February 20, 2009

Nature is stingy; the things we need to sustain life above a primitive level are scarce.  Fresh tomatoes, iPods, and rotator cuff surgery do not come forth as easily as the air we breathe, and thus man had to discover on his own how to produce or acquire them.  

Economics is the discipline that supposedly sheds light on this process.  As Rothbard tells us, “It deals in general with the action of men to satisfy their desires,” focusing on the exchange of goods as the means by which this is accomplished.  A social organization based on the inviolability of private property fosters the best outcomes for all its members.  Yet, it would be next to impossible to find an economist who would agree with this view, in part because most of them are on the state’s payroll.  

The idea of protecting lives and property is thought by some to provide a justification for the state and for acceding to its claim of a legal monopoly on force within its territorial area.  The state, though, has never shown much interest in preserving the liberty of its citizens.  Especially today, the state sees them as objects to plunder and sacrifice, with the usual exceptions made for the well-connected.  Witness the state’s plundering soul come into naked focus in the way politicians lick their chops over the prospect of taxing internet sales.

Given the existence of scarcity, some people, at least, have to produce and trade to alleviate this condition.  If such individuals can be considered the productive class, then the state and its dependents constitute the parasitical class.  People create wealth, government seizes it and then spends or redistributes it.

While seizure is done openly through taxation and other means, it is never enough to satisfy the state’s insatiable appetite for revenue.  Since the advent of central banking especially, it has relied heavily on inflation to supplement its tax receipts.  Inflation is here understood to mean any imposed increase of the money supply; the state imposes inflation on us through the central banking system.  With a racket such as this the state is always under threat of rebellion.  For this reason it is careful to share its loot with others, particularly those who are outspoken in defending it or who are otherwise useful in providing a patina of legitimacy.

We are told the state acts always in the public interest, and to the surprise of some this turns out to have an element of truth.  If the state represents the public sector of society, as opposed to the private sector, then there is indeed a sense in which its self-aggrandizements are in the public interest--as opposed to the public’s interest.  

Inflation camouflages scarcity  

The modern American state, armed not only with a monopoly to produce legal tender at will but with the privilege of seeing its dollars exported to other countries and held there as reserves, no longer thinks of scarcity in any normal sense.  Whatever spending it can’t cover with taxes, it can pay for by borrowing or printing.  The astronomical public debt it runs up can be ignored, we’re told, because “we owe it to ourselves.”  [See Rothbard’s analysis here.]  The system of international fiat monies in which the dollar is a central player is a scheme destined to collapse.  It’s now collapsing, but states everywhere refuse to acknowledge it.  

People need a sound currency to prosper.  States need an inflatable currency to rule with a heavy hand.  States try to capture the best of both by inflating judiciously.  It hasn’t worked; the mere existence of fiat money creates moral hazard, as Guido Hulsmann has written.  Central banks inflated to paper-over earlier recessions, and the long-run effects have caught up.  

Though states seem mostly concerned with the health of their major financial players, their real terror lies in the potential breakdown of the hosts on who they depend: the taxpayers and middle classes.  They need their hosts to be fat, happy, and dumb to carry on their rule.  But the hosts are in danger of impoverishment.  Worse, they’re wising up to the methodology of inflation. States are so desperate they’re goosing their money supplies in plain sight by hundreds of billions and handing it over to cronies.   Inflation normally done in secret has been making headlines.  Inflation normally blamed on business is being exposed as standard central bank policy.  

Clearly, states are desperate for massive PR assistance.  With the help of its media lapdogs and the professoriate in state-funded universities, along with a society whose individuals are trained from early childhood to sing the state’s praises, states so far are surviving.  For most people the state is still the country they love for the freedom it permits them.  It is the entity that is trying its best to “do something” to fix the mess it created, which it blames on the market for failing to function under its impediments.  The something it does is more intervention.  As for justifying its vast inroads on freedom, it hasn’t had to address that issue because most people don’t care.  In times of crisis, they stand by the one thing they hope will save them, even if their hope is groundless.  

There’s at least one other reason why freedom issues are suppressed.  The central bank has changed the way the federal government is perceived. Schwarzenegger is handing out pink slips in California , but all’s well inside the Beltway. 

Federal politicians speak and act as if the economy they control is no longer subject to economic law.  So far, the central bank has allowed them to get away with it.  The central bank cannot go bankrupt, and neither can the government that appoints the central bank’s leaders.  That’s a comforting thought to many people.  Even people for whom it’s uncomfortable tend to believe it because they don’t have a background in Austrian economics.  We see debating in the classrooms and blog posts.  In mainstream media there is no real debate.  The best we get are occasional appearances by Peter Schiff, Ron Paul, and Jim Rogers, each of whom blasts the inflationist approach.  Most people are tying to be patient.  We have “change” in charge.  He has a nice smile.  Give him a chance.    

Learning from the wrong depression  

The ones leading the charge point to the lessons learned from the Great Depression.  They’re looking for answers in the wrong depression.  They should be studying the depression of 1920-21.  

The success of the “command economy” of WW I gave Hoover hope he could keep the country out of a depression with comparable interventions.  By 1932, his policies put one in four workers out of a job.  

Then came Roosevelt .  Though he was elected on a somewhat free-market party platform, Roosevelt declared war on the Depression in his first inaugural address.  He told Americans he would ask Congress for “broad Executive power to wage a war against the emergency, as great as the power that would be given to me if we were in fact invaded by a foreign foe.”  

Neither Hoover nor Roosevelt could bully the economy back on its feet.  In 1941, 12 years after Black Tuesday, 10 million Americans were jobless – nearly 15 percent of the workforce.  

From 1940–1943 the number of unemployed workers declined by 7,050,000.  Was government intervention finally working?  You bet.  All it took was the draft, which increased the number in military service by 8,590,000 during the same period.   

There’s a consensus of opinion that WW II ended the Depression, based largely on the rise in real GNP.  In this context, “real GNP” is misleading.  Consumer spending and business investment each declined during the war.  As economist Gene Smiley observes, “the [war’s] extensive price controls, rationing, and government control of production render data on GNP, consumption, investment, and the price level less meaningful.”  Government mandates, for instance, eliminated the production of most consumer durable goods. Smiley asks: “What does the price of, say, gasoline mean when it is arbitrarily held at a low level and gasoline purchases are rationed to address the shortage created by the price controls? What does the price of new tires mean when no new tires are produced for consumers?”  

Real recovery didn’t begin until 1945, when the war was nearly over and Roosevelt could no longer be elected.  

Unfortunately, the central bank was not only still around, it became the central bank of the world.  It was choking on gold reserves but inflated so much it was in danger of exhausting those reserves by the early 1970s.  On August 15, 1971 , Nixon de-monetized gold and thereby converted the world’s currencies to fiat money.  

With the world’s economies run by monopoly printing presses, there is a serious disconnect with reality.  Someone very important needs $30 billion to stay afloat?  Will it to happen, and it is done.  A bunch of very important entities need 20 times that figure, or even more?  All it takes is more will.  No one has to dig it out of the ground.  

Money, which once had real value whose supply could not be changed on command, can be created in any amount by state appointees.  This is inflation.  It has ruined other countries.  It is a juggernaut of destruction.  It is what the administration is counting on to save us.