Power & Market
While Americans contemplated Jeffrey Epstein’s demise, Chinese authorities had more pressing matters as the country’s third bank was bailed out late last week. HengFeng Bank with $200 billion in assets fell into the hands of “Central Huijin Investment, a subsidiary of the China Investment Corporation that acts as the Chinese government’s shareholder in the country’s four biggest banks,” according to a brief report overnight by Shanghai Securities News, published by state news agency Xinhua and cited by Zero Hedge.
Prior to HengFeng, Bank of Jinzhou was propped up using “state-owned strategic investors,” according to Dai Zhifeng, analyst with Zhongtai Securities Co.
In plainer terms, Zero Hedge reports ,
“The latter approach is more market-oriented and showcased the determination of regulators to resolve problematic banks, while injecting confidence into the market,” Dai said, although when stripped of all the pig lipstick, what just happened in China is that another major bank, one with $100 billion in assets, just collapsed and received a government-backed rescue.
China’s banks hold $30 trillion in deposits according to Alexander Campbell, more or less double the amount of aggregated U.S. bank deposits. Campbell was pitching Alex Rosenberg on Real Vision on his thesis of buying gold in Yuan terms with the idea that bank bailouts take a flood of central bank created fiat money to paper over. So while the Chinese may want to keep the Yuan near the 7 to the dollar range, bank busts are just beginning in China and 7 may become a distant memory.
Campbell’s view is,
Bank of Jinzhou just went under, Baoshang went under. They're providing liquidity while trying to take out the small guys.
There's some big guys coming up. Industrial Bank looks fine. But by all of our metrics, it's the sketchiest big bank. Minsheng is not that far behind them. If you start to get those banks under question, the liquidity that they have to provide to offset the deleveraging, the negative liquidity from bank runs will be so big that I think the question of do you want to keep seven is obvious. And you say, no, who cares? Like, let's have it go down. And let's stimulate the economy. I think the cruxy thing, and the thing for the trade then is will do we print money as well?
China’s rural banks have classified loans totaling 4.1% which may not sound bad, but is the equivalent of circling the drain in the fractionalized banking world. ZH cited a JP Morgan report downgrading Chinese banks.
The J.P. Morgan economics team revised down its GDP growth forecast for 2020 by 0.1ppt due to the recent sharp turn in Sino-U.S. trade negotiations. But even prior to that, declining PPI and industrial profits growth, suggesting declining debt-servicing ability and weakening cash flow for Corporate China, increase the risks that banks will be asked to support macro growth at the potential expense of profitability. Recent official PBOC comments on an accelerating interest rate liberalization process are illustrative of such rising risks.
Meanwhile, Donald Trump is thrashing China with tariffs. In a piece for Bloomberg, Stephen Mihm compared Trump’s tariffs with the bad old days of Smoot-Hawley and the failure of Austrian bank, Credit-Anstalt, and the European liquidity crisis which followed.
While FDR finally backed off, Mihm, doesn’t believe Trump will. “Donald Trump is no FDR,” he writes. “Trump isn’t going to get religion and suddenly work for international cooperation on trade and currency before things go off the rails. He’s going to stay the course.”
China will have no choice but to let the Yuan sink versus the dollar as “Beijing has found itself paralyzed and with zero credibly options how to kickstart the economy,” writes ZH.
“The only thing that's left is for China to admit that this is indeed the case, so sit back, relax and watch as bank after bank on the list above fails and China's financial cancer spreads across the country with the $40 trillion in assets (which is certainly not bad news for either gold or Bitcoin).”
When Trump talked about winning, he must have been talking about holders of the yellow metal and its crypto cousin.
The Macro Problem of Microtransactions: The Self-regulatory Challenges of Video Game Loot Boxes by Matthew McCaffrey has been published as a case study for Harvard Business Review.
The video game industry has ignited a global controversy surrounding microtransactions in gaming, especially the use of loot boxes: randomized rewards with potential real-world value. Consumers and legislators are calling for the regulation of these revenue models on the grounds that they are unfair, predatory, or could be considered gambling. This article examines the controversy from a management perspective. First, I introduce current regulatory responses to the controversy and what they mean for business practices. Then, I explain ongoing industry-level and firm-level attempts to self-regulate as a way to placate consumers and governments. These tactics highlight a wide range of broader strategies that game developers and other stakeholders can pursue in order to improve customer relations and, more publicly, signal their commitment to self-regulation and avoiding consumer harm. These practices can be applied more broadly to firms that offer controversial products or services that do not yet fit within current regulatory frameworks.
