Sep
19
2014

Is Predatory Pricing Impossible? ~ How Mr. Dow Outsmarted the Monopolists

The story of Herbert Dow, the founder of the Dow Chemical Company, provides a wonderful case study against the efficacy of “predatory pricing” in the free market. In the early 20th century, Mr. Dow used the free market – not some state regulatory agency – to outsmart the Bromkonvention, a price-cutting cartel of 30 German chemical companies.

The case centers on the chemical bromine, which was used to produce film and used as a sedative. The German cartel set the global price at 49 cents a pound. American companies, including Dow Chemical, sold bromine for only 36 cents. The cartel told them to stay in the American market; Dow took his bromine abroad in 1904.

The Bromkonvention attempted predatory pricing to drive Dow out of the market. It started selling bromine in the American market at 15 cents a pound, taking a loss at the extraordinarily low price. Dow simply purchased hundreds of thousands of pounds at 15 cents and sold them back to Germany and England for 27 cents – a nearly 100% profit. The Germans couldn’t figure out why American demand was so high; they further cut the price down to 10.5 cents a pound, simply increasing Dow’s already incredible margins.

Dow later challenged the Germans in many other markets during the WWI era. He produced indigo, aspirin, Novocain and phenol, which was used to make explosives during the war.

Dow’s bromine war shows the free-market solution to the problem of predatory pricing posed by cartels at home and abroad. Those who huddle together and agree on artificially high prices are by definition the lazier and stupider of the companies; they are running away from work and intelligence. The way to break them up is to outsmart them and laugh at them.

Aug
10
2014

Who Owns the Future: China or India?

China and India are the two most populous countries in the world. Both have the potential to become the most important economy in the next generation or two. Both are highly bureaucratic, but, as economist Gary North pointed out, India is a Keynesian bureaucracy and China is a Communist bureaucracy. North argues that India has a brighter economic future than China because its Keynesian bureaucracy is more in line with Western bureaucracies. But what exactly does this mean?

Keynesian Bureaucracy vs. Communist Bureaucracy

Both kinds of bureaucracy gets funding by extracting money from the taxpayers. But only in a Communist bureaucracy do the bureaucrats actually have the power to imprison and torture citizens. In such a system, the state can do whatever it wants because it owns the courts. The state owns every individual person and all property. This is called totalitarianism. Both are systems of centrally planned economies, but only the Communists carry people off and execute them in the night.

Dr. Gary North said that the chief difference between these two systems is that Western Keynesian bureaucracies respect the right of self-ownership. An individual person is a separate legal entity and not just a small, insignificant part of the state, as under Communism. “Keynesianism rules indirectly, by positive incentives mostly, and by the threat of interference from time to time.” At least Keynesians are somewhat predictable in their actions and incentives.North continued, “In a Keynesian bureaucracy, the state is not the primary owner of the means of production. The government directs the economy primarily through indirect means, such as low-interest loans, certain kinds of subsidies, the regulatory system, control over the central bank, and various kinds of sanctions, both positive and negative. In the United States, the central bank is legally independent from the federal government. It usually cooperates with the federal government, but it does not have to. In a Communist society, the central bank has to cooperate.”

Legacy of Common Law

There are other reasons why North believes India has a brighter future than China. The reasons are related to the fact that India was ruled by the British for 250 years. Now, hundreds of millions of educated Indians speak fluent English and are well-acquainted with a common law system. The common law system is closer to a free and rational legal system than the tyrannical Communist system practiced by the Russians and Chinese. Common law, or customary law, is the part of law that comes from custom and judicial precedent rather than statutes written up by a legislature.

“If we’re talking about betting on the future,” North writes, “I would bet on India over China. That is because I believe in liberty. The Chinese have a degree of economic liberty, but they do not have the basics of what we in the West regard as a free society… India is bureaucratic, but it is a Western bureaucracy, not a Communist bureaucracy. That makes all the difference.”

Should We Be Impressed with China?

Perhaps Westerners are overly impressed by the economic growth numbers seen in China over the last several years. North wondered if people were impressed by the wrong things: “They are impressed with central banking, massive bureaucracy, hostility to common law, hostility to freedom of the press, rigged statistics, government-owned commercial banks, and in the case of China, the biggest real estate bubble in history. That bubble is going to pop, and there will be social turmoil in China when it happens.”

