Mises Economics

The President of the European Central Bank, Mario Draghi, laughs during a press conference in Frankfurt, Germany in this file photo. The European Central Bank left its benchmark interest rate unchanged at a record low 1 percent on Thursday while it waits to see whether the economy needs more help as the 17 countries that use the euro struggle with a debt crisis and likely recession. (Thomas Lohnes/AP/File)

Why do European central bankers sound like Austrian economists?

By Kel Kelly, Guest blogger / 02.13.12

Last week I attended a workshop at the ECB on Global Liquidity. Global Liquidity of course refers to money flowing throughout the world as a result of western central bank money printing—especially Fed printing. I thought it might be beneficial to highlight some insights gained.

1. Attended mostly by central bankers, the group of 40-50 people seemed to be in agreement that their—and particularly the Fed’s—monetary policy is a key driver of financial asset prices, including commodities and real estate.

I learned that while there is no consensus among central bankers that increased bank credit is the sole driver of higher asset prices (though I’m told many say that it is, and one economist I spoke with said that it was), there is a consensus that it is the sole driver of inflation in the long run. The short-run drivers are rather insignificant. One that I agree with is changes in the supply of imports. As a booklet I bought states: “Inflation is ultimately a monetary phenomenon.”

Why central bankers agree that rising consumer prices are ultimately a monetary phenomenon, but believe rising asset prices are only a partial monetary phenomenon is beyond me.

Just to be clear, I asked one central banker about the theory that unions can drive up prices. He said that they could—if there was an increase in money. He was spot on.

An very interesting insight came about when he said that I sounded like a monetarist. I said that I was actually more aligned with Austrians. He immediately replied that the school is not much different than monetarists with respect to what we had been discussing. Of course he was right, but it impressed me that he was that intimately familiar with Austrian views. After all, one Italian central banker I spoke with a few years ago asked: “what is an Austrian?”

2. The group also discussed that monetary policy has both a supporting and a destabilizing effect on the economy and financial system (we, of course would argue that it is the sole driver of asset prices and of GDP and consumption in the long run). One PPT presentation by an economist from the Bank for International Settlements, regarding the financial crises concluded: “Who to blame? Model says the Fed.” I agree with him. But it’s shocking that they actually state/admit this.

Another statement was “the central bank can create distortions.” Again, to us they are—absent acts of nature—the only ones creating distortions, but that they accept their influence as matter of fact is surprising to say the least.

3. The group kept commenting that it was increased credit driving leverage. They agree that it is leverage driving asset prices. As one person said “increased leverage has to come from somewhere” (i.e., you cannot create new leverage without creating more money/credit). (They defined leverage as total bank assets over bank equity and as equity of banks times leverage). Interestingly, several people discussed that the leverage of banks is inversely related to the VIX.

4. There is a whole area of research related to the following information that I too have previously learned the importance of: the transmission channel of money flow into consumer prices (i.e., bank loans) is a completely different transmission channel of money flow into asset prices. For asset prices, money flow is originated in the interbank market (money market) with the large banks and hits the hedge funds/brokerage houses/institutional investors in the form of “non-monetary bank liabilities such as money market papers, certificates of deposit, commercial papers, structured notes, or bonds, which [are bank credit but] not recognized as the common medium of exchange.”

As part of this, there is a large debate about which side of bank balance sheets are responsible for rising prices: the asset or liability side. This is known as the money view vs. the credit view. The money view is the liabilities view that argues that the creation of money in the form of bank deposits pushes prices higher. The credit view is the asset view (or loanable funds theory) that argues that the creation of credit in the form of bank loans is responsible for rising prices. They noted that credit has grown much more rapidly than money over the last 25 years.

This explains why both GDP growth and consumer prices have had low growth rates while asset prices of boomed (asset inflation has been high). It also explains why performance of the financial market is unrelated to the performance of the real economy (money can flow into asset prices without flowing very much into consumer prices, causing GDP to stay low).

5. Though there was some debate on this, it was said several times that “the U.S. is the global provider of liquidity.” I thought that Europe and parts of Asia were also providers, by way of coordinated monetary policy. But somehow the US is supposed to be the driver. Perhaps they simply mean that the Fed initiates policy first, and that other central banks follow in the footsteps of the Fed unofficially so as to keep their currencies aligned. By intentionally keeping their currencies at parity, they suck in capital flows pushing their asset prices higher. Thus, US liquidity evolves into global liquidity.

