Economic Myths #6 – Price Stability

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One of the so-called mandates that our economic lords and masters have arrogated for themselves is that of maintaining so-called price stability, a constant purchasing power of the monetary unit in our wallets. At first blush, price stability sounds rather appealing – not only does it “bless” us with the apparition of certainty but might we not also be “protected” by the potential of higher prices in the future, so we never have to curtail the amount that we can buy and enjoy? If so we can therefore assure ourselves that our cost of living will be sustained and manageable, relieved of the horror that the essential consumables may some day be out of our reach.

Unfortunately this ambition is not only disastrous for a complex economy but is also antithetical to the nature of human action in the first place. The whole purpose of economising action is to attempt to achieve more for less – to direct the scarce resources available to their most highly valued ends and to gain the highest possible outputs with the lowest possible inputs. In short, economic progress means that we are gradually able to attain more and more for the same amount of labour; or, to put it another way, we could attain the same quantity of goods for a lower amount of labour. Any consistent attempt to stabilise the prices in the economy would not only target the goods that we buy with our money but also the goods that we sell – and that for most of us means our labour! But if we cannot sell our labour for any more and if we cannot buy our wares for any less then it means that we will simply be locked into a repetitive cycle of working, buying, consuming and working again for the same prices for the whole of our lives with no improvement in the standard of living whatsoever. Instead of economic progress bringing goods at cheaper prices to the lowest earners, everyone will now have to attempt to be a high earner – i.e. by putting in more labour – in order to accomplish any increase in their wellbeing.

Of course, real price stability never does and never can work in this way for it is impossible for a centralised authority to monitor and regulate all the many millions of individual prices and exchanges that occur every day in the economy. Rather they target the mythical pseudo-concept of the general “price level”, usually concocted by taking a selective index of goods, an index that can be altered conveniently in order to paint the data in the fashion desired. Individual prices within the index, however, may still fluctuate relative to each other even though the absolute price average may appear constant – a fact that may not mean a great deal to the bureaucrat but is of great importance to the individuals who wish to purchase those particular goods. Furthermore, because of the belief that a dose of price inflation is good for a growing economy, “stability” usually tends to be defined as including some measure of price inflation such as the Bank of England’s 2% inflation target. We are apparently “stable” when the government is robbing your pay packet of some of its purchasing power, it seems.

Such a policy is not restricted to existing as a mere moderate tempering of an otherwise healthy and growing economy. Rather, it can have disastrous and deleterious effects upon the entire system. The outcome of a genuinely growing economy with sound capital investment should be a gradual, secular price deflation where goods and services become cheaper over time. If central banks attempt to counter this in order to achieve stability it must lower interest rates and print more money in order to devalue the monetary unit relative to goods in order to prevent prices from falling. However such an act is what induces the ill-fated business cycle; prices may appear stable but the relative prices of capital goods will begin to rise and those of consumption goods to fall as the new money gets sucked into ultimately unsustainable investment projects. This is precisely what happened in the 1920s when a high degree of productivity was countered by a voluminous expansion of credit that masked price rises, giving the illusion of price stability and suckering promoters of the scheme (such as Irving Fisher) into believing that they were living in a new era of permanent prosperity. The same was also true of the run up to the tech boom collapse at the turn of the century and the housing market collapse of 2008; these had been preceded by a period of low interest rates and apparently low price inflation – alleged hallmarks of an successful economy – that camouflaged the underlying distortions, leaving mainstream economists scratching their heads in confusion as to what went wrong.

Far from creating certainty and consistency, achieving “price stability” is one of the very worst horrors of a centralised, bureaucratically managed economy. Let us leave prices – which, after all, are supposed to result from the underlying supply and demand according to individual preferences – to the free market so that we can create a genuinely stable and lasting economic prosperity.

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Talent in Society

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Extremely talented individuals are often lauded for their achievements in apparently furthering human endeavour and accomplishment. While effort and hard work is a vital component of any great achievement so too must we recognise that particular individuals are especially gifted by nature in one way or another and that lesser beings such as ourselves have little hope of matching the achievements of these people, however hard we might work.

However, the precise talents that we are wont to recognise and celebrate today all appear to be concentrated in highly specific areas. The artistic and sporting talents of actors, directors, football players and so on – and the often very lucrative salaries that professionals in those areas can attract – receive not only a (sometimes obsessive) degree of praise and attention but also an overwhelming amount of encouragement and nourishment. Television shows such as The X-Factor and Britain’s Got Talent attempt to attract hidden singers and artists amongst the general public; children at school are persuaded to “express themselves” and find their “artistic personality” and to “aspire” to “creative” achievements.

There is nothing basically wrong with any of this, of course, and talent should be encouraged where it is found – although with children one might to wish to ensure that they are literate and numerate before attempting to find their “inner selves” and deceiving them too much into thinking that they are likely to emerge as anything other than normal, regular taxpayers. The problem is that when you strip out any highbrow rhetoric all of these talents – even great art, stirring music and record-breaking sporting achievements – basically achieve little more than provide entertainment; they are luxuries that must be funded out of more basic, material productive accomplishments. One very vital talent, the one talent that both provides all of the resources that maintain our standard of living and provides the wherewithal for us to enjoy art and sport is ignored. This is the ability to serve the needs of consumers as the head of a productive enterprise – in short, entrepreneurial talent.

