About This Blog

Ludwig von Mises (1881-1973) was the greatest economist of my time. His greatest works can be accessed here at no charge.

Mises believed that property, freedom and peace are and should be the hallmarks of a satisfying and prosperous society. I agree. Mises proved beyond a shadow of a doubt that the prospect for general and individual prosperity is maximized, indeed, is only possible, if the principle of private property reigns supreme. What's yours is yours. What's mine is mine. When the line between yours and mine is smudged, the door to conflict opens. Without freedom (individual liberty of action) the principle of private property is neutered and the free market, which is the child of property and freedom and the mother of prosperity and satisfaction, cannot exist. Peace is the goal of a prosperous and satisfying society of free individuals, not peace which is purchased by submission to the enemies of property and freedom, but peace which results from the unyielding defense of these principles against all who challenge them.

In this blog I measure American society against the metrics of property, freedom and peace.

Saturday, February 18, 2012

The Coming, Great Progressive Depression

The Great Depression of the 1920's, 30's and 40's was one of the most traumatic economic downturns in the history of the world. The mere mention of the Great Depression conjures up images of insufferable poverty and a complete breakdown of society and the division of labor: soup kitchens, unemployment lines, agricultural dust bowls, hobos eating mulligan stew, stock market suicides and Hooverville shanty towns for the homeless.

Various schools of economics continue to argue about what caused the Great Depression. Whether Monetarist, Keynesian, Austrian or Marxian, all schools agree that the Great Depression was caused by interventionism -- either too much or too little. In his book, A Critique of Interventionism, Ludwig von Mises defines interventionism as "a limited order by a social authority forcing the owners of the means of production and entrepreneurs to employ their means in a different manner than they otherwise would."

The idea that interventionism caused the Great Depression is reasonable. No one -- not even the staunchest Marxist -- has ever argued that the economic structure of the United States during the time of the Great Depression was unfettered, free market capitalism. Therefore, it follows that whatever went wrong during the Great Depression was due not to unfettered capitalism properly understood, but to the vain attempts by the "social authority" at the time (the federal government and the Federal Reserve) to force capitalists to act "in a different manner than they otherwise would."

Economic reasoning inexorably demonstrates that each trading partner in a voluntary exchange must always benefit. Voluntary and unfettered exchange of private property is capitalism properly understood. Is it therefore reasonable for interventionist critics to argue that unfettered capitalism contains within itself the seeds of its own destruction, or some fatal flaw that leads men to voluntarily create the economic hell known as the Great Depression? This is, after all, why interventionists intervene. If capitalism did not contain some fatal flaw that must be remedied by forcing individuals to act in ways other than they would voluntarily act, what reason would interventionists have to intervene?

The notion that capitalism, properly understood, is fatally flawed is obviously preposterous. In order for this notion to be otherwise, interventionists justifying their own interventions would have to prove that individual capitalists engaged in voluntary exchange either do not always benefit mutually, or that these capitalists perversely define "benefit" as hunger, poverty and homelessness. One would think that the interventionists, unable to prove either, would quietly fade into history, but such is not the case. Indeed, interventionism today is far more prevalent than it was in the time of the Great Depression. This leads me to conclude that there is coming another Great Depression, this one far worse than the one experienced almost a century ago. In fact, we may be experiencing the beginning of this coming, Great Progressive Depression.

Why do I reach this conclusion? Because the modus operandi of modern Progressivism is interventionism, interventionism and more interventionism. The Progressive argument for interventionism today is no different than the argument of the interventionists of yesteryear. Unfettered capitalism, the Progressives say, is fatally flawed. However, like their predecessors, these modern day Progressive interventionists cannot coherently define, find or even describe this flaw.

So they point to empirical American economic reality. They observe that in America some people are more prosperous than others. They observe that the disparity between the incomes of the very wealthy and the very poor is wide. They blame capitalism for this disparity, never conceding that capitalism, properly understood, still does not exist in the United States, and never acknowledging that interventionism is far more prevalent than it has ever been. Foolishly, they set out to correct the flaw they perceive in capitalism by prescribing and installing more and more interventionism on an unprecedented scale.

Another flaw Progressives perceive in capitalism, which calls for the correction of interventionism, is corruption. No matter how productive and beneficial voluntary exchange may be, traders are wont to cheat their peers, exploit the economically weak, collude with each other and corrupt authority. To back up their assertions, the Progressives again point to the reality of the American economy. Everyday it seems government prosecutors indict liars, con men and thieves in big business and big government. But is it reasonable to ascribe the existence of these nefarious individuals to unfettered capitalism? Especially since the economic structure in which these characters thrive is not unfettered capitalism, properly understood, but omnipresent interventionism?

