The Unlearning Economics blog offers a supposed list of inconsistencies inherent in the free market. Unfortunately, the reasons are themselves a convoluted, inconsistent collection of strawmen. Below is a response to each of his twenty four points.
1. Credit expansion does, indeed, cause boom-bust cycles. Many Austrians agree that outlawing fractional reserve banking would eliminate the problem–it is fractional reserve that allows the expansion followed by contraction. Additionally, fractional reserve also constitutes contract fraud because it essentially creates two claims to one piece of property. Capital controls are not the solution; solvent banking is.
2. The existence of regulatory capture is hardly the only argument against the vast majority of regulations. Most regulations cause secondary effects which are usually countered with (you guessed it) more regulation. There is not space in this post to detail the myriad distortions caused by government regulations. Of course, the same arguments can be applied against police and corruption.
3. Information asymmetry can be a form of fraud which is precisely why institutional arrangements such as warranties arise on the free market. Consumers demand protection against fraud through such arrangements. In reality, information asymmetry exists in every exchange to some extent. Should the state police every single exchange that occurs?
4. Expansion of the division of labor is one of the greatest engines of prosperity. It allows more and more preferences to be satisfied at lower and lower costs. Peasants did, indeed, leave the fields voluntarily for factories because they saw the choice of the latter as superior to the former. To argue otherwise is to either insult their intelligence or argue with the historical record.
5. This is, perhaps, the primary way we acquire income. However, any method in which income is acquired voluntarily is legitimate. Gifts would also fall under this legitimate category.
6. Wages that are imposed above market-clearing levels will result in unemployment. However, the trend for wages to rise on the free market will not cause unemployment. Rising wages are caused by increasing amounts of capital accumulation which make labor more productive. A minimum wage law cannot make a worker more productive.
7. The trend in a free market is for increasing standards of living. the author acts as if economic prosperity and ecological health are opposed when actually the two are positively correlated. He asks, “Can the economy be too big in its physical dimensions relative to the ecosystem?” This is a faulty way to think of the economy. The economy is simply an integrated nexus of individuals who are trying to satisfy their preferences. To the extent that the economy is “too big,” humans will have to go. Of course, many environmentalists propose this very “solution”.
8. Of course, whether there are tax cuts for the rich has nothing (necessarily) to do with inflation. If the government taxes the rich, it will spend that revenue. Either the rich spend it or the government spends it. Actually, taxes guarantee it will be spent–it’s no guarantee that the rich will.
9. Economic theory is not correctly based on empiricism. You cannot isolate human action and subject it to experiments like you can with chemicals (for example) which can be held constant.
10. Some economists do, indeed, question the state’s ability to define property rights, but that is beyond the scope of this post. However, just because the state cannot enforce property rights perfectly does not mean that the state is absolved from doing so. This is the state’s primary function. A minimalist state which enforces property rights is preferable to a lumbering Leviathan.
11. Why do many who care so much about the plight of the poor insist on policies that are proven failures? Why not insist on something that works…like enforcing property rights?
12. I’m opposed to Keynes, and I don’t advocate expansionary fiscal and monetary policy.
13. True. Property rights apply to things which are scarce goods. Ideas are not. If someone “steals” an idea, you are also still in possession of it.
14. The difference between the private sector and the public sector is that the private sector can employ economic calculation through profit-and-loss analysis to determine whether they have squandered resources. The public sector cannot–production choices are a shot in the dark. Which is more likely to squander scarce societal resources?
15. Corporations cannot rule the world except at government behest. They are subject to the demands of consumers.
16. Deficit spending is never ok, and tax cuts do not constitute spending.
17. We argue against anti trust here and here.
18. There is not, and will never be, any such thing as a free lunch. In fact, the free market emphasizes this more than any other institutional arrangement. Ask any entrepreneur who is reaping losses. But competition always improves market conditions and will continue (as it has in the past) to drive down prices of consumer goods.
19. Everything is not subjective, though only individuals act, feel, and think. And it is impossible to impose liberty, as there is nothing to impose.