The role of the typical leader of a multinational business, far from being lauded as a pinnacle of accomplishment and receiving praise and adulation for directing scarce resources to the ends that consumers most desire, is usually painted as a greedy, overpaid “fat cat” who exploits his workers and customers. Although it is true, of course, that many of these large firms are in bed with government and do not necessarily achieve their riches through voluntary trade, somehow one does not sense that this is the consciously acknowledged reason for the zealous lambasting thrown in the ir direction and that this attitude exists in spite of, rather than because of, any government ties. So-called “public service” – in other words, becoming a bureaucrat who leeches off productivity rather than creates it – is seen, for its alleged selflessness and altruism, to be a more noble pursuit that stooping into the grubby gutters of business. In reality the contrast between entrepreneurial talent and political talent is completely the other way round. Entrepreneurs have to be able to direct the scarce goods available to their most highly valued ends in order to bake a bigger pie; politicians, on the other hand, do nothing more than persuade everyone else why you and your sponsors should have a larger slice of that pie without adding anything to it.

Our inability to recognise and nurture this very vital talent upon which our lives depend is nothing short of tragic. Even television programmes that highlight the entrepreneurial spirit paint aspiring entrepreneurs as either whimsical and unrealistic day dreamers to be laughed at (such as in The Dragon’s Den), or as hard-hearted, self-centred and antagonistic (such as in The Apprentice). Popular entrepreneurs such as Richard Branson have had to mould their image as an underdog, portraying the mainstream, established business community as greedy and exploitative of the consumer.

Of course it is hard to believe that the entrepreneurial spirit will ever be entirely killed as there will always be people hot on the heels of any profit opportunity. But when we are doing all we can to kill or ridicule the entrepreneurial spirit and when we create more “profit” opportunities through fleecing the public rather than serving them we have to begin to wonder how our standard or living will be maintained in years to come. At the very least, the great entrepreneurs of the future – the John Rockefellers, the Henry Fords, the Andrew Carnegies, the Bill Gates– are unlikely to be from the West, and Asia will take over as the productive power house of the world. We in the West will simply become lazy and dependent, expecting our mouths to be filled with goodies by someone else’s spoon. Although all of this might seem like a relatively minor issue compared to what else is going on in the collapsing Western Empire – debasement, debt, war, and so on – it is all part of the same calamitous catalogue of problems that we face. By recognising the true origin of productivity and encouraging the genuine virtue in entrepreneurship then we can, at least, begin to pull some of the nails out of not the West’s coffin and bring us on a path towards resurrection.

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Economic Myths #5 – Banking is Capitalist

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By both mainstream economists and the general public alike the cycle of “boom and bust” is believed to be a tendency inherent in any capitalist economy. The fact that the latest such cycle, resulting in the seemingly endless stagnation that we are enduring now, originated in the banking sector and that large banks and bankers ratcheted up huge earnings and bonuses only to cause disaster has implicated banking to represent the very worst aspects of capitalism, motivated by uncontrollable greed that ends in destruction.

Unfortunately this popular view of the mainstream could not be further from truth. In fact with its intimate ties to government and its special, legal privileges it is hard to imagine a less capitalistic industry than banking. Part of the deception – wilfully inflamed by politicians and their lackeys – is one that engulfs other industries subject to government meddling such as energy; that simply because the participants in the industry are private individuals or entities and are not officially part of the government means that the enterprise must be classified as part of the free market and saddled with all of the supposed flaws of that system. Very often however private companies and brands are simply the public facing part of what is essentially a government operation or a government controlled cartel. Britain’s railways, for example, are owned by Network Rail, a statutory corporation with no shareholders; the train operations are parcelled out into geographic monopoly franchises that are awarded to private bodies by the government. The network is, therefore, under the de facto control of the government. And yet when you are stranded for two hours on a crowded platform because of delays whose logo is it you see everywhere at the station? Whose name is embossed proudly along the side of the train that you’ve been waiting for and who – and, by extension, which economic system – gets all of the blame for the problems? This is just as true in the banking sector as it is in the railways. Banking is nothing more than a government run cartel operated in front of the public by private bodies.

The supporting pillar of this government cartel is the central bank. Although this body is not always government owned it possesses a key legal privilege which is to be the sole producer of the nation’s money supply. Since 1971 (but in practice much earlier) all of this money in the world has been paper money, irredeemable and unbacked by any precious metal or market-chosen commodity. This is a very hefty privilege indeed for who wouldn’t want to have the legal ability to just print the very thing that can be exchanged for valuable goods and services? The central bank can manipulate interest rates (the most important prices in the economy) and control the volume of money either by changing the reserve requirements of the commercial banks or by making open market purchases (usually of government bonds but since 2008 pretty much any asset) with freshly printed cash. At the very bedrock of the banking system, therefore, is an institution that is blessed not by the voluntary purchases and exchanges of individuals but rather by the aegis of government. This institution would not exist in a genuine, capitalist economy as its powers rely not upon free exchange but upon government enforcement. Money would not be a centralised, government issued ticket on worthless paper nor would anyone have monopoly control over its production. Rather, money would be a commodity such as gold or silver. No one would be able to simply wave a wand and make gold appear in the way that central banks can make paper money appear, nor could anyone simply do the equivalent of no productive work in order to purchase valuable assets. Rather they, like anyone else, would have to earn their money through productivity that serves consumers. The volume of money in the economy would be regulated not by the central bank’s fiat but by the demand for freshly mined gold from the ground. Interest rates would be set by the demand for and supply of loanable funds and not by the arbitrary decree of monetary policy.

