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The second full day in Salamanca

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The schedule of this conference is precisely what one might want in an exotic and historic place such as this: the lectures run until just after noon and then the afternoons are open for touring and museums and the like. There is so much to see, and wherever you are, you are struck by a sense of awe of the deep roots of the liberal tradition.

The sessions opened today with a lecture by Toby Baxendale, a businessman in London who is very active in the city's academic circles. He began with his own education in economics in a highly mainstream environment, complete with the claim that all the world's problems can be solved by printing more money. He eventually left economics to study law and then went into business.

His topic addressed the thing that is on everyone's mind: the economic crisis. This is applied Austrian economics. He began with a tour of money supply over the last 10 years, with a comparison of what happens graphically when you aggregate all forms money as versus distinguishing between credit transactions and real money claims. Using the latter measure, one can trace bubbles and crashes based on money creation. The correlations are very tight, whether one looks at GDP or retail sales.

Looking backwards, we can see that the current crisis is nothing but an extension and exaggeration of the dot com bubble and bust. While Baxendale anticipated a bust, he in now way expected its severity and extent.

The money pumping gave rise to a new class of entrepreneurs, a class he called pseudo-entrepreneurs. These are people whose investments were based entirely on newly created money poured into marginal projects that otherwise wouldn't be pursued. We can see this by introducing the notion of heterogeneity to entrepreneurship as well as capital itself. There are real and imagine entrepreneurs.

Baxendale then turned to the crisis itself, which began in August 2008, with the collapse of Lehman. The whole class of businesspeople in the UK had the sensation of falling off a cliff, and this continued through November of that year.

He spent some time discussing the Iceland meltdown, which hasn't been commented on that much (Mises.org has a great article on this topic). As he was attempting to transact business in Iceland, he recalled very well correspondence with the Iceland central bank. He asked whether he can send Euros in a business deal. They wrote back "no, we are in danger of going bust." He praised the bank for being honest, and keeps the email as a historic memento.

It was scary to do business in this period. He ended up scrambling for ways to get cash to his suppliers. Even today, the government of Iceland does not admit its errors or own up to its liabilities, nor does any other government or central bank in the world. The result is a general stagnation that makes real growth impossible. We are living in times in which obvious errors are not admitted and government are working to paper over a rotted system that desperately needs to be swept away before recovery can begin.

In his own industry of fish and meat distribution, he had never seen such a dramatic change in consumption patterns. His day-to-day business is completely different from what it was when the bust began. For his part, he can't even imagine a day when they will have surplus capacity. Business is no longer about the future but the present, with investment occurring only where profits are immediate and sure.

Baxendale expects a massive inflation mainly due to the failure of policy to admit the failures of the past. The entire system is current operating with tape and glue, whereas the truth is that unprofitable institutions need to go out of business.

So much money has been poured into rescuing the credit sector but today his lending costs are exorbitant beyond what he has ever seen. The banks themselves have moved from being captains of the universe, to being zombie banks, to be completely captive of the state. It is a remarkable transformation.

He concluded that the Austrian theory is absolutely essential for business. He is grateful that in 1997 he type the words Ludwig von Mises into a search engine and up came mises.org, which has been his source of economics education ever since.

Walter Block was next on the program.

Gabriel Calzada introduced him with a note that his book on roads is currently being translated into Spanish to be published in Spain.

His talked focused on 100% banking. He began with the problematic nature of fractional reserve (a person deposits $100 and the bank lends out $90 of that in money substitutes) which creates money and also its attendant illusions. The bank now has more liabilities that real assets to back them in the event of redemption.

Also this creates a conflict over rights. All parties have a right to withdraw money but that money is insufficient to go around to all those people. Just because this transaction is voluntary doesn't mean it is legitimate. It is like a contract to sell a person a square circle. It doesn't reflect reality.

Austrians disagree on this topic but there is nothing wrong with this. There are many disputes within Austrian economics, and this is a sign of health. To Walter, the issue of fractional reserves is perfectly clear. He believes that debate needs to continue until there is a consensus.

As for the gold standard, for him it is a matter of history. Whenever people have been free to choose, they have chosen gold for all the known reasons: durability, portability, interchangeability, and more. Gold restrained government and shored up liberty.

