Power & Market
In recent years, there's been a movement among the American Left to increase the minimum wage to $15 an hour. This is under the assumption that having a minimum wage helps workers and makes corporations pay their fair share. However, this is the opposite effect of a minimum wage, especially one that high. It keeps low-skilled (often black or other ethnic minority) workers from finding employment, forcing them to depend on government, and leads to closures of small businesses (especially black-owned businesses) which benefits corporations. To truly help workers and small businesses, we must abolish the minimum wage.
In 1931 came one of the first minimum wage laws, the Davis-Bacon Act. It required $2,000 (about $35,000 today) for contractors working on public works projects. It was introduced by Pennsylvania Senator and former Secretary of Labor James Davis and New York Congressman Robert Bacon. Davis was a eugenicist and Bacon was a racist who introduced a labor law because a Veterans' Bureau Hospital in his district had been built by black workers. As with Davis' other bill, this act was designed to keep low-skilled workers (mostly black) from being employed. The other Congressmen made it clear this was why they backed Davis-Bacon. Missouri Congressman John Cochran reported that he'd received "numerous complaints in recent months about southern contractors employing low-paid colored mechanics" and his colleague, Congressman Clayton Allgood, said that "cheap colored labor...is in competition with white labor throughout the country." Thirty years later, in the 1960s, minimum wage laws again caused black people to lose their jobs. Farmers were required to pay $1 an hour (about $9 today) instead of the $3.50 a day (about $31 today) they were being paid before. This led to thousands losing their jobs, causing one man's wife to say the dollar meant nothing if her husband didn't have a job.
While minimum wage advocates don't advocate for it for the racist reasons of Davis and Bacon, the effects are still discriminatory towards black people. Black workers tend to occupy low-skilled or semi-skilled trades. Immigrants, inner-city minorities, and young people also make up the majority of low-skilled trades. Making the hiring of these workers more expensive leads to poverty, homelessness, crime, and a host of other societal ills. Without a minimum wage, these low-skilled workers and their employers can agree on a wage and the worker can work as long as he or she wants. Once they have the skills (from, say, attending a trade school) and the work experience, they can move on to greener pastures to find an employer willing to pay them more. A minimum wage puts the employer in control, giving them plenty of reasons not to hire the lower-skilled. Without it, the worker is in control.
If the minimum wage is anti-corporate, why does Amazon, Google, Target, and Hobby Lobby support a $15 an hour minimum wage? It keeps out competition. They can afford almost $30,000 per employee. Small businesses can't. As USA Today notes, "The path would be clear for even more market dominance of big business and Wall Street, gained at the expense of Main Street." People couldn't buy local and corporations could expand their power.
This is especially true of black-owned small businesses. Black businesses have less money to find employees and must often use their own money to fund their business. They have less employees as a result. Imagine if they had to pay $30,000 per employee out of their own pocket. They'd lose the few employees they already have. That would kill black entrepreneurship and doom black communities. This could lead to gentrification where black communities become white and the original black residents are kicked out.
According to the CBO, a minimum wage hike would lift 900,000 out of poverty but put 1.4 million out of work. Young, less educated people account for a disproportionate share of those job losses. These low-skilled workers may not have the skills to get another job. We forget what a low-skilled job is. It's dishwashing, being a retail cashier, being a receptionist, and being a laundry attendant. It's not plumbing or automotive mechanics or carpentry. Those jobs pay tens of thousands. Those jobs require trade school, not just a high school diploma. A minimum wage punishes those who were born poor and weren't given the opportunities to go to trade school or college and get those skills.
The best way to help labor is to allow workers to negotiate the wages they want, not to apply a one-size-fits-all wage. The best way to save small and minority-owned businesses is not to make every employee an expensive commodity. Minimum wage laws hurt low-skilled, often black, workers. Implementing these laws lead to the growth of big business at small business' expense. To be truly pro-labor and anti-corporate, we need to abolish the minimum wage.
Among the several misgivings non-anarcho-capitalist people might have with anarcho-capitalism, there is the issue of public goods. Public goods, in fact, are supposed to be those goods which free markets cannot efficiently supply and allocate because of two properties: non-rivalry, i.e., the fact that A’s consumption of (public) good X does not impair B’s consumption of it; and non-excludability, i.e., the fact that A, the owner of (public) good X, cannot prevent B from enjoying it as well.
So, the argument goes, public goods supposedly need to be produced by governments; otherwise, they would be underproduced or overused—that is, free markets would fail to deliver optimal (i.e., desired) quantity and allocation. However, even setting aside historical instances of private provision of alleged public goods,1 it is the theory itself—as well as the alleged necessity for their governmental production—that relies on shaky and fallacious premises, as I will briefly summarize.