The reason why private banks appear to be the epitome of greed is that they are the channel through which the central bank’s deeds flow. They are the recipients of new money from open-market operations and of new loan-issuing powers when reserve requirements are altered. Credit expansion under the business cycle therefore affects the banking industry first and it is this industry that demonstrates the largest paper gains – all of those huge profits and hefty bonuses – and, consequently, the most catastrophic losses when the inflation stops. And yet the only method of making the fraudulent and destabilising fractional reserve system work, at least for a time, is the monopoly issuance of paper money by a central authority, robbing people of the ability to redeem notes that are over-issued and allowing the banks to inflate continually in concert. Furthermore, under this system banks are endowed with a special legal privilege in that they do not have to time their assets in line with their liabilities. When the disaster of “borrowing short” to “invest long” finally unravels who is that steps in to save the day? Why, the cartel-managing central bank of course, in its role as a lender of “last resort”, permitting the private banks to privatise their gains and socialise their losses. Once this fact – recognised in the US as the infamous Greenspan put – is understood by the private banks it will serve only to inflame risky and reckless business ventures. After all, why bother with prudence when you know that someone else will mop up the mess? None of this would be possible in a genuine, capitalist economy where each bank would have to suffer its losses and take full responsibility for its risky ventures.

This short description indicates that banking is woefully far from being a capitalist industry. Rather it is an industry that is well and truly in bed with government, relying on government for its profits, for the sustainability of its operations and for the absorption of its losses. “Private” banks they may be but a part of the free market? Absolutely not!

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Money – the Root of all (Government) Evil?

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In addressing the evil and parasitic nature of the state, libertarians focus on many of the state’s specific characteristics in order to demonstrate its destructive effects upon civilisation – whether it is nationalised industries, market interference, the minimum wage, anti-discrimination and egalitarian pursuits, the business cycle, or whatever, there is a treasure trove of libertarian literature available that explains and elaborates the deleterious effects of these particular state endeavours. However, a less addressed question is which of these areas, if any, are the most important? Which of them amount to mere nuisances that can be circumvented or otherwise put up with and which, if any, of them amount to a significant transfer of wealth and power to the state with seemingly permanent effects? Furthermore, is there any one issue that libertarians should stress above all others if we are to deliver a real and significant puncture to the state’s ever-inflating balloon?

One prime candidate for this title is war and international conflict. With war comes every glittering prize that the state could ever dream of – mass mobilisation of labour and industry towards a common purpose dictated by the state; control of all markets; mass propaganda; control of communications; suspension of free speech and possibly of habeas corpus; and not to mention the bogeyman of the supposed enemy to which to channel the attention and hatred of the average citizen. Indeed Murray Rothbard, relatively in his career, recognised that while libertarians had some very profound things to say about the state’s mismanagement of, for example, the post office, focussing on war was the real key to unravelling the state’s power and oppression of the population.

Nevertheless, while a permanent and lasting degree of state power and control is enabled by war there is another contender for the top spot. That is the government’s control of money and, specifically, the ability to create an endless supply of paper money distributed to itself and its favoured outlets, as opposed to the rigour and discipline imposed by a “hard money” standard such as gold. Ultimately it is the state’s ability to fund itself that is at the root of all of its other absorption of power and control – even war.

In order to demonstrate this let us look at what the situation would be if government was constrained by a denationalised, “hard” money such as gold. In the first place, government would be wholly reliant upon the tax receipts of its individual citizens for funding and would be unable to resort to extensive deficit spending or inflation. The plainness and visibility of that confiscation places a much lower limit upon the state’s coffers. Put simply, when too much money is taken out of your hands physically you are likely to revolt much sooner. Indeed, in the past, war itself was an expensive operation and battling kings often struggled to raise funds to maintain campaigns. Strategic brilliance was often not accomplished by an all-out destruction of the enemy but, rather, by out-manoeuvring your opponent and preserving for as long as possible expensively-trained soldiers and equipment. In many cases funding had to come from external sources. The genesis of the aristocracy was in those who were rewarded with titles to the conquered land in return for funding the war – in other words the ruler had to parcel out parts of the new territory to those who had helped him grab it. Indeed even the English parliament itself and the Magna Carta­ – famed as the genesis for two cardinal principles of liberty, no taxation without consent and no trial without due process – resulted in part from the reliance of the king upon his relationship with the barons for support and funding. Hard money therefore not only physically restricts the amount the state can spend but has been the indirect cause of the enshrinement of restrictions upon the state’s despotic power.

In more recent times, however, the ability to provide funding from a non-stop printing press has permitted the state to expand its activities without having to account for them through tax receipts. People do not see the money disappearing from their pay packets or from their bank accounts; all they see is the prices they have to pay for goods and services rising and squeezing their purchasing power, a fact that can be easily blamed on greedy businessmen and shareholders. It is possible for a libertarian to be sympathetic with the view that as long as you know how much the government is taking from you then it has a reasonable degree of tolerability. But when government resorts to the smoke and mirrors trick of robbing not the money in your hand but, rather, its purchasing power then it must be opposed emphatically. In comparison to earlier conflicts, the wars of the twentieth century were so prolonged and destructive precisely because government could resort to the printing press. Had they relied solely upon tax receipts “war-weariness” would have set in much sooner among the population and they would have demanded a swift end to hostilities. Hence all of the overreaching effects of the state’s engagement in war flows directly from its ability to control the supply of money. If we wish to end the consequences of war upon the state’s metastasised growth then we need to attack the root of its ability to fund it.

