Book Review: Economic Freedom and Representative Government

Economic Freedom and Representative Government is a lecture delivered by F. A. Hayek at The Royal Society of the Arts on the 31st of October, 1973, about a year before Hayek was awarded the Nobel Prize in Economic Sciences.  This lecture highlights the dangers of unlimited government, points out flaws which lead to unlimited government, and offers a theoretical solution.  As always, Hayek's observations are very perspicacious, and though this lecture was written primarily for a British audience (they do not have a written Constitution), we in the United States today find ourselves facing many of the problems he wrote of 40 years ago.

To begin with, Hayek assumes that the majority of the people are in favor of a free market and against government direction; however, most of the groups would like an exception to be made in their favor.

 Take, for example, an Iowa farmer.  He is in favor of the free market, and though he may dislike the idea of giving welfare to thousands of lazy people in the inner city of Chicago, he may deem farm bills and agricultural subsidies fair and right.  The auto manufacturers couldn't care less about agricultural subsidies, but they want their bailouts, the folks in government housing want their handouts, the banks want a share when they're in trouble, and on and on...

 Any political party that wants to achieve and maintain power is forced to use its powers to buy the support of particular groups "not because the majority is interventionist, but because the ruling party would not retain a majority if it did not buy the support of particular groups by the promise of special advantages."  This is the problem.

Hayek explains that the problem is there because of majority rule.  Whatever the majority decides becomes law, and since it is law, it is believed to be just.  "A legislature is now not a body that makes laws; a law is whatever is resolved by a legislature."  Hence, "law is not dependent on justice but determines what is just."  This is a perversion of "law."  The old, real sense of the word is lost.  The legislature is not bound by committing themselves to general rules, and if they want to retain a majority they must "use coercion in the discriminatory manner that is required to assure benefits to particular people or groups."  

Here in the United States, I must note, we had a law which bound the legislatures to general rules...It was called the Constitution.  Davy Crockett understood this and said, "We have the right as individuals to give away as much of our own money as we please in charity; but as members of Congress we have no right to appropriate a dollar of the public money [for special interests or charity]."  The legislatures were bound to specific duties outlined in the U.S. Constitution, but now they've freed themselves from a strict interpretation of the Constitution and make laws to try to control anything and everything, binding and fettering the people instead.  But, I digress...

According to Hayek, "The main subject of this lecture is what we have to do, if we ever again get a chance to stop those tendencies [outlined above] inherent in the existing political systems which drive us toward a totalitarian order"--an unlimited government.

To preserve individual freedom, Hayek says, coercion must be confined to the general rules of just conduct.  "An individual who is bound to obey only such rules of just conduct as I have called these rules of law in this narrow sense [lawyer's law--relating to the laws which apply equally to all and define the protected sphere of each person with which others are prohibited from interfering, made to "prevent conflicts between people who do not act under central direction but on their own initiative, pursuing their own ends..."] is free in the sense that he is not legally subject to anybody's commands, that within known limits he can choose the means and ends of his activities."  

But how?  How can legislatures, especially divided into political parties that only gain a majority by promising special benefits to some groups, resist these pervasive tendencies?  Hayek admits that there never has been a legislature limited to making laws in the narrow sense described in the last paragraph.  

Hayek proposed having two representative assemblies.  One would make laws in the narrow sense and its members, disinterested citizens, would be elected for very long terms and would not be eligible for re-election.  The other would be governed by the laws of the first assembly in directing government proper.

F.A. Hayek admitted that he did not believe his "utopian construction" of an idea for a government would not be realised in the foreseeable future.  However, he decided to promulgate the idea because as David Hume said, "In all cases, it must be advantageous to know what is the most perfect in the kind, that we may be able to bring any real constitution or form of government as near it as possible, by such gentle alterations and innovations as may not give too great a disturbance to society."

I enjoyed reading this lecture.  The problems presented by Hayek are pertinent today.  I think many of these problems would have been prevented in the United States if we had insisted on keeping Congress and the President bound by a strict interpretation of the Constitution.  

