise he could not maintain to be acting in the sense we defined above.

The Action Axiom and “Microeconomics”

Generally, microeconomics textbooks frame the main tenets of consumer (and, analogously, producer) theory as follows: “Consumers are supposed to be rational—i.e., they employ scarce means to attain desired ends. Moreover, consumers’ preferences are assumed to feature (at least) the following properties: completeness, transitivity, and non-satiation.” 

As I will briefly explain, it is very easy to derive these properties from the action axiom itself. There are many other properties of human behavior that we could derive from this axiom—such as, e.g., time preferences, the law of diminishing marginal utility, and the law of optimum returns—but those will not be examined here.

First, consider “completeness”—i.e., human beings’ capability of always ranking alternative ends. Since action requires having preferred ends, it also entails that human beings will act if and only if they indeed have ends they want to achieve—i.e., they are willing to act in order to substitute a state of the world with a more desired one. In other words, were human beings not always capable of deciding between at least two possible ends and ranking them (e.g., B is preferred to A, or vice versa), they simply could not act (Cf. Rothbard 2011, pp. 305–07). But, as we saw above, action is an axiomatic truth of human nature—we cannot conceive of nonacting human beings. Therefore, action itself implies complete preferences—i.e., human beings need to be always capable of ranking the various potential states of the world (A, B, C, etc.) they can attain while engaging in action.

Second, consider “transitivity”—i.e., if I prefer A over B and B over C, then I must also prefer A over C. Again, it is straightforward that absent transitivity human beings would not be capable of conclusively ranking preferences—hence, they would not have precisely definable desired ends to struggle for. Consider, for instance, the simplest possible case: Fabrizio is faced with the possibility of employing some means (say, one hour of his labor) in order to attain one among three alternative ends—A, B, and C. However, suppose also that he prefers A to B, B to C, and then C to A; the question now arises: How could he act? In fact, it is obvious that he would face a paradox—not being able to decide which end is to be pursued and which ones are to be foregone. Again, this proves that transitivity is directly—and easily—derived from the action axiom: men with nontransitive preferences would not be able to act—but this would contradict their nature as human beings!

Third, consider nonsatiation. Here, suffice it to say that “a man perfectly content with the state of his affairs [i.e., satiated] would have…neither wishes nor desires; he would be perfectly happy. He would not act; he would simply live free from care” (Mises [1949] 1998, p. 13). Again, denying nonsatiation of preferences would be tantamount to denying the acting nature of human beings. Thus, we proved again (via reductio ad absurdum) that nonsatiation is consistently derived from a true axiom—and must thus be itself true.

There are two other properties that conventional microeconomics textbooks ascribe to economic agents’ preferences—namely, continuity and convexity (i.e., consumers are assumed to love goods’ variety). Suffice it to say that while convexity can be postulated (but need not be, since it is not directly derived from the action axiom), the assumption of continuity is simply wrong—because human action does always involve choices among discrete, noncontinuous units (pounds of bread, gallons of milk, haircuts per year, etc.) (Cf. Rothbard [1962, 1970] 2004, pp. 130n27, 305–07).

The Action Axiom and Ethics

If the fundamental feature of human nature is that human beings act, then what does this (a priori) truth imply for other branches of human sciences? Take, for instance, the task of building a rational (i.e., a priori true) ethics of human liberty.

Starting from the action axiom, we can, for instance, build a rational and cogent argument for human beings’ natural and absolute self-ownership—i.e., any human being shall be the sole owner of his body, his labor, and his mind (namely, his choices, his values, his free will, etc.). In fact, let’s assume the simplest possible case: there are two persons—A and B. Now, there are three possible arrangements (Cf. Rothbard 2011, pp. 353–54).

First, we can assume that A is the owner of B (or vice versa). However, if A is the owner of B, then B is A’s slave—and slaves, by definition, are not free to act as they will. But if B is no longer capable of free-willed action, then he would no longer be a human being as we defined this concept (i.e., acting man) above. But this would imply a paradox—B being a human being in our hypothesis but no longer being one in our conclusion. Hence, this first arrangement is to be discarded as self-contradictory.