First, consider that a truly non-rivalrous good is not even an economic good itself: nobody, indeed, would face the need to economize it. In fact, if both A and B can consume (public) good X without reducing the satisfaction each one of them can derive from it, then X is no longer a scarce means that must be allocated efficiently—i.e., it is no longer an object of economic choice and action. On the contrary, X could be considered a “natural condition of human welfare".2 But, if X is so abundant that neither conflicts nor tradeoffs would arise when both A and B are eager to employ it, then A and B need not worry about any potential underproduction, squandering, or misallocation of X itself. Indeed, X will always be available to A and B for whatever purpose they might need it.
That said, moreover, oftentimes so-called public goods—when scrutinized more carefully—actually feature rivalry: hence, conflicts and tradeoffs are bound to arise when it comes to their employment. Therefore, governments themselves, while allocating such goods, must be guided by some principle. Since such a principle is not (by definition) the free-market price mechanism blamed by public-goods theorists, then governmental production and allocation of public goods would require some ethical principle justifying it—that is, some justification for coerced exchange between subjects and governments, i.e., taxation and government expenditures.3 However, such an ad hoc ethical principle would be outside the realm of value-free economic theory.
Second, what about non-excludability? Here, the anarcho-capitalist answer is straightforward: governments cannot introduce coercive mechanisms preventing the depletion of (rivalrous) non-excludable goods.4 In fact, on what ground could bureaucrats maintain that depleting a scarce resource today is worse than doing so tomorrow—or in one year, in one century, etc.? Of course, they could not do so on the economic-theoretical ground.5 Why? There are two main reasons.
Reason number one: economics does not allow aggregating individual utilities into a social welfare function (utilities are, in fact, unmeasurable, and you cannot perform on them such mathematical operations as additions, averages, etc.). Hence, aprioristic assessments about the social (dis)utility of consuming a (scarce) non-excludable resource today as opposed to tomorrow—or of having a (scarce) non-excludable resource consumed by a group of people rather than a different one—cannot be performed on an economic-theoretical ground.
Reason number two: economics does not allow interpersonally comparing the utility of one person (who, say, is depleting the scarce resource today) with the utility of another one (who, say, is not eligible to deplete the resource today, and hence would be depleting it tomorrow). Thus, economics has nothing to say about the distribution of a (rivalrous) non-excludable resource among individuals—i.e., economists cannot know whether (public) good X is desired more eagerly by A or B, and thus have nothing to say about which one among A or B should be entitled to consume it.
Therefore, again, since public-goods theorists maintain that the free-market price mechanism is not suitable for allocating (scarce) non-excludable resources, then some sort of ethical justification for governmental coercive provision would be required. However, again, this moves us beyond the scope of value-free economic theory. Economic theory, in fact, cannot proffer value-judgements about the allocation, production, consumption, etc., of scarce resources—this being, instead, the realm of ethics and aesthetics.6 Economics can, at most, show the most efficient arrangement to achieve the desired allocation of resources and satisfaction of (given) ends.
Moreover, oftentimes so-called public goods are actually both rivalrous and excludable;7 hence, they can be homesteaded according to Lockean-Rothbardian ethics—i.e., the first one employing (or better: fencing) them is to become their owner. Thus, there is no need for entrusting governments with public goods’ production: the free market, once a just ethical system of assigning property rights is in place, can do that more efficiently—via the price mechanism.
Third, as we already hinted, even if such a thing as pure public goods were to exist, this would not suffice to establish the case for their governmental—i.e., coercive—production.8 In fact, governments can produce public goods only if financed via taxation. But then, what gives governments the right to take away resources from citizens—i.e., taxes—in order to produce public goods? There are, indeed, at least two issues with such an ethical stance legitimizing governmental provision of public goods.
Problem number one: government, in order to produce and allocate public goods, would invade—via taxation—the legitimately acquired property of its subjects. In fact, if I can no longer enjoy my property to the extent I deem fit—but rather government is to barge in, take it away from me, and employ it as it wish—then government becomes (against my consent) the true owner of the resource. But this would be a prima facie theft—and, unless we want to advance an ethics legitimizing theft, aggression, and invasion, we must recognize this option as deeply unethical.
Problem number two: what if the (public) goods that government is supplying are not goods at all for some taxpayer—being “bads” instead? That is, what if government is forcing its subjects to consume goods they actually abhor?9 For instance, I hate watching TV: were government to tax me in order to finance public provision of TV programs, then I would be dissatisfied twice—the first time being deprived of a share of my income, the second time being subjected to junk TV programs.
Fourth, and last: any coerced exchange is always suboptimal with respect to a free one. In fact, why do people (freely) exchange? They do so because they know they are psychically profiting from it. If A performs an exchange with B, then we can conclude that both A and B are happier (after the exchange) than they were beforehand—i.e., they revealed their preference for such a free exchange through their action. But things are totally different when governments are involved in coercively supplying—via taxation—public goods. As Hoppe wrote,10
“the value of the public goods is relatively lower than that of the competing private goods because if one had left the choice to the consumers (and had not forced one alternative upon them), they evidently would have preferred spending their money differently (otherwise no force would have been necessary)”.