Available for purchase here.
For more from McCaffrey on the topic on the Mises Wire:
Today is Hans Hoppe's birthday. He is an outstanding libertarian theorist, in the tradition of Murray Rothbard, and his strikingly original work ranges widely over philosophy, history, and economics. Among his many contributions are a defense of self-ownership and property rights through argumentation ethics and a trenchant criticism of democracy. He is a scholar of the highest integrity and courage, and all lovers of liberty are in his debt.
The U.S. government is infamously in debt. Since about 2012, the official national debt has equaled or exceeded the GDP. Shockingly, the real fiscal gap is much higher: with our $21.5T GDP and $22.5T official debt, we also have about $200T in unfunded liabilities over the next few decades. Most of that last number is due to programs such as Medicare and Social Security, but our regular debt comes from accumulated deficits: the U.S. government spends more each year than it steals in taxes. Since theft is its primary source of income, this situation is not sustainable.
The single largest item in the 2019 federal budget (contributing heavily to the aforementioned deficits and unfunded liabilities) is Social Security. The second-largest item is defense. The U.S. government spends more on defense than any other country in the world – by far. In fact, it spends about as much as the next eight countries combined. That is to say, the U.S. defense budget is approximately equal to the combined defense budgets of China, Saudi Arabia, India, France, Russia, the United Kingdom, Germany, and Japan.
Is spending of that magnitude necessary, or even remotely justifiable? Probably not. We’ve all heard infamous examples of gross waste and financial incompetence in the DoD – from $21T over a couple of decades that wasn’t correctly accounted for , to $1,280 cups , $999 pliers, and $640 toilet seats.
One of the biggest boondoggles in the U.S. DoD budget – and the focus of this article – is the F-35, AKA the most expensive weapons system in history. And of course, the costs continue to go up, according to a recent DoD report. The Pentagon first put out the project for bids in 1996 , and the first F-35s were manufactured and flown in 2006. However, it wasn’t until 2018 that they saw combat for the first time when Israel deployed them. Since then, the USMC , USAF , and RAF have used them in combat only rarely. For a plane that is supposed to be sufficiently versatile and modular to replace virtually all other combat aircraft , the F-35 has been used very little.
Perhaps you’re wondering if this is a typical timeframe for a high-tech military project. Well, in 2001, the DoD expected to have its first combat-capable F-35s in 2010. That did not happen, not by a long shot. At least as late as 2013, these 5th Generation fighter jets could not fly in bad weather or at night. Despite all this, the F-35 program will cost about $1.5T, or approximately what the U.S. government spent on the entire Iraq war.
Last year, Defense News identified thirteen significant deficiencies in one or more F-35 models: from the possibility of a blown tire destroying the entire aircraft, to inadequate vision and sensor systems , to not being to fly too high, too fast, or in certain maneuvers without either apparent or actual major problems. Other issues included logistical and security concerns. Many of these have solutions in progress, although several additional issues with the weapons systems have been identified since then.
How does a project like this happen, and continue, despite perpetual problems? There are 1,400 subcontractors for the F-35 program, spread out over 307 congressional districts in 45 States. For those of you unfamiliar with the U.S. political system, that means there are 307 Congressmen (out of 435) and 90 Senators (out of 100) who have constituents whose livelihoods depend in whole or in part on the F-35 program.
Even the extraordinarily liberal (and openly socialist) Senator Bernie Sanders claims to oppose the program but supports having it partly based in Vermont, so his constituents can benefit from the subcontracting jobs.
It’s not just U.S. politicians who are financially committed to this disaster: there are eight other countries involved in the development of the F-35.
I don’t have a solution to the issues presented here. Really, since I oppose U.S. involvement in all the wars I’m aware of, I don’t really want to see the F-35 used more than it has been. Probably the myriad problems will be solved eventually, and perhaps most of the money to be wasted in this program has already been spent.
Last week, the Business Roundtable launched a major attack on property rights, the bedrock of capitalism.