Second, we can assume that A owns a share of himself and a share of B (and vice versa). However, this would entail that A cannot act without B’s approval (and vice versa). But, for B to approve A’s action, B is required to purposefully cast a vote approving such an action (and vice versa). But then we reach again a paradox: A cannot act without B’s consent, but B’s consent is itself an action requiring A’s approval, but A’s approval is itself an action requiring B’s consent, et cetera—an infinite regress. But if both A and B’s action is stalled, then neither A nor B can act—and, if they cannot act, they are at odds with their nature as human beings (i.e., acting men). Hence, again, this second arrangement is to be discarded as paradoxical.

Lastly, we are left with the third option, the only consistent—i.e., noncontradictory—solution to our problem of human beings’ ownership: both A and B are to be self-owners. No other arrangement is compatible with human nature—i.e., action as deliberate choices employing scarce means in order to achieve preferred ends.

Conclusion

Economics has conspicuously departed from its Mengerian-Misesian-Rothbardian framework as a purely deductive science. By doing so, mainstream economists have forgotten the epistemological groundwork of economics, abandoning proper praxeological analysis, neglecting the apodictical (a priori) truths of praxeology, and imitating empirical (a posteriori) sciences. In the end, this departure from the Mengerian-Misesian-Rothbardian framework has proved detrimental for (at least) two reasons.

First, it prompted mainstream economists to justify their assumptions as “operational” (or “heuristic”) hypotheses—like empirical scientists do—instead of acknowledging the a priori truth of praxeological tenets. Second, it undermined sound and rational analysis even in other branches of human sciences—such as ethics—thus leaving intellectual room for moral relativism, postmodernism, and collectivistic ideologies.

For all the hullabaloo that surrounds the “Defund the Police” movement, we forget that our fellow citizens have legitimate concerns that must be openly and honestly discussed. Although the defund the police movement is surrounded by controversy, libertarians, conservatives, and liberals alike can find common ground in the sort of law enforcement that is required for a safe and secure neighborhood.

Those who embrace individual freedom and liberty should take the defund the police movement seriously. The driving force behind defunding the police is the thirst to govern our communities, and ourselves, without government coercion. If we defund the police, it must follow that communities are empowered to “police” their own neighborhoods as they see fit. Without government-sponsored police, law enforcement is privatized. And this is a good thing!

Libertarians hold the political philosophy that an individual needs to be recognized as such. Rights can only be applied to the individual, not to a group of individuals. The most supreme right of them all is the guarantee that personal property and individual freedom are never violated, without exception. This means that the rights to life, liberty, and the pursuit of happiness are not just ideals we strive for but actual rights that each individual person has been born with. These rights are not granted, given, or awarded to anyone by anyone. Instead, these rights are inherent in man’s existence and cannot be infringed upon by anyone or anything. The government is not exempt from this truth. No government, or individual, can violate the inherent right each person has to life, liberty, and the pursuit of happiness. Policing our communities is no different.

It is widely accepted that law enforcement is the responsibility of government. However, we must recognize that each community requires a different approach to policing. When considering population size, community diversity, resources available, etc., we can see that the law enforcement needs of places like New York City will necessitate a different approach from the one for Coeur d’Alene, Idaho—no matter how small the nuance. It is hard to deny that each specific community requires a unique approach.

Although the general theory of American individual liberty is recognized as good—life, liberty, and the pursuit of happiness—it is difficult to apply this theory to real-world circumstance. This is why the defund the police movement mistakenly conjoins two contradictory goals: (1) the freedom to police for communities to police themselves as they see fit, and (2) a heavy-handed government to make sure that happens.

The freedom to do what is best for your individual circumstance and a strong authority figure to enforce compliance cannot coexist. Unavoidably, the right to police the community you live in as you see fit will clash with some strong authority figure who wants to decide for you what they think the right way to police is. The ideal of people choosing what’s best for themselves becomes others deciding what’s best for them.

There are as many different opinions about what good policing looks like as there are politicians who lie—we couldn’t begin to count that high, even if we tried! The premise is correct—we must overhaul what policing looks like in practice—but the conclusion is wrong. Replacing one authority figure with another in order to rectify policing issues will not solve the problem.