20. Monopolies and cartels cannot arise on the free market.
21. Taxes are coerced. You cannot avoid being taxed as long as you are alive. But by definition, rent is paid voluntarily, and can be avoided. It’s hard to argue against someone who is failing to draw elementary distinctions.
22. We don’t claim the name of Adam Smith, though many of our self-supposed “allies” do misuse the term “invisible hand”.
23. We claim the name of Mises, but do not think he was infallible.
24. Mises was not infallible. Perhaps this blogger should interact with specific propositions instead of painting broad groups of individuals with the same brush…
“Peasants did, indeed, leave the fields voluntarily for factories because they saw the choice of the latter as superior to the former. To argue otherwise is to either insult their intelligence or argue with the historical record.”
No they didn’t. They were forced from their land.
“There is not, and will never be, any such thing as a free lunch. In fact, the free market emphasizes this more than any other institutional arrangement.”
There certainly is – it’s called rent. If you are lucky enough to inherit land, you don’t even have to stump up any capital.
“But by definition, rent is paid voluntarily”
Try living anywhere with Property Rights without paying rent.
Reading this I can only conclude you’ve missed half of my points and haven’t followed any of the links.
1. You’ve evaded the point. CCs also prevent credit expansion, which Rothbardians claim causes boom-bust. But they don’t argue against them.
2. Again, red herring. My point is that regulatory capture seems to serve as an argument against regulation by free market proponents, whilst they don’t completely reject police on similar grounds.
3. Well, the state is implicitly involved in every single exchange but I guess that’s besides the point. Libertarians say that the state should regulate against ‘force, theft and fraud’, but when you mention specific instances of information asymmetry they have a standard ‘how can the govt protect against that?’ line. Fraud is, naturally, endemic so it’s not possible to prevent it completely. But it seems libertarians do not want any real fraud prevention, despite saying so.
4. No, they didn’t. They were forced into factories by the state, and pre-factories they worked far, far fewer hours. Don’t believe bulls*** historical myths about them working in factories voluntarily, as it just didn’t happen.
5. This is a tricky point for libertarians because they tend to presume a level playing field. However, inherited wealth creates an increasingly skewed distribution of power and income and often leads to an aristocratic or feudal style layer which undermines the government (witness: all of history).
6. First point: bare assertion.
Last point: actually workers are often more productive when they’re paid more.
Middle: actually it wasn’t about capital accumulation – Worstall was talking about labour’s bargaining power in relation to full employment. Apparently higher wages and better working conditions due to bargaining power are not as destructive as higher wages and better working conditions due to legislation.
7. They are positively correlated? That explains the environmental destruction of the last few decades. You’ve basically just reiterated my point for me. To deny that the economy is inside the environment and uses up resources is to deny ‘there ain’t no such thing as a free lunch’, which seems to be a cornerstone of your belief system. If you really think economic growth can go on forever then it’s not worth discussing.
8. You don’t understand what positional luxury goods are, do you?
9. Didn’t follow the link, again. That was aimed at Milton Friedman.
10. Just because the state cannot provide, say, public education perfectly, it doesn’t mean the state is absolved from doing so. This is the state’s primary function.
You see how things are if you just base your ideology on assertions about what the state should and shouldn’t do?
11. You missed the point. What Bowman is trying to say is that he wants lower taxes. He ends up contradicting himself by accusing his opponents of being nationalist.
12. Didn’t follow the link. That was aimed at Hayek.
13. But arguments could be made for some form of IP that use similar arguments to private property: it provides an incentive for individuals to come up with ideas if they can claim right to them.
14. IDK, how about the sector that caused trillions of pounds of losses in 2008 (please don’t say the government did it. Please).
15. Based on consumer sovereignty, of course, which is questionable at best. And if you read the link, you’ll see that he actually does want corporations to rule the world, by force.
16. Tax cuts beyond a certain point cause deficits. Many conservatives argue against deficits on the grounds that they impoverish future generations or what not, but turn a blind eye with tax cuts.