6. One paper argued that Europe is as large of a driver of US asset prices, but it’s not registered on the radar screen as such because the Eurodollars they use are held in the names of US banks, and thus show up as US assets. If this is the case, European banks affect our asset prices much more than previously expected.

7. I was surprised at how their language was so similar to that of Austrians, since mainstream economists usually cloak their points with obscure, “roundabout” language. These monetary economists spoke regularly of the central bank creating money, and kept noting that it was only possible in a fractional reserve system. They even used the term “Ex nihilo” as Austrians do. They also spoke of misallocation of capital, distortions, and booms and busts. Interestingly, one paper presented distinguished between “aggregate demand” and “aggregate real demand” differentiating between aggregate demand caused by money printing and true aggregate demand in the real economy (which, of course, can rise only with more production).

8. Though they know that they are aware causing rising prices, boom and bust asset movements, and financial crises, they still support fractional reserve banking and credit creation. They really, truly believe that economies need new credit in order to grow. That, is their originating flaw.

The main takeaway is that it is very surprising how aligned with Austrians these monetary economists are. I think this is so because these people focus in such a detailed fashion on money and prices that they cannot avoid the real facts. Within the scope of their daily work, they are not political propagandists; they are merely seeking—as are Austrians—to understand how things really work. It’s just too bad they don’t advocate different policy actions based on their conclusions.

Shoppers walked out of Bloomingdale's at the Mall of America in Bloomington, Minn. Malls across the country are facing a rash of store closings, resulting in unprecedented vacancy levels. (Carlos Gonzalez/AP/The Star Tribune/File)

The decline of the shopping mall

By Ryan McMacken, Guest blogger / 02.08.12

According to Bloomberg, banks are beginning to push short sales consistently for the first time since foreclosures began to pile up back in 2008. Prices really began to fall before the financial crisis, as early as mid-2007 in some places, but banks have long placed numerous obstacles in the way of homeowners who tried to sell their homes for what they were actually worth in the marketplace. Those of us who have worked with real estate agents who do short sales have heard nothing but complaints for years about how banks will stall and prevent short sales in a variety of ways. The result is that the property then goes into foreclosure and ends up selling for far, far less as an REO property post-foreclosure.

Why would banks do this? Well, banks have for years just assumed that home prices would turn around “any day now.” Their army of PhD economists, who ran their little computer models to tell them what would happen, told them to just avoid facing the reality of home prices for just a little while longer, and then everything would be OK. After nothing but declines since 2008, some banks are coming to terms with reality.

The article mentions CoreLogic’s home price index as ongoing proof of price declines, and we could also point to Case-Shiller in which the composite index has declined year over year fro the past 14 months or so, ever since the tax credit ended. In other words, government meddling did nothing but postpone the inevitable.

The New York Times reports on vacant malls across the American landscape. Thanks to declining retailers:

The result is near-record vacancy rates at malls of all kinds, both the big enclosed ones and the sprawling strips. Sears Holdings is closing up to 120 stores, Gap Inc. 200 stores and Talbots 110. Abercrombie & Fitch closed 50 stores last year, Hot Topic, almost the same number. Chains that have filed for bankruptcy in recent years, like Blockbuster, Anchor Blue, Circuit City and Borders, have left hundreds of stores lying vacant in malls across the country.

The political side of this is that these malls were cash cows for state and local governments and now that revenue is drying up. It’s not just that people are buying less stuff, it’s also that a lot of it has moved online, so the stakes are very high for governments seeking to tax internet sales.

Meanwhile, while single-family and retail real estate remains in the dumper, multifamily loan originations spiked 64% in 2011. The multifamily industry is just making up for lost time after almost a decade of misallocation of resources toward single-family mortgages in response to Fannie, Freddie and the Fed pushing homeownership like there’s no tomorrow. Multifamily production and demand suffered from about 2003 through 2009, thanks to government and GSE edicts on mortgages.

Republican presidential candidate Rep. Ron Paul listens to a question at a news conference after a speech at a campaign event in Las Vegas February 1, 2012. (Rick Wilking/Reuters)

Ron Paul's Fed chairman

By Douglas French, Guest blogger / 02.03.12

As president, Ron Paul would select Jim Grant as chairman of the Federal Reserve. A president Newt Gingrich would appoint Grant to a gold standard commission. “Unfortunately, I haven’t heard from Mr. Romney yet,” joked Grant when MarketWatch’s Brett Arends called on him in his offices down on Wall Street. “I’m sitting by the phone, I’m ready.”