Public-goods theory is no compelling argument against anarcho-capitalism. Public goods are, oftentimes, resources that are rivalrous; when they are not, they nonetheless can be oftentimes produced on the free market—and be rendered excludable applying the standard libertarian homesteading principle. Moreover, it is impossible to ethically justify governmental production of public goods—unless we consider as legitimate both theft and coerced dissatisfaction of consumers. Lastly, consumers would always prefer at least one private good—acquired via uncoerced free exchange—over any conceivable governmental public good—produced via coerced taxation.
- 1. On private production of alleged public goods, see Rothbard, Economic Controversies, 2011, Ch. 24: “The Myth of Neutral Taxation”, pp. 470-73, originally published in 1981.
- 2. Cf. Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 3-5, 1033.
- 3. For a theoretical, comprehensive analysis of coerced exchanges between governments and subjects, i.e., binary intervention, see Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 907-61, 1149-1292.
- 4. On economics and public-goods theory when it comes to non-excludable, depletable resources (e.g., environment), see Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 1036-37, 1124. On how an anarcho-capitalist society would handle seemingly non-excludable resources and prevent negative externalities (e.g., air pollution), see Rothbard, Economic Controversies, 2011, Ch. 20: “Law, Property Rights, and Air Pollution”, originally published in 1982.
- 5. Cf. Rothbard, Economic Controversies, 2011, Ch. 17: “Toward a Reconstruction of Utility and Welfare Economics”, pp. 310-12, 313-14, originally published in 1956.
- 6. Cf. Rothbard, Man, Economy, and State with Power and Market, 2004 (1962, 1970), pp. 74-75.
- 7. On supposed public goods (e.g., law, courts, and police) actually turning out to be standard private, free-market producible goods, see: Osterfeld, Anarchism and the Public Goods Issue: Law, Courts, and the Police, 1989; and Hoppe, Fallacies of the Public Goods Theory and the Production of Security, 1989.
- 8. Cf. Hoppe, The Economics and Ethics of Private Property, 2006 (1993), Ch. 1: “Fallacies of the Public Goods Theory and the Production of Security”, pp. 11-13, originally published in 1989.
- 9. Cf. Rothbard, Economic Controversies, 2011, Ch. 24: “The Myth of Neutral Taxation”, pp. 465-66, originally published in 1981.
- 10. Hoppe, The Economics and Ethics of Private Property, 2006 (1993), Ch. 1: “Fallacies of the Public Goods Theory and the Production of Security”, p. 14, originally published in 1989.
The common thread that connects failed societies, from Weimar Germany to the Soviet Union, is an almost pathological insistence on denying reality. Weimar Germany denied that masses of printed money would destroy civilized society. The Soviet Union insisted that Soviet Man would emerge spontaneously from the ashes of capitalist society. Weimar Germany spawned Nazi Germany. Nazi Germany was completely destroyed, both physically and politically, by the World War II Allies. Mercifully, the Soviet Union simply collapsed after seventy years of consuming capital to achieve the phantom of the classless society. Today both Nazi Germany and the Soviet Union are synonymous with tyranny and failure. Both nations murdered millions. Both nations no longer exist. True, Germany exists as does Russia, but I contend that both are new nations. Neither is perfect, but neither claims a political heritage to the nation that preceded it.
Pathological policy errors flowed inexorably from a skewed view of reality in both Nazi Germany and the Soviet Union. Once this view of reality was deemed to be above criticism, its champions adopted increasingly tyrannical policies. Nazi Germany's Aryan Supremacy racial theories seemingly justified the murder of the handicapped, Gypsies, those of alternative sexual orientation, Jews, and Slavs. In the name of birthing a new Soviet Man, the Soviet Union murdered anyone who stood in the way of its program to confiscate all businesses, including small farms. When businesses and farms failed, there was no soul searching as to root causes that might lie in Marxism itself. No, the problem had to be saboteurs within society. Reality, you see, was what the Soviet Union's Politburo said it was. As the vanguard of the proletariat, the Politburo stood outside society and saw its flaws. Those who disagreed were blind to this insight and had to be eliminated.
Chasing the Phantoms of Alternative Reality
Today the West especially is adopting policies that flow from alternative realities that, frankly, do not exist. Here I list just a few:
- Catastrophic global warming/climate change is caused by man and must be stopped. I prefer to qualify the term "global warming/climate change" by the adjective "catastrophic". Is the world warming? Who knows? Is the climate changing? Probably. But neither global warming nor climate change is "catastrophic". Yet it has become almost an article of faith that the earth is on the precipice of an environmental catastrophe, requiring ever more radical handicaps on our freedoms and the economy.