17. Irrelevant. I’m starting to think you didn’t read it properly.
18. You said: there’s no such thing as a free lunch, except competition. Cheers, that’s what I said.
19. Yep, private property and contracts without anything else is still a policy, one that many might not agree with.
20. Bare assertion, and no that’s not what the link said. Rothbard argued that they can but it doesn’t matter.
21. You didn’t follow the link. Rent and tax are effectively the same thing. You can’t *not* exist on the earth, and if that earth happens to be owned by private landlords then you’re going to pay rent.
22. What? Did you even follow the links? They do claim the name of Smith.
23. It’s worse than that – the Mises institiute is really the Rothbardian institute. Many of them insist that Mises was incredibly close to being an anarcho-capitalist when in fact he was relatively moderate compared to them.
24. Just highlighting the problems praxeology experiences when it comes into contact with the real world…
“But arguments could be made for some form of IP that use similar arguments to private property: it provides an incentive for individuals to come up with ideas if they can claim right to them.”
Crappy arguments come from all sides… deal with it. Just because some person made the claim that that’s why property rights exist, it doesn’t mean it’s a valid argument.
“Rent and tax are effectively the same thing. You can’t *not* exist on the earth, and if that earth happens to be owned by private landlords then you’re going to pay rent.”
Ah, but take this to the logical conclusion – the existence of any private property (not just land) would lead to this scenario. Hence, we should do away with all property.
Erm, no, that makes no sense at all. People *have* to exist on land but do not *have* to have other forms of property (excluding subsistence, but if you argue down that route you’re on your way to a basic income which I doubt you’d want to advocate judging by your leanings).
“Just because the state cannot provide, say, public education perfectly, it doesn’t mean the state is absolved from doing so. This is the state’s primary function.”
What law of nature makes it so? Why is the state inherently better than a private business? Is it its lack of profit-loss accounting that makes it superior or it tending to pander to special groups? Perhaps the enormous negative externalities caused by government?
If you read more carefully, I was just highlighting how many libertarian arguments are based on bare assertions on what the state should and shouldn’t do. The sentence was not to be taken literally.
“Tax cuts beyond a certain point cause deficits.”
Taking your argument to the extreme, we see that it is technically correct: If we cut all taxes and retained spending, we’d be in some deep deficits. The stoppage of taxation would result in deficits due to the other condition of retaining spending.
Of course, this analysis takes tax cuts and spending out of the economic equation and you hence disregard the reason for the argument against deficits. We don’t argue against deficits simply because they are deficits, but because they cause distortions of resource allocation.
Often the reason is impoverishing future generations, which happens whether or not the deficit is caused by an unfunded tax cut or unfunded spending.
Two quick points.
He misses my point on number 7. My point was that the growth of the economy and the health of the environment are positively correlated–in other words, as the economy grows, attention can then be given to environmental concerns. The growth of the economy is *beneficial* to the environment. Doubtless, he disagrees, but he seemed to miss my point altogether.
On 13, it’s not as if we aren’t familiar with that stock argument for IP. We simply find it unconvincing for many reasons–one of which being the explosion of creative activity that existed before IP laws were established.
IP: I’m prepared to concede, as I’m actually against it. I just think libertarians don’t realise many of the arguments they put forward against IP can apply to other property, which they defend vehemently.
Evidence (e.g. our depleting natural resources and environmental destruction) suggest that growth is not good for the economy. Again, though, I’m just highlighting a contradiction: in one breath you say ‘no free lunch’ but in another you assert that growth is costless.
Thanks for your comments. Obviously, we have some fundamental differences, but we always appreciate the opportunity to examine our beliefs and hopefully come to a better understanding all around.
Personally, I find the term “costless” to be somewhat ambiguous given that costs are subjective and that only individuals can evaluate them. I don’t think anyone who takes the concept of opportunity cost seriously would propose that growth is truly “costless” simply because every action incurs a cost.
