Tuesday, March 23, 2021

Mises Wire

Mises Wire

The Anti-imperialism of Mises

Posted: 22 Mar 2021 12:00 PM PDT

The death of Ludwig von Mises has brought forth numerous essays on his contribution to economics. It is equally in order to discuss his work in the historical sciences, as he called them. Having had the honor and pleasure of attending Mises' graduate seminar during the years in which he wrote Theory and History and devoted his seminar to that subject, I had the rare opportunity of participating in the final formulation of his long-considered concepts of the historical sciences. But, before discussing that part of his contribution in another article, I shall indicate some of the substantive historical analyses which Mises made.

Faced with the rise of classical liberalism in the 19th century and its collapse since the first world war, Mises had very special motives for examining contemporary history. Mises emphasized that ideas are the base on which all social activity takes place. It is in the realm of ideas that the battle for civilization and progress takes place. Mises emphasized the fact and the necessity that classical liberalism had to be obstinate and uncompromising. Success of liberal ideas required the enlightenment of people who studied ideas who would convince the citizenry of their correctness. Mises advocated a revolution in ideas as the necessary step to the revolution of the practice of freedom. However, the advocates of classical liberalism in the 19th century were not obstinate and uncompromising. The English utilitarians, especially Ricardo, had incomplete and compromised notions leading succeeding liberals not to correct and complete them but to turn away to more compromises as in the case of John Stuart Mill.

One of the important causes of the decline of liberalism, Mises believed, was the illusion that society would necessarily continue to accept and perfect its ideas. Mises believed that as classical liberalism came closer to realization, it was necessary for its advocates not to rest, but to increase their activity and perfect the theoretical base of classical liberalism. Instead, liberalism was swept away by the emergence of parties speaking to special interests. For Mises liberalism meant the abolition of special privileges. In discussing class conflict, Mises emphasized: "Conflicts of interests can occur only in so far as restrictions on the owners' free disposal of the means of production are imposed by the interventionist policy of the government or by interference on the part of other social forces armed with coercive power." Coercive power and government intervention are the sole causes of war between interests. For Mises, the supporters of feudalism, privilege and status were clearly defeated by classical liberalism. The rise of the new challenge to classical liberalism came from within itself, from the failures of utilitarian economists. Mises said:

But in Ricardo's system of catallactics one may find the point of departure for a new theory of the conflict of interests within the capitalist system. Ricardo believed that he could show how, in the course of progressive economic development, a shift takes place in the relations among the three forms of income in his system, viz., profit, rent, and wages. It was this that impelled a few English writers in the third and fourth decades of the nineteenth century to speak of the three classes of capitalists, landowners, and wage-laborers and to maintain that an irreconcilable antagonism exists among these groups. This line of thought was later taken up by Marx.

In the Communist Manifesto, Marx still did not distinguish between caste and class. Only later, when he became acquainted in London with the writings of the forgotten pamphleteers of the twenties and thirties and, under their influence, began the study of Ricardo's system, did he realize that the problem in this case was to show that even in a society without caste distinctions and privileges irreconcilable conflicts still exist. This antagonism of interests he deduced from Ricardo's system by distinguishing among the three classes of capitalists, landowners, and workers…. At no time, however, did Marx or any one of his many followers attempt in any way to define the concept and nature of classes. It is significant that the chapter entitled "The Classes" in the third volume of Capital breaks off after a few sentences. More than a generation elapsed from the appearance of the Communist Manifesto, in which Marx first makes class antagonism and class war the keystone of his entire doctrine, to the time of his death. During this entire period Marx wrote volume after volume, but he never came to the point of explaining what is to be understood by a "class." (Mises, The Free and Prosperous Commonwealth (trans. by Ralph Raico; ed. by Arthur Goddard), Princeton, Van Nostrand Series in the Humane Studies, 1962, pp. 163–64)