Ludwig von Mises had the answer:
To be sure, public opinion is not mistaken if it scents cor­ruption everywhere in the interventionist state. The corrup­tibility of the politicians, representatives, and officials is the very foundation that carries the system. Without it the sys­tem would disintegrate or be replaced with socialism or cap­italism. Classical liberalism regarded those laws best that afforded least discretionary power to executive authorities, thus avoiding arbitrariness and abuse. The modern state seeks to expand its discretionary power—everything is to be left to the discretion of officials. 
Since massive interventions caused the last Great Depression, it seems reasonable to believe that even more massive interventions today are bound to cause another: the coming, Great Progressive Depression. 

In view of the inability of Progressives to find a fatal flaw in the logic of unfettered capitalistic theory and in view of the fact that interventionism has time and again proved a practical disaster, why do Progressives continue to advocate interventionism?

Moreover, why do populist "economists" like Paul Krugman and Alan B. Krueger advocate Progressive interventionism on a massive scale as smart public policy? Krugman is a Nobel-prize winner and op-ed columnist at the New York Times. Krueger is President Obama's Chairman of the Council of Economic Advisors.

Is it any wonder popular entertainers and celebrities, like Bruce Springsteen, publicly advocate that America become a social welfare, interventionist state "like Sweden?" Springsteen can be excused for his woeful ignorance of economics. Like most celebrities and politicians -- indeed, most Americans -- Springsteen is uneducated in economics. His statements advocating interventionism do not originate from a reasoned understanding of interventionism. They are the regurgitated nonsense of quacks like Krugman and Krueger.

Anyone interested in a reasoned explanation of the futility of interventionism will find it available online free of charge from the Ludwig von Mises Institute. Mises' argument is clear, concise and impeccably logical. No economist -- not Krugman, not Krueger or any of their Progressivist peers -- have ever attempted to refute Mises' logic. Interventionist policies, says Mises, inevitably result in a lower standard of living for the very individuals the policies were designed to benefit.

Still, despite this certain knowledge and a wealth of empirical failures of interventionist measures, Krugman and Krueger, not to mention Springsteen, continue to blithely recommend them. Why?

Krugman and Krueger should know what Springsteen does not. As Mises puts it:
By its very nature, a government decree that “it be” cannot create anything that has not been created before. Only the naive inflationists could believe that govern­ment could enrich mankind through fiat money. Govern­ment cannot create anything; its orders cannot even evict anything from the world of reality, but they can evict from the world of the permissible. Government cannot make man richer, but it can make him poorer.  
Progressive critics will be quick to shout that this is pure hogwash, merely the racist and bourgeois opinions of an economic quack whose real goal is to keep the masses downtrodden. I suppose fair is fair. If I can call Krugman and Krueger quacks with impunity, progressives should be able to label Mises a quack as well. However, this privilege is not independent of argument or the truth. There is a difference between science and quackery, just as there is a difference between truth and untruth. One must read and critique the argument in the light of logic in order to judge between quackery and science. This neither Krugman or Krueger are wont to do. They prefer to shill for the interventionist status quo which greatly benefits them, both financially and psychologically, at the cost of the prosperity of the rest of us.

When the vacuous Nancy Pelosi stands before the nation and proclaims that extending unemployment benefits will create 600,000 jobs or that giving federal food stamps to the needy benefits the rest of us, she knows that her blatant economic stupidity will not be challenged either by the illiterate press or by Krugman, Krueger and company. Why would Krueger challenge Pelosi? His economic understanding is virtually the same as hers:
In his prepared remarks, Chairman Krueger said: "The rise in inequality in the United States over the last three decades has reached the point that inequality in incomes is causing an unhealthy division in opportunities, and is a threat to our economic growth. Restoring a greater degree of fairness to the U.S. job market would be good for businesses, good for the economy, and good for the country."

With only weak challenges presented by "far right" newscasts and knowledgeable economists on the internet, Pelosi's words -- and Krueger's -- gain the ring of truth among the rabble, like Springsteen, who know no better.

The unvarnished truth is that governmental intervention in the free market produces effects in the real world that are contrary to the stated intentions of the interventionists themselves. Government unemployment compensation and unionism results in less efficient production, capital consumption, lower wages and permanent and significant unemployment among American workers.

I am not going to flesh out the irrefutable logic which leads immutably to these conclusions. Mises has already done so. Unbiased individuals interested in economic truth will study and critique Mises' words. But be warned! Economic reasoning is not easy. Conclusions are not as conveniently supplied after thirty minutes as the finale of a television sitcom. However, the truth is there for all who want to fathom it.