Conclusion

If we project out to the year 2050, when India has the world’s largest population and China’s population has stagnated, it seems likely that India will be the bigger economic powerhouse. China does have a big real estate bubble and rapidly aging population. And Dr. North’s argument about the significance of common law and the superiority of Western Bureaucracies certainly add fuel to the argument for preeminence of India.

Jul
24
2014

Orwell’s “Complete Reversal” on Capitalism

George Orwell (1903-1950) was a socialist writer who had tried very hard to make a neat separation between economic freedom and political freedom. He thought you could control the production of the body without controlling production of the mind. But, ultimately, he changed his mind.

Orwell’s far left publisher, Victor Gollancz, accused Orwell of being too pessimistic about the future of the totalitarian state in “Inside the Whale,” an essay in which he uses the story of Jonah inside the whale as an image of accepting the world without trying to change it. Orwell responded to Gollancz’s concern on January 4, 1940: “You are perhaps right in thinking I am over pessimistic. It is quite possible that freedom of thought etc. may survive in an economically totalitarian society. We can’t tell until a collectivized economy has been tried out in a western country.” (13)orwell

Orwell saw capitalism as a system in which wealthier people exploit workers. So he didn’t have a high view of economic freedom and, thus, didn’t see why economic freedom would be necessary in a free society.

But Orwell changed his mind a year later. In his BBC radio talked “Literature and Totalitarianism,” Orwell argued that literature would be impossible in the future totalitarian world. In his talk he admitted the inescapable tie between economic and political freedom. “It was never It was never fully realised that the disappearance of economic liberty would have any effect on intellectual liberty. Socialism was usually thought of as a sort of moralised liberalism. The state would take charge of your economic life, and set you free from the fear of poverty . . . but it would have no need to interfere with your private intellectual life. . . . Now, on the existing evidence, one must admit that these ideas have been falsified.” (15)

Writing in the conservative academic quarterly journal Modern Age, Arthur Eckstein called this an “astonishing passage” and a “complete reversal” from Orwell’s earlier denial of the necessity for economic liberty. Eckstein chastised Orwell for never being honest enough to return to this inescapable idea in his later writings. “The implications of this view of the social impact of capitalist economics made Orwell the socialist very uncomfortable, challenging his most cherished ideals about how a ‘just’ society should look.” (16)

Eckstein is right: Orwell should have developed the implications of this insight– regardless of the soft feelings of his socialist buddies or his own attachments to vague socialist utopianism. Nevertheless, Orwell recognized the dead-end of the totalitarian state and painted an unforgettable picture in his book Nineteen Eighty-Four, published shortly before his death. He was very much a liberal in his writing, rather than a socialist. He believed strongly in freedom of thoughts. Here is the way Orwell set up the fundamental conflict of civilization: “(1) Society cannot be arranged for the benefit of artists; (2) without artists civilization perishes” (p 18). Orwell offered no solution to this dilemma. He didn’t offer socialism as a solution.

Eckstein, Arthur. “1984 and George Orwell’s Other View of Capitalism.” Modern Age, March 1985. Pp. 11-19.

 

Jul
21
2014

Book Review: “Get a Job, Build a Real Career and Defy a Bewildering Economy”

Charles Hugh Smith is an economist and blogger who writes primarily on his Of Two Minds blog. He published his book “Get a Job, Build a Real Career and Defy a Bewildering Economy” this year to help job-seekers navigate career planning in the newly emerging economy.

Today’s Emerging Economy

Charles Hugh Smith paints a picture of today’s emerging economy as one that is based on using new technologies to deliver more value at lower costs. His premise is that, since many business sectors and especially governments are grossly inefficient and expensive today, there must be a reversal of the trend to constantly spend more and consume more. Indefinite expansion of consumption is the core problem because it is unsustainable. In fact, it has not really been “sustained” for several years. The enormous consumption has been based increasingly on debt. The rising interest payment on the debt will lead to insolvency of dinosaur industries and government services that protect themselves only by political power and not by economic efficiency.