- White privilege in the US is responsible for crimes against minorities and disparities in wealth. This critical race theory has spawned witch hunts for secret and shadowy white supremacist groups especially in the military, which has empowered investigators to find evidence of these groups and root them out. It will be imperative that these investigators actually uncover such groups, whether they exist or not. Critical race theory is the old Marxist class struggle theory in new clothes. The Marxist class struggle theory postulated that we all are born into a class and cannot escape its prejudices. But notice that the Marxist and now the Race theorists consider that they themselves are not susceptible to the prejudices in which all the rest of us are trapped. Very convenient, eh?
- Covid-19 is an existential threat to human life on earth. Constitutionally guaranteed human rights may be violated with impunity. Who gets to decide all this? Why, elected officials and government bureaucrats, of course.
- Modern Monetary Theory (MMT) explains that government need not moderate its spending. Government can always manufacture more money in order to fund new programs and pay its debts . More government spending can always prevent a drop in aggregate demand. Government debt is irrelevant, because "we owe it to ourselves". MMT gave government elected officials exactly what they always wanted--carte blanche to spend, spend, and spend some more and not worry about justifying or prioritizing spending. As Keynes actually said, pay people to dig holes in the ground and pay others to fill them back up. What could possibly go wrong?
Champions of the above denials of reality refuse to discuss whether their view of reality is accurate. All are articles of faith and cannot be questioned. In fact, to question them is considered to be an admission of ignorance, guilt, or perfidy. One wants to destroy Mother Earth, enslave minorities, kill innocent people, and prevent all in society from enjoying unlimited prosperity. It's the old straw man fallacy on steroids. Furthermore, resources will be expended to pursue these phantoms, and more resources will be expended to protect oneself from being caught in a witch hunt. Society will live in fear--fear of global warming, fear of being branded a racist, fear of contracting a dread disease. Unfortunately, what society does not fear is that our lifetime's savings will be wiped out by inflation made possible by MMT.
The Basics of Reality
Contrast these phantoms with the pragmatic basics of sound economics: namely, that in order to prosper man must face the reality of human existence—primarily scarcity and uncertainty. People's preferences must be accepted at face value. Man acts. This is an irrefutable axiom in that to deny it is to confirm its validity. His action is rational in the sense that he believes that his action will improve his condition. He understands cause and effect. He performs one act at a time. He performs the most important act first; in other words, he ranks his actions in order of importance. Performing an act means that he must sacrifice the execution of others until later; in other words, acting means giving up some other preference, at least until some later time. Man's ordinal ranking of preferences means that the cost of an action is determined by what he eschews until later. No two men have the identical ordinal ranking of preferences; plus, the preferences cannot be assigned a cardinal value in order to compare one man's preferences with another. Man discovers the concept of comparative advantage and adopts the division of labor in order to accomplish more. Through the market process, man adopts a universal medium of exchange (money) in order to break the tyranny of direct barter. Now man can indirectly exchange his specialized production for a universal medium of exchange in order to obtain his real wants. Man invents government as a specialized service in order to protect his person and his property at a lower cost. He invents law in order to adjudicate inevitable disputes.
All this is reality. Peaceful exchange requires social cooperation, which brings about peace and prosperity among men everywhere. As advice columnist Ann Landers used to say, Wake up and smell the coffee!
Some readers might enjoy this this interview I conducted conducted with Václav Klaus, the former Prime Minister of Czech Republic, on the current Covid-19 situation and the prospect for human freedom. He has a rich perspective and experience having spent most of his life under a communist system and shares his views freely.
This interview is was conducted as apart of a full length documentary, Planet Lockdown, and is being released in advance of the film for those that wish to learn more about the world and where we are.
This time last year, the Swiss National Bank (SNB) had US stock holdings of $94 billion. The portfolio of Switzerland’s central bank has grown by $56 billion since, reporting ownership of $150 billion worth of US listed stocks as at Q1 2021. Apple is currently the largest holding, at $8 billion, but the portfolio contains countless smaller publicly traded companies, like GameStop, valued at $25 million at quarter end this year.
At the recent annual general meeting, SNB Chairman Thomas Jordan said:
We would like to live in a world where the interest rates are positive. But in the current situation negative interest rates as well as readiness to intervene in the currency markets are essential.
Per the Chairman, it’s not the bank, the world just isn’t quite right. Apparently, due to the “current situation,” the bank is forced to act accordingly. As reported, despite a recent devaluation of the Swiss franc, the currency is still “highly valued.” For this reason, its appreciation must be moderated via monetary intervention.
Unfortunately, these actions create a few unconventional outcomes: a policy rate of minus 0.75% and the purchase of over 2,000 US publicly traded stocks in order to manage the foreign exchange market. This “essential” intervention has an upside for the SNB, a profit of $23 billion USD for year end 2020, of which nearly half came from foreign currency positions such as stock gains and dividends.