In a stunning new mission statement, the Roundtable, which represents nearly 200 of America’s blue-chip companies, downgraded shareholders. According to the Roundtable, the purpose of a corporation will no longer be to conduct business with the sole objective of generating profits for shareholders. Owners of corporations (read: shareholders) will now just be one of five “stakeholders”— alongside customers, workers, suppliers and communities — that will call the tune for corporations.
The Roundtable’s new anti-capitalist mission statement promises to dilute and muffle shareholders’ voices and further politicize corporate governance.
Read the full article at USA Today
Joakim Book has recently published an essay at AIER arguing that Rothbard was wrong to change his mind about free banking in Scotland. Rothbard had originally praised the episode of Scottish free banking in his 1983 book The Mystery of Banking, but then changed his mind in a 1988 essay on The Myth of Free Banking in Scotland. While the topic has been debated extensively throughout the 90s and 00s between free bankers and full-reserve advocates, it is worth responding to this latest argument against the Rothbardian position.
Setting the stage
Before moving on to answering Mr. Book’s specific charges against Rothbard, it is perhaps useful to briefly recount the background to the dispute over free banking. Is it possible to have stable fractional reserve banking in a free market, so-called free banking, where banks issue more bank notes and demand deposits than they have cash on hand to redeem? Or is such a system based on special privileges granted to banks, and will it inevitably result in bank panics and business cycles? Rothbard’s position was the second, while Lawrence White in the early 1980s, first in articles and then in his 1984 book Free Banking in Britain, advanced arguments for the feasibility of free banking on theoretical grounds while using the example of the Scottish experience with free banking 1716-1844 to show that it had also worked in practice. Rothbard’s initial praise for the Scottish experience was based on White’s first paper detailing the episode of free banking, but reading White’s 1984 book and reviewing the histories of Scottish banking himself made Rothbard change his mind and criticize the Scottish system, and White’s portrayal of it, harshly.
The present argument
The charges against Rothbard are three in number:
- Rothbard interprets the low failure-rate of Scottish banks as proof of government protection, whereas White and others see it as proof of the stability of the system.
- The Bank Restriction during the Napoleonic Wars apparently also applied to Scotland, meaning that the Scottish banks were rendered immune from the legal claims of their clients. This is “completely false” according to Mr. Book, as the only reason the Scottish bank customers did not demand specie was that they preferred bills of exchange and bank notes.
- Rothbard claims that the Bank of England was a lender of last resort to the Scottish banking system – which according to Book is a wrong-headed interpretation of the evidence.
As argument number 2 appears to me to get at the heart of the issue, I will deal with arguments 1 and 3 summarily before moving on.
Ad 1): Here I think we must return a Scots verdict – while it is true that we would regularly see firms go out of business in a free market, as more successful entrepreneurs displace the less competent, it seems to me that the banking sector is a special case. Presumably, the clients of the bank would not hold bank notes if they feared there was a risk of the bank going out of business, so people would only patronize very sound banks, meaning that the banking sector would be more stable than the surrounding economy. That’s just speculation, however. Since we don’t have any similar systems to compare the Scottish experience to (the English banks that White compares the Scottish to were artificially weakened due to government regulations meant to protect the Bank of England), we can’t say one way or the other what the low number of bankruptcies indicates.
Ad 3): It is hard to understand how Mr. Book can sustain this charge, let alone describe Rothbard’s position as a “strange historical twist”. It is true, as Mr. Book relates, that in the crisis of 1793 the British government, not the Bank of England, was the source of help for the Scottish banks (a fact that does little to sustain the notion of “free” banking in Scotland), but this is not news to Rothbard, who relates the exact same incident. Nor does it disprove Rothbard’s point about the importance of London for the Scottish banks, for while he does not say that the Bank of England was the lender of last resort to Scottish banks, he does cite the historians Frank W. Fetter and Sydney Checkland to the effect that “(r)edemption in London drafts was the usual form of paying note holders” and “the principal and ultimate source of liquidity [of the Scottish banks] lay in London, and, in particular, in the Bank of England.” That expert historians say something is obviously no guarantee that it’s true, but I think it behooves Mr. Book to realize that his argument is with these gentlemen, instead of making it seem like Rothbard invented the central role of the Bank of England to the Scottish system.