It is true, of course, that there may be something of a chicken and egg story when it comes to war and paper money. Does paper money cause government to engage in war or does war cause government to print paper money? Either way, however, even if government was previously respectful of a hard money standard which it does not abandon until the outbreak of a war, it is this power of printing paper money in and of itself that fuels the extent of its belligerence. And in any case, the ease with which government can suddenly suspend a hard money standard only comes about because they have arrogated to themselves monopolistic control of the operation of money issuance. It would be much harder for government to print un-backed notes and force their acceptance when others are issuing notes fully redeemable in gold. Whatever comes first, however, either the paper money or the war and the growth of the state power, if you wish to prevent the flood then you must turn off the taps.

In more peaceful times hard money also disciplines the citizenry into realising that government is not the fountain of all wealth. The state has grown so much under democracy because, apart from the veneer of legitimacy that popular elections lend to the state, politicians are able to bribe the electorate with endless goodies that they do not believe that they have to pay for. The resulting borrowing and inflation – now reaching an eye-watering level in the West – which does not touch the citizen directly gives the impression of government as an endless stock of resources, the only difficult task being to elect someone who will give them to you rather than worrying about the more trifling matters of production and enterprise. Indeed, public discourse rarely seems to acknowledge the fact of scarcity, usually focussing on single issues and concluding with an explosion of outrage about how government isn’t “doing more” to combat the alleged societal ill. The more difficult question of the expense that we would endure, what should be given up as a result and which goods cannot be brought into being because of the new expenditure diverted to cure the problem complained of is overlooked. To the citizen there is always more money, more resources and more of everything that government can acquire from somewhere other than himself. However, in exactly the same way as a hard money standard would induce “war-weariness” in belligerent times so too would it induce “state-weariness” in peaceful times. People would soon tire of having their pay packets robbed to fund goods for other people; and people would soon realise that many of the things they would otherwise want from government for free simply cannot be afforded and must be worked for by themselves.

Let us turn next to the whole problem of the business cycle. Although panics existed before the advent of modern central banking many of these occurred precisely because hard money rules were casually abandoned, with issuing institutions expanding the volume of credit beyond the stock of monetary gold and government happily stepping in and relieving them of the obligation to redeem their notes in specie. But whatever the characteristics of pre-central banking business cycles it is undeniable that they reached a depth, severity and prolongation in the twentieth century that was not seen before. There are two reasons for this. First, government’s enhanced control over the supply of money induces a more serious degree of malinvestment than would otherwise be the case where the supply of money is checked by the stock of redeemable gold. In both of the biggest collapses of the last one hundred years – 1929 and 2008 – credit expansion ran for the best part of a decade or more. The longer the false signals towards entrepreneurs are continued the more they will borrow and invest in unsustainable capital projects and the further those projects go the more difficult they will be to unwind. When the bust finally comes, therefore, the situation is far more serious than it otherwise would have been. This brings about the second factor – that it lends credibility to the argument that the government should step in and “do something” to combat the malaise. The reason why the Great Depression endured for years (and why we are still enduring the current one) is not because of the initial collapse – it is because government did everything it could to maintain the existing structure of production, wages and prices. Fittingly enough President Hoover often invoked the language of war in describing the threat of the downturn and the culmination of this in the New Deal – the complete cartelisation of industry and agriculture into a fascistic economy – was achieved by the resurrection of World War One era departments and programmes. It is supremely ironic that government-caused depressions give rise to ever more invasive government intrusions, an irony that turns truly into tragedy when we consider that what followed the Great Depression was the carnage and destruction of World War II. With the current belligerence of the US in provoking tension with Russia and China another war is something that cannot be ruled out as a result of the present crisis; and we all know how destructive war is to freedom.

What we can see therefore is that government control of money is a prime contender for the top spot of issues that libertarians should consider as the most serious when combatting threats to liberty. If this should be doubted then one has to question why the mystery of central banking and its ability to pull the monetary strings from a shady, secretive outlet has been a political non-issue for decades. Politicians only bring into debate the relatively “easy” problems that do not upset the apple cart. While they are keen to oust their immediate, political opponents they never provide the public with any serious choice that would restrict the power and growth of government as a whole. At least democracy – another cause of government growth and legitimacy – gets praised and lauded from time to time, if only ever to justify the government’s military crusades against foreign tyrants. But before the last few years central banking and monopoly issuance of money was hardly even mentioned – not even to give it a blessing. It seems as though government is fine with brainwashing its citizens into embracing the justice of elections by voting but it is far too scared to even make them aware of its power over money. Although this is now beginning to change and there is a greater enquiry into and scrutiny of the US Federal Reserve (not least because of ex-Congressman Ron Paul’s emphasis of the issue) the acceptance of and absence of discussion of these evil institutions has pervaded for too long. This is where government would be truly and irredeemably hurt. It could enact as many reams of invasive and destructive legislation as it liked, yet they would be of zero threat if government was starved of funding to enforce them.

It is appropriate to end with the words of Ludwig von Mises who recognised everything we have been saying here in his first major treatise on the subject of money:

Defense of the individual’s liberty against the encroachment of tyrannical governments is the essential theme of the history of Western civilization. The characteristic feature of the Occident is its peoples’ pursuit of liberty, a concern unknown to Orientals. All the marvellous achievements of Western civilization are fruits grown on the tree of liberty.

It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights. The demand for constitutional guarantees and for bills of rights was a reaction against arbitrary rule and the non-observance of old customs by kings. The postulate of sound money was first brought up as a response to the princely practice of debasing the coinage. It was later carefully elaborated and perfected in the age which—through the experience of the American continental currency, the paper money of the French Revolution and the British restriction period—had learned what a government can do to a nation’s currency system.