What are these new technologies that are supposed to lower costs and enable increases in production? They are referred to as DSFRA technologies (digital-software-fabrication-robotics-automation). Smith sees the opportunities both in the new sectors created by technology and also in the traditional industries that can take advantage of the DSFRA technologies to become more efficient (27). There is opportunity to improve upon the services currently performed by highly centralized bureaucracies, where labor costs are way too expensive considering their inefficiency.

Creative Destruction

Economist Joseph Schumpeter famously used the term “creative destruction” to talk about the tendency of innovation to destroy the traditional economy and its various monopolies. Capital must expand; the only way for capitalists to find productive investments is to neglect and destroy less productive investments. There is a constant battle between security and innovation. Free-market capitalism is despised by those who want to maintain the status-quo in the economy – who want to protect fat monopolies because they are on the “inside” and benefiting from them. The free-market provides opportunities for those who don’t depend on the status-quo.

Smith talks about the difference between free-market capitalism and state-cartel capitalism. These are two combating sides of capitalism. They are not even close to the same ideology. He does a good job explaining why people either love or hate free-market capitalism. “Those who see it disrupting oppressive social and economic arrangements view it as liberating, while those whose security depended on inefficient, corrupt, obsolete systems maintaining power indefinitely view it as destructive” (31). Those latter folks who love security and turn a blind eye to inefficiency are supporters of state-cartel-capitalism. Perhaps the supporters of increasing consumption and increasing debt should be labeled as the “conservatives” of today.

“The great irony of free-market capitalism,” Smith wrote, “is that the only way to establish an enduring security is to embrace innovation and adaption, the very processes that generate short-term insecurity” (36). To put it in a more Darwinian way, “Eliminating risk eliminates the possibility of successful adaptation.” The implication for the jobseeker is this: no risk, no reward.

Smith predicts that these inefficient status-quo bureaucracies will be replaced by “do-ocracies,” where an individual’s influence will be based on how much of value a person does. Influence will be earned.

Beyond Centralized Bureaucracy

Smith blames hyper-consumerism as the source of modern-day alienation in the workplace. But it’s not just the workers – it’s also the employers who are interchangeable and commoditized today. He builds on the analysis of cultural historian Christopher Lasch, who examined the alienating factors in American society in the late 1970s. Smith gave a brilliant summary of these factors discovered by Lasch: “A narcissistic personality crippled by a fragile sense of self that sought solace in consumerist identifiers and a therapeutic mindset that saw alienation not as the consequence of large-scale, centralized commoditization and financialization but as individual issues to be addressed with self-help and pop psychology” (69).

Rather than viewing ever-increasing centralization as the solution to modern-day alienation, Smith identifies it as the cause of alienation. People are less equipped with self-confidence and self-reliance because of centralization, and thus less able to take the personal responsibility necessary to overcome alienation. The therapeutic mindset sells people on the idea that their happiness and success depends on some protracted relationship with a highly-centralized organization.

Create Value That Solves Problems

Graduating from high-school or even college is no guarantee that you will have the hard or soft skills necessary to thrive in today’s economy. The skills of professionalism will not appear magically as students go through their coursework. These skills would include things like the ability to communicate clearly, to be accountable to others and to self-manage. Smith argues that these kinds of professional skills need to be learned systematically by job-seekers and students.

It is important for people to learn how to create value that solves problems. Charles Smith wrote, “The ultimate purpose of education is to learn how to acquire human and social capital, and the ultimate purpose of human and social capital is mastery of the skills needed to solve problems” (73).

If educators want to prepare students for the work-place, Smith says they should teach them two things: how to learn and the values/behaviors needed to develop human and social capital. Human capital includes personal attributes such as knowledge, abilities and personal attributes. Social capital refers to the economic benefits of social cooperation (trust, information-sharing, providing assistance to community members). In a word, human capital is personal ability or knowledge and social capital is the ability or knowledge of a social network.

Top 8 Professional Skills

  1. Career-long learning
  2. Cross-applying knowledge to different fields
  3. Adaptability to different work environments
  4. Accountability for work
  5. Effective Collaboration (online and offline)
  6. Clear communication
  7. Constantly developing human and social capital
  8. Knowledge of financial records and project management

Ethical Values Create Economic Value

In addition to these professional skills, job-seekers need strong ethical values to be productive. This is far more important than education; ethical values actually determine how much human and social capital you develop at any level of schooling. And ethical values are fashioned in the home and the community, especially during childhood. Smith identified some of the key ethical values needed for success: self-discipline, protracted focus and deferred gratification for long-term goals. Unethical people tend to have low self-discipline and gratify their appetites immediately – despite the long-term deterrents working against their decisions (jail-time, always being broke, undeveloped talents, general monotony).