However, the wedge of Ricardian concepts of disharmony of interests in a perfect capitalist society, and the existence of special interest political parties in societies claiming to be capitalist, permitted the socialists to appear the champions of the abolition of privilege, of classless society resulting from the withering away of the state. Mises emphasized that in the absence of an uncompromisingly presented liberalism, socialism appeals to people who think more clearly and seek a serious solution to government by special interests. Through the dominant position socialism gained at the Universities, it was able, in Mises' view, to gain the sincere, honest, and best minds among the youth. In many ways, the success of socialism was due to its ability to appear to be what liberalism actually is. Mises described the many ways that the parties of the special interest state have prevented the presentation and success of liberal ideas and, thus permitted the success of socialism. Mises insisted that liberals must emphasize the fact that since liberalism serves no special interest there is "no class that could champion liberalism for its own selfish interests." For Mises liberalism could not be the special party of capitalists. Historical reality has demonstrated that the wealthy tend to support any other party except the liberals. Indeed, for capitalists to support liberalism, it is necessary for them to rise above their self-interest to the level of general principles. Mises noted:

The "have's" do not have any more reason to support the institution of private ownership of the means of production than do the "have-not's." If their immediate special interests come into question, they are scarcely liberal. The notion that, if only capitalism is preserved, the propertied classes could remain forever in possession of their wealth stems from a misunderstanding of the nature of the capitalist economy, in which property is continually being shifted from the less efficient to the more efficient businessman. In a capitalist society one can hold on to one's fortune only if one perpetually acquires it anew by investing it wisely. The rich, who are already in possession of wealth, have no special reason to desire the preservation of a system of unhampered competition open to all…. They do have a special interest in interventionism, which always has a tendency to preserve the existing division of wealth among those in possession of it. But they cannot hope for any special treatment from liberalism, a system in which no heed is paid to the time-honored claims of tradition advanced by the vested interests of established wealth. (Ibid., p. 186)

Mises deduced from history that all governments inherently recognize no limitations on power. Complete domination over property is the goal of all governments, and if they accept limitations it is merely tactical since the admission of any government control over property implies total control. Mises concluded:

Thus, there has never been a political power that voluntarily desisted from impeding the free development and operation of the institution of private property of the means of production. Governments tolerate private property when they are compelled to do so, but they do not acknowledge it voluntarily in recognition of its necessity. Even liberal politicians, on gaining power, have usually relegated their principles more or less to the background…. A liberal government is a contradictio in adjecto. (Ibid., p. 68)

Mises insisted that the concept of self-determination was the most logical derivation from liberalism. Self-determination made sense not as a collective concept, but as an individualist concept. "If it were in any way possible to grant this right of self-determination to every individual person, it would have to be done." But, Mises considered individual self-determination to be technically impractical; however, as a matter of principle it was irrefutable that the individual must have the right to individual self-determination. In foreign policy, Mises applied this concept to self-determination consistently.

The right of individual self-determination was clearly applicable in the area of education. For Mises, compulsory education in any circumstances was a violation of this right. Compulsory education is a clearly political act. "There is, in fact, only one solution: the state, the government, the laws must not in any way concern themselves with schooling or education. Public funds must not be used for such purposes. The rearing and instruction of youth must be left entirely to parents and to private associations and institutions."

Mises made an important, if often unrecognized, analysis of imperialism, which is another aspect of the negation of the right of self-determination. Mises indicated that the origins of imperialism can be found in the desire of states to create protected export "markets." A desire to avoid the effects of competition, Mises said, led states

to the adoption of the policy of using import duties to protect domestic production operating under less favorable conditions against the superior competition of foreign industry, in the hope of thereby making the emigration of workers unnecessary. Indeed, in order to expand the protected market as far as possible, efforts are made to acquire even more territories that are not regarded as suitable for European settlement. We may date the beginning of modern imperialism from the late seventies of the last century, when the industrial countries of Europe started to abandon the policy of free trade and to engage in the race for colonial "markets" in Africa and Asia …

The basic idea of colonial policy was to take advantage of the military superiority of the white race over the members of other races. The Europeans set out, equipped with all the weapons and contrivances that their civilization placed at their disposal, to subjugate weaker peoples, to rob them of their property, and to enslave them. Attempts have been made to extenuate and gloss over the true motive of colonial policy with the excuse that its sole object was to make it possible for primitive peoples to share in the blessings of European civilization…. If, as we believe, European civilization really is superior to that of the primitive tribes of Africa or to the civilizations of Asia—estimable though the latter may be in their own way—it should be able to prove its superiority by inspiring these peoples to adopt it of their own accord. Could there be a more doleful proof of the sterility of European civilization than that it can be spread by no other means than fire and sword? (Ibid., pp. 123, 25)