[…]

Thus the sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system.

The sound-money principle was derived not so much from the Classical economists’ analysis of the market phenomena as from their interpretation of historical experience. It was an experience that could be perceived by a much larger public than the narrow circles of those conversant with economic theory. Hence the sound-money idea became one of the most popular points of the liberal program. Friends and foes of liberalism considered it one of the essential postulates of a liberal policy1.

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1 Ludwig von Mises, The Theory of Money and Credit, p 414.

 

Economic Myths #4 – Profits are Evil

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One of the elements of any economic system founded upon free exchange that induces a purple-faced rage amongst statists and progressives is the concept of profit. This residual – the amount left over once an entity has deducted its costs from its revenue – is said to line the pockets of greedy shareholders while exploiting labourers and consumers.

First of all it is important to understand what we mean and what we do not mean by profit. Here we will be discussing profits that an entity may earn purely as a result of voluntary trade and free exchange; we do not mean those “accounting” profits that entities may earn as a result of favourable government regulations, direct government subsidy or any kind of residual of a trade relationship based upon force. These profits – including bank bailouts and stimulus funding – are rightly to be condemned as unjust and immoral, sustaining the power base of the incompetent, wealthy elite at the expense of everyone else. But such a condemnation must not be allowed to throw out a very precious baby with repulsively filthy bathwater – for profit is one of the most vital elements that gives life to an economic system that relies upon the division of labour.

For the praxeologist profit is, of course, endemic in any human action and not just those based upon monetary calculation. All actions seek to produce better circumstances than those that would prevail, but for the action. All humans in everything they do therefore seek for a psychic profit – making more money than before is only one of these possible actions. Strictly speaking, therefore, any condemnation of profit would be a performative contradiction as, in the mind of the critic, the satisfaction of achieving condemnation would be a better circumstance than not having done so. Although such a technical and theoretical argument is unlikely to appeal to the mass of lay persons who view profits as evil and unjust, it is important to understand the roots of the concept for here we can see the importance of the profit motive – the stimulus for engaging enterprise in the first place. Without the possibility of earning profit – i.e. a better circumstance than that which prevailed before – no entrepreneur or inventor would ever bother developing and bringing to market all of the wonderful products that make our standard of living so high.

Abandoning for a moment our commitment to wertfrei economics and embracing the belief that anything that benefits the consumer or labourer is “good” and anything that harms him is “bad”, let us examine two or three specific, recurring myths concerning the concept of profit.

First of all, let us deal with the allegation that profits line the pockets of the capitalists at the expense of workers and consumers. Profits are not achieved at the “expense” of anybody. The amount of profit is only ever determinable in retrospect after all of the consumers have purchased their wares and all of the workers have been paid their wages. At the time that the consumers bought the products and the workers negotiated their terms of employment nobody knew what the profit was going to be – or even if there would be a profit at all! If you felt that you were being “fleeced” at the time you purchased a product or sold your labour then why did you enter the transaction? If a firm should be required to divest its profits back to those whom it has cheated and stolen from then what happens when the firm makes a loss? Does it work the other way round too? Did not the customers and the workers cheat the firm in this instance? Should the firm be able to go back to a customer who may have purchased an item six months ago and take more from him to wipe out the deficit? Profits, instead, benefit the consumer by ensuring that scarce productive resources are devoted to their most highly valued ends – industries and production lines where profits are abnormally low will have resources reduced and redirected to areas where they are abnormally high, thus decreasing supply in the former and increasing it in the latter. Ironically, the combined action of entrepreneurs has the ultimate effect of eliminating all profit by balancing resources throughout the economy. It is only because consumers’ tastes and preferences are constantly changing that profit opportunities continue to exist and deployment of resources must be repetitively assessed and altered accordingly. Ultimately, therefore, it is the consumer who is responsible for the existence of profit and not the capitalist-entrepreneur. Furthermore, it is profit that provides entrepreneurs with the resources to further invest in capital equipment and expand the business. This will increase supply and lower prices.

Second, even if the concept of profit for inducing enterprise was accepted, what of the allegation that profits are really used to “extract” money from the industry to pay shareholders – money that would otherwise be invested back in the business to the benefit of consumers? What this overlooks is the fact that if a distribution is made to owners or shareholders it is because the entity has already invested in the business to the extent that is economically viable and any further expansion would be wasteful. While the firm may retain some additional earnings as a buffer in anticipation of a poor performing year or for some other kind of insurance, masses of retained earnings are otherwise wasted by lying in corporate bank accounts. It is better to distribute those funds to the shareholders so that they can be reinvested in other productive enterprises that are still in need of investment. Thus the consumer is benefitted by this fresh investment in other products and services that ensures that the supply of these can also be increased and their price lowered.

Finally, it is worth emphasising that which we indicated above – that profits are never certain and the possibility of their corollary – loss – is always present. Capitalist-entrepreneurs do not first of all calculate how much profit they want and then work out how much they will pay for inputs and charge for outputs. Such a calculation may form the motivation to engage in enterprise and it might determine the boundaries of their productive action but they cannot force the outcome to agree to their projections. Rather, they must be prepared to be the highest bidder for inputs and the lowest seller for outputs in order to ensure that they can purchase resources on the one hand and then sell the resulting products on the other. This process is fraught with uncertainty and only at the end is it possible to ascertain if it has been profitable – and, indeed, a certain line of production which may hitherto have been profitable may suddenly find it is loss-making. All it may take is a marginal increase in costs as a result of competing entrepreneurs bidding away resources to other uses, coupled with no corresponding increase in sales in order to completely wipe out any profit. Or may be consumer tastes change and competing products and services become more attractive? Although profit is the motivator of entrepreneurial activity it is never certain and everyone else must be paid in full before it can materialise, if it does at all.