Getting gold in Scotland
Did Scottish banks at any point suspend convertibility, contrary to their legal obligations and the act of 1765 that governed Scottish banking? It is true, as Mr. Book alleges, that the Bank Restriction Act of 1797 only referred to the Bank of England and the Bank of Ireland – but that does not mean that Scottish bankers redeemed their bank notes in gold. As a leading authority on Scottish free banking notes, as soon as the leading bankers in Edinburgh got news of the suspension from the Bank of England, they met together and decided to follow suit.1 In clear violation of the law, the Scottish bankers en masse suspended redemption of their notes for the duration of the suspension in England. The result, as hard money advocates would predict, was a massive inflation in Scotland and erosion of the reserves of the Scottish banks. They went from having reserves of gold covering 10-20% of their outstanding issue of bank notes to only 0.5-3.2%.
While this development hardly speaks to the purported stability of so-called free banking, it does not contradict Mr. Book’s charge that specie redemption was still possible in Scotland. After all, since the action of the Scottish banks in refusing to redeem their notes was clearly illegal, presumably a disgruntled client desirous of gold could take his bank to court. Why didn’t anybody do this? Surprisingly, we need only read the article on the bank restriction by George Selgin that Mr. Book himself links to in support of his claims to realize why. For the Bank Restriction Act did affect Scottish banks: while it did not make Bank of England notes legal tender, if anyone insisted on using such notes in payment of debts, “he was to be protected from arrest for debt” (Selgin quoting Frank W. Fetter). In other words, the legal remedies available to persons insisting on payment in gold were severely curtailed – in Scotland particularly so, as the Act deprived bank creditors of the right to summary diligence, a special procedure under Scots law for the enforcement of debts.
As is to be expected, the suspension of convertibility in Scotland lead to the complete disappearance of silver and gold coins from circulation2, per the working of Gresham’s Law, and bank notes proliferated, leading to the above-mentioned outcome that bank reserves dwindled to a fraction of what they were before the suspension.
All this leads us back to Rothbard. Rothbard claimed both less and more than Mr. Book attributes to him. He didn’t claim that the Act of 1797 applied to Scottish banks, merely that they used the opportunity to suspend convertibility – and this not on his own authority, but on that of Professors White and Checkland. However, Rothbard also claimed much more than simply a temporary suspension in Scotland during the early 1800s. It is worth quoting him at length since this claim seems to have escaped Mr. Book’s attention:
Now I come to the nub: that, as a general rule, and not just during the official suspension period, the Scottish banks redeemed in specie in name only; that, in substance, depositors and note holders generally could not redeem the banks' liabilities in specie. The reason that the Scottish banks could afford to be outrageously inflationary, i.e. keep their specie reserves at a minimum, is that, in practice, they did not really have to pay.
[Quoting Professor Checkland] The Scottish system was one of continuous partial suspension of specie payments. No one really expected to be able to enter a Scots bank … with a large holding of notes and receive the equivalent immediately in gold or silver. They expected, rather, an argument, or even a rebuff. At best they would get a little specie and perhaps bills on London. If they made serious trouble, the matter would be noted and they would find the obtaining of credit more difficult in future.
Rothbard goes on to describe a legal battle in the 1750s over the redemption of bank notes that ended up with a nominal victory for the cause of redemption, but in reality the courts refused to force the banks to pay up. The clear conclusion must be that convertibility of Scottish bank notes were only sporadically enforced throughout the existence of the much-vaunted system of free banking in Scotland.
This result should not surprise us, as the system was inherently unstable. While Mr. Book focuses on the issue of bankruptcy rates, this is not Rothbard’s main reason to deem the system unstable. Instead, he focuses on the fact (again using Checkland as his source) that throughout the existence of an independent Scottish banking system, the Scottish banks expanded and contracted credit in a long series of business cycles, as also Huerta de Soto has pointed out. What the Scottish bankers did was secure legal privileges in order to be able to engage in fraudulent credit expansion, and it is only after reading deeper in the history of Scottish banking that Rothbard realized this and subsequently changed his mind on the issue. Far from criticizing Rothbard, Mr. Book, who himself writes often and persuasively about the role of financial history, should recognize him as a kindred spirit – and accept the Rothbardian strictures on free banking in Scotland, based as they are on sound theory and historical inquiry.