Self-Accreditation

After giving an analysis of the higher education cartel’s ability to raise prices even as the value of degrees goes down, Smith offers a solution to the job-seeker who wants to avoid paying extortionist prices for the credentials that will help get him hired: accredit yourself.

Essentially, this process involves mastering the eight professional skills cited earlier, mastering new skills and then demonstrating your abilities to solve real problems for real organizations. Put these projects online and distribute them to networks so that your abilities are easy to verify by potential employers.

Conclusion

Overall, the book does a good job of showing job-seekers how to spend their time: getting busy doing projects and publicizing them online with measurable results and easy-to-demonstrate proof. Smith calls this “self-accreditation.” Smith identifies centralization as the great problem in today’s economy, especially in the top-heavy sectors that have a lot of waste, such as government, healthcare, education and security.

The most unique contribution Smith makes is at the beginning of the book with his rather sophisticated economic analysis of the emerging economy and the different forms of capitalism operating in the world today. His points on the importance of professional skills and the strategy of self-accreditation are spot-on, even if these are not completely new ideas.

Smith, Charles Hugh. “Get a Job, Build a Real Career and Defy a Bewildering Economy.” Charles Hugh Smith, 2014.

Buy the book at Amazon

Jul
15
2014

Politics vs. Community Engagement

A survey by the National Conference on Citizenship found that Washington DC residents ranked last in the nation in “trusting all or most neighbors.” But Washingtonians certainly have trust for their rulers. Their trust in the media is number one in the country. And, as good consumers of the media, they ranked first in voter turnout in 2012.

DC is in the bottom half of the nation in terms of charitable giving. The survey even said they don’t care much about eating together as families (based on Census answers).

Ilir Zherka, Executive Director of the National Conference on Citizenship, remarked, “As compared to the rest of the country, D.C is the most politically active, but also the most socially disconnected place in the country.”

Real life is lived in the local community. True service can only be offered face-to-face to other humans. National politics is not about serving people; it is about lining the pockets of lobbyists and politicians and ruling over millions of nameless people.

 

Jul
11
2014

Austrian Economics: Not a Hypothesis!

In a speech at Mises University in 2011, the legendary Austrian economist Hans-Hermann Hoppe argued forcefully that Austrian economics cannot be treated merely as a hypothesis. It is not an empirical science that must be tested out in the world, but rather a working out of logical principles. It must be true. It rests on principles that cannot be untrue.

Hoppe called his speech Praxeology: The Method of Economics. Austrian economics rests on praxeology, which is the study of human action. And human action is a person’s pursuit of valued goals using finite means including time. If the real economics rests on the implications of human action, then one needs to start out with some basic axioms on purposeful human action. Actually, it is more than a start; Austrians argue that a firm understanding of logically-necessary human action should serve as the basis for economic thought. Sure, empirical study will confirm the theory, but the theory doesn’t depend on it. Common sense will do the trick.

What, then, are the implications of praxeology?

  • No one can purposefully not act
  • Every action is aimed at an improvement over what otherwise would have happened
  • A larger quantity of a good is preferred over a smaller quantity
  • What is consumed now can’t be consumed again
  • If the supply is lowered, either the same quantity or more is bought
  • Prices fixed below market-clearing prices lead to shortages
  • Without property, prices are impossible. And without prices, cost-accounting is impossible
  • An increase in property titles without a corresponding increase in real property does not raise social wealth – but leads to a redistribution of existing wealth
  • If the minimum wage is increased to $1,000 per hour, then massive unemployment will result
  • Every voluntary exchange benefits both exchange partners
  • Every coercive exchange has a winner and a loser

These examples are not hypothetical. They are firmly based in the “laws” of behavior and incentives, or what is called “a priori knowledge.” These things must be true, if you just stop and think about it. While a priori knowledge may not tell us very many things, it does tell us some important things.