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Economic Myths #3 – We Need More Jobs!

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During the economic malaise one of the most frequently watched figures in the economy is the number of jobs that are either created or destroyed. Government makes “job creation” a central plank of its economic policy to put people back to work and the impression that more people are being hired and fewer are being fired buoys their hubristic impression that we must be on the road to recovery.

Unfortunately this obsession with jobs is another example of the error of looking at an isolated aspect of economic achievement rather than at the entire picture – much like trying to boost consumption in order to further growth which we explored in myth #2. Jobs (or work, or labour) are simply what we have to do in order to achieve our valuable ends with the scarce resources available. It is the toil and suffering that we have to undertake in order to get to what we want because we do not live in the Garden of Eden. Our ideal situation is to have everything we want without having to have any jobs at all and economic growth fuelled by greater capital investment permits us to have more and more of what we desire for less effort. Our focus, therefore, is not on jobs per se but, rather, on what these jobs produce – the outcome of our labour and not that labour itself.

The most oft-cited example of useless job creation is government paying people to dig holes in the ground and then fill them up again. The unemployment figures would go down; the stock market would probably rally; the currency would strengthen. And yet these “jobs” have produced absolutely nothing whatsoever. All of the time and effort put into administering and fuelling them simply depleted the world of resources rather than added to it. In the real world, what this looks like is government providing artificial stimulus or subsidies to industries that are not otherwise economically viable; government “job creation” programmes; and not to mention, of course, the endless ream of bureaucrats that the government employs directly. Creating artificial jobs that do nothing funded by a government payroll simply papers over the cracks of an unsound economy. Yes, more people feel better as they have dollars in their hands and are probably not worrying about where the next meal will come from; but all that has happened is that those who were already working are now being forced to subsidise those whose employment creates no productivity.

A related fallacy is that if somebody somewhere is carrying out some kind of economic activity and the more of that activity there is then, so it is concluded, the better the economy is doing. To the central planners it doesn’t matter whether there is a housing boom, a construction boom, a tech boom or a stock market boom as long as there is lots of stuff going on, regardless of whether people actually want the products that are churned out by those enterprises. It is for this reason why we have the business cycle in the first place. Obsessed by creating some kind of “output” the artificial stimulus of credit expansion pushes the economy onto a path which, while brimming with activity, is ultimately not in harmony with the desires of consumers.

Job quality is more important than job quantity. The correct focus of any economic policy should be to ensure that we are labouring to direct the scarce resources available to the ends that we desire – and not simply on wasting those resources by doing some kind of fundamentally useless activity just to make government look good. “Full production” and not “full employment” should be our mantle.

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Anarchism and Law

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In our recent series concerning libertarian law and legal systems, we explained briefly how legislation is ultimately incompatible with a free society and that the finding of laws would be a decentralised, heterogeneous process. This essay will attempt to elaborate on how this procedure might work in a purely anarchical society – one with no compulsory, centralised authority of ultimate decision-making power – and how law will, in spite of (or perhaps because of) this fact cohere into a harmonious system.

As we have stressed countless times before, law emerges only because individual humans perceive conflicts that arise from interpersonal scarcity; we each wish to devote the means available for our disposal to our different, individual ends. If A wants to eat a loaf of bread then B cannot do so at the same time. Laws therefore arise to determine who has the right to own and, thus, to eat the bread. Where there is no conflict between two individuals then there is no need for law as it would simply serve no purpose.

The genesis of law, therefore, is a conflict over a scarce good between two individuals. For example, A alleges that B has aggressed against his (A’s) property; B might retort that the property is rightfully his and that A is the true aggressor for withholding it from him. Laws arise to determine who has the just title to the disputed property. But where would these laws come from? It is unlikely that A and B can unilaterally come to their own determinations of precisely which outcome is just. Aside from the fact that they are both biased parties and will seek to mould the law according to the outcome that they each desire, laws are intended to be publically acknowledgeable standards of conduct. In other words, the outcome of the case matters not only for A and B; everyone else in the world also needs to know who is the rightful owner of the disputed property so that they too may avoid or otherwise resolve any potential conflicts that they may have over that property. In short, everyone needs to know who owns what and who may lawfully do what with which goods. A and B are merely individuals and otherwise have no public reputation for dispensing and pronouncing the ownership structure that is just. A and B may unilaterally declare what they believe be to be the just position (and they may be correct) but why should anyone listen to them? Why would their own pronouncements afford them any moral protection at all from future aggressors?

Rather, what is likely is that each party will seek a just outcome through established and trusted professional bodies that have earned a reputation for dispensing justice and resolving conflicts. These bodies are privately owned and funded and must satisfy the “consumers” of justice that they will resolve cases fairly and impartially, otherwise they will lose custom to those providers that will. They are not compulsorily funded monopolies such as state-provided law courts and they must persuade their customers that their dispensation of justice is adequate.

Whether the processes followed by such private, justice dispensing bodies (hereafter “private courts”) will be adversarial, inquisitive or more closely related to some kind of arbitrational procedure cannot be said for certain; that is for the marketplace to determine, just as the marketplace will determine the structure and procedures of food and beverage manufacturers. There is, however, an arguable case for stating that the process will be adversarial much like law courts in common law systems, as we shall see shortly.