Arend’s discussion with Grant produces many great points from Wall Street’s foremost wordsmith, including:

“The anachronism is today’s system,” he says. We have a “command and control, top down” system whereby the Federal Reserve imposes an interest rate on society. The Fed, in other words, tells us what the price of money should be. It is, Grant says, oddly at odds with the modern age. “We live in a world of collaborative social networks” of the Internet and Facebook, of Wikipedia instead of the old World Book, and so on. And yet when it comes to the price of money, we wait for a committee that sits in private to tell us what it should be."

Republican presidential candidate, Rep. Ron Paul, R-Texas speaks to members of the group Hispanics in Politics, Wednesday, Feb. 1, 2012, in Las Vegas. (Julie Jacobson/AP/File)

Is Ron Paul's gold standard idea dangerous?

By Douglas French, Guest blogger / 02.02.12

With the campaign carnival stopping in Nevada this week for Saturday’s Republican caucus, the Las Vegas Sun’s J. Patrick Coolican takes Ron Paul to task for Paul’s call to end the Fed and return to gold. Coolican writes:

To start with, inflation is not a problem right now. The Fed has effectively controlled inflation since Paul Volcker, who was appointed by President Jimmy Carter, began to rein in inflation 30 years ago. (Most important, inflation rates have been stable and predictable, which allows for economic planning by firms and households.)

Let’s see, Tall Paul left the Fed in 1987. Using even the establishment’s numbers via “The Inflation Calculator” what cost a $1.00 in 1987 cost $1.89 in 2010. So the value of the dollar has been cut in half just since 1987 using the most conservative numbers. What’s stable and predictable about cutting the value of the dollar in half?

Coolican doesn’t understand what all the fuss is about concerning the tripling the Fed’s balance sheet (he writes that “the Fed has tripled the money supply” since 2008 which isn’t right M-2 is up 29%). He says prices have increased 1.5% per year. What’s the problem?

Even according to the government CPI increased 3% over the past 12 months. If one calculates CPI the old fashioned way as John Williams does on Shadowstats.com, price inflation is running at more than a 10% clip.

Coolican then enlists the services of UNR economist Elliott Parker, who says monetary matters were a mess before the steady hand of the Fed came to be in 1913. “It’s an absurd argument because before the Fed prices were unstable in the short term, and long term there was a long period of deflation,” says Parker.

Look at any historical long-term chart of the CPI and it’s a flat line until heading skyward starting in 1971. And what’s so bad about falling prices for a long period of time. That’s how we all become better off is when goods and services become more affordable through technological improvements.

The long depression Parker talks about (1870s to 1900) was actually a period of great prosperity. This period of the classical gold standard was marked by gently falling prices leading to increased productivity, raised living standards, and the first glimpses of globalization.

Jim Grant of Grant’s Interest Rate Observer writes, “you can look far and wide without finding a decade so ebullient, prosperous and — in so many ways —so modern as that of the 1880s.”

While prices fell, the US economy prospered. Industry expanded; the railroads expanded; physical output, net national product, and real per capita income all roared ahead. For the decade from 1869 to 1879, the real national product grew 6.8% per year and real-product-per-capita growth was described by Murray Rothbard, in his History of Money and Banking in the United States: The Colonial Era to World War II as “phenomenal” at 4.5% per year.

And no there was no Fed back then to bail out Wall Street, so malinvestment was liquidated quickly and in turn the economy recovered quickly. So while Coolican says, “The world would have collapsed without aggressive action by the Federal Reserve.” The financial world needed to collapse and hasn’t been allowed to as the Fed continues to prop it up. Thus, the pain continues.

Coolican and Parker think falling prices create less incentive to produce. But they leave out the cost side. As costs fall through innovation, profit margins remain. All inflation does is hide inefficient producers. As for the worry of wages falling, it’s not the amount of your wages, but how much will your wages buy.

But the hundreds of years of evidence supporting gold money doesn’t convince Parker. He says, “But there is no evidence that getting rid of the Fed and replacing it with private banking along the lines of a gold standard would help the economy at all. None. In fact, the idea scares the hell out of me.”

Another reminder of the quality economics training that students are receiving at our nation’s universities.