That being said, I think those of us on this blog would argue that the benefits of economic growth generally outweigh whatever costs might be incurred. For one, as people increase their material well-being, they are able to devote increasing amounts of time to activities besides pure subsistence. For some, this might be increased intellectual or spiritual pursuits, and for others it might even be an increased ability to care for the environment (perhaps by planting trees). In short, it’s hard to care much about pollution when you are simply looking for your next meal.
(1)
“1. Credit expansion does, indeed, cause boom-bust cycles. Many Austrians agree that outlawing fractional reserve banking would eliminate the problem–it is fractional reserve that allows the expansion followed by contraction. Additionally, fractional reserve also constitutes contract fraud because it essentially creates two claims to one piece of property. Capital controls are not the solution; solvent banking is.”
Fractional reserve (FR) credit expansion can be pro-cyclical. But it has enormous advantages as well as disadvantages. Effective financial regulation and central banks are precisely what make FR banking stable.
Fractional reserve banking is not fraud, and this is one of the worst, most ignorant, cultish dogmas of the Austrian school.
http://socialdemocracy21stcentury.blogspot.com/2011/09/if-fractional-reserve-banking-is.html
(2)
Taxes are coerced. You cannot avoid being taxed as long as you are alive. …
Children are coerced by parents. This does not mean parenthood is immoral.
Libertarian natural rights ethical theories are unconvincing.
http://socialdemocracy21stcentury.blogspot.com/2011/08/rothbards-argument-for-natural-rights.html
(3) . Monopolies and cartels cannot arise on the free market.
Only if you redefine monoply as a “complete supply of a product maintained or established by government” – a sleight of hand.
Even Rothbard admitted that a free market can result in some companies gaining complete supply of certain commodities. Therefore the Rothbardian objection to monopoly reduces to a mere objetcion to government. That being so, private monopoly tyranny is fine in the libertarian world. Another double standard.
http://socialdemocracy21stcentury.blogspot.com/2011/07/rothbard-on-monopoly-price-on.html
(4) 14. The difference between the private sector and the public sector is that the private sector can employ economic calculation through profit-and-loss analysis to determine whether they have squandered resources. The public sector cannot–production choices are a shot in the dark.
Something does not need to be profitable to be economically and socially useful – e.g., government law and order, enforcement of contract, etc.
In the imaginary equilibrium states beloved by neoclassicals and by Austrians (e.g., Mises’s ERE), there would in fcat be no profit.
1. To the contrary, the existence of a central bank which acts as a lender of last resort increases volatility as it allows banks to expand credit beyond where they would if they were constrained by competition. With the “stability” inherent in the Great Depression and Great Recession, who needs volatility?
FRB and insurance are disanalogous for many reasons. For one, legal tender laws constrain choice of currency, but we are free to choose insurance (ignoring for the moment, that we are forced to buy certain types of insurance: car insurance, for instance.) For another, banking is related to human action, and as such, deals with uncertainty which is uninsurable. Risk, however, is insurable.
2. Our purpose is not to discuss the ethics of coercion. We were simply drawing the relevant economic distinction between coercion and voluntary exchange. Even if coercion is an ethically sound principle, the economic results will be different than a transaction that is voluntary. The original poster failed to draw this distinction.
3. Again, government-bestowed monopolies and market monopolies are disanalogous. In one comment, it’s difficult to sort out all the relevant details—for instance, whether we are dealing with a monopolist of consumer goods or a factor of production. We’ve written about monopoly (see below) but obviously only touch on what we saw as most important.
Monopoly posts:https://hanseconomics.com/2011/12/30/the-monopoly-bogeyman/
https://hanseconomics.com/2012/01/04/monopoly-revisited/
4. That is not the point. Of course, something can be socially useful without profit and loss. It’s simply impossible to tell whether consumers value it more than other things that could be produced with the same resources. But even if they value something else more, that doesn’t mean it confers absolutely no social benefit.
The ERE is markedly different from Neoclassical models of equilibrium for several reasons. One is simply that Neoclassicals often view equilibrium as an ideal to which we “should” attain. Austrians view the ERE as a useful construct to analyze what things would be like without changing preferences. But they acknowledge that this state will never be attained because human preferences are always changing.