What will happen then once there is an allegation of aggression by one party against another? Let us say that A believes that B has committed an act of aggression against him. B may either deny this, he may dispute the facts, or he may believe that A is the true aggressor – whichever way they cannot resolve their dispute amicably and with agreement. What will A do in order to appeal for justice? In the first place he will seek out a private law court that he believes, from past decision-making, will most likely award him the outcome that he desires (all else being equal). A will bring an action against B in this private law court – let us call it L1 – and will furnish his case to that body. B, however, while likely being notified of the suit against him, has no obligation to attend the trial by L1. L1 is a private body like any other and has neither power of compulsion nor power of subpoena over anyone. B therefore has three options. First, he can either ignore the lawsuit and have nothing to do with it; this might seem risky but he has to judge the value of defending himself from A’s allegations against that of other activities to which he could devote his time and money. Indeed he might believe that A’s case is either frivolous or an outcome in his (B’s) favour so certain that there is no point in wasting any expense. Secondly, he might choose to defend himself against the suit in court L1. Thirdly he may disregard the suit in court L1 and proceed to bring a defensive action in another body – court L2. After all, if the potential outcome of the lawsuit poses a threat to B then B too will be eager to find a reputable law dispensing body that is mostly likely to find in his favour and not in A’s. If he believes that this likelihood is greater in court L2 than in court L1 then he will opt for court L2 and leave A to prosecute his case in court L1. It is because of these options, arising out of the fact that the private court system will never be able to compel any person, whether plaintiff, defendant or third party, to appear as a witness or to adduce evidence, and that they will have to rule solely on the evidence that is presented to it voluntarily, that the whole private court procedure is likely to be adversarial in nature. The court has no powers of inquisition or detection and is wholly reliant upon that which is provided to them by the parties. The parties may, of course, prior to the suit have hired their own private detective agencies to investigate and produce evidence that aids their cause and this may involve the questioning of and adducing of evidence by witnesses. The courts, eager to preserve their standards of justice, will develop rules as to that which constitutes acceptable evidence and private detective agencies will need to follow these should they wish to remain in business1. Furthermore, because of the need to be seen to be making an impartial decision, it is not likely that the court itself can get involved in fact finding missions and the direct handling of critical evidence. Rather, it is ultimately up to the parties to bring their cases to the court and to present them and for the court to rule impartially as a totally uninvolved third party.

How, then, will the courts reach a decision? If a case is prosecuted in court L1 then the court first of all needs to come to a settled understanding of what the facts of a certain case are. Facts are often disputed in cases and precisely what happened may be a painstaking and drawn out process. Once the facts are agreed, however, the more interesting question is how will the court apply the law to the case? And from where does this law come?

The overwhelming concern for L1 is that it rules in such a way as to treat like cases as alike – in other words, thefts are always dealt with in the same way; murders in their own way; assaults in theirs; and so on. In other words the same facts always lead to the same legal result in order to create a high degree of certainty of outcome. Law is, of course, meant to be a guide to avoiding and otherwise resolving conflicts and those bodies that rule in such a way as to confuse or distort the certainty necessary in order to accomplish this will simply lose custom. The task for the court therefore is try to compare and contrast the facts in the current case with those in past decisions – either sustaining the points of law in past cases that are in harmony with the facts of the current case on the one hand, or distinguishing those cases where the facts are different and the legal points do not apply to the current case on the other.

Where the case simply concerns a dispute of facts rather than the applicable law – i.e. the question to be determined is precisely which acts A and B carried out and the lawfulness of those same acts is not disputed – the court has to make a judgment along evidential lines to the satisfaction of the required standard of proof. Where the facts are agreed, however, and it is the question of law that is unresolved – i.e. whether A’s or B’s acts were unlawful – then the task for the court is much more difficult. Resolving these so-called “hard cases” at the individual court level is not so much our concern here, although we may venture to say that where there is no clear precedent the court is likely to reason an outcome that best adheres to the principles of past cases which will, in a libertarian society, be underpinned by libertarian society. We can also venture to suggest that a court is likely to be as cautious and as precise as possible when “discovering” law to apply to what appears to be a novel situation in order to avoid the appearance of outlandishness and to be sure to not inadvertently confuse or bring into question existing, well established principle, a limitation that has often escaped our statist legal systems. Rather, the more important aspect for us is how such “new” law will come to either be embraced or rejected by the legal system as a whole. This aspect turns squarely on how the decision is respected by the parties to the case and by subsequent persons and bodies that must deal with that case.

In the first place, if the trial is taking place in only a single private court – court L1 – that court’s judgment will be the only one in existence. We must add at this point that neither the court nor anyone else has the absolute right to enforce that judgment. Rather, remedial actions intended to resolve the conflict in harmony with the judgment now carry a degree of demonstrable moral weight. It is assessing the strength of this moral weight that is the first indicator of whether the judgment forms good law. Let us examine how this might unfold.

