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, March 31, 2012

Maximum Leader Obama's Fatal Conceit

In Socialism's "Fatal Conceit," Ralph R. Reiland writes:
The appeal of socialism, wrote Nobel-winning economist F. A. Hayek, “depends on the instinctual appeal of promised consequences.”

The problem, argued Hayek, is that “socialism cannot possibly do what it promises.”

Socialism fails, unavoidably, because it is based on the flawed concept, the “fatal conceit,” that one man or one group, one cabinet of commanding officials or one central committee, or one team of planners from Harvard and Yale, can gather and understand enough information in order to reshape the world around them according to their wishes, reshape human nature, and design an economic system that can outstrip the overall and long run performance of the decentralized and basically self-ordering and spontaneous processes of the marketplace.
Hayek's "fatal conceit" is not unique to the economic ideology of socialism. It is rather unique to men who are particularly arrogant, men who believe their exceptional intuition and intelligence allow them to know and understand what is incomprehensible to the rest of us. Usually this knowledge and understanding focuses on the the future and on the establishment of some utopian vision of a society that will satisfy all in society even though individuals in that society cannot themselves see it or know it.

John Law was such a man. He presided over the great paper money inflation in France in the early 18th century. Wikipedia tells us that Law "was responsible for the Mississippi Bubble and a chaotic economic collapse in France."

Obviously, such was not Law's intention. He was a well-meaning reformer who sought to bring unlimited prosperity to all Frenchmen by fundamentally changing French money and commerce according to his particular vision. In his book, Money and Man, Elgin Groseclose describes Law's attempt:
Law, meantime, was working at a furious rate remodeling everything in the kingdom. He was not content with printing notes with dangerous obstinacy; he was also busy concerning matters of trade and agriculture. He had in mind the idea of depriving the clergy of their uncultivated lands and giving them to the peasants. He wanted asylums for the poor built in all parts of the country. He encouraged fisheries, and helped manufactures with substantial loans. He took an interest in large undertakings and furnished funds for building the bridge at Blois and for digging the canal at Briare. He wanted to have barracks built in the provinces in order to spare the inhabitants from having to house the troops...

...The latter part of 1719 saw Law at the height of his greatness. He was the most prominent figure in Europe. He visited the street where millions were made daily out of his enterprises, and was received with an enthusiasm such as could hardly have been accorded a sovereign... ...Law was declared to be a minister whose merits exceeded anything that the past had known, the present could conceive or the future would believe.
Law's efforts ushered in a short but grand period of apparent wealth creation and accumulation, what we would today call a "boom." Commoners and princes were leveled by their reckless speculation in Law's equity market. Waiters became millionaires virtually overnight. But Law's boom led to the inevitable bust and his vision was never realized. Groseclose writes:
On January 5, 1720, Law was made Comptroller General of France. He and his System had reached the zenith of their fortunes. Law surveyed a world inflated in an enormous bubble, as delicate and insubstantial as froth, a world gone mad in speculation, everywhere feverish activity, but activity of an unhealthy sort, concerned with the making of money rather than the creation of wealth, concerned with stocks and shares rather than ships and goods. Law must have been perplexed, dismayed at what he saw. He had conceived a "state within a state," an edifice of commerce and trade and industrial activity within the political state, a structure which would support and strengthen the degenerate and enfeebled state without; enterprise which
would absorb the energies and interests of the people rather than the hollow and hectic life of the court. 
Somewhere his plans had gone astray. Instead of creating a condition of industry and trade, geared and lubricated by the device of commercial credit, he found the same old interests and pursuits, but heightened and intensified by a spirit of gambling and speculation.
Fiat currency allowed Law to monetize the wealth of France. Control of that fiat currency allowed him to direct that wealth into avenues of his own choosing. It all seemed perfectly reasonable. After all, Law knew better than anyone else what must be done in the future to satisfy all.

Today we have a Maximum Leader who, like John Law, believes he knows better than anyone else -- certainly far better than the ignorant individuals who comprise the hoi polloi -- what must be done to satisfy all. Maximum Leader visualizes a future powered by algae and the sun rather than the crude and earthy resources of coal and oil. He visualizes a society wherein all enjoy the best of health care, education, and bullet-train transit, wherein the disparity between rich and poor is minimal, wherein each individual benefits according to his need and each individual produces according to his ability.

Maximum Leader is able to steer the country down this avenue of his enlightened vision only because he and his government control our fiat money supply which monetizes the wealth of America, not by means of some elaborate Louisiana stock venture, but by means of debt, the promise of future prosperity and production. Debt allows Maximum Leader and company to move the country's wealth around like pieces on a chess board, from individuals who produce wealth to individuals, favored by the government, who promise to produce wealth in the future based on the enlightened vision of Maximum Leader.