In this file photo, a man walks past a collage of copies of Chinese RMB, U.S. dollar and other foreign bills at a money exchange store in Hong Kong. Galles argues that the free market system is unfairly blamed for people behaving unethically. (Kin Cheung/AP/File)

The free market doesn't make people poor. People do.

By Gary Galles, Guest blogger / 01.30.12

I am a believer in the power of liberty — voluntary relationships — to bring out the best in individuals and, therefore, society. But that well-founded belief makes it painful to see markets (willing exchange) blamed for virtually everything someone can think to object to, in favor of coercion of some by others via government, inspired by some utopian vision that cannot actually be achieved by that coercion.

The question then becomes why unattainable utopian visions seem to be so much more attractive and inspirational to so many people than liberty, which can achieve the best society actually attainable, and how the spell that leads to ever-increasing statism can be broken.

Leonard Read, one of America’s most prolific defenders of liberty in the 20th century, considered that question. And in his 1969 Let Freedom Reign, he offered a useful two-part answer in his chapters, “Free Market Disciplines” and “The Bloom Pre-Exists in the Seed.”

In “Free Market Disciplines”, Read showed that liberty’s failure to gain more adherents than utopian statism can be, in part, traced to the fact that it is the ends envisioned, rather than the means involved, that often motivate people. And since unlike utopian visions, freedom, including free markets — an “amoral servant” — cannot be proven to have no objectionable results to anyone, liberty can be saddled with an inspirational deficit. However, attributing disliked results to markets misplaces the blame. Therefore, restricting voluntary arrangements (beyond preventing the use of force and fraud on others) cannot solve the real problem, yet it hobbles the market’s ability to coordinate people’s cooperative and productive plans, causing harm in the misguided attempt to accomplish good:

[T]he free market is the only mechanism that can sensibly, logically, intelligently discipline production and consumption. For it is only when the market is free that economic calculation is possible. Free pricing is the key.

[But] it is necessary to recognize the limitations of the free market. The market is a mechanism, and thus it is wholly lacking in moral and spiritual suasion…it embodies no coercive force whatsoever.

[Quoting W.H. Pitt]: “[T]he market, with its function for the economizing of time and effort, is servant alike to the good, the compassionate, and the perceptive as well as to the evil, the inconsiderate, and the oblivious.”

Given a society of freely choosing individuals, the market is that which exists as a consequence — it is a mechanism that is otherwise non-definitive. It is the procession of economic events that occur when authoritarianism…is absent.

In a word, the free market is individual desire speaking in exchange terms … When the desires of people are depraved, a free market will accommodate the depravity. And it will accommodate excellence with equal alacrity. It is "servant alike to good … and evil.”

It is because the free market serves evil as well as good that many people think they can rid society of evil by slaying this faithful, amoral servant. This is comparable to… breaking the mirror so that we won’t have to see the reflection of what we really are.

The market is but a response to — a mirror of — our desires.

Instead of cursing evil, stay out of the market for it; the evil will cease to the extent we cease patronizing it. Trying to rid ourselves of trash by running to government for morality laws is like trying to minimize the effects of inflation by wage, price, and other controls. Both destroy the market, that is, the reflection of ourselves…attempts not to see ourselves as we are…

To slay this faithful, amoral servant is to blindfold, deceive, and hoodwink ourselves…denying the market is to erase the best point of reference man can have.

The market is a mechanism and is neither wise nor moral…The market is an obstacle course; before I can pursue my bent or aptitude or obsession, I must gain an adequate, voluntary approval or assent…My own aspirations, regardless of how determined, or lofty, or depraved, do not control the verdict. What these others…will put up in willing exchange for my offering spells my success or failure, allows me to pursue my bent or not.

Eventually, in a free society, the junk goes to the junk heap and achievements are rewarded.

I believe that anyone should follow his star; but let him do so with his own resources or with such resources as others will voluntarily supply. This is to say that I believe in the market, a tough, disciplinary mechanism.

[An] individual, in the free market, considers how much of his own property he is willing to put on the line…the free market gives short shrift to projects that are at or near the bottom of individual preferences.

Read saw that defenders of liberty must face the fact that markets enable people to do whatever they want better — i.e., that it is an amoral servant. It cannot be relied upon with certainty to only do good and inspirational things. But whenever they enable doing ill, they only reflect what some desire. If we reformed ourselves, markets could do no harm. And Read had great faith such improvements were possible, that “Eventually, in a free society, the junk goes to the junk heap and achievements are rewarded.” In contrast, coercively “reforming” ourselves by law does not eliminate the cause of such harm and so does little to actually stop it, but the restrictions on markets adopted in the process throw out the amoral servant to doing greater good than can be accomplished via any other mechanism.