Hoppe argued that the examples above are different from truly hypothetical questions that you would have to test, such as “Do people prefer McDonald’s or Burger King?” Logical positivists deny there is a difference between these two kinds of knowledge; they neglect common sense and say that everything is just hypothesis and could possibly be negated. I call balderdash and so does Hoppe. To negate any of the implications above should strike you as absurd. To think it is possible that raising minimum wage to $1,000 could increase employment should strike you as absurd.hoppe Logic will hold under all circumstances and should be respected rather than questioned at every turn.

Now this does not mean that the specifics of human actions can be predicted scientifically; for this is the job of entrepreneurs. Making predictions about future behaviors is more of an art than a science. The entrepreneur’s job is to predict the preferences of potential customers to make a profit. Hoppe explained that we cannot predict our future levels of knowledge until we actually have them. There are no “empirical constants” that can predict what people will do in the future.

But the kind of knowledge you can get from praxeology can have the great benefit of avoiding mass harm. For instance, Ludwig von Mises (1881-1973) pointed out in 1920 that socialism could not possibly raise living standards. This is because it is impossible to make economic calculations under socialism. He said it was impossible because there is no private property for the factors of production. And without private property there can be no prices for the factors of production. And the absence of prices is the real problem: we cannot compare the input and output prices to calculate the relative efficiency of production and discover whether we will make money or lose it. “If this is a hypothesis,” Hoppe asked, “then what do we need to do in order to find out whether this is true or not?” The answer is as inescapable as it is horrifying: “We have to introduce socialism first.” And, as we know from history, even though it is proven empirically to fail its victims and lower their living standards, socialist apologists simply say the planners weren’t given enough controls! Hoppe mocked the idea, imagining what the partisans of coercion might say in defense of socialism: “It might be different if we also controlled the weather or if Stalin puts on a hat which he did not put on the year before or if he murdered a few more Ukranians – then it might work out perfectly or alright.”

So the problem with talking about “empirical economics” is that it enables power-mongers to try their ideas out on less powerful people. Unfortunately, trying out bad economics causes great evils against real humans and then nobody bothers apologizing to the families of the dead because they excuse their bad economic theories endlessly. They posture and say that it wasn’t a pure enough test for their perfect ideas and must be tried again, risking more lives.

It is better to require economics to be rational and true from the beginning; true from its basic axioms.

 

Jun
26
2014

Was YOUR father Just Like Ron Paul?

Warren Buffett, one of the wealthiest men in the world, enjoyed the benefit of having a very Ron Paul-esque father. In fact, Howard Buffett was probably more like Ron Paul in his sound economic and liberal political views than any American politician until… Ron Paul himself in 1976.

buffett

Howard Buffett was so sure he couldn’t get elected to Congress in 1943 that he hadn’t bothered writing an acceptance speech.

Howard Buffett (1903-1964) served four times as a Republican Congressman in Nebraska during the decade between 1943 and 1953. Unlike almost all of his political peers in Congress, Buffett was a consistent defender of liberty. The taxpayer was the “forgotten man,” in Buffett’s eyes; the government kept using his money He stood against interventionism both at home and overseas, opposing the Cold War, foreign aid and military conscription. Buffett tied together conscription and freedom in 1962 when he wrote “When the American government conscripts a boy to go 10,000 miles to the jungles of Asia without a declaration of war by Congress…. what freedom is safe at home? Surely, the profits of U.S. Steel or your private property are not more sacred than a young man’s right to life.”

Buffett was not completely alone in the fight for liberty in the 1940s and 50s. He was part of a group of Republicans known as “Taftites.” They were part of the “Taft” wing of the Republican Party led by the Republican Senator from Ohio Robert Taft. The Senator was primarily driven by a desire to stop the imperialist and expansionist internationalism sweeping the United States after the Second World War. Taft opposed new internationalist alliances such as NATO, favoring instead a return to international law in world affairs. Besides Buffett, other Taftites included Rep. Ralph Swinn of New York, H.R. Gross of Iowa and then Rep. George Bender and Frederick Smith – both from Taft’s state of Ohio (McMaken, 7).

Howard Buffett was a critic of the Office of Price Administration (OPA), which had the job of putting price controls on retail consumer goods to “stabilize” the economy. Lower prices are cute – for a short time, before they lead to shortages and you cannot buy the goods at any price. Buffett blamed the OPA for shortages in lumber, soybeans and corn. He thought price-fixing had a particularly pernicious effect on small businesses, claiming that price regulations had caused half-a-million businesses to fail in just three years from 1941 to 1943.