Surely, the most ardent propolice individual must admit that a community where people feel safe is the prime goal, whether that is achieved through traditional policing or not. If we can offer people a safe community, is it important if that safety is achieved through a private company? Are we to believe that a community would reject a safe neighborhood merely because that safety was provided by a private company, rather than the government? I think not!

The defund the police movement makes a poignant case against the current system of policing and community involvement by the government. By uniting behind the cause of privatizing the police, we will make strides toward a safer and more respectful community.

History has shown that government will prioritize revenue and power over the safety of citizens. Enforcing arbitrary laws (like parking tickets) to generate revenue from fines, government funds bloated pensions and expands union control—and the safety and well-being of citizens takes a back seat. We can see this reality playing out in cities like Chicago, Baltimore, and Detroit. In Baltimore, government spending on police is more than half a billion dollars per year. Such a massive amount of money expended in the name of safety has produced one of the most dangerous cities in the United States.

There is a real, undeniable problem in minority neighborhoods—drugs, violence, and theft—and we must face that problem. The belief that the system (i.e., the police, government, capitalism, etc.) unfairly treats minorities (skin color, sexual preference, sexual identity, etc.) is a mainstay in modern culture and cannot be ignored. There is a prevailing belief that systemic racism has forced minority groups into a life of crime. Because government has a monopoly on law enforcement, there can be no solution that does not include cartel-like control without tearing down the entire system. This is why groups like Black Lives Matter believe that defunding the police is not a mere catchphrase—it is a call to reimagine the “system” in its entirety.

Although some state and local governments have agreed to “cut” law enforcement spending, calls for defunding the police have persisted. Appeals for compromise will go unheard. And this is a good thing!

Defunding the police and revamping law enforcement are legitimate goals that need to be addressed. Libertarians, conservatives, Republicans, and all other members of society should strive to recognize this ubiquitous issue.

The message of “defunding” the police is correct, even if the conclusion on how to fix bad community policing is not. It is true that government-sponsored policing has been, and is, destructive to some communities. We see this destruction nightly on our news channels. Elected officials have used law enforcement for their own protection, rather than for the protection of their constituents. Chicago mayor Lori Lightfoot used police as a personal protection service for her home as buildings burned and protestors looted stores nearby. Politicians claim gun laws are our way to salvation as they are escorted by an armed cadre of bodyguards. The police have been enlisted as a political tool rather than for public safety. It is hypocrisy at its finest!

Without government monopoly on law enforcement, no such abuse by politicians can exist. Why? Because paying customers are given preference, regardless of political standing.

The premise that a community has the right to decide how best to protect their neighborhood is a by-product of individual freedom. The defund the police movement is right: the government should have no say about how to police a neighborhood if that neighborhood doesn’t want the protection the government is offering. Forcing a community to accept whatever solution the government proposes has resulted in distrust of law enforcement personnel, runaway government spending, and the militarization of the police.

The conclusion the defund the police movement has come to—replace one government-controlled police force with another—is unfitting. The answer to creating a safer, more inclusive community is not through more government oversight and political heavy handedness. No! The answer is for the people to establish what works best for them in their individual circumstance. This is accomplished by privatizing law enforcement.

Given covid, the mutation, lockdowns, BLM protests and riots, the storming of the Capitol, impeachment and the first Biden stimulus bill on the horizon, it’s easy to miss headlines from the Federal Reserve. On Monday, the Fed released Reserve Bank income and expense data transfers to the Treasury for 2020. This is the central bank’s preliminary income statement and remittance figures for 2020, the headline number starting at:

$88.5 billion of their estimated 2020 net income to the U.S. Treasury.

Meaning, the Fed is to send $88.5 billion to “the people” via the US Treasury. However, more context and figures are required to reach a better understanding as to what this means.

Net income for 2020 was derived primarily from $100 billion in interest income on securities acquired through open market operations…

The Fed’s income primarily comes from owning US Treasurys and mortgage-backed securities (MBS), which makes sense because the Fed now owns $4.7 trillion and $2.0 trillion of these securities, respectively. This means $6.7 trillion was created and lent to the world. They can now receive over $100 billion a year in return (interest revenue) as compensation for their lending service.