The problem is that Barack Obama is no more enlightened than John Law, and his circle of favored sycophants are no less greedy and immoral than the circle of sycophants that surrounded John Law and became rich due to his efforts. For this reason, Maximum Leader Obama will suffer the same fate as Law. He will inevitably fail in disgrace, but not without visiting poverty and chaos on the rest of us.

The interests of those who honestly produce and own wealth, and of those who dishonestly seize and redistribute wealth according to their enlightened vision are inevitably opposed. When private property is respected, the effects of greed, immorality and reckless speculation are localized on the shoulders of the owners of private property. Waste and loss is dispersed among them and limited to them. When private property is disrespected, when the wealth of the nation is monetized, concentrated in Washington and disbursed to pet projects and favored sycophants, the wages of greed, immorality and reckless speculation are imposed on the entire population via the depreciating monetary unit.

Groseclose describes the turn of events in Law's France:
By making interchangeable the shares in his company, in which was absorbed most of the commercial activity
of the country, and the paper of the bank, Law achieved a perfect assimilation, in theory, between money and wealth, and achieved the ideal still so eagerly sought of making capital wealth perfectly liquid and money perfectly representative of commercial activity.

The actual results were, of course, quite the contrary. The share market continued to fall, and shares were converted into bank money in enormous quantities. The shares which had been issued at from 500 to 5,000 livres, were now repurchased at 9,000. More than the wealth of the West and the East Indies would have been required to sustain such an operation. Over 2,000,000,000 livres were paid out, without effect, in an effort to sustain the market, and the currency was inflated to an extent far exceeding the issues of the year before. By the close of the era the amount of bank issues outstanding totaled 3,000,000,000 livres.

The general eagerness of holders to convert their shares into money was tempered only by the fact that the notes which they received in payment were rapidly becoming as worthless as the shares. Investors had to choose between an investment that would yield nothing, and notes that would buy nothing. The attempt to make money and commercial wealth synonymous was a fiasco. This perhaps most audacious attempt in history at managed currency overlooked one vital fact: when trade is bad good money is more than ever necessary. The state of money cannot be made to depend on the state of the market.
To stem the disastrous effects of Law's monetary "System," the government resorted to the usual methods: exchange controls, restrictions on gold ownership and the like. Eventually, the government devalued Law's bank money by 50%. Groseclose documents the consequences of the devaluation:
This was, of course, a mere juggling of words, which made no man either richer or poorer, but to such a degree were wealth and money confused in the public mind that the effect of the decree was cataclysmic. The man who had a hundred livre note saw it worth, in six months, but fifty livres. The operator who had lulled himself with the belief that he was worth a million saw his property to be only five hundred thousand. The wealth represented by billions of shares and notes had been, indeed, but a dream, but it was a stern awakening to have a royal edict proclaim the fact that it was worth only half what it professed to be.

The edict was repealed after having been in effect but six days, but the damage had been done past repair. From then on there remained only the ghastly work of gathering together the broken and shattered bits of the System, and the thankless task of reconciling a disillusioned public that for a year had been living in a fool's paradise.

The depreciation of the currency had caused such serious disturbances as, later in the century, might have ripened into revolution. Butchers, bakers, grocers, and other tradespeople were unwilling to receive paper money at all. Specie had been driven out of circulation. There arose a fierce demand for something
with which one could buy bread to eat, wood to burn, clothes to wear. What had been a condition of physical need bade fair to become a condition of physical distress. Toward the end of May the prohibition of the use of the precious metals as currency was repealed, but as the metallic reserve of the bank was not 2 per cent of the amount of its circulation, the effort to restore convertibility resulted in a series of new disasters. The value of gold and silver was alternately raised and lowered... ...The weight of gold was the same, but the sum for which the government would issue or receive it fluctuated with startling rapidity. Such measures had no effect. In a condition of panic the only desire was to lay hold of a piece of gold, whether it was called ten livres or fifty. It would buy something for daily needs, or it could be put aside with the assurance that ultimately it
would command its real value.

The formal close of the System was marked by a decree of October 10, 1720, declaring the notes of the bank no longer currency, and requiring contracts to be discharged and payments to be made in gold and silver. The paper currency of the state, after an experience of less than two years, was extinguished. The experiment of a managed currency, of a currency that should expand with the needs of trade, was abandoned. In December, 1720, Law was forced to flee the country....
The American electorate should not make the mistake of believing that what happened in Law's France will not and could not happen in Obama's America. The consequences of monetizing wealth and inflating fiat currency are inevitable and inexorable. Do not buy into Obama's managed vision of the future.

Do not allow Maximum Leader's fatal conceit to become yours.

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