Why, then, are there free market opponents to gold? He remembers that Friedman used to call the Austrians gold bugs. Greenspan became opponent of gold, after having written excellent articles defending gold. Perhaps the explanation here relates to Rothbard's Law: everyone specializes in what he is worst at. Freidman is great on many issues but he specialized in money, the subject on which he was truly unsound.

His final topic concerned his book the monetary and financial sections of Defending the Undefendable.. He wrote it during graduate school because he was sick of all the math that was part of his studies. By the time he got his PhD he had a whole collection of essays that became a book. Some of essays in the financial section actually address many topics alive today.

Specifically he referred to the miser, which is the person under attack today for hoarding. Keynes was of course against hoarders and blamed them for all troubles. He never really understood that savings has to precede investment. Also, there is no objective criterion for what constitutes hoarding. The only alternative to liberalizing hoarding is to presume that the government owns all property. In fact, Block said, the hoarder is a hero and necessary for economic growth. That means that the hoarder perseveres despite all attacks.

Another hero is the person who inherits money, and supposedly doesn't deserve it. In fact, he deserves it because it was given to him voluntarily as a gift. Most strange is that James Buchanan favors a 100% inheritance tax, purely on grounds that he doesn't like it, while giving no real argument for it. Actually inheritance is nothing but a form of love and care, a benefit for the fortunate. Should the government tax that too? Why not tax high IQs or love or good education?

The money lender is another hero from Block's point of view. He first addressed the issue of Jesus in the Gospels chasing the money lenders out of the temple. De Soto says that Jesus was actually chasing out fractional-reserve lenders. This drew a big laugh from the audience.

The reason the money lenders charge the poor higher interest is because the risk is higher. If we get rid of the money lenders, there will be no opportunity at all for borrowing.

Another hero is the non-contributor to charity. But who has done more for society, the charity worker or the very rich who have produced new wealth rather than merely move it around. Did Bill Gates make more of a contribution as an entrepreneur or as a philanthropist? Once he enriched people through production and exchange; today he enriches left-wing organizations pushing bad policies.

Charity and markets together make up the voluntary sector. He sees no reason to categorically separate them. The real opposition is not between charity and markes but between the whole voluntary sector and the government sector, which relies fundamentally on coercion.

He concluded with a defense of counterfeiters in an age of fiat paper money. He says that this is no different from a pirate who takes property from a government ship. It is a matter of stealing what is already stolen, and thereby no different from stealing from a thief.

Thomas DiLorenzo spoke next on the topic of "The Real Reason for Central Banking: Government for the Privileged Few." In the introduction, Calzada mentioned that DiLorenzo's book on Lincoln was published this year in Spanish. It has had a huge effect in Spain, where it is widely assumed that Lincoln is a hero.

He began with a story from American history that involves tyrannicide. Hamilton was the first champion of central banking in the U.S., a man heralded by central banks all over the world. He noted that vice president Aaron Burr actually shot Hamilton in a duel, so in the U.S., the first promoter of central banking was shot dead.

There are many myths of central banking we see going around today. As soon as the bailouts started last year, the Wall Street Journal published a piece that defended central banks while citing the "baneful influence of Thomas Jefferson." Jefferson was the fiercest opponent of central banking. The WSJ blamed Jefferson for creating an ethos that has weakened central banking. But this was just a count historian writing in an attempt to shore up a special interest gimmick against which public opinion has turned decidedly.

The Fed never had anything to do with serving the public interest. The proponents of central banking in the U.S. wanted to recreate the British mercantilist system in the U.S. because they figured that they would be running it. To quote Mel Brookes, it is good to be the king, from their point of view.

A central bank goes along with a strong government and high taxes and protectionism. This contradicts everything the revolutionaries were against. They rebelled against government monopolies and privileges for the few.

The first central bank in the U.S. was the Bank of North America lent most of its money to the federal government. It was short lived but the proponents stayed on task. The proponents of a new constitution pushed to overthrow the Articles of Confederation, and a key goal here was a central bank. Hamilton became the first Treasury Secretary despite not knowing anything about banking. He merely wrote the wealthiest man in America, Robert Morris, and asked for the job. The letter said that he favors high tariffs, subsidies for business, and a central bank. George Washington, on the advice of Morris, recommended him in the new position.