You appear to concede (4) and shy away from (2).
(3)
In the case of monopolies, certain monopolies are in fact advantageous: monopolies in enforcment of law and order. There is a whole branch of the Austrian school (like Mises and Hayek) who do in fact take actually this view; the minimal state is the basis of market exchange:
“There are people who call government an evil, although a necessary evil. However, what is needed in order to attain a definite end must not be called an evil in the moral connotation of the term. It is a means, but not an evil. Government may even be called the most beneficial of all earthly institutions as without it no peaceful human cooperation, no civilization, and no moral life would be possible. In this sense the apostle declared that ‘the powers that be are ordained of God.’””
Mises, L. von. 2007. Economic Freedom and Interventionism: An Anthology of Articles and Essays (ed. B. B. Greaves), Liberty Fund, Indianapolis, Ind. p. 57.
There was an era when private power collapsed into “private” protection agencies: it called feudalism, an era of incessant warfare and private thugs. As for modern times, if you want you need look no further than the mafia.
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(1)
“For one, legal tender laws constrain choice of currency, but we are free to choose insurance (ignoring for the moment, that we are forced to buy certain types of insurance: car insurance, for instance.”
This is irrelevant to the issue of FRB.
“For another, banking is related to human action, and as such, deals with uncertainty which is uninsurable. Risk, however, is insurable. “
There are many insurance policies that are insuring against uncertainty. Your statement is simply a false claim.
FRB entails a mutuum loan. Demand deposits are in fact mutuums loan to the bank in which:
(1) Ownership of the money passes from the client to the fractional reserve bank;
(2) The bank returns only money up to the same value (a tantundem), not the original money;
No amount of Austrian obscurantism will change these facts.
http://socialdemocracy21stcentury.blogspot.com/2011/12/why-is-fractional-reserve-account.html
I’ll ask you to refrain from calling the conclusions of others “cultish dogma”. Such an emotionally based classification is unhelpful in the quest for economic truth. Now let me explain why fractional reserve banking is in fact fraud:
Fractional reserve banking is fraud because it is inconsistent with property rights. When you make a demand deposit you are effectively still in control of the money you deposit (ownership is defined by control). When the bank lends out a fraction of your demand deposit it has created additional titles to the same property. It is a conflict of rights to have multiple titles to the same piece of property. If though ownership is technically passed to the bank in the modern setting, that doesn’t mean the act isn’t inconsistent with property rights. Even the though the bank doesn’t legally have to allow you to redeem your title for the actual property on demand, they do. You can use a debit at any time, practically anywhere – this effectively makes demand deposits money and creates a situation where the original depositor is still owner.
Time deposits, on the other hand, may be lent out because the depositor has made a contract to relinquish ownership for a specified period of time during which the bank may lend out his funds and split the interest with him. Prior to modern fractional reserve banking, time deposits were made at different institutions than those at which people stored their money simply for safe keeping (demand deposits).
On the state:
Mises’s minarchist views are an uncharacteristically unexamined part of his philosophy. They are inconsistent with property rights as well as the consequentialist conclusions of his economic analysis.
To the extent that any entity does not respect property rights, it can be considered unjust. The Mafia is very analogous to the government, not a hypothetical defense insurance agency.
On point 4:
Profit, or the gains from exchange as it seems you are using the word, is ex ante present in all voluntary interactions; if one did not perceive a benefit (subjective, monetary or otherwise), they wouldn’t make the exchange. Due to uncertainty, in the ex post, they could decide they either made the correct choice or did not (profit or loss).
In the imaginary ERE, profit disappears because we can learn things about economic laws by imagining a world without uncertainty. Since profit (not returns or interest) comes from uncertainty only, there is no profit in the ERE. This profit from uncertainty business has little to do with voluntary vs coerced interpersonal relations. In no way does it support your attempt at trapping Austrians in a contradiction.
“When you make a demand deposit you are effectively still in control of the money you deposit (ownership is defined by control).