As if manipulation of foreign exchange markets is nothing more than routine policy, Reuters reports:
The SNB spent nearly 110 billion Swiss francs ($120 billion) on currency interventions in 2020…
It seems unfathomable that approximately $120 billion USD was spent by the SNB for the purpose of currency intervention during the year. This money was not the result of profit made from the sale of goods or services; the SNB is not a highly successful investment bank who is simply buying equities from past business dealings. Rather, it's a central bank. The purchases come from money creation for the purpose of buying stocks. This only works because they have a monopoly on one of the most desired currencies in the world. The SNB continues to do what only a handful of central banks can successfully get away with, for now.
Over the course of the year, they never wavered on this most lucrative of devaluation strategies. Their actions led to a hefty profit, money supply expansion of Swiss francs, and Switzerland having the lowest rates in the world. Like most central bank inflationary schemes, there is no end in sight. We are left to wonder what the value of the portfolio will be this time next year.
If this strategy works so well for Switzerland, there’s no reason the USA shouldn’t do the same. After all, the USD is still one of the strongest currencies in the world as well. But if the Fed employed the same strategy, buying $150 billion of stocks and making billions from dividend income, it would most certainly be considered problematic; the same sentiment should exist to the SNB.
It’s concerning why this story is only followed by a limited number of media outlets, and will likely never be important enough for mainstream economists to speak against. Few people in America or Switzerland seem to realize, nor care, what is going on. But it’s important to note the flagrant abuse of power, theft, and inflationist monetary policy that makes our already expensive stock market all the more expensive.
Failure is a misnomer if we are referring to the human action involved in an entrepreneurial pursuit. A commonly held, although misleading notion, is that entrepreneurs often fail within the first few years in the marketplace. Often, I wonder why and how it happens that entrepreneurs fail only after a few years in the market if they envisioned a profitable opportunity where none had existed beforehand and was visually unapparent to others. In a non-metaphorical sense, let us think about this: Entrepreneurs discover and invest in producing and distributing goods for those who demand them the most, thereby creating downward pressures on consumer prices via their purposive action.
With that said, why is it that at one point, the entrepreneur discovers effectual ways to satisfy consumer demands, and only within a few years is the entrepreneur reported to have failed? I do not buy this one bit, and I believe this belief is all wrong. Here is why: Firms measure “success” or "failure" via profit and loss. How do we measure the entrepreneur's contributions? One way we might measure the entrepreneurial function is by their compounding effect on future developments for human flourishing.
Instead of, as some might think, that entrepreneurs quit too soon, the reality is that entrepreneurs are often negatively affected by distortions and interventions in the marketplace. Not to mention, entrepreneurs are subject to the ongoing competition between existing and emerging institutions.
Does Entrepreneurial Success Rest on Personal Characteristics?
Some have said that entrepreneurs do not pick the right people for their team, their purposes are directed toward the wrong endeavor, and somehow, they lack commitment, persistence, and all the rest. I do not buy it. We must look at the effects of various institutional changes, distortions, and interventions, that play such a significant role in the assumed failure of nascent or incumbent entrepreneurs.
It boggles the mind how failure is attributed in many cases only to entrepreneurs' characteristics instead of the distortions and interventions placed in their way that obstruct the signals that are widely used to make decisions. Institutions like money and price act as entrepreneurial signals that reflect the known knowledge needed to produce and distribute consumer goods and services, particularly those economic goods valued most by market participants who consume and are satisfied by them.
Even the thought of an entrepreneur's failure is somehow self-inflicted is utter nonsense. Who would discover a profitable opportunity only to fail at it knowingly? Moreover, the same people who attribute failure to the entrepreneur have the antidote for fixing their failures.
The Public Service Provided by Entrepreneurs
It is no doubt true that sometimes entrepreneurial projects do not cut the mustard. However, according to Murray Rothbard, no one else knows their market and the workings of their market better than the entrepreneur. Therefore, there must be some external factors creating situations conducive to failure. As we have seen, commentary about entrepreneurial failures seems to face inward – failure is the entrepreneurs' fault – of course. I beg to differ. Firms may fail, but in at least one sense, entrepreneurs do not. Entrepreneurs shape our future only by adding to the entrepreneurial stock of knowledge. The steamboat, airplane, vehicles, ice manufacturing, light bulbs, umbrellas, pens, food and food processing, digital apps, just technology, in general, are all outcomes of an accumulation of knowledge from previous entrepreneurs that took place over decades and in some cases even centuries.
Many socialists think that protectionism benefits the poor. But these views deviate from the free trade tradition that can be found in some corners of socialist thought. Like liberal economists in the nineteenth century, some socialists also argued that protectionism served the interests of corrupt entrepreneurs. The forgotten contribution of socialists to the free trade tradition is clearly fleshed out in an article titled “Marx and Manchester: The Evolution of the Socialist International Free-Trade Tradition, c.1846-1946,” featured in The International History Review.