Part of the myth is that Hamilton was an economic genius. In fact, he knew nothing about the subject, whereas Jefferson had read Adam Smith and Turgot.

The first central bank after the Constitution was the result of a corrupt political deal. It was agreed that the new capital's property would be extended to Mount Vernon, Washington's home. The result was an inflationary monster with a twenty year charter, which was not renewed.

Part of what the central bankers wanted was a large public debt, which Hamilton believed would benefit the rich who held the debt, who in turn would agitate for higher tariffs and taxes. Hamilton further argued for nationalizing the debt, which was soaring. Far from providing stabilization, the new nation was bearing a staggering burden of debt. It was nothing but a plan to expand government.

In a passing note, one that would completely astonish most students of American history, DiLorenzo noted that The Federalist Papers were really a form of political propaganda to create a large central government while promising the opposite.

DiLorenzo then continued with a quick march through early 19th century history. The Second Bank of the United States led to the panic of 1819. President Jackson heroically fought the central bank and ended it. What followed was the most stable monetary that ever existed in the U.S. Jackson issued an eloquent statement against the central bank, rightly seeing central banking as nothing but a subsidy of the rich and powerful.

The battle for and against central banking lasted 125 years. In the end, the economic justification of central banking is a market failure argument, but this is nothing but a ruse. The record shows that the central bank has led to ruin in case after case, particularly since the Federal Reserve. In the name of price stability, the dollar has been nearly destroyed.

Following DiLorenzo, as an intermission, we heard a poem in Spanish about the School of Salamanca by a professor in Guatemala, whose name will have to be added in the comment box. Never have I wished more that I had retained what I learned in Spanish classes. I would hope for an English translation but so much can be lost in poetry.

Joseph Salerno was next with the topic "The Effects of Inflation on Morality and Society." This was a very powerful paper with all new material. He argued that the most dangerous consequence of the economic crisis is the possibility of a future of hyperinflation, which he regards as something that could happen after the Fed's astonishing monetary expansion. This policy resulted from macroeconomic theory that proposes that the Fed generate panic spending as a means of generating economic growth.

He focused on one effect of hyperinflationary policy: the decline of culture and the withering of human personality in society. By eliminating economic calculation, inflation wrecks property rights and the ability to plan for the future, which is a core aspect of the the ability of the human personality to form and flourish. Once calculation is destroyed, people can no longer control time and instead respond to the passage of time like beasts, consuming all they can as soon as possible. Saving and planning are replaced by con games and gambling.

Personality is the projection of a planned mode of being and the control of means and ends, which requires ownership and property. Property is a coherent embodiment of all that makes hopes and dreams possible. Without it, one can't pursue productive work or even leisure. Money prices further given meaning to exchange, and without that a person cannot know whether one's activities are going to be successful. This is why the division of labor becomes severely restricted. All plans for their future are wrecked. They lose a coherent sense of who they are and what they are doing.

During the German hyperinflation, professors could no longer support themselves and gave up teaching to become taxi drivers and waiters. The connection between property and personality was shattered. During this period, we saw the death of hundreds of years of development and accumulated wisdom. No one knows who he or she is. They lost their intellectual and spiritual moorings. It was a period of madness in which the social structure collapsed, where all things were a matter of chance.

The malfunctioning of money penetrates to the very core of the human personality. The state was the conqueror and successor of money as the standard of judgment, obliterating the ontological basis of the human personality. Human existence became atomized and aimless. Thought, values, and culture were deformed. The individual's faith in himself was destroyed.

Hitler ridiculed people for going along with this swindle, while promising to rescue them from their troubles. He noted that once the government began to run the presses full time, the revolution was complete. It was this that put an end to the people's confidence in the future. His intent was not to present a plan for the end of the robber state; he took advantage of the collapse to create a dictatorial state. He hoped to bring about the revolution led by the "starving billionaires." The people were ready to follow a leader according to a twisted nationalist and collectivist idea. Of course Hitler too was a product of hyperinflation, a personality created by the deranged period, a man who believed in his own infinite capacity for remaking society and the future.

This German hyperinflation is a concrete example of the destruction of a culture and people by the destruction of its money. It turns society completely upside down and prepares the way for the total state.