And now, my dear reader, I pose the question to you: what do you believe is the best way to face this problem caused by special interests?  What do you think is the most efficient way to preserve the classical meanings of law and justice?  Is a law whatever the legislature decides, and because a majority decides something should be a "law," is it necessarily just?  Think about it.

I'm a Trillionaire

Yes, I am now a trillionaire!  I invested less than 30 dollars, did no work, and waited less than a week.  I promptly received the return on my investment: a total of $260,000,000,000,000  issued by the Reserve Bank of Zimbabwe in 2008. 

The problem with this rich quick scheme?  It's only paper.

Zimbabwe hyperinflation reached it's peak in 2008-2009.  Hyperinflation was preceded and caused by droughts, a large national debt, the redistribution of wealth, and "uncontrolled government spending."  Read more at the Dallas Federal Reserve's website.

Would you like to be a trillionaire like me?   You can for 1 cent plus $4.99 shipping and handling  (here)  or (if you're interested in hundreds of trillions) here or here.

But if you're hungry, I recommend you skip this investment and use your 5 dollars to buy a Whopper at Burger King instead.  Don't invest in something that can quickly lose its value with the whims of politicians.  Invest in something real that has inherent value--be it sandwiches, businesses, gold, silver, or oil...because, well, you can't eat paper.

Book Review: Nation, State, and Economy

Nation, State, and Economy (Nation, Staat, and Wirtshaft) was written by Ludwig von Mises in 1919--at the same time as Keynes wrote The Economic Consequences of Peace.  Translated by Leland B. Yeager, the book was published by New York University Press in 1983.  If you’re addicted to reading Von Mises’ books (like I am), there’s no reason not to read it; but I would not recommend the book for beginners.  This is one of Von Mises’ earlier works, and his theories had not yet matured.

To start the book, Mises urged everyone to go on with life instead of living in eternal remorse over World War 1.  People should, however, learn from the disaster and never repeat their errors: “Every person must take his life and every nation must take its history as it comes; nothing is more useless than complaining over errors that can be no longer rectified, nothing more vain than regret.”  “Nations,” he says, “like individuals, become wise only through experience, and only through experience of their own.”  

Mises believes that nations are not based on geographic or political boundaries, but rather on language because language affects the thought process.  “Community of language binds and difference of language separates persons and peoples,” he says.  

Democracy doesn’t work well, he observed, in a state with a nationally mixed population (I.e. with strong ethnic groups which have not been assimilated).  “In polyglot territories, the application of the majority principle leads not to the freedom of all, but to the rule of the majority over the minority.”  The struggle of nationalities for control will only “lose sharpness to the extent that the functions of the state are restricted and freedom is extended.”

Von Mises goes on to international affairs.  War, Mises observes, was always caused by one thing, greed for power.  Philanthropic pacifism wants to abolish war without getting at the causes of war.  The League of Nations and any extensive efforts at arbitration will fail, Mises predicted.  Methods such as a socialist world community would not eliminate problems; they are utopian.  “Whoever wants peace among nations,” he declares, “must seek to limit the state and its influence most strictly.”  Mises rejects war not on philanthropic grounds but from the standpoint of utility: war lowers the standard of living.  An increase in wealth never results from destruction.  Free people who are busy with their own business do not want war, but the “‘statification’ of life and of the economy necessarily leads to the struggle of nations.”  Von Mises explores the pre-war conditions in Germany and Austria and the reasons an authoritarian government was able to take power.  He then notes that the development of the spatial division of labor and progress toward a world economy works “more effectively for peace than all the efforts of the pacifists.”

“Inflation,” von Mises wrote, is an indispensable intellectual means of militarism.  Without it, the repercussions of war on welfare would become obvious much more quickly and penetratingly; war-weariness would set in much earlier.”  During World War I, inflation messed up balance sheets because the depreciation of money was not accounted for. “The inflation drew a veil over capital consumption.  The individual believed that he had become richer or had at least not lost, while in truth his wealth was dwindling.  The state taxed these losses of individual economic units as ‘war profits’ and spent the amounts collected for unproductive purposes.”  Everyone fell into ecstasy, thinking they had made a lot of money off the war, while their standard of living dropped.