Mises countered the argument that the liberal solution—immediate withdrawal of government (European colonial) and leaving the inhabitants alone—might lead to chaos or oppression. Since Europe exported the worst of its civilization under imperialism, it is not the fault of the natives that they may adopt all the evils taught them by the Europeans. Since imperialism is the negation of liberalism, there was no possibility for non-Europeans to come into contact with liberal concepts and practices. Imperialism itself was one of the means by which European politicians sought to escape from the logical necessity of completing the liberal revolution in Europe. Just as mercantilism was the overseas extension of feudalism, so imperialism was the overseas extension of neo-mercantilism.

For Mises none of the arguments in support of imperialism could have any basis in liberalism. Abolition of all forms of imperialism was alone consistent with liberalism. Mises felt that the evil consequences of imperialism would become evident only after the withdrawal of European troops and bureaucrats because only then would the full extent of the impact of European illiberalism flower. The longer the Europeans remained the more poisonous the blossoms. Thus, the immediate end of imperialism would reduce the effects, and its prolongation "in the interests of the natives" would intensify it. Mises added:

If all that can be adduced in favor of the maintenance of European rule in the colonies is the supposed interest of the natives, then one must say that it would be better if this rule were brought to an end completely. No one has a right to thrust himself into the affairs of others in order to further their interest, and no one ought, when he has his own interests in view, to pretend that he is acting selflessly only in the interest of others. (Ibid., p. 127)

Mises's total commitment to classical liberalism, pure and uncompromised, made him an heir in history to the great 19th-century classical liberals who dealt with history generally, such as Acton, or with contemporary history, such as Cobden and Bright. Mises was fearless, as were Acton, Cobden and Bright, in attacking the state in all its aspects, not the least in its more recent manifestation, imperialism. The individual and the state are irreconcilable. History confirms what reason teaches us, that the state is the negation of the individual and his extension, private property, just as where the individual and his property rightfully exist, that the state be abolished. It was because of the failure to pursue and achieve that freedom by 19th-century liberals, that the current struggle is necessary. Mises has emphasized that it is by study of that failure that the lessons will be learned to achieve liberty. Those who dare not study history will be bound to repeat it.

[This originally appeared as "Mises and History," in the January 1974 edition of the Libertarian Forum.]

Why Envy Can Destroy Economic Progress

Posted: 22 Mar 2021 09:00 AM PDT

Economists think that culture is a fuzzy concept. Yet as research demonstrates, culture provides insight into a country's potential for growth. One cultural feature worth studying for its propensity to impede development is envy. Envy is described as a feeling of resentment motivated by the achievements of other people. The manifestation of this emotion can be destructive or progressive. Gaining education, starting a business, or investing are examples of constructive envy. The desire to outperform one's rival can serve as an incentive to engage in productive activities. Specifically, studies posit that individuals work longer hours to compensate for the fall in income relative to other groups.

However, many have argued that constructive envy is more dominant in developed countries, whereas the fear of destructive envy is pervasive in the developing world. This is because in countries with weak institutions—i.e., institutions that don't protect private property—fewer people are likely to become wealthy; hence the scarcity of success makes achieving pretentious. As a result, competent individuals rationally avoid enterprising initiatives to thwart the schemes of envious people. As expected, envy-avoidance behavior imposes a constraint on productivity, thus restricting the growth of material prosperity. In anthropological studies scholars posit that the intention to prevent the effects of destructive envy has resulted in the deliberate underproduction of crops.

To people in an envious environment, the benefits of performance outweigh the costs of destructive envy. In "Envy and Agricultural Innovation: An Experimental Case Study from Ethiopia," Bereket Kebede and Daniel John Zizzo illustrate that destructive envy is a deterrent to adopting agricultural innovations. The authors report that in one of the study villages, a man burnt his brother's farm when his brother cultivated a more lucrative cereal. Therefore, destructive envy entails a deadweight cost, since instead of being productive envious people are invested in undermining the efforts of their neighbors.