And the government price controls didn’t even do the only good thing it was supposed to do: end inflation. Buffett told the New York Times in 1952 that imposing price controls is a “fake remedy” for inflation. It “makes inflation worse by concealing and postponing its effects. It will ultimately destroy the free market that is the base on which American freedom rests,” he said.

The gold standard was both an economic and political issue for Buffett. It was so important for individual political rights, he thought, because gold-backed money was welcome all around the world and, thus, gave people the freedom of movement – they were not trapped into their own government. But, with the abandoning of the gold standard, the American citizen became “dependent upon the goodwill of the politicians for his daily bread.” This is probably not a safe position for American citizens.

 

McMaken , Ryan. A Brief History of the Old Right: Libertarian and Conservative Critics of Foreign Interventionism. Ryan McMaken: 2002.

Jun
21
2014

Minarchists and Anarchists Agree on 95% Reduction in Government, Says Walter Block

The incomparable Austrian economist Dr. Walter Block visited with Brian Wilson on the Libertas Media Podcast recently to discuss libertarianism – especially the movement and its various distinctions. Dr. Block made the statement that anarchists and minarchists agree that the government should shrink by 95%. Minarchists are those limited-government libertarians who believe a tiny government is necessary to protect property rights and uphold the law – something libertarian anarchists believe could be done more effectively in the private sector. Block said these two groups should work together as brothers-in-arms against the Statists to decease the government by 95% and only then should they worry about that final 5%. Perhaps this could have been an interesting debate between the founding fathers around the time of the American Revolution, but right now the aim should be getting rid of the welfare, warfare and waste.

Walter Block, the Big Tent libertarian

Walter Block, the Big Tent libertarian

The big question is one of principle: Can a person still be a libertarian if they are involved in politics? Anarcho-Capitalists, who are libertarian anarchists, would generally frown upon people being involved with the government in any way because they view it as an institution of systematic violence and injustice. But Walter Block, who describes himself as a “big-tent” libertarian, sees no violation of libertarian principles when a libertarian enters politics. Still, as big-tent as Walter Block might be, he noted at the end of the podcast that there are standards that must be met to call yourself a libertarian. There must be economic freedom, personal freedom and non-offensive foreign policy.

Ron Paul is an example of a libertarian who went into politics without abandoning his libertarian principles. But he fought every expansion of the U.S. government and worked to reduce it, constantly educating people on the need to do so. Perhaps it is really a question of the politician’s goal when he gains political power: will he use his power to grow the government or to reduce it. It would be difficult to label Congressman Paul’s involvement in politics as “anti-libertarian.”

We are all involved with the government every day of our lives; it is simply too overwhelming large to not deal with it from time to time. Block cites the example of taxes: if you pay your taxes (even if only to avoid jail) then you are participating with the U.S. government in some way. This is unavoidable. Ben Franklin was right. There are only two guarantees in life: death and taxes. And the government will be an instrumental part of at least one of these guarantees in your life. Block illustrated his point by saying that if a mugger demanded your money and you gave it to him, you would not be in the wrong… you would be a victim. And you are a victim of the government and forced to participate with it in many ways.

And it isn’t just paying taxes that forces you to “participate” with the state. Going to the library, working in any capacity for the government or a company contracted by the government, or even driving on public roads forces you to participate with the government. Why should we single out running for political positions as the sole way of participating with the state? As long as the motivation isn’t power—which it almost always is – an individual running for political office could be a consistent libertarian if his focus was on reducing the government and educating the public. I suppose this would most likely be a minarchist libertarian, but perhaps even an anarchist could take a public office for the express practical purpose of reducing the government by 100%. It would be like buying the New York Yankees, a team you hate, and running the franchise into the ground so they could never compete in the Major Leagues ever again.

According to Walter Block, if you can take money from the government, say through social security or getting matching campaign funds during an election campaign, then you should do it. He calls it “liberating” money from the government. Block said that at age 73 he gladly takes money from the government when they freely give it to him. He quipped that he would possibly also take money from them when they didn’t freely give it to him, but he was too much of a coward with regard to the consequences of jail and violence. Taking from the government is the same as taking from a robber gang (albeit with good PR).