Read proceeded to address the crucial distinction between the “inspirational” utopian ends and the means that such ends necessarily entail in “The Bloom Pre-Exists in the Seed.”

Intended ends may be the vision that inspires people, so much so that they ignore whether the means are morally defensible. That is, the utopian ends envisioned can be chimeras of self-delusion that can be used to justify immoral means. And if the collectivism to be imposed requires immoral means, one cannot assert the result is a moral system:

[Many] people expect to achieve lofty goals without any thought of the means they use to attain them…[but] a hard look at means and ends is appropriate.

Ends, goals, aims are but the hope for things to come, in a word, aspirations. They are not a part of the reality…from which may safely be taken the standards for right conduct. They are no more to be trusted as benchmarks than are day dreams or flights of fancy. Many of the most monstrous deeds in human history have been perpetrated in the name of doing good — in pursuit of some “noble” goal. They illustrate the fallacy that the end justifies the means.

Examine carefully the means employed, judging them in terms of right and wrong, and the end will take care of itself.

 

An individualist…looks upon society as the upshot, outcome, effect, recapitulation incidental to what is valued above all else, namely, each distinctive individual human being.

[Quoting Hayek]: “[W]e differ not so much on ultimate values, but on the effective means of achieving them.” Thus, if we would find the distinction between collectivism and individualism…examine the actions — means — that are implicit in achieving the goals.

[There are] opposed means implicit in the pursuit of collectivism or of individualism…So, for us to understand…we must discover what is implicit in the collectivistic as well as in the individualistic approach.

Implicit in the collectivistic approach…is the masterminding of the people who make up society…The control of the individual’s life is from without…

The collectivistic view holds that society is the prime concern…The individual does not fit himself into place but, instead…is assigned that niche or role which the political priests believe will best serve whatever societal pattern they have formulated…These coercive actions…are implicit in and must logically follow from the beehive way of looking at humanity.

Implicit in this beehive view is that men exist who are competent to form the ways and shape the lives of human beings by the millions…that there are those who not only can rightly decide what is best for all of us but who can prescribe the details as to how the best that is in us can be realized.

Any conscientious collectivist, if he could see beyond his utopian goals and thus properly evaluate the authoritarian means his system of thought demands, would likely defect…

However lofty the goals, if the means be depraved, the result must reflect that depravity. Therefore, the eventual outcome of the collectivistic way of life may be accurately predicted by anyone who understands the means which must be employed.

People who call themselves individualists rarely reflect on the means implicit in their philosophy. Individualists thus overlook the merits of their means to the good life just as the collectivists overlook the shortcomings of their way. When only ends are envisioned and means ignored, there can be no reliable estimate as to whether the consequences will be good or bad.

When the individual replaces the beehive as the ultimate goal…the means implicit in achieving such a goal must be radically different.

Either I will concentrate on me and my welfare or on others and their welfare…mind my own business or mind other peoples’ business.

In view of the obstacles to the relatively simple task of self-realization, reflect on the utter absurdity of my…undertaking to manage the lives of millions.

Attention to self is not a disregard for others. On the contrary, each individual best promotes his own self-interest by peaceful, social cooperation as in the free market. Indeed, the more I make of myself the more are others served by my existence…The way to assume “social responsibility” is for the individual to rise…as far as possible.

If we concede…that man has a right to his life, it follows that he has a right to sustain life, the sustenance being the fruits of one’s own labor. Private ownership is as sacred as life itself.

Private ownership lies at the very root of individual liberty. Without it there can be no freedom; with it freedom is secure…It is senseless to talk about freedom if the right of private ownership be denied.

Can we pronounce a moral judgment on these means implicit in the individualistic goal…to the pursuit of self-perfection and the right of owning what one produces? … These means serve as a powerful thrust toward the individual’s material, intellectual, moral, and spiritual emergence — and that is right! Others — those who comprise society — are the secondary beneficiaries of individual growth. If we would help others, let us first help ourselves by those means which qualify as righteous.