Interest income on US Treasurys and MBS is hardly new. But this line item is:

The Federal Reserve Banks realized net income of $405 million from facilities established in response to the COVID-19 pandemic.

This might sound like a lot of money to most people, but is a relative drop in the bucket given the aforementioned $100 billion the Fed made off buying the nation’s debt.

As for the expenses, the largest cost to the Fed is the interest it pays to depository institutions (banks). This is interest paid to banks in order to compensate them for holding money at the Fed.

The Federal Reserve Banks had interest expense of $7.9 billion primarily associated with reserve balances held by depository institutions.

If this wasn’t confusing enough, it gets better:

We find operating expenses (mostly salaries and benefits) for $4.5 billion, plus $831 million for “producing, issuing, and retiring currency,” and $947 million for “Board expenditures.”

In what may come as surprise to most, the US Treasury is not the only entity the Fed is beholden to; this year the Fed paid:

$517 million to fund the operations of the Consumer Financial Protection Bureau.

And the payout to banks:

Statutory dividends totaled $386 million in 2020.

Numerous questions should come from this: 

These numbers are preliminary. We won’t have the finalized figures until March. But so far, the $88.5 billion remitted to the Treasury seems to be “pretty good” given the low interest environment and when compared to the last decade of remittances.

Of course, something doesn’t seem quite right. In order for the Treasury to get a remittance from the Fed, the Fed must expand the balance sheet and money supply, therefore buying interest-bearing assets. The interest income earned by the Fed pays for expenses such as billions of dollars in salaries and interest payments to banks. This gets reduced even more after payouts to another government agency and dividends to banks. What’s left gets sent to the Treasury. Keep in mind the US Treasury does the actual “money printing.” In effect, a significant cost associated with the Fed is paying for their knowledge, allowing them to manage the money supply.

It’s a system implemented well over a century ago, a system in dire need of repair if not abolishment. An entity which can legally create money runs the risk of eventually owning the assets of an entire nation, being insensitive to prices and immune to bankruptcy. This, as well as other pernicious effects such as causing the boom-and-bust cycle, increasing malinvestment, price distortions, and asset bubbles all make it strange to think that society pays billions of dollars for this knowledge-based service. Central banking is a service so slanted toward the banks and government, and against society, that it’s no wonder the general public isn’t meant to understand its inner workings.

Despite economist Thomas Sowell’s laconically phrased observation that the real minimum wage is zero, progressive elements within the Democratic coalition are likely to push for increasing the federal minimum wage once Biden takes office. While whether or not to raise the minimum wage is therefore ultimately a political question, a school of thought has gained purchase within mainstream economic circles in recent decades that contravenes long-held classical assumptions about supply and demand. If the cost of a commodity increases, demand should fall if the price rises beyond the point at which the marginal utility of acquiring another unit of that commodity is less than the cost of another unit of that commodity (Sowell 2011). Not so with labor, argue these economists (Harris and Kearney 2016; Tcherneva 2020; Stiglitz 2012, 2020; Pollin and Luce 2000; Reich 2017). Because pay to labor constitutes a large part of aggregate demand, higher wages translate into more purchasing and hence an approximately equivalent increase in the sales of businesses to offset the higher cost of labor.

Such demand-side economics trace their origins to Keynes, but interest was rekindled by the publication of Card and Krueger’s empirical study of fast food workers in New Jersey and Pennsylvania (Card and Krueger 1993). Widely cited following its publication, the next decade saw a strong shift in opinion among economists. A survey by the American Economics Association found that well over half of its members now disagree or doubt that minimum wages by themselves cause unemployment or underemployment (The Economist, August 2020).

Such cautious inquiry has translated in the world of the post-2008 k-shaped recovery to demands for almost doubling the federal minimum wage. A host of academics have voiced their support for the Seattle minimum wage coalition, with even the formerly skeptical Paul Krugman making an about-face, writing in the New York Times that wages were so low that significantly raising the minimum wage would do no harm to the economy (Krugman 1998, 2015).

According to the literature, however, the real picture is more nuanced.