For the last time, then, why do knowledgeable Progressives continue to advocate Progressivism? The simple answer is self interest. Mises puts his finger on it:
Surely, no one can doubt that the freedom achieved by classical liberalism paved the way for the incredible development of productive forces during the last century. But it is a sad mistake to believe that by oppos­ing intervention classical liberalism gained acceptance more easily. It faced the opposition of all those whom the feverish activity of government granted protection, favors, and privi­leges.
So, after all is said and done, the motive for this sad history of destructive interventionism that has plagued the world for the last 100 years, that has caused one Great Depression and is about to cause another Great Progressive Depression, turns out to be simple greed, avarice and selfishness -- the selfsame vices ascribed to the hated capitalist traders. The circle of hypocrisy and arrogant self-righteousness is thus closed on the interventionists themselves. 

Lastly, do not underestimate the damage to all of us that a hundred years of wrongheaded interventionism has wrought. As Mises observes:
Anyone defending interventionism with such arguments is undoubtedly seriously deluded regarding the extent of the productivity loss caused by government interventions. Surely, the adaptability of the capitalist economy has ne­gated many obstacles placed in the way of entrepreneurial activity. We constantly observe that entrepreneurs are suc­ceeding in supplying the markets with more and better prod­ucts and services despite all difficu1ties put in their way by law and administration. But we cannot calculate how much better those products and services would be today, without expenditure of additional labor, if the hustle and bustle of government were not aiming (inadvertently, to be sure) at making things worse. We are thinking of the consequences of all trade restrictions on which there can be no differences of opinion. We are thinking of the obstructions to produc­tion improvements through the fight against cartels and trusts. We are thinking of the consequences of price con­trols. We are thinking of the artificial raising of wage rates through collective coercion, the denial of protection to all those willing to work, unemployment compensation, and, finally, the denial of the freedom to move from country to country, all of which have made the unemployment of mil­lions of workers a permanent phenomenon.
Deluded and economically illiterate interventionists like to think their ideology means constant, step-by-step progress toward prosperity for all. Hence, they label themselves "Progressives." In fact, the abhorrent practice of "Progressivism" means constant, step-by-step progress toward certain impoverishment and the coming, Great Progressive Depression.

But there is another meaning that can be ascribed to the label: the Great Progressive Depression. I'm talking about the mental depression suffered by knowledgeable economists who realize that the vast damage wrought by interventionists over the last 100 years or so cannot be easily reversed and mitigated.

The following Mises quotation from "A Critique of Interventionism" is lengthy, but well worth anyone's contemplation. It should be of special interest not only to self-assured "Progressives" themselves, but also to political conservatives and libertarians who naively think prosperity will return to America immediately upon the election of a new, non-Progressive President:

Etatists and socialists are calling the great crisis from which the world economy has been suffering since the end of the World War the crisis of capitalism. In reality, it is the crisis of interventionism.

In a static economy there may be idle land, but no unem­ployed capital or labor. At the unhampered, market, rate of wages all workers find employment. If, other conditions be­ing equal, somewhere workers are released, for instance, on account of an introduction of new labor-saving processes, wage rates must fall. At the new, lower rates then all work­ers find employment again. In the capitalist social order un­employment is merely a transition and friction phenomenon. Various conditions that impede the free flow of labor from place to place, from country to country, may render the equalization of wage rates more difficult. They may also lead to differences in compensation of the various types of labor. But with freedom for entrepreneurs and capitalists they could never lead to large-scale and permanent unem­ployment. Workers seeking employment could always find work by adjusting their wage demands to market condi­tions.

If the market determination of wage rates had not been disrupted, the effects of the World War and the destructive economic policies of the last decades would have led to a de­cline in wage rates, but not to unemployment. The scope and duration of unemployment, interpreted today as proof of the failure of capitalism, results from the fact that labor unions and unemployment compensation are keeping wage rates higher than the unhampered market would set them. Without unemployment compensation and the power of la­bor unions to prevent the competition of nonmembers will­ing to work, the pressure of supply would soon bring about a wage adjustment that would assure employment to all hands. We may regret the consequences of the anti-market and anti-capitalistic policy in recent decades, but we cannot change them. Only reduction in consumption and hard la­bor can replace the capital that was lost, and only the forma­tion of new capital can raise the marginal productivity of la­bor and thus wage rates.

Unemployment compensation cannot eradicate the evil. It merely delays the ultimately unavoidable adjustment of wages to the fallen marginal productivity. And since the compensation is usually not paid from income, but out of capital, ever more capital is consumed and future marginal productivity of labor further reduced.

However, we must not assume that an immediate aboli­tion of all the obstacles to the smooth functioning of the cap­italist economic order would instantly eradicate the conse­quences of many decades of intervention. Vast amounts of producers’ goods have been destroyed. Trade restrictions and other mercantilistic measures have caused malinvest­ments of even greater amounts that yield little or nothing. The withdrawal of large fertile areas of the world (e.g., Russia and Siberia) from the international exchange system has led to unproductive readjustments in primary production and processing. Even under the most favorable conditions, many years will pass before the traces of the fallacious poli­cies of the last decades can be erased. But there is no other way to the greater well-being for all.


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