For scholars interested in unlocking the complex relationship between socialism and free trade this article is a must-read. Marc-William Palen ably disputes the notion that socialists are universally in favor of protectionism. However, he admits Marx and Engels proposed free trade because of the perception that it accentuated the socialist revolution: “Marx and Engels viewed the international turn to free trade as an advancement of the global capitalist project, the dawn of a new epoch of capitalist internationalism. For Marx, free trade was a progressive condition of industrial capitalism, moving it a step closer to socialist revolution. Protectionism, by contrast, was regressive and belonged to the pre- and proto-industrial capitalist era. For Marx’s close friend and patron Friedrich Engels, too, free trade was preferable to protectionism as the former would ‘expand as freely and as quickly as possible’ the capitalist system and thus hasten the destruction of ‘the whole system.”
Based on Palen’s presentation it appears that Marx and Engel advocated free trade due to the assumption that it would accelerate revolution. Yet he offers evidence indicating that both expressed genuine dislike for protectionism. Like classical liberals, Marx perceived protectionism as a function of backward economies. As Palen notes his condemnation of protectionism as archaic is quite revealing: “People are thus about to begin in Germany with what people in France and England are about to end. The old corrupt conditions against which these countries are rebelling in theory and which they only bear as one bears chains, is greeted in Germany as the dawn of a beautiful future.’’
Engel in his description portrays protectionism as being “at best an endless screw, and you never know when you have done with it. By protecting one industry, you directly or indirectly hurt all others, and have therefore to protect them too. By so doing you again damage the industry that you first protected and have to compensate it . . . and so on ad infinitum.” Interestingly, even Marx thought that protectionism fueled interstate conflicts, since antitrade policies could be construed as an act of aggression.
The tendency of protectionism to lead to war was also asserted by Karl Kautsky, as Palen reminds us: “The higher the tariff barriers between individual capitalist states grow, the more each of them feels the need to assure itself of a market which no one can exclude them from, and to gain supplies of raw material which no one can cut off,’ thereby creating an ‘arms race’ that ‘must grow ever greater and the danger of a world war come ever nearer.” In this arena, Kautsky, is like Kant who taught that trade nurtured international peace.
Probably, in the socialist tradition Eduard Bernstein is the most strident critic of protectionism. As such, Palen will be cited at length:
Like Kautsky, Bernstein was consistent in his support for free trade over the course of his socialist political career. Bernstein believed free trade was not only progressive but also good for both the proletariat and the bourgeoisie. Also, like Kautsky (and Marx), Bernstein condemned List-inspired ‘infant industrial’ protectionism for creating geopolitical tensions and for being reactionary and atavistic, a throwback to the era of mercantilism and a stumbling block to modernization. His critique of militarism – for which he blamed jingoism, nationalism, protectionism, and the undue influence of arms manufacturers on German policymaking — owed much to the influence of later Engels. And like Kautsky, Bernstein’s critique shared much in common with Hobson and Schumpeter, as did his belief that free trade and industrialism were the foundation stones of a peaceful economic order, such that R. A. Fletcher posits that Bernstein was ‘not only fundamentally more British than German but also thoroughly imbued with the values of Cobdenite radicalism.
Moreover, the hostility of some socialists to protectionism was not unique to Europe. Palen contends that during the Great Depression, American labor leaders were vehemently opposed to protectionism:
A Marx-Manchester ‘utopian’ planned supranational vision of free trade and peace prevailed not only among European socialist federal unionists, but also among socialist internationalists in 1930s and 1940s America. Under the political and intellectual leadership of Norman Thomas and Scott Nearing, American socialists renewed their Marx-Manchester commitments in response to the Great Depression and continued Republican protectionism.
Palen singles out Thomas for his raging denouncement of protectionism: “Under his leadership, the Socialist Party of America made sure to single out the GOP’s protectionist 1930 Smoot-Hawley Tariff, calling it ‘the most monstrous tariff legislation in the history of the country. . . . It has, in effect, declared economic war against the rest of the world and served to aggravate the instability of world economy and world trade.” Clearly, unlike their contemporary counterparts, socialists in an earlier tradition understood that protectionism did not elevate the poor.
Yet despite the evidence against protectionism as a tool to improve living conditions, it is gaining traction on the left and right. But socialists and their friends on the right can save us from the dangers of protectionism by applying the wisdom of the maverick thinkers discussed in this piece. I urge them to read Dr. Marc-William Palen.
How does one respond when a friend, colleague, professor, or one of the most decorated economists on the planet, claim they don’t foresee and inflationary problem? Janet Yellen, US Treasury Secretary claims, as reported by Reuters:
I don't think there's going to be an inflationary problem. But if there is the Fed will be counted on to address them.
Henry Hazlitt dedicated an entire book on inflation, opening with the sentence:
No subject is so much discussed today — or so little understood — as inflation.