Von Mises goes on to contrast socialism and liberalism (the old liberalism, nearly the opposite of modern day liberalism, was a belief in liberty).  Both Socialism and liberalism strive for the same goal (general welfare); they both seek for “the greatest happiness of the greatest number.”  The only difference is in the methods they choose to reach the goal.  Liberalism calls for free trade internationally, not for the sake of foreigners, but for the sake of one’s own people.  It calls for free trade at home, “not out of regard for particular classes, but for the welfare of all.”  Mises says, “An economic order resting on private ownership of the means of production and according the greatest possible scope to the activity and free initiative of the individual assures…the attainment of the goal…The socialist…seeks to attain it by socialization of the means of production…In the socialist society, the distinction between rich and poor would fall away; no one would possess more than another, but every individual would be poorer than even the poorest today, since the communist system would work to impede production and progress.”  Waste, he explains, is rampant in public services and enterprises, while private enterprise is highly efficient.  Socialism cannot be defended rationally, Mises claims, it is more like a doctrine of salvation.  “Yet, the Kingdom of Christ is not of this world; socialism, on the contrary, wants to establish the kingdom of salvation on earth.  Therein lies its strength, therein, however, its weakness too, from which it will collapse some day just as quickly as it has triumphed.  Even if the socialist method of production really could raise productivity and provide greater welfare for all than the liberal method, it would be bound bitterly to disappoint its adherents, who also expect the highest exaltation of the inner feeling of happiness from it.  It will not be able to remove the inadequacy of everything earthly…it will have to recognize that a religion not referring to the life to come is an absurdity.”

On the other hand, von Mises explains some of the essential points of liberalism, “If they deny to the state the mission of furthering the realization of the values of life, they do so not out of want of esteem for true values, but rather in the recognition that these values, as the most characteristic expression of inner life, are inaccessible to every influence by external forces.  Not out of religiosity do they demand religious freedom, but out of deepest intimacy of religious feeling, which wants to make inner experience free from every raw influence of outward power.  They demand freedom of thought because they rank thought much too high to hand it over to the domination of magistrates and councils.  They demand freedom of speech and of the press because they expect the triumph of truth only from the struggle of opposing opinions.”

Mises then writes of the great influence oppression can have in the “modern” world (of 1919).  He speaks of how it is so easy to kill and control so many, of how one pressing one button could kill “thousands.”  [Just think of the extent of destruction a war or oppression could create today with nuclear weapons and so much more technology.]  Von Mises said that, “Only one external limit is posed to this rage for destruction.  In destroying the free cooperation of men, imperialism undercuts the material basis of its power.  Economic civilization has forged the weapons for it.  In using the weapons to blow up the forge and kill the smith, it makes itself defenseless in the future.  The apparatus of the economy based on division of labor cannot be reproduced, let alone extended, if freedom and property have disappeared.  It will die out and the economy will sink back into primitive forms.   Only then will mankind be able to breathe more freely.  If the spirit of reflective ness does not return sooner, imperialism and Bolshevism will be overcome at the latest when the means of power that they have wrested from liberalism will have been used up.”  

Mises then concludes by affirming the rights of self-defense.  A war in self-defense is a “just war” and “the most virtuous person cannot live in peace if that does not please his evil neighbor.”  Then he goes on to tell us that everyone, even the most evil leader, has claimed to exercise power for the “general good.”  But basically, as Lord Acton said, “Power tends to corrupt and absolute power corrupts absolutely.”

I’m glad I read Nation, State, and Economy.  It definitely contains plenty interesting ideas and food for thought.

Book Review: Economic Planning: Thoughts for Today and Tomorrow

Economic Planning: Thoughts for Today and Tomorrow is a series of lectures given by Ludwig von Mises at the University of Buenos Aires in 1958. The lectures were published by Margit von Mises in 1979, after her husband's death. Margit correctly notes in her forward that these lectures are easier to understand than many of Mises' works. It was her "earnest hope" that the book would be "made available to younger audiences, especially high school and college students throughout the world."