Visionary or utopian ends may inspire people to pursue what turn out to be statist failures, sacrificing liberty for innumerable “good causes.” Read argued powerfully that we should instead focus on the means (voluntary versus coercive) rather than stated goals or ends that can often be achieved only in someone’s imagination. And since the means utilized by statist “solutions” are immoral, such systems are morally inferior to voluntary arrangements, not morally superior.

Leonard Read recognized that liberty — voluntary arrangements that spring up, once one’s rights to oneself and one’s production are protected — provides the means of achieving what is actually achievable in advancing society. As we develop ourselves, we each have more to offer others, accomplishing the goals of statist utopias, without immoral acts, that they themselves cannot, despite their immoral acts. And what freedom has historically accomplished, beyond anyone’s ability to envision, extended to further as-yet-unknowable possibilities (beyond the fact that it will benefit those who voluntarily participate) was at the heart of his inspirational vision.

To follow in Leonard Read’s path toward increasing liberty, we too also develop our ability to “see” the unseen (and often unimagined) good that can only be accomplished by freeing people’s ability to peacefully create and innovate. To complement that skill, we must also be able to “see” and articulate the inherent failings of the coercive and immoral means employed toward utopian goals, which are unachievable despite such means. With such binocular vision, liberty can be recognized as far more inspirational than any statist alternative. If that is the vision we hope others to catch, that is the vision we need to better articulate, as Read argued over and over again.

A Chinese national flag flies in front of private apartment blocks in Hong Kong in this file photo. Some are warning that China's inevitable housing bust could have a global effect. (Tyrone Siu/Reuters/File)

Beware of China's housing bubble

By Mark Thornton, Guest blogger / 01.29.12

The housing bubble was a global rather than US event. The bubble outlasted the US experience in several other countries such as Australia and Canada which are experiencing some weakness. However, the one I’ve worried about is in China. Keep your eye on this one.

FORTUNE:

The Chinese government’s announcement last week that growth for 2011 slowed only slightly to a still impressive 9.2% was greeted enthusiastically by the world’s stock markets. Investors also remain buoyant on China’s future. They appear to be buying the official line that the gigantic property price bubble is gradually and smoothly deflating, posing little risk to an engine that’s so crucial to the future of global trade.

But the math tells a different story. The housing frenzy has driven prices so high, so fast, that a crash on the scale of the real estate collapse in Japan in the 1990s is a virtual certainty. And China’s already exaggerated official growth rate could take a pounding, all the way to the zone of the unthinkable, into the low single-digits.

A President Lincoln impersonator gives his famous "Gettysburg Address" during the Knott's Berry Farm Civil War Encampment in this file photo. Lincoln's famous quote about the role of government, which President Obama quoted in his SOTU speech, is hypocritical, Galles argues. (Mindy Schauer/AP/Orange County Register/File)

Was Lincoln's quote about government hypocritical?

By Gary Galles, Guest blogger / 01.26.12

Toward the end of his State of the Union speech, President Obama said “I believe what Republican Abraham Lincoln believed: That government should do for people only what they cannot do better by themselves, and no more.” Apparently, he didn’t note the immense irony of those words on the lips of one of American history’s most aggressive expanders of the scope and reach of the federal government, or the cognitive dissonance between that claim and the preceding substantial laundry list of things he wanted to do for (and to) Americans.

But the huge gap between the Presidents limited government words and his expansive government actions shows how limited is the power of such words to constrain centralized power and control. Ritual obeisance to the rhetoric can simply be combined with inconsistent behavior, and his inflation of government even further past any defensible claim of advancing the general welfare is defined out of existence.

Fortunately, this issue has already been considered. In his 1969 Let Freedom Reign, Leonard Read wrote about a loophole in the limited government formulation that now allows President Obama to eviscerate any such limitation. His depressingly current chapter on “Governmental Discipline” merits careful consideration.

 During the last century, several of the best American academicians and statesmen — in an effort to prescribe a theory of governmental limitation — have agreed: The government should do only those things which private citizens cannot do for themselves, or which they cannot do so well for themselves.

[T]his is meant to be a precise theory of limitation…

The government should, indeed, do some of the things which private citizens cannot do for themselves…Codifying and enforcing an observation of the taboos gives the citizenry a common body of rules which permits the game to go on; this is what a formal agency of society can do for the citizens that they cannot, one by one, do for themselves… And no more!

This proposal…does not go far enough. It has a loophole, a “leak,” through which an authoritarian can wiggle

What they [citizens] will not do and, therefore, “cannot” do for themselves is to implement all the utopian schemes that enter the minds of men, things that such schemers think the citizens ought to do but which the citizens do not want to do…”only” is utterly meaningless!