Jun
6
2014

1776: Libertarian Revolution Against Conservatives of Power

In his magnificent Libertarian Manifesto For a New Liberty, Murray Rothbard made the case that the American Revolution of 1776 was a principled libertarian revolution – not a conservative revolution. The conservatives were those who wanted to continue their illegitimate, market-insane privileges; the revolutionaries actually cared about the principles of liberty.

Classical Liberals

Rothbard credited the “classical liberal” movements of the 17th and 18th centuries for bringing to the Western world the Industrial Revolution. These were revolts against the conservative Old Order which had a supposedly divinely-inspired king in charge of an absolute State mixed up with a monopolistic, anti-market order with urban guild controls and rural feudal land monopolies. This structure of mercantilism had business monopolies working closely with powerful States who could declare wars to enrich the businesses.am rev 2

The purpose of the classical liberal revolutions was to free individuals in all areas of life. Entrepreneurs were to be freed from regulatory controls that, of course, favored the big businesses who worked closely with political leaders; tax burdens were to be reduced; civil liberties such as religious freedom were to come. This was the ambitious program of the classical liberal revolutionaries.

Every facet of life was to be finally separated from the aegis of the State. “Separation of Church and State,” was just one aspect of this separation. Rothbard also named separation of the economy, of speech, of military affairs. “Indeed, the separation of the State from virtually everything,” he said (3). The revolutionaries were not middle-of-the-road “small government” types who believed in government-forced insurance programs; rather, they were dead set on stopping any new form of taxation or expansion of the State – because they knew such expansion always came at the expense of individual rights.

American Libertarian Revolution of 1776

The ideas of classical liberalism pored over into the American colonies in the 18th century. The debates that had been happening in England for years moved seamlessly into the New World. Bernard Bailyn wrote of the American Revolution:

Where the English opposition had vainly agitated for partial
reforms . . . American leaders moved swiftly and with little
social disruption to implement systematically the outermost
possibilities of the whole range of radically liberation
ideas.

The American colonies were in a unique position to actually implement the great liberal thought which began in England because they did not have the same constraints as British libertarians, namely, the feudal landlords and wealthy aristocrats who had been lording over the people for centuries.american revolution

Rothbard called the American Revolution an “explicitly libertarian revolution, a revolution against empire; against taxation, trade monopoly and regulation; and against militarism and executive power (7).” And yet, there were some entrenched elites who clamored for State controls, wanting in the colonies a copy of the British mercantilist system. These not-so-revolutionary forces organized themselves into a political party, called the Federalists. Unfortunately, these were indeed the people who were in charge during the first two presidential administrations in America.

Jeffersonianism and the Democratic Party

The Democratic Party has roots in libertarianism, not in socialism as you might expect based on the modern-day party. Despite President Jefferson’s strong libertarian leanings, his years in office witnessed a relentless march towards uncompromising statism as the American political elites headed towards another war with Britain. The Federalists were able to get a central bank, tariffs and taxes to fund their war march, and they spent horrifying amounts of cash on the military and public works programs.

Rothbard painted the scene in Moticello, where an old Thomas Jefferson complained about the Federalists’ hatred of freedom and motivated his visitors, Martin Van Buren and Thomas Benton, to found the Democratic Party. The new party had great success in the 1830s – defeating the central bank – but it never recovered in its libertarian form after being split up and destroyed over the issue of slavery and then the Civil War.

Power Elites: Conservatives Who Hate Liberty

It was not the libertarians who wanted to go back to the Old Order of landed elites who dominate everybody else’s life because they enjoy special privileges; it was the conservatives of the time: the Federalists in the 1790s; the Republicans in the 1800s; the Democrats and Republicans in the 1900s; Bush and Obama so far in the 2000s. These are all conservatives of power – they care deeply about conserving their own power.

Although libertarians are among the most likely to be traditionalists who uphold strong family values in their personal lives and communities, they are political radicals who oppose the State because it conserves immoral traditions of unjustified power. The State is an excuse power elites can use to maintain their power position without doing any real work. Libertarians oppose this evil program and that is what the American Revolution was about.

 

Rothbard, Murray. For a New Liberty: The Libertarian Manifesto. New York: Macmillan Publishing, 1973.