In his first lecture, Von Mises explains that the "kings"--modern captains of industry--don't rule, they serve. If they do not please their subjects, the customers, they lose their kingdom. I consider it striking how this principle of free market capitalism resembles Christ's advice to His disciples on how to be great in God's kingdom: "Whoever wants to become great among you must be your servant, and whoever wants to be first must be your slave..." (Matthew 20:26-27 NIV)

Von Mises carefully shows that capitalism improves conditions for the masses. Often, he observes, people look back at the Industrial Revolution, the factory working conditions, and the long hours for women and children and mourn how industrialization took these women and children from their homes into the factories. This thinking is all wrong, he says. "The mothers who worked in the factories had nothing to cook with; they did not leave their homes and their kitchens to go into the factories, they went into factories because they had no kitchens, and if they had a kitchen, they had no food to cook in those kitchens. And the children did not come from comfortable nurseries. They were starving and dying." The advent of capitalism improved living conditions so much that England's population doubled with the Industrial Revolution. The Industrial Revolution was not evil; children who otherwise would have starved to death obtained jobs and lived. Since then, we have continued to see conditions improve.

What about wage rates? Since every individual is both consumer and producer, Mises says, "Wage rates under capitalism are not set by a class of people different from the class of people who earn the wages...If buyers do not pay the employer enough to enable him to pay his workers, it becomes impossible for the employer to remain in business."

Savings are good for the economy because they are invested, Mises notes. Let me give an example: take your latest tax refund or stimulus check. If you are a good, patriotic American and want to help the economy with your check, what should you do? Hide it under your mattress? No, that won't do you, or anyone else, any good. Spend it immediately (like you are advised to do) on luxury items? No! You might have fun with a new motor boat or big screen TV, but they really will do you no permanent good. Do you really help the economy? Not very much, you encourage frivolous industry. Should you save and invest your money? Yes! Your savings will be lent to some entrepreneur who may start a useful business, boost the economy, hopefully make a net income for himself, and pay you back with interest so you can lend even more money to the next entrepreneur. Theoretically, you will enrich yourself and society indefinitely.

Von Mises says the meaning of economic freedom is "that the individual is in a position to choose the way in which he wants to integrate himself into the totality of society. The individual is able to choose his career, he is free to do what he wants to do." Many people do not realize, he notes, that "in a system where there is no [free] market, where the government directs everything, all those other freedoms are illusory, even if they are made into laws and written up in Constitutions." Where there is no economic freedom it is very easy for the government to suppress these other liberties. Take, if I may give an example, Pastor Richard Wurmbrand in Communist Romania: his ration cards were suspended when he was too vocal about his religious beliefs. Consider in Revelations where St. John speaks of the mark of the beast without which no one could buy or sell: in that case economic sanctions seriously inhibit religious liberty. Or consider the consequences of perhaps saying something "wrong" in the future if the government controls healthcare; it would be very easy for some hitch in bureaucracy to come up so you would not get your healthcare. Von Mises observes that while in a capitalist society the consumer is the boss, "In socialist countries it is not the seller who has to be grateful, it is the buyer. The citizen is not the boss; the boss is the Central Committee, the Central Office. Those socialist committees and leaders and dictators are supreme, and the people simply have to obey them."

Mises was a firm believer in limited government. He says, "Under socialism, of course, the government is totalitarian, and there is nothing outside its sphere and its jurisdiction. But in the market economy, the main task of the government is to protect the smooth functioning of the market against fraud or violence from within and from outside the country. People who do not agree with this definition of the functions of government may say: 'This man hates the government.' Nothing could be farther from the truth. If I should say that gasoline is a very useful liquid, useful for many purposes, but that I would nevertheless not drink gasoline because I think that would not be the right use for it, I am not the enemy of gasoline, and I do not hate gasoline...The government's only legitimate function is, precisely, to produce security." "Interventionism means that the government not only fails to protect the smooth functioning of the market economy, but that it interferes with the various market phenomena; it interferes with prices, with wage rates, interest rates, and profits. Von Mises goes on to explain the futility of price controls and protectionism, concluding that all government interference is wrong and leads to socialism.