Reflect on the veritable flood of taboos — against other than destructive actions — now imposed on the citizenry by federal, state, and local governments. And all in the name of doing for the people what they “cannot” do for themselves. In reality, this means doing for them what they do not wish to do for themselves.

How might we state this idea, then, in a way that…if followed, would restore government to its principled, limited role — keep it within bounds? Consider this: The government should do only those things, in defense of life and property, which things private citizens cannot properly do each man for himself.

The only things private citizens cannot properly do for themselves is to codify all destructive actions and prohibit them…Neither the individual citizen nor any number of them in private combination…can property write and enforce the law. This is a job for government; and it means that the sole function of a government is to maintain law and order, that is, to keep the peace…a task much neglected when government stops out of bounds.

All else — an infinity of unimaginable activities — is properly within the realm of personal choice: individuals acting cooperatively, competitively, voluntarily, privately, as they freely choose. In a nutshell , this amended proposal charges government with the responsibility to inhibit destructive actions — its sole competency — with private citizens acting creatively in any way they please.

The government is engaged in countless out of bounds activities…what private citizens will not do rather than something they cannot do…

[W]e allow government to commandeer resources that private citizens will not voluntarily commit to such purposes. In other words, private citizens are forced to do things they do not wish to do.

Why are private citizens forced to do what they do not wish to do? After all, the formal coercive agency of society — is their agency!

We have one test, and one only, for what private citizens really wish to do: those things they will do voluntarily!

But here’s the rub: There are those who believe we do not know all the things we want or, at least, are unaware of what is good for us. These “needs” invented for us…have no manner of implementation except by coercion. In a word, these people who would be our gods can achieve the ends they have in mind for us only as they gain control of our agency of force: government.

And the primary reason why they can force upon us those things we do not want is our lack of attention to what are the proper bounds of government.

By asserting his devotion to limited government in his State of the Union address, President Obama seems to be trying to blunt criticism of how untrue that statement is. He mouths the same words as those who are truly concerned about limiting over-reach of government, but he clearly means something else than they do. It reminds me of some other words of Abraham Lincoln:

We all declare for liberty, but in using the same word we do not all mean the same thing. With some the word liberty may mean for each man to do as he pleases with himself, and the product of his labor; while with others the same word may mean for some men to do as they please with other men, and the product of other men’s labor. Here are two, not only different but incompatible things.

Republican presidential candidates, from left, Rick Santorum, Mitt Romney, Newt Gingrich and Ron Paul take part in a Republican presidential debate Monday Jan. 23, 2012, at the University of South Florida in Tampa, Fla, as moderator Brian Williams of NBC News listens. According to Galles, C.S. Lewis' "The Screwtape Letters" offers uncanny insight into the world of US electoral politics. (Paul Sancya/AP)

What C.S. Lewis can teach us about US politics

By Gary Galles, Guest blogger / 01.24.12

If there is one thing the 2012 presidential campaign has already taught us, it is that past complainers that politics was negative and underhanded didn’t know how good they had it. Abetted by technologies that increase the reach and power of smear campaigns and mechanisms to allow far more money to be spent on them, electoral politics has turned into an even more intense mud-pit of attacks and fingerpointing about every conceivable issue (including ones made up of whole cloth), along with “O yeah?” responses and counterattacks and bare-knuckle brawling among partisan spinners. And that is just the Republican primary. We haven’t even gotten near the general elections yet.

Given the incredibly bitter invective and the amazingly negative campaigning we have observed, I have concluded that perhaps the most accurate, though accidental, commentator on the current state of politics was C.S. Lewis, just over half a century ago.

In The Screwtape Letters, Lewis used the device of letters of instruction from an experienced Devil on how to successfully tempt humans. In one of them, he turned to how to inflame domestic hatred between two people. But with only a few minor alterations[1] to accommodate the fact that “the names have been changed to protect the guilty,” he seems to equally well describe our current political competition:

When political candidates have campaigned against one another for many months, it usually happens that each has tones of voice and expressions of face which are almost unenduringly irritating to the other. Work on that. Bring fully into the consciousness of your partisan that particular lift of his opponent’s eyebrows which he learned to dislike … and let him think how much he dislikes it. Let him assume that his opponent knows how annoying it is and does it to annoy — if you know your job he will not notice the immense improbability of the assumption. And, of course, never let him suspect that he has tones and looks which similarly annoy the other side.