When individuals are precluded from enjoying the gains of innovation due to envy, society can only regress. Furthermore, envy traps poorer countries in poverty, because it creates mistrust and reduces the social capital necessary for forming large-scale networks. If individuals do not trust each other, they will be reluctant to share ideas with outsiders and as such may lose valuable opportunities. Trust lowers transaction costs, and without it business formation can become a burden.

Yet destructive envy as a barrier to development in poor countries is insufficiently examined, notwithstanding the evidence suggesting that it is more important than assumed. Boris Gershman in "Envy in the Process of Development: Implications for Social Relations and Conflict" contends that the manifestation of envy in rich countries is quite different from in the developing world:

In the 2002–2003 wave of the Afrobarometer survey, an impressive average of over 9 percent of respondents in nine African countries named envy/gossip as one of the three most important sources of violent intergroup conflict, alongside religious and ethnic rivalry, disputes over land, and economic hardship…. The destructive potential of envy affects the incentives of those making investment, production, and consumption decisions…. For this reason, even though people strive for higher relative standing, they might not want to move too far ahead of others.

However, the potential of envy is more constructive in developed countries:

Under "keeping-up-with-the-Joneses," envy-provocation via conspicuous consumption is normal, and the usual response to such behavior is to match the spending pattern of the reference group. Status-seeking via purchases of visible goods and services is, of course, an integral part of consumer culture. Envy is not avoided but rather sought, and envy-provocation is seen as desirable rather than as dangerous.

Gershman offers an explanation as to why destructive envy is infeasible in developed countries: "Intuitively, if individual property rights are well-protected, defense technology is accessible and effective, and punishment for disruptive activities is severe and inevitable, then the cost of engaging in destruction is high, thus making it an unlikely response." Invariably, poor countries are deficient in institutions that can generate widespread prosperity. So, because people care about relative standing, one way for individuals in developing countries to protect their status is to engage in destructive envy. However, destructive envy does not confer advantages for citizens in rich countries, since their institutions are designed to engender continuous prosperity.

In revisiting the case of Tzintzuntzan in Mexico, Gershman reminds us that success can eliminate the adverse effects of destructive envy: "With the arrival of new opportunities, a by-product of Mexican economic growth, the persistent fear of envy that plagued the community began to dissipate, paving the way to peaceful emulation and sowing the seeds of a consumer society." So, although intellectuals on the left usually attribute the failures of developing countries to capitalism, the evidence reveals that promarket policies are instrumental in generating prosperity. Evidently, destructive envy is a better explanation for the challenges encountered by developing countries than free market capitalism. Indeed, only the success generated by capitalism can tame the pernicious effects of destructive envy and improve the quality of life in developing countries.

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The New New Deal Has Already Arrived. Thank the Covid Panic.

Posted: 22 Mar 2021 05:00 AM PDT

The new covid relief bill signals that whatever restraint on public spending existed before 2020 is now all but gone. And the bill represents the beginning of a new era: an era that can be likened to that of the New Deal. 

Original Article: "The New New Deal Has Already Arrived. Thank the Covid Panic."

This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.

 

The Everything Bubble: How A Debt-Driven Economy Creates More Frequent Crises

Posted: 22 Mar 2021 04:00 AM PDT

The pace of global recoveries since 1975 has been slower and weaker, consistently every time, according to the Organisation for Economic Co-operation and Development (OECD). Recoveries take longer and happen slower. At the same time, periods of crisis are less aggressive albeit more frequent than prior to 1975. Another interesting evidence of the crises and recoveries since 1975 is that almost all economies end the recession period with more debt than before.

Global debt has ballooned to all-time highs, more than three times the world gross domestic product (GDP). For the economy to really recover, we must stop the race of perverse incentives created by the wrong analysis of the origin of crises and the solutions that are often proposed in mainstream economics and politics. I agree with Johan Norberg that the two main factors that have driven the phenomenal progress we have seen are free markets and openness. The freedom to innovate, experiment, create and share must come with the right incentives.