Ludwig von Mises' 4th lecture is on inflation: "With the stroke of a pen, the government creates fiat money," he says. Mises, an Austrian, recalled when German hyperinflation took its toll. On August 1, 1914, $1 equaled 4 marks and 20 pfennings. By November 1923, $1 was worth 4.2 billion marks. Inflation is based on a live-for-the-day mentality, as Madame de Pompadour said, 'Aprés nous le déluge." (Keynes said, "In the long run, we are all dead.") Sometimes, though, Mises observes, we outlive the short run and find ourselves in "le déluge." Mises recommended the gold standard: "The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments." Inflation increases the quantity of money while lowering its purchasing power, effectively lowering real wages and decreasing unemployment. But unions noticed the lowering of real wages and started using indexing in their bargaining. If full employment is to be achieved, Mises explains, the unhampered market must determine wage rates. He also says that capital is the only way to increase the standard of living; unions, protectionism, inflation, and minimum wage rates only hamper the process.

Foreign investment, he remarked, is good for the country.

Like many authors and speakers, Von Mises ends with an optimistic note:

"We must fight all that we dislike in public life. We must substitute better ideas for wrong ideas...Our civilization will and must survive. And it will survive through better ideas than those which now govern most of the world today, and these better ideas will be developed by the rising generation."

Now, Let's take a look into Argentine history...

(Historical information thanks to A Brief History of Argentina)

If the Argentines had followed Mises' advice, given soon after Perón's resignation and exile, history would be written differently. But, no, bureaucracy, inefficiency, inflation, and corruption reigned. No president dared cut back the public sector because there would be outcries of (temporarily) jobless bureaucrats. In Argentina, economic downturns and regime changes became synonymous. Individuals tolerate difficulties if they have no one to blame but themselves. But when the government was in charge of (and consequently responsible for) everything, and nothing worked, the people had no one to blame but the government. There were riots and guerrilla fighters. Less than a decade after Von Mises gave his lectures there, 200 students were jailed and 30 hospitalized during the "Night of Long Pencils" at the University of Buenos Aires. The guerrillas claimed to fight the "enslavement of foreign capital. " The labor unions and guerrillas made Argentina ungovernable. Perón returned to power in '73. In '75, he died and his wife Isabel became president. A civil war between the Monteneros and Triple A ensued, and a military junta took the reins in '76. A temporary economic boom occurred, but the military soon succumbed to corruption. As Lord Acton said, "Power tends to corrupt, and absolute power corrupts absolutely." The national debt rose astronomically. The junta "mortgaged future economic health, but the prosperity of the moment enabled the junta to defeat the guerrillas." To wipe out the approx. 2000 remaining guerrillas, the military killed 19,000 Argentines. The government tortured and killed in secret. They raided homes at night, and their victims just disappeared.

After a war with Britian over the Malvinas Islands, strikes, various elections, revolts, and with the onset of hyperinflation and 1/5 of total employees in the country working for the government, President Carlos Menem took office. Menem and his finance minister Cayallo privatised companies, lowered tarrifs, encouraged foreign investment, sought closer trade relations with neighboring countries, streamlined beauracracy, created a new peso note fixed on par with the U.S. dollar, and anounced that "subsidies no longer exist." Inflation dropped from 3000% to less than 20% in 3 years. Argentina's GDP increased by 35% from 1990 to 1994, and foreign investment increased by 150%. Of course, the situation in Argentina has changed since then, but imagine all the bloodshed, revolutions, and poverty that could have been avoided if Von Mises' advice had been followed in 1958.

The lectures found in Economic Planning: Thoughts for Today and Tomorrow are very easy to understand, and I would recommend them to anyone looking for a short, easy introduction to Von Mises' work in Austrian economics.