In sum, Salerno quoted Hayek to the effect that no one can be a great economist who is only an economist. We must come to terms with the broad effects of the science on social development and change.

On the basis, Salerno ended with a scathing attack on the modern Keynesian school. Contemporary economists are not guiding us to a paradise but rather to the destruction of the private property order and all that it gives rise to.

The final speaker was the legendary professor Jesus Huerta de Soto, who doesn't come to the United States very often, so this was a real treat for the Americans here. His topic was "400 years of Dynamic Efficiency." He did not disappoint. His speech was rousing and challenging and erudite.

First, he covered the Spanish roots of Austrian economics. Murray Rothbard developed the theory of the Spanish origins in 1974, and Hayek shared his view. It was Bruno Leoni who convinced from Hayek that the roots of liberalism were not in Scotland but on the Continent. The basic principles of the competitive market were first explained by 16th century scholastics.

They articulated the subjectivist, libertarian tradition through their studies of money and trade. They explained value theory and also the relationship between cost and price. They believed that the just price was established by common estimation of traders and not by the state. They were the first to introduce the idea of competition and its merit. In politics, they were libertarians. They denounced enslavement and heralded market action rather than state enforcement.

De Soto brought laughs by disagreeing only with Juan de Mariana's negative judgment of bull fighting, But he further noted that he is the grandson of a famous bull fighter, so perhaps he is biased.

He concluded this section with the claim that the Austrian School is truly, and at its roots, the Spanish School. He then reversed the positive judgment of Hulsmann to provide a passionate denunciation of the British classical school and Adam Smith in particular for setting back economics hundreds of years with the labor theory of value and other issues.

De Soto thrilled the audience with a short disquisition on the work of Jamie Balmez was a Spanish thinker of the mid 19th century, who beat Carl Menger in time in resurrecting the subjective theory of value, giving a very clear discussion of utility. He did not say that but it was an interesting observation that perhaps even in modern times (19th century) the Austrian School should be called the Spanish School.

Second, he covered the economic core of the Austrian tradition as regards efficiency. The notion is not static but dynamic and made so by entrepreneurial judgment. It is not an end result we can achieve by eliminating "waste" but a process of trial and error carried out by entrepreneurs and consumers .

The roots of this notion of dynamic efficiency also has its roots in the scholastic tradition, and San Bernardino of Sienna. This notion was squeezed out by the introduction of mechanistic analogies within economics. They replicated mechanical physics in economics, using instead of energy the notion of utility. This eradicated the creative, dynamic, and human elements of economic theory. It was reductionist but had a huge influence on economics in the 20th century, which has been intellectually sympathetic to socialist schemes.

Modern welfare economics is an example of static efficiency, which attempts to reduce the whole of society to a series of mathematical formulas. On the contrary, the goal of dynamic efficiency is to inspire profit opportunities and permit both creativity and coordination, a combination of the views of Schumpeter and Douglas North, best expressed in the work of Mises, Kirzner, and Rothbard.

Third, de Soto covered the relationship between ethics and economics. The dominant static view of economics assumes perfect knowledge and believes that the main project of economics is to allocate resources according to some outside criterion. But from the Austrian point of view, every human being has a unique creative capacity that allows for the discovery of new ends and means. If resources, ends, and means are not given, the fundamental ethical problem is not to redistribute what exists but how to promote creativity and coordination. The field of social ethics the Austrian paradigm presumes the human right to control resources and pursue plans in a atmosphere of freedom. This principle is universal, applying to all people in all times and in all places.

He concluded that all forms of statism, not just interventionism and socialism, are ethically unjust and immoral. If we understand private property and the integrity of the human person as a creative actor, we can see that there is no contradiction between justice and efficiency. What is efficient cannot be unjust; what is inefficient cannot be just.

He added a final defense of the institution of the family as a transmitter of a moral system that supports the market economy. Moral principles cannot be imposed by the sate, so we need robust cultures and families in order to build up the moral system that undergirds the market order. The firmer moral principles are, the more prosperous a people will be and the more likely it is that freedom will be preserved.


Contact Jeffrey A. Tucker

Jeffrey A. Tucker is the founder of the Brownstone Institute and an independent editorial consultant.