The goal of this essay has been to show that, contrary to Mr. Book’s criticism, Rothbard’s change of mind on the issue of free banking in Scotland was based on a better understanding of the episode and was not, as Mr. Book alleges, “the imposition of perfectionist normative judgments” on the historical record. More generally, we have again shown that the claim that Scottish experience validates free banking theory is not supported by the evidence. On the contrary, the attempts by Mr. Book and other free bankers to explain away or ignore the myriad examples of government privilege and intervention in the Scottish case is starting to sound like a no true Scotsman fallacy – they are either ignored, or explained away as not really affecting the financial system.
Free banking has not passed the free market test, at least not in any of the cases that have been brought forward by the free bankers to support their claims. True free banking would indeed be a very stable system – but one with very high reserves. As Mises said:
Suspension of the bank-notes’ convertibility and legal-tender provisions had transformed the ‘hard’ currencies of many countries into questionable paper money. The logical conclusion to be drawn from these facts would have been to do away with privileged banks altogether and to subject all banks to the rule of common law and the commercial codes that oblige everybody to perform contracts in full faithfulness to the pledged word. Free banking would have spared the world many crises and catastrophes.
It is a mistake to associate with the notion of free banking the image of a state of affairs under which everybody is free to issue bank notes and to cheat the public ad libitum. People often refer to the dictum of an anonymous American quoted by Tooke: "Free trade in banking is free trade in swindling." However, freedom in the issuance of bank notes would have narrowed down the use of bank notes considerably if it had not entirely suppressed it. It was this idea which Cernuschi advanced in the hearings of the French Banking Inquiry of October 24, 1865: "I believe that what is called freedom of banking would result in a total suppression of bank notes in France. I want to give everybody the right to issue bank notes so that nobody should take any bank notes any longer."
I am quoted in the Washington Post in a story about the controversy over video game loot boxes. Loot boxes have been much debated in the past few years, with consumers frequently venting their outrage and regulators circling the gaming industry eager for a chance to flex their political muscles. As I've argued repeatedly, however, many critics overlook the economic significance of loot boxes and other microtransaction models.
The Post article has to do with upcoming changes to Rocket League that will remove its loot boxes, and what these changes will mean for the thriving black market that's grown up around the game. These changes are likely all to the good, as they show that the market is working to keep consumers happy: gamers complain loudly about loot boxes, and developers and publishers are changing their revenue models in response. My point, as I've been stressing since all this began, is that this process is a small part of a much larger experiment going on in the industry right now in which entrepreneurs try to figure out new ways to keep (mainly AAA) games profitable. Yet despite the much-publicized backlash from consumers, we haven't heard the last from consumers about what they think the best revenue models are, and we don't yet know what the industry will look like once the dust has settled.
Was Mises for open borders, as the term currently is used?
The short answer is "No," as Professor Ben Powell from Texas Tech University explains in a new academic paper titled "Solving the Misesean Migration Conundrum." But Powell goes further than merely explaining Mises's view— he also proposes a solution to the problem of immigrants dramatically altering the liberal institutions of destination nations and failing to assimilate (two problems open borders advocates generally deny). The resulting policy prescription takes the form of "unrestricted immigration with selective restrictions," designed to achieve economic gains from immigration while addressing such concerns. Powell's own work on immigration is well known, as is his strong support for completely open borders—so it is noteworthy that he does not attempt to distort Mises to fit his own policy preference.
Unfortunately the paper is behind a paywall imposed by its publisher, the Review of Austrian Economics, so we can only excerpt here. (We can only lament the absurd and stubborn refusal to put all academic journals online, free of charge. Academics struggle to generate interest in their work, and this is especially true for Austrian-friendly economists and others with minority viewpoints. In our age of on-demand content, paywalls are laughably out of touch).
Powell starts by examining two primary sources for Mises's views on immigration, namely Nation, State, and Economy (1919) and Liberalism (1927). Both were written during Mises's prolific interwar period, before the rise of Nazism and his flight from Vienna to Geneva and ultimately New York City. But neither book gives us a thorough treatment of the matter. As Powell points out, "in his voluminous writings Ludwig von Mises dedicated relatively few pages to the topic of immigration." In fact, as pointed out early in our Immigration Roundtable series at mises.org, Human Action contains only a few small references to the issue. We can only wish he had written more later in his career, with the hindsight of World War II and the reordering of national boundaries it caused.