That was nearly 60 years ago! Going back to Mises, it was addressed, yet ignored for over a century!
The problem starts with trying to gauge your interlocutor's understanding of “inflation.” There’s the commonly accepted idea of inflation being a general “increase in prices,” but inflation originally signified the act of increasing the supply of money and credit, then during the last century this became less widely used. Now, the act of increasing the money supply by even several trillions of dollars a year is considered routine policy; what was once dubbed inflation is now called stimulus.
Should they remain fixated on the idea that inflation means price increases measured by the CPI, steer them in the direction of illustrating various problems with inflation calculations. These problems have been cited for several generations and even in my recent article Inflation: The Art of Moving Goal Posts. By understanding how inflation data is compiled, what’s omitted, what’s included, and the immeasurability of the idea itself helps cast doubt on the mainstream narrative.
But if inflation calculations are inherently flawed, are there other ways to convey that society already has an “inflationary problem” at hand?
Looking at median sales prices of homes in America, we see prices have steadily risen, save for the previous recession where prices declined. Interesting how housing prices have sharply increased during this recession; we can only speculate as to how much this is caused through central bank intervention.
You can also point to continual all-time highs in the stock market, the rise of crypto currencies, and the burgeoning NFT market, all occurring when our future has never looked so uncertain, in the face of the money supply, national debt, and stimulus reaching unheard of levels.
Unfortunately, the unaffordability of life through increase in asset prices and associated debt level don’t matter much to inflationists. It’s the general price increase in necessities such as gasoline and toilet paper which matters most.
Should all else fail, and the inflationary problem remains unnoticed, try pointing to a country like Venezuela, noting how their money supply has risen on an upward trajectory. It’s unlikely anyone could deny that “maybe,” the cause of their hyperinflation and currency collapse was a result of a dramatic explosion to their money supply, M2 now standing at 1 Quadrillion VEF! (The chart below is in millions).
Strange days indeed. And the task of discussing problems with inflation persists. Often difficult to prove until it’s too late, two different definitions of inflation create complexity and having assets excluded from already faulty inflation calculations doesn’t help. Being told by experts that inflation isn’t yet a problem makes the public’s understanding of the topic difficult to grasp. All the while, the commonly accepted method of national default is by way of printing a currency into oblivion, suffering the consequences of default through hyperinflation.
While dinner table economic talk may work with those whom you keep close company, not many of those who desire a free market appear to keep company with those deciding the narrative for the entire planet. What can be said to someone like Yellen or the Fed who gets paid to seemingly ignore the basic history and principles of inflation? Unfortunately, if it won’t come from you, then we can only hope Congress will do the right thing…
In 1759, economist and philosopher Adam Smith wrote one of the greatest descriptions of the free market ever produced. Writing about a market economy based on voluntary exchange, Smith likened the process of self-minded producers catering to the consumers’ interests as a process managed by an invisible hand. He states, “Every individual … intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.”
This quote, perhaps the most famous passage from his book The Theory of Moral Sentiments, reveals both the morality and simplicity in which a free economy operates. We, as individuals, are not guided by some altruistic vision for the betterment of others, but rather the fulfillment of our interests and gains. Yet in the free market, pursuing our own self-interest makes all of society better off.
This is because in order to get what we want, we must voluntarily trade. The only way voluntary trade can happen is if each individual likes what the other has more than what they have. Therefore, in the process of obtaining what we want and enjoy, we enable someone else to also obtain what they want and enjoy. Otherwise, the trade wouldn’t happen in the first place, and we wouldn’t be benefiting others.
In a bigger picture, this means that we work jobs, sell products, and own businesses not for the sake of our customers or bosses, but for our own individual interests. Yet in the process of obtaining the money to further our own interests, we contribute a good or service that can benefit many others; whether that be working at a restaurant, owning a store, or running a lemonade stand, we contribute to a larger, common good. Through voluntary exchange, the prerequisite for furthering our own desires is by fulfilling others’.
The invisible hand of the free market, fueled by voluntary exchange, translates the intricate and subjective interests of ourselves into benefitting the interests of others and, when compounded, ultimately caters to the common interest.
Yet, there exists another invisible hand, in the realm of politics; one also predicated on voluntary exchange, yet moving opposite to the motion of the free market’s invisible hand. Understanding it is crucial to deciding just how far we should replace economic activity with political and bureaucratic control.
The Invisible Hand of Politics
Outside of the political process, self-interested individuals exchange and thereby benefit others in the pursuit of their own goals. Yet in the political process, politicians elected on the basis of representing the “general interest” ultimately must cater to much more specific causes. Economist Milton Friedman writes in his coauthored book Free to Choose, “There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith's invisible hand. Individuals who intend only to promote the general interest are led by the invisible political hand to promote a special interest that they had no intention to promote.”