In civilized politics hatred usually expresses itself by saying things which would appear quite harmless on paper (the words are not offensive) but in such a voice, or at such a moment, that they are not far from a blow in the face. To keep this game up you … must see to it that each of these two fools has a sort of double standard. Your partisans must demand that all their utterances are to be taken at their face value and judged simply on the actual words, while at the same time judging all their opponents’ utterances with the fullest and most oversensitive interpretation of the tone and the context and the suspected intention. Their opponents’ partisans must be encouraged to do the same to him. Hence from every quarrel they can both go away convinced, or very nearly convinced, that they are quite innocent … Once this habit is well established you have the delightful situation of both sides saying things with the express purpose of offending and yet having a grievance when offense is taken.

Lewis seems to have hit the current state of politics on the head. Screwtape politics has intensified. Unfortunately, it may not reveal which initiatives truly advance the general welfare or who the most worthy candidates are. But at least it gives us insight into James Madison’s famous statement in Federalist 51: “If men were angels, no government would be necessary.”

Note

[1] Alterations from the original are indicated in italics. The original version is given below:

When two humans have lived together for many years, it usually happens that each has tones of voice and expressions of face which are almost unenduringly irritating to the other. Work on that. Bring fully into the consciousness of your patient that particular lift of his mother’s eyebrows which he learned to dislike in the nursery, and let him think how much he dislikes it. Let him assume that she knows how annoying it is and does it to annoy — if you know your job he will not notice the immense improbability of the assumption. And, of course, never let him suspect that he has tones and looks which similarly annoy her.

In civilized life domestic hatred usually expresses itself by saying things which would appear quite harmless on paper (the words are not offensive) but in such a voice, or at such a moment, that they are not far from a blow in the face. To keep this game up you … must see to it that each of these two fools has a sort of double standard. Your patient must demand that all his utterances are to be taken at their face value and judged simply on the actual words, while at the same time judging all his mother=s utterances with the fullest and most oversensitive interpretation of the tone and the context and the suspected intention. She must be encouraged to do the same to him. Hence from every quarrel they can both go away convinced, or very nearly convinced, that they are quite innocent. You know the kind of thing: “I simply ask her what time dinner will be and she flies into a temper.” Once this habit is well established you have the delightful situation of a human saying things with the express purpose of offending and yet having a grievance when offence is taken.

Signs advertising gasoline prices are pictured at Fleet Fueling in Burbank, California in this file photo. A recent study suggests that uniform pricing on high-demand purchases like gasoline happen as a natural reaction to market conditions. (Fred Prouser/Retuers/File)

Price fixing occurs naturally, study shows

By Israel Curtis, Guest blogger / 01.23.12

Recently reported in the MIT Technology Review was the results of research modeling billions of interactions between buyers and sellers. The data would appear to undermine the argument used to defend invasive regulation, price-fixing, and anti-trust laws, which operate under the assumption that all inconvenient price increases must be the result of shady conspiracies by industry leaders.

The results make interesting reading.  It turns out that a crucial factor is the speed at which buyers and sellers react to the market. When buyers react quickest, sellers are forced to match the best possible value for money and prices tend to drop. By contrast, when sellers react quickest, they are quick to copy others offering poor value for money. This reduces the number of sellers offering good value for money in a vicious cycle that drives prices as high as possible. This is the emergence of a cartel and it happens in these guys’ model without any collusion between sellers. Instead, it is an emergent property of the market place that happens when the sellers outperform buyers in the way they react to market conditions. “This cartel organization is not due to an explicit collusion among agents; instead it arises spontaneously from the maximization of the individual payoffs,” say Peixoto and Bornholdt.

I particularly loved the echoes of “Spontaneous Order” in this quote. Of course, the writers of this particular article are still scratching their heads, unable to conceive of a world without regulatory and punitive market controls. Simply leaving market agents alone would be too radical, but at least they acknowledge that even new strategies would still be subject to the law of unintended consequences:

But this work muddies the waters somewhat. If cartel-like behaviour is an emergent property of an ordinary market, how should it be controlled, regulated and punished? The good news is that various strategies could easily be tested using this kind of agent-based model. The bad is that new strategies may themselves lead to emergent properties that are hard to spot in advance.

The abstract is available at the Cornell University Library.