Based on the large body of research being compiled, we find evidence that raising the minimum wage affects different sectors of the economy differently, and that it is not clear what would happen in the event that the minimum wage is significantly increased (Neumark and Wascher 2007; Jardim et al. 2017).

Because of this, even left progressive economists like Thomas Picketty are skeptical of broadly raising minimum wages in an effort to offset wealth and income inequality. He is likely correct, as most of the economic inequality in the United States is structural in origin, the result of technological displacement, skills hierarchies, geographic concentration, and trade, fiscal, and monetary policies (Moore 2014).

Given the potential dangers and inability of the government to successfully execute such microeconomic tinkering during the 1960s and 1970s, a time of much more functional governance than now, it seems unlikely and unwise to grant the federal government the power to set wages in this way in an attempt to optimize economic growth.

Research indicates average take home income since 2014 has increased slightly in some sectors, while going down in others, but with no noticeable uptick in the cost of basic consumer items (Vigdor et al. 2016, 2017). This may be unique to Seattle, a diverse and competitive economic zone. More local experimentation in the coming years is likely and will provide us with a better understanding of the impact of raising the minimum wage on various sectors of the labor market. While nationally it may be that the Biden administration, which so far has boxed out the more progressive elements of the Democratic coalition, will not prioritize the fight over federal minimum wages, in any event, the public should not be misled into believing that the data unequivocally supports the fight for a fifteen-dollar-an-hour federal minimum wage.

Resources and Works Cited:

Card, D., & Krueger, A. (1993). Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. doi:10.3386/w4509.

Harris, B., & Kearney, M. (2016, July 29). The "Ripple Effect" of a Minimum Wage Increase on American Workers. Retrieved October 06, 2020, from https://www.brookings.edu/blog/up-front/2014/01/10/the-ripple-effect-of-a-minimum-wage-increase-on-american-workers/

Jardim, E., et al. (2017, June 26). Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle. Retrieved January 05, 2021, from https://www.nber.org/papers/w23532

Krugman, P. (1998, September). The Living Wage. Retrieved October 06, 2020, from http://www.pkarchive.org/cranks/LivingWage.html.

Krugman, P. (2015, July 17). Liberals and Wages. Retrieved October 06, 2020, from https://www.nytimes.com/2015/07/17/opinion/paul-krugman-liberals-and-wages.html

Moore, H. (2014, June 03). Seattle Misreads Thomas Piketty as its Minimum Wage Mascot. Retrieved January 05, 2021, from https://www.theguardian.com/money/us-money-blog/2014/jun/03/thomas-piketty-seattle-minimum-wage-risks-jobs

Neumark, D., Wascher, W. (2007). Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research: Cambridge.

Pollin, R., & Luce, S. (2000). The Living Wage: Building a Fair Economy. New York: New Press.

Reich, R. B. (2017). Saving Capitalism: For the Many, not the Few. London: Icon Books.

Rolf, D., & Bryant, C. W. (2016). The Fight for Fifteen: The Right Wage for a Working America. New York: The New Press.

Sowell, T. (2011). Basic Economics: A Common Sense Guide to the Economy. Fourth Edition. New York: Basic Books.

Stiglitz, J. (2012). The Price of Inequality. New York: W.W. Norton Company.

Stiglitz, J. E. (2020). People, Power, and Profits: Progressive Capitalism for an age of Discontent. UK: Penguin Books.

Tcherneva, P. R. (2020). The Case for a Job Guarantee. Cambridge: Polity Press.

Vigdor, Jacob, et al. (2017). The Seattle Minimum Wage Ordinance October 2017 Update: Report on Employer Adjustments, Worker Experiences, and Price Changes. Seattle. University of Washington, Daniel J. Evans School of Public Policy.

Vigdor, Jacob, et al. (2016). Report on the Impact of Seattle’s Minimum Wage Ordinance on Wages, Workers, Jobs, and Establishments through 2015. Seattle. University of Washington, Daniel J. Evans School of Public Policy.

What Harm do Minimum Wages do? (2020, August 13). The Economist. Retrieved October 6, 2020, from https://www.economist.com/schools-brief/2020/08/13/what-harm-do-minimum-wages-do