Powell recognizes, as did our article linked above, that Mises primarily saw immigration as a matter of international labor mobility. Thus any restrictions on migration have the same destructive effects of protective tariffs on goods:
The economic theory underlying the trade of goods, capital, and labor is fundamentally the same. On narrowly economic grounds, for anyone concerned with maximizing economic output, or in Misesian terms “the commonwheel,” unrestricted migration is optimal. Mises recognizes this point when discussing Ricardo in Nation, State, and Economy, writing that “the tendency inheres in free trade to draw labor forces and capital to the locations of most favorable natural conditions of production without regard to political and national boundaries.
But "in Mises we find a tension that prevents him from unequivocally advocating for unrestricted migration," Powell tells us. Nation, language, and culture exist independent of government, an obvious point Mises took pains to allow for. Powell quotes Mises from Nation, State, and Economy:
When “immigration takes place into a country whose inhabitants, because of their numbers and their cultural and political organization, are superior to the immigrants. Then it is the immigrants who sooner or later must take on the nationality of the majority” The process of assimilation “proceeds the faster the closer are the contacts of the minority with the majority and the weaker the contacts within the minority itself and the weaker its contacts with fellow nationals living at a distance” Furthermore, assimilation is “furthered if the immigrants come not all at once but little by little, so that the assimilation process among the early immigrants is already completed or at least already underway when the newcomers arrive."
Language and culture evolve, of course, but for Mises the problem is illiberal states and the potential weaponization of state apparatus by newcomers:
The problem, for Mises, lies in the fact that states, in his time and ours, are not liberal. They are interventionist. Once states interfere with economic activity, some people are able to use the state to secure economic gains for themselves at the expense of others living under that same government. Once different nations are living under the same government, they come into conflict with each or, as Mises put it, “Migrations thus bring members of some nations into the territories of other nations. That gives rise to particularly characteristic conflicts between people.”
And Powell provides this uneasy quote from Liberalism:
The entire nation, however, is in unanimous in fearing inundation by foreigners. The present inhabitants of these favored lands fear that some day they could be reduced to a minority in their own country and that they would then have to suffer all the horrors of national persecution…. It cannot be denied that these fears are justified. Because of the enormous power that today stands at the command of the state, a national minority must expect the worst from a majority of a different nationality. As long as the state is granted the vast powers which it has today and which public opinion considers to be its right, the thought of having to live in a state whose government is in the hands of members of a foreign nationality is positively terrifying.
Powell then lays out his summary of Mises's objections, i.e. the "conundrum":
However, the institutions of freedom are not exogenously given. Among other factors,they depend on the ideology, political beliefs, and culture of the population controlling the state. Immigrants often migrate from origin countries with dysfunctional institutional environments that lack economic freedom. If the immigrants’ own belief system, was, in part, responsible for that dysfunctional system, and they bring those beliefs with them to the destination country in too great of numbers, too rapidly, to assimilate to the beliefs in the destination country, they could erode the very institutions responsible for the high productivity that attracted them in the first place. Thus, immigration itself could, in principle, turn a relatively free destination country, where Mises wouldn’t see immigrants as a problem, into a more interventionist state where immigration does create the problems Mises fears.
Powell's solution? Start with a "baseline presumption of free trade and unrestricted immigration," given the strong economic case for labor mobility and free trade. Then target narrow exceptions from the optimal policy for war, national defense, and fears of institutional deterioration.
A plausible deviation from the optimality of free trade can be found in the “national defense” exemption. If a particular good is vital to national defense, and a particular country is geographically situated such that potential adversaries would be able to cut off the supply of this good, in the event that they go to war with each other, then, in times of peace, the country in question may find it optimal to protect (or subsidize) the industry producing the vital good, so that a domestic supply would be available in the event that the countries go to war with each other. Note how specific this deviation from free trade is. General protection against imports of many goods is not justified. Protection is justified in only the one specific good. Also note, that even if this specific protection is justified in one country, that does not imply that it is justified in another. If protection is justified in land-locked and surrounded Lesotho, that does not imply that the United States, with large coasts on both the Atlantic and Pacific oceans, could justify the same protection.