For decades, governments and central banks have always identified the problems of the economy as demand problems, even if it was not the case. If there was a crisis or a recession, governments immediately believed that it must be due to lack of demand, and subsequently decided that the private sector was not willing or able to fulfill the real demand needs of the economy, even if there was no real evidence that companies or citizens were investing or consuming less than what they needed. The entire premise was that companies were not investing "enough." Compared to what and decided by whom? Obviously by central planners who benefit from bubbles and overcapacity but never suffer the consequences.

Governments and central banks never perceive risks of excess supply and even less predict a bubble. Why? Because most central planners see debt, oversupply, and bubbles as small collateral damages of a greater good: recover growth at any cost.

Behind the mistake in diagnosis is the obsession to maintain or grow GDP at any cost regardless of the quality of its components. GDP is relatively easy to inflate. I always explain to my students that GDP is the only economic calculation in which you add what you spend with what you earn. GDP can be inflated through government spending and with higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to finance productive investment and allow the economy to grow, while efficiency, innovation, and technology allow us to be more productive and receive more and better goods and services at cheaper prices. It is a virtuous cycle.

The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we incentivize malinvestment and prevent technology substitution by implementing massive government stimuli and liquidity injections.

Central banks justify their actions saying they do not cut rates, it is a market and falling rates reflect private sector demand. Really? How and when did they survey that? What private sector? Crony or obsolescent companies? Highly indebted ones? Furthermore, if low rates and liquidity injections are a market demand, why not let the market set rates and liquidity instead of central banks?

Those same governments that feel the need to "increase inflation", something that no consumer has demanded ever anywhere, do so because they benefit as the first recipients of newly created money and the only sector that truly benefits from inflation. Not even crony sectors fully benefit from inflation, the tax of the poor. Those suffer higher costs and import expenses.

By always making the same diagnosis, mistakes are repeated and accumulated. No wonder the pace of recoveries is slower, weaker, and more indebted. There are four reasons for this weakness. 

First, governments believe the problem is lack of demand and name themselves as the solution, using savers to finance it, via taxes and inflation. The best way to boost GDP? Massive white elephants, enormous infrastructure projects that generate a short-term boost to the spending side of GDP. Infrastructure is needed, of course, but the difference is when countries decide to use it as a subterfuge to disguise growth. Build anything at any cost. This leaves behind massive debt and a less dynamic, not stronger economy.

Second, demand-side policies perpetuate those sectors that are in process of obsolescence at the expense of savers, salaries and productive sectors. Governments will always subsidize and support the inefficient at the expense of the efficient because their objective is to maintain what they believe works and keeps jobs. It is not due to bad intentions or evil objectives, it is simply to perpetuate the past that they live off.

Third, massive liquidity injections and low rates are exactly the equivalents of indirect subsidies to the inefficient. The earliest recipients and most benefitted from "unconventional monetary policies" will, by definition, be the most indebted and least productive. This is why productivity growth and money velocity stall during periods of government-led monetary and fiscal excess.

Fourth, the benefits of the short and long-term credit cycle are broken. Creative destruction is all but eliminated, malinvestment is promoted via unsustainably low rates and liquidity is absorbed by financial assets and unproductive sectors.

Inflation does not rise as much as central planners want because technology and efficiency are unstoppable even if they try, and because overcapacity is perpetuated through constant refinancing. Massive liquidity and low rates make zombie companies soar. The percentage of companies that cannot pay interest expenses with operating profits balloons despite ultra-low rates and alleged "growth-boosting" plans.

Further Signs of Trouble

For decades, demand-side policies showed diminishing but not lethal results, but now the world has repeated the same policies so many times that there is simply exhaustion. Rates are unsustainably low, liquidity is excessive and there is no real fiscal space in governments that have all but consumed their ability to extract wealth from savers.

The more we hear from governments that we need to spend more and save less, the weaker the response from economic agents.

Governments and central banks create a crisis from a moderate and completely healthy slowdown by denying economic cycles and, even worse, presenting themselves as the ones that will revert them.

Promoting a debt-driven economy leads to more frequent crises, shorter economic cycles and abrupt recessions.

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