This is mainly due to the expansive role that the government has usurped over the years, writing and enforcing detailed legislation that directly threatens a small sum of citizens while negligibly affecting the rest. When the state has such a capability of writing specific laws, laws that greatly concern only a few number of individuals, those individuals will be incentivized to lobby government for favorable decisions.
Take Friedman’s example of the US’s policies regarding coastal traffic, which is greatly restricted to American flagships. He estimates the costs of such legislation to be, in 1980 costs, around $600 million a year, yet divided among the populace, costs the average taxpayer just $3 a year. His conclusion:
“Which of us will vote against a candidate for Congress because he imposed that cost on us? How many of us will deem it worth spending money to defeat such measures?”
The ones who will deem it worth spending money on such policies are the ones mostly affected by the legislation, that is, the 40,000 individuals actively involved in the industry, who have much more to win or lose than $3. Indeed, Friedman confirms, “they spend money lavishly for lobbying and political contributions.”
Thus, almost always, the activists and lobbyists that guide the activity of elected officials represent not the common interest, but the special interests that are much more financially contingent on their decisions. Company executives seek to limit foreign competition, farmers seek price floors on their products, and public sector unions seek to protect state monopolies. The incredible costs of these policies are widely dispersed among the people, and so the outcome of Congress doesn’t reflect the general interest, but the special interest that has the most to lose.
Market or State
Between these two invisible hands comes a choice: which one do we want to promote more? Should we promote a free market, where individuals voluntarily exchange and benefit a more general interest? Or should we want to expand the domain of politics, letting more aspects of the economy be dictated by special interests?
Hopefully, the answer is clear. In the market economy, producers will always have greater incentives to work in the people’s interests than do politicians. This is because producers can only obtain money through voluntary exchange, and so they must produce what the consumers want.
Similarly, we may think that politicians have a great incentive to work in our interests. We elect them, and so we think they work in the general interest of their constituents. Yet ultimately, the issues they are most pressed about don’t concern the majority of their constituents, but rather select interest groups that have much more to lose. Such groups are the reason why much of the issues politicians vote on concern special interests. The votes and money from these groups are why they support them.
Furthermore, as we expand either the domain of the free market or the grasp of government, either of the invisible hands become stronger. For example, if we were to privatize the postal service, this means that the agency, although assumed to be self-interested, would have greater incentive to cater to the interests of the people than if it were in government hands. This greater efficiency would put more pressure on politicians to actually work in the general interest.
Alternatively, if the state was expansive, intervening in the economy at will and catering to different interest groups, the more producers will pull away from the free market invisible hand, and lean more towards political handouts. And as the state expands in its role, the more companies will be compelled to look for government assistance, thus extremifying the political invisible hand. This phenomenon is known as crony capitalism.
The choice is ours over which invisible hand to favor, the market’s or the state’s. Will we judge the intentions behind them, or focus on the outcomes? As we build towards a freer society, the choice couldn’t be any more clear.
Montana governor Greg Gianforte has had enough of President Joe Biden’s covid relief bills. Instead of paying people to stay unemployed, he’s giving them a bonus for finding work.
After scrapping what he called the “impractical government mandates” imposed by former governor Steve Bullock in 2020, businesses in his state were still struggling.
We got rid of hours of operation, capacity limits. We got rid of our statewide mask mandate. We put lawsuit protection in place for businesses and nonprofits. And now, as we have opened up, employers can't find workers. It's across all industries. Restaurants are having to shut down for days because they can't find cooks or wait staff.
Addressing the media, Gianforte said that because the federal government extended unemployment benefits due to the pandemic, people have incentives to stay home. In order to change that scenario and get Montanans back to work, he drew out a new plan.
We made the decision to opt out of the federal supplemental unemployment benefits, and replace it with a back-to-work bonus.
Now, he is offering anyone who gets off unemployment benefits and finds a job a $1,200 bonus.
This is going to help employers. And, honestly, there's dignity in the work. And there's also satisfaction in being self-sufficient. We made that decision yesterday. And we're just getting a phenomenal response from our business community.
Isn’t that something! Who would have thought that forcefully locking down the country’s economy and then showering the unemployed with taxpayer-backed “free” money would produce anything but chaos.
While Gianforte's plan isn't ideal considering that government-backed incentives to get people back to work are unnecessary in a truly free market, his reasoning is correct. When you subsidize something, you always get more of it.
They Never Learn Their Lesson
In 2013, well into President Barack Obama’s second term, Congress extended long-term unemployment benefits. But the extension ended as 2014 rolled in. What we saw happen was a significant drop in unemployment rate.
As Mises associate scholar Randall G. Holcombe explains in this article, when the government pays people to remain unemployed, what we get in return is more unemployment.
The long-term unemployment rate skyrocketed during the recession because we paid people to be unemployed longer.
Needless to say, this lesson was lost on our overlords. Thankfully for the people of Montana, their governor isn’t waiting for a total economic collapse to revert course.