Fears of institutional deterioration, and Mises’ specific fears that large sudden flows of immigrants could lead the immigrants to become the majority and turn an interventionist state against the native born, should be similarly thought of as “national defense” exceptions to the baseline of unrestricted immigration. As with the trade example, these exceptions need to specific and well identified, and any deviation from unrestricted migration should be as narrow as possible to only target the problem, while leaving in place as much of the gains from unrestricted immigration as possible. Also, as with trade, just because one country can identify a specific exception, that does not mean that the same exception is justified in other countries.
Powell applies this institutional lens to the controversial issue of Muslim immigrants in Europe:
...in the European Union there are roughly 13 million predominantly Muslim immigrants who originated in the Middle East or North Africa. 4 This too is clearly below the threshold of them becoming the majority “nation” that Mises fears. Absent any concrete evidence of these immigrants decreasing European economic freedoms, or otherwise harming European institutions, the presumption of unrestricted migration should remain. But it’s conceivable that, after a period of unrestricted migration, the stock and continued flow of Middle Eastern and North African immigration could reach a level that one of these two fears become justified. If it does, then the appropriate immigration policy response is to put a quantitative limit on Middle Eastern and North African immigration, while leaving immigration from all other regions of the world unrestricted.
Another example of the institutional principle? Israel, which Powell states "would soon cease to be Israel" if it allowed unrestricted immigration from surrounding Middle East countries. But does allow unrestricted immigration for Jews worldwide, and thus represents a "case of selective unrestricted immigration."
This is a fascinating paper, and worthy of greater attention. We only wish it were available online.
As an addendum, critics of the Mises Institute sometimes claim our writers fail to "follow" Mises on immigration (when they are not claiming we follow Mises cultishly). This paper refutes that argument. But Mises's views are not dispositive on immigration or any other issue, and nobody truly knows what he would say about current conditions were he alive today. And more importantly, mises.org and our academic journals offer a variety of perspectives on this thorny issue: from Walter Block's homesteading of government property to Hans-Hermann Hoppe's "full cost principle" to Ryan McMaken's call for wholly local, decentralized immigration policy. The term for this is "diversity of thought."
The dull, tired, whiny Old Gray Lady has another opinion piece about America's slavish devotion to free market orthodoxy, but this time with a slight twist: it's economists themselves to blame for the anti-government revolution.
Yet while the article's title held promise —"Blame Economists for the Mess We're In," it turns out the author had no interest in examining economics as a self-serving or compromised profession per se. He merely laments what he sees as its pro-market turn after the high-water mark of academic support for socialism in the 1930s. Thus we get the usual complaints about slashing regulations, antipathy for minimum wage laws, lack of support for unions, and the bipartisan "turn toward markets":
As the quarter century of growth that followed World War II sputtered to a close, economists moved into the halls of power, instructing policymakers that growth could be revived by minimizing government’s role in managing the economy. They also warned that a society that sought to limit inequality would pay a price in the form of less growth. In the words of a British acolyte of this new economics, the world needed “more millionaires and more bankrupts.”
In the four decades between 1969 and 2008, economists played a leading role in slashing taxation of the wealthy and in curbing public investment. They supervised the deregulation of major sectors, including transportation and communications. They lionized big business, defending the concentration of corporate power, even as they demonized trade unions and opposed worker protections like minimum wage laws. Economists even persuaded policymakers to assign a dollar value to human life — around $10 million in 2019 — to assess whether regulations were worthwhile.
And of course no Times piece about economics is ever complete without some boilerplate language about inequality, the great non-issue of our day. As always, egghead economists focus only on their God of efficiency:
They agreed that the primary goal of economic policy was to increase the dollar value of the nation’s output. And they had little patience for efforts to limit inequality. Charles L. Schultze, the chairman of Mr. Carter’s Council of Economic Advisers, said in the early 1980s that economists should fight for efficient policies “even when the result is significant income losses for particular groups — which it almost always is.” A generation later, in 2004, the Nobel laureate Robert Lucas warned against any revival of efforts to reduce inequality. “Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution.”
It’s time to discard the judgment of economists that society should turn a blind eye to inequality. Reducing inequality should be a primary goal of public policy.
The market economy remains one of humankind’s most awesome inventions, a powerful machine for the creation of wealth. But the measure of a society is the quality of life throughout the pyramid, not just at the top, and a growing body of research shows that those born at the bottom today have less chance than in earlier generations to achieve prosperity or to contribute to society’s general welfare — even if they are rich by historical standards.