If the court decides in favour of the plaintiff (A) and against the defendant (B), B has a number of options. He can recognise the validity of the judgment and voluntarily furnish an appropriate remedy to the plaintiff. Such an act would be the first indicator of the soundness of the judgment. If, on the other hand, B rejects the decision or is otherwise uncooperative the task of enforcing a remedy may fall to a private recovery agency hired by A. Such an agency would necessarily be using force in order to extract a remedy (say, compensation) from B to make good the loss to A. This agency will want to make absolutely sure that the judgment in court L1 upon which it is basing its action is valid law in order to avoid the possibility of B later bringing a suit against the agency. In other words, the agency needs the weight of the judgment to prove that its remedial actions are a response to the genuine aggression of B and are not themselves new acts of aggression against an innocent party. If the recovery agency accepts the judgment and proceeds to enforce a remedy out of B this further lends weight to the judgment’s validity2. Before or even after that happens, however, B could bring a suit in an alternative court (L2) if he disputes the judgment of L1 (or may already have done so if he anticipated that L1’s judgment would not be favourable, as we suggested above). L2 will now examine the evidence and make a second judgment. If L2 rules the same way as L1 and finds in favour of A then this, again, adds a tremendous degree of weight of L1’s original decision and it is unlikely that any private recovery agency would hesitate to act as a result of not one but two judgments from established, reputable bodies against B. On the other hand court L2 might find in favour of B and against A. In this instance we now have the quandary of two alternative decisions emanating from different courts. What on earth will be the outcome of such a situation? It is likely that the two courts, faced now with the reality of uncertainty in their jurisprudence as to the outcome of a particular type of case, will be eager to resolve this difference of opinion in order to ensure that they will be able to cater for clients facing similar circumstances in the future and thus earn their custom – not to mention to clear up once and for all the problem for the specific plaintiffs before them. Court L1 might review the case presented in court L2 and decide to change its opinion in light of the new judgment, acknowledging that its original decision was incorrect and that henceforth the legal principles outlined by the trial in court L2 will form part of its jurisprudence. This is especially likely if L2 benefitted from evidence or testimony that was unavailable to court L1. On the other hand, should the difference of opinion not be resolved, L1 and L2 might themselves appeal to a third court – court L3 – in order to deliver a third and what is likely to be a final judgment. The two courts, eager to preserve their decision-making reputation, will be keen to demonstrate that each of their decisions was the correct one and will present their cases before L3 accordingly. If L3 rules in favour of A, the judgment of L1 is vindicated and L2 will mostly likely incorporate L3’s decision into its jurisprudence, overruling its own. If, on the other hand, L3 rules in favour of B, then it is L1’s decision that must be discarded. Courts that are serially victorious on appeal cases may have their reputation as justice-dispensing bodies enhanced whereas those who do not may have to work harder in the future to restore their own reputation. For the parties to the immediate case, however, one of them will now have two judgments in his/her favour and the other will only have one. While it is theoretically possible for parties to go on litigating ad infinitum, not only do we have to remember that the parties themselves will have to fork out the costs for these endless cases but that also further or alternative courts may simply refuse to hear the case, taking the reasonable view that two similar judgments by different reputable bodies makes good law and there is no need to go to the time and expense of prosecuting the same case again when there are other customers who are in need of justice dispensing services. Doubtless a private recovery agency will accept the weight of two judgments as authority to enforce a legal remedy from the losing party, should the latter not comply voluntarily. The only likely solution for the losing party is to adduce new evidence that the previous three courts were not able to benefit from and only then could the case be tried a fourth or fifth time. While it is also possible that one or more of the decisions would be completely wayward it is likely that the discipline of the marketplace will ensure that such instances are kept to a minimum.

Finally, another possibility is that court L2 might rule in favour of the same party as court L1 but on different legal grounds from that of court L1. While this will resolve the case for the immediate parties it is likely that L1 and L2 will privately bring a suit in L3 in order to resolve the outstanding question of law and remove any uncertainty from their jurisprudence. Of course, it may not be possible to settle all points absolutely in the immediate case and further cases may illuminate other circumstances or possibilities that bring past judgments into question. As we noted in our series of libertarian law and legal systems, law is determined not only by libertarian principle but by custom, convention and economic expedience. Although libertarian principle remains as a constant bedrock, these other aspects are likely to change as time unfolds and so it is entirely possible – nay, likely – that past discoveries of law will come to be replaced by new ones to reflect the wider societal change. Indeed as society changes so too does the precise nature of conflicts that arise – old situations disappear and new ones arise. Law that was applicable to the former may no longer be suitable for the latter. The law of a sparsely populated agrarian society, for example, will most likely have to deal with problems such as straying cattle and farm workers’ contracts whereas a densely populated urban society would need law to address issues such as noise, light pollution, boundaries, and also building covenants, rights of way and restrictions to a much greater degree. The precise legal rules that are determined for one society may not be appropriate for another and hence law will change over time as society changes.

Conclusion

This is basic outline of how law is likely to be discovered through prosecuting independent cases in an anarchist legal order populated only by private justice dispensing agencies. Crucially what we can see is that even though law discovery and decision making is heterogenous and takes place in different times and venues, in its entirety it coheres into a single body of jurisprudence that all courts will apply in future cases. What we see then is that a coherent system of law, in much the same such as money, turns out to be one of those institutions that exists and flourishes as a result of human purpose but not of human design. In just the same way as no one individual invented and introduced money, so too there is no one person determining and scribing the law. Just as no one individual will is needed to determine the price of a good in order to ensure its rationing and distribution to the most urgently desired ends, neither is there a single will pronouncing the just outcome of cases. And yet, just like money and market prices, law serves one of the most vital purposes of human interaction – the dispensation of justice and the resolution of conflicts – without any compulsory, monopolistic and centralised authority.

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1Such detective work may also be carried out by an insurer in cases where the aggrieved party is insured against the risk of aggression. Indeed some cases might ultimately prove to be a contest between the insurers of the parties rather than the parties themselves.

2The recovery agency is likely, of course, to outline the prerequisites that a plaintiff must possess before it will go ahead with a recovery. The judgment of a reputable and impartial third party is likely to be one of them.