May
28
2014

Skyscraper Effect in China?

Chinese Skyscrapers Mania

Skyscrapers are some of the most long-term building projects on the planet, and China seems to build a new one every day. Shanghai currently has three of the 16 tallest buildings in the world: the Jin Mao Tower (1999), the Shanghai World Financial Center (2008) and the Shanghai Tower (2014). And China is planning to finish the tallest skyscraper in the world with a project in Changsha, the capital city of central China’s Hunan province.

 

 Do Skyscrapers Cause Economic Depression?

The economist Andrew Lawrence created the “skyscraper index” in 1999 to point out the correlation between the building of the latest “world’s tallest skyscraper” with impending global financial disaster. Lawrence called his index an “unhealthy 100 years of correlation.” Bottom line: if you hear that some builder is constructing the “tallest skyscraper in the world,” watch out! It is not that the building of the skyscraper causes the economic depression, but is rather a prominent symptom of powerful economic forces. Specifically, these skyscrapers tend to get built when there is the largest disconnect between the actual interest rate and the natural interest rate. That is, when government intervention forces the actual interest rate lower than the natural rate of interest for a long period of time and to a great extent.

Boom-Bust Business Cycle

The builders announce and begin constructing the world’s tallest skyscraper in the late phase of the boom in the Austrian business cycle, while unemployment is still low. Next is a sharp economic downturn and increase in unemployment. The skyscraper is finally completed during the early phase of the inevitable economic correction. Had the builders known the future, they would not have continued their incredible building project in these cases, but, the relevant price information typically comes too late for them to make an informed decision on construction.

Capital-Intensive Boom

The most famous economic disaster in U.S. history, the Great Depression, took place at a time of what Austrian economist Mark Thornton called a “capital-intensive boom in the construction of ever-taller buildings.” What was he talking about? Everybody has heard about the massive gains and bubble in the stock market at the end of the 1920s, but fewer are aware of the massive construction bubble that occurred at the same time. At the time of the great stock market crash, U.S. builders were in the midst of constructing not just one of the “world’s tallest skyscrapers,” but three: 40 Wall Street (71 stories in 1929), the Chrysler Building (77 stories in 1930), and, of course, the Empire State building (102 stories in 1931).

What is the Austrian Explanation of the Skyscraper Effect?

skyscraper

Planned “world’s tallest skyscraper” in Changsha, China.

The skyscraper has become the symbol of the capitalist system in the modern era, much like railroads and factories were its symbols in earlier eras. Skyscrapers are very long-term investment projects – just the kind of projects that artificial booms encourage. Remember, during the Great Depression, the famous “cluster of errors” occurred first in capital-goods industries rather than consumer-goods industries.

Mark Thornton explained, “In the Austrian view, changes in the interest rate change the relative price between longer-term capital projects and shorter-term capital projects. A lowering of the interest rate raises the prices of longer-term capital goods relative to shorter-term capital goods.” The market responds to this change in relative prices by diverting resources to long-term capital goods, such as skyscrapers. There are only so many resources in the economy at any given time, and they do not always get diverted to the best long-term projects for the actual market. “These resources become formulated in a highly specific capital good that may not be well suited to the alternative production processes of the postadjustment economy,” said Thornton.

And then there is the earthy question of what happens when land prices go up and construction prices go down? Skyscrapers go up.

Thornton explained what happened in four major financial crises throughout the 20th century:

“First, a period of “easy money” leads to a rapid expansion of the economy and a boom in the stock market. In particular, the relatively easy availability of credit fuels a substantial increase in capital expenditures. Capital expenditures flow in the direction of new technologies that in turn creates new industries and transforms some existing industries in terms of their structure and technology. This is when the world’s tallest buildings are begun. At some point thereafter, negative information ignites panicky behavior in financial markets and there is a decline in the relative price of fixed capital goods. Finally, unemployment increases, particularly in capital- and technology-intensive industries. While this analysis concentrates on the US economy, the impact of these crises was often felt outside the domestic economy.”

Perhaps the Chinese government knows about the skyscraper effect and that is why last summer they called it off “until the project passes relevant safety examinations and gains building permits.”

 

Read Mark Thornton’s Skyscrapers and Business Cycles