No, you’re not. You relinquish ownership when you sign the contract:
(1) This is how Western legal systems treat the FR account, and have done so for centuries
http://socialdemocracy21stcentury.blogspot.com/2011/10/what-british-law-says-about-fractional.html
http://socialdemocracy21stcentury.blogspot.com/2011/09/mutuum-contract-in-american-law.html
(2) This is what is plainly stated in FR reserve bank contracts.
(3) You have the right to demand repayment of the debt owed by the bank to you on demand: this means the bank gives you back other money from its reserves to pay you back (a tantundem), not the same money.
In demand deposits, you have lost your absolute property rights to the money when you lent it to the bank, and instead have entered into a contract with the bank to allow them to use it, and in return you obtain a debt instrument, even though the bank is obliged to repay to you on demand the debt in whole or in part from their other reserves, other unused deposits, or money from sale of financial assets or borrowing from other banks (in the interbank lending markets).
http://socialdemocracy21stcentury.blogspot.com/2011/09/if-fractional-reserve-banking-is.html
When the bank lends out a fraction of your demand deposit it has created additional titles to the same property.
No, it hasn’t, for reasons stated above.
It is a conflict of rights to have multiple titles to the same piece of property. If though ownership is technically passed to the bank in the modern setting, that doesn’t mean the act isn’t inconsistent with property rights.”
You contradict yourself. You here appear to accept that “ownership is technically passed to the bank in the modern setting”. That being so, any “withdrawal” from your FR account, as anyone who has studied this subject knows, is merely repayment of the debt due to you by the bank, NOT a demand to return propety left as a bailment. There are no “multiple titles to the same piece of property” – this is a completely wrong.
“Profit, or the gains from exchange as it seems you are using the word, is ex ante present in all voluntary interactions; if one did not perceive a benefit (subjective, monetary or otherwise), they wouldn’t make the exchange”
You are simply redefining the word “profit” to mean the “satisfaction derivdd from exchange.”
But I have used it in the sense of monetary profit above. This is just the fallacy of attempting to change definitions of words during an argument.
Have to side with Lark Keynes on this one. The relationship between the depositor and bank is creditor-debtor. There are no “property” rights involved, just contractual rights.
OTOH, that does not mean that fractional reserve banking is not fraudulent. You can commit fraud relative to contracts or property, or both. You’re mixing tort/criminal concepts with contract/property concepts. The law regards these things as conceptually distinct.
Economists really need to listen to lawyers more.
For what it’s worth, Austrians don’t ignore these legal concerns. The first three chapters of De Soto’s “Money Bank Credit, and Economic Cycles” deal specifically with the historical changes in the mutuum contract. Similarly, Rothbard discusses the change in banking law during the 19th century in chapter 7 of “The Mystery of Banking” Austrians argue for changes in the legal system to be in accord with what they perceive to be the proper functions of banks.
@KRLATHAM: It’s not so much that Austrians and other economists ignore legal concerns as that they do not understand them.
-“Property” refers primarily to “real” (land and improvements on land, such as buildings) and “personal” (every other kind of thing that can be owned, tangible or intangible).
-Contracts deal with promises to be performed. Promises are not property.
– “Fraud” can be a tort (civil wrong) or a crime.
These are three different major areas of law: property, contracts, torts, criminal law. All separate and often first year law school courses.
These subjects are studied primarily through the analysis of disputes between parties. I think one other blind spot economists have is that, not having an understanding of or appreciation for the conflicts that arise in these contexts, they assume as a given that these are all sorted out without effort or consequence. Which is not the case, obviously. When the bank “writes off” a debt, for example, that is hardly the end of the matter in the world at large, even if it constitutes the end of the matter as far as the economists’ theories and musings are concerned.
We are governed by law, not economics. At least we should be.
I agree with all of that. Outside the present mix-up between property/contract rights, what are other ways that economists specifically ignore legal concerns? I’m aware of those distinctions, and I don’t think I come across many flagrant violations of the standard division.