This is not just bad for those who suffer, although surely that is bad enough. It is bad for affluent Americans, too. When wealth is concentrated in the hands of the few, studies show, total consumption declines and investment lags. Corporations and wealthy households increasingly resemble Scrooge McDuck, sitting on piles of money they can’t use productively.
It's too bad the author chose to focus on the non-issue of inequality in his critique of modern economics. The Left can't get over its silly perception that modern economists somehow are in thrall to Milton Friedman rather than Keynes, when in fact the former is not the ideologue they imagine while the latter has his DNA deeply woven into every fiscal and monetary stimulus policy.
But the bigger point is not about ideology or policy or political views. Economics has become a lost profession, one that serves economists but not society. Economics is broken, except for those who make their living from it. It doesn't make us richer, or happier, or healthier. It doesn't make us smarter or more knowledgeable. Economics as currently taught and practiced fails to help explain the world — the fundamental role of any social science. Mises was derided by some as a mere "literary economist" for his lack of equations, charts, and graphs, but statistics and mathematical models that don't accurately predict anything are no substitute for the real calling of economics. Working as a quant at an investment bank, or worse yet a central bank, may feel like practicing economics, but it is motion without action.
Economics and economists today are indeed lost, but not in the way the New York Times imagines. The real scandal is the profession's turn from theory to data as the starting point for economic analysis.
Stocks fell last week following news that the yield curve on Treasury notes had inverted. This means that a short-term Treasury note was paying higher interest rates than long-term Treasury note. An inverted yield curve is widely seen as a sign of an impending recession.
Some economic commentators reacted to the inverted yield curve by parroting the Keynesian propaganda that recessions are an inevitable feature of a free-market economy, whose negative effects can only be mitigated by the Federal Reserve. Like much of the conventional economic wisdom, the idea that recessions are caused by the free market and cured by the Federal Reserve is the exact opposite of the truth.
Interest rates are the price of money. Like all prices, they should be set by the market in order to accurately convey information about economic conditions. When the Federal Reserve lowers interest rates, it distorts those signals. This leads investors and businesses to misjudge the true state of the economy, resulting in misallocations of resources. These misallocations can create an economic boom. However, since the boom is rooted in misperceptions of the true state of the economy, it cannot last. Eventually the Federal Reserve-created bubble bursts, resulting in a recession.
So, recessions are not a feature of the free market. Instead, they are an inevitable result of Congress granting a secretive central bank power to influence the price of money. While monetary policy may be the prime culprit, government tax and regulatory policies also damage the economy. Many regulations, such as the minimum wage and occupational licensing, inflict much harm on the same low-income people that the economic interventionists claim benefit the most from the welfare-regulatory state.
The best thing for Congress and the Federal Reserve to do after the bubble bursts is to let the recession run its course. Recessions are painful but necessary if the economy is going to heal from the damage done by government’s inflate-tax-borrow-spend-and-inflate-some-more policies. But Congress and the Fed cannot resist the cries to “do something.” So, Congress spends billions on wasteful “economic stimulus” plans and bailouts of politically influential corporations. Meanwhile, the Fed tries to “prime the pump” via new money creation, restarting the whole boom-and-bust cycle.
This is not to say that no one would experience economic difficulties in a free market. Businesses and even whole industries would still close because of changing consumer tastes, new competitors offering superior products, or bad business decisions. There may even be bubbles in a free market as some investors misread fads as permanent changes in consumer preferences. But periods of downturn would be shorter, and most would only affect specific industries rather than the entire economy.
President Trump’s imposition of tariffs (which are a form of taxes on American consumers) has been particularly harmful. The tariff war has not just raised prices on imported consumer goods. It has also cut off markets for export-reliant businesses, such as manufacturers that import materials used to construct their products.
The trade dispute with China may be the event that pushes the US economy into a major recession or even a depression. However, the trade war is not the root cause of the downturn. The next recession, like every recession since 1913, will come stamped “Courtesy of the Federal Reserve.” The only way to end the boom-and-bust cycle and restore peace, prosperity, and liberty is to end the welfare-warfare state, repeal the Sixteenth Amendment